Mattel 1998 Annual Report Download - page 47

Mattel, Inc. and Subsidiaries 45
Disney Warrant
In June 1996, the Company entered into a licensing agreement with
Disney Enterprises, Inc. Pursuant to this agreement, the Company
issued Disney a warrant to purchase 3.0 million shares of the
Company’s common stock at an exercise price of $27.375 per share.
This warrant cannot be exercised prior to April 2, 1999 and expires
no later than April 2, 2004. The warrant’s fair value of $26.4 million
was determined using the Black-Scholes pricing model, assuming an
expected life of eight years, a dividend yield of 0.88%, a risk-free
interest rate of 6.17%, and a volatility factor of 27.60%.
The fair value of the warrant is amortized as a component
of royalty expense when the related properties are introduced over
the period the related revenues are recognized. During 1998 and
1997, $3.2 million and $1.1 million, respectively, was recognized in
the results of operations related to this warrant.
Common Stock Repurchase Plan
Mattel’s common stock repurchase plan, initiated in May 1990, provides
for the repurchase of common shares to fund the Company’s stock
option plans. The number of shares to be repurchased is authorized
on an annual basis by the board of directors based upon anticipated
reissuance needs. During 1998, 1997, and 1996, Mattel repurchased
9.7 million, 6.5 million, and 10.0 million shares, respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel
board of directors on the Company’s common stock since the
second quarter of 1990. The board of directors increased the
quarterly cash dividend from $0.07 per common share to $0.08 per
common share in the second quarter of 1998. Tyco was precluded
from paying cash dividends on its common stock for the year ended
December 31, 1996 due to limitations set forth in its various debt
agreements.
Note 6 - Commitments and Contingencies
Leases
The Company routinely enters into noncancelable lease agreements
for premises and equipment used in the normal course of business.
The following table shows the future minimum obligations under
lease commitments in effect at December 31, 1998 (in thousands):
Capitalized Operating
Leases Leases
1999 $ 400 $ 37,900
2000 300 29,000
2001 300 19,600
2002 300 11,500
2003 300 7,800
Thereafter 9,600 5,600
$11,200 (a) $111,400
(a) Includes $8.7 million of imputed interest.
Rental expense under operating leases amounted to $58.4
million, $61.5 million and $58.1 million for 1998, 1997 and 1996,
respectively, net of sublease income of $0.5 million, $0.3 million
and $0.5 million in 1998, 1997 and 1996, respectively.
Commitments
In the normal course of business, the Company enters into contractual
arrangements to obtain and protect the Company’s right to create
and market certain products and for future purchases of goods and
services to ensure availability and timely delivery. Such arrangements
include royalty payments pursuant to licensing agreements and
commitments for future inventory purchases. Certain of these
commitments routinely contain provisions for guaranteed or minimum
expenditures during the terms of the contracts. Current and future
commitments for guaranteed payments reflect the Company’s focus
on expanding its product lines through alliances with businesses in
other industries, such as television and motion picture entertain-
ment companies.
The largest commitment involves the Company’s 1991
agreement with The Walt Disney Company. This licensing agreement,
which contains annual minimum royalty guarantees, permits the
Company to use the Disney name and certain characters on
preschool and infant products through September 2002. In related
agreements, the Company participates in attractions and toy stores
at three Disney theme parks under agreements in effect through
June 2002. Under these agreements, the Company makes semi-
annual payments to Disney.
In June 1996, the Company entered into a licensing agreement
with Disney Enterprises, Inc. for an expanded strategic alliance, which
grants the Company exclusive worldwide rights (with certain
exceptions) to produce toys based on all children-oriented Disney
television and film properties introduced, commencing summer
1997. The agreement spans three years, with the Company having
the right for up to two additional years to market merchandise
from film properties produced during the second and third years.
The initial term of the agreement may be renewed for an additional
three-year period upon mutual consent. This agreement contains
minimum royalty guarantees that are contingent upon the number
and nature of the properties introduced by Disney. Commitments
for 1999 introductions are expected to approximate $19 million
payable over a three-year period. Future commitments could be up
to $37.8 million per introduction year. Pursuant to the agreement,
the Company issued Disney a stock warrant, valued at $26.4 million,
to purchase 3.0 million shares of the Company’s common stock.
Licensing and related agreements provide for terms extending
from 1999 through 2003 and contain provisions for future minimum
payments as shown in the following table (in thousands):
Minimum Payments
1999 $127,000
2000 90,000
2001 88,000
2002 57,000
2003 9,000
$371,000