Mattel 1999 Annual Report Download - page 36

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Mattel, Inc. and Subsidiaries
Disney Warrant
In 1 99 6, Mattel entered into a licensing agreement with Disney Enterprises, Inc.
Pursuant to this agreement, Mattel issued Disney a w arrant to purchase 3.0 million
shares of Mattel’s common stock at an exercise price of $27.37 5 per share. This
warrant expires no later than April 2 , 2004. The warrant’s fair value of $2 6.4 mil-
lion 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 .6 0%.
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 19 99 , 1 99 8 and 19 97 , $5.6 million, $ 3.2 million and $ 1.1 mil-
lion, respectively, was recognized in the results of operations related to this warrant.
Learning Company Employee Stock Purchase Plan
In December 1997, Learning Company stockholders approved the 19 97 Employee
Stock Purchase Plan, which provided certain eligible employees with the opportunity to
purchase shares of common stock at a price of 85 % of the price listed on the New York
Stock Exchange at various specified purchase dates. The plan met the criteria estab-
lished in SFAS No. 123 for noncompensatory employee stock purchase plans and there-
fore, no compensation expense was recorded in connection with this plan. During the
years ended December 31 , 1999 and 19 98 , approximately 37 thousand and 5 6 thou-
sand shares, respectively, were purchased by employees under this plan. As a result of
the May 1 99 9 merger, the 19 97 Employee Stock Purchase Plan was terminated.
Prior to their merger with Learning Company, Broderbund also had an
employee stock purchase plan. During the year ended December 31 , 1997, approxi-
mately 62 thousand shares were purchased by employees under this plan. As a
result of the merger with Learning Company, the Broderbund employee stock pur-
chase plan was terminated.
Common Stock Repurchase Plan
Mattel’s common stock repurchase plan, initiated in May 1 990, provides for the
repurchase of common shares to fund Mattel’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 19 99 , 1 99 8, and 1 99 7, Mattel
repurchased 4 .0 million, 9.7 million, and 6 .5 million shares, respectively.
Dividends and Capital Transactions
A regular quarterly cash dividend has been declared by the Mattel board of directors
on Mattel’s common stock since the second quarter of 1990. The board of directors
increased the quarterly cash dividend from $ 0.08 per common share to $ 0.0 9 per
common share in the second quarter of 19 99 . Learning Company did not pay divi-
dends on its common stock during 19 99 prior to the May merger and during the
years ended December 31 , 1998 and 19 97 .
Note 6 - Commitments and Contingencies
Leases
Mattel routinely enters into noncancelable lease agreements for premises and equip-
ment used in the normal course of business. The following table shows the future
minimum obligations under lease commitments in effect at December 31 , 1 99 9 ( in
thousands) :
Capitalized Operating
Leases Leases
2000 $ 3 0 0 $ 49,000
20 0 1 30 0 3 7 ,8 0 0
20 0 2 30 0 2 0 ,5 0 0
20 0 3 30 0 1 5 ,1 0 0
20 0 4 30 0 1 3 ,9 0 0
Thereafter 9,2 0 0 1 0 ,30 0
$ 10 ,7 00 ( a) $ 1 4 6,6 00
( a) Includes $8 .4 million of imputed interest.
Rental expense under operating leases amounted to $7 5.2 million, $ 66 .6 mil-
lion and $7 1.5 million for 19 99 , 1 99 8 and 19 97 , respectively, net of sublease income
of $0 .6 million, $0.5 million and $0 .3 million in 1 99 9, 1 998 and 1 99 7, respectively.
Commitments
In the normal course of business, Mattel enters into contractual arrangements to
obtain and protect Mattel’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 commit-
ments 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 Mattel’s focus on
expanding its product lines through alliances with businesses in other industries.
The largest commitment involves Mattel’s agreements with The Walt Disney
Company and Disney Enterprises, Inc. The licensing agreement with The Walt Disney
Company, which contains annual minimum royalty guarantees, permits Mattel to use
the Disney name and certain characters on preschool and infant products through
September 2 00 2.
The agreement with Disney Enterprises, Inc. grants Mattel exclusive worldwide
rights ( with certain exceptions) to produce toys based on all children-oriented Disney televi-
sion and film properties introduced. This agreement spans three years, with Mattel having
the right for up to two additional years to market merchandise from film properties pro-
duced 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 proper-
ties introduced by Disney. Commitments for 20 00 introductions are expected to approxi-
mate $ 10 million payable over a three-year period. Pursuant to the agreement, Mattel
issued Disney a stock warrant, valued at $2 6.4 million, to purchase 3.0 million shares of
Mattel’s common stock.
In January 2 00 0, Mattel and Warner Bros. Worldwide Consumer Products
signed a licensing agreement making Mattel the worldwide master toy licensee for the
literary characters from the Harry Potter books published by J.K. Row ling as well as for
feature film and television properties developed by Warner Bros. Pictures featuring the
Harry Potter characters. Mattel’s w orldwide toy licensing agreement involves the first
two Harry Potter books and theatrical films. This agreement contains minimum royalty
guarantees and has a term of four years, provided that the second theatrical film is
released prior to January 1, 20 03 . If the second theatrical film is released subsequent
to January 1, 20 03 , the agreement w ill be extended to a date twelve months after
the release of the second theatrical film. Pursuant to the agreement, Mattel issued