Mattel 2005 Annual Report Download - page 70

by non-employee members of the Board of Directors were also excluded from the acceleration. The effective
date of the acceleration was December 28, 2005; on such date, the closing price of Mattel’s common stock on the
New York Stock Exchange was $15.95 per share. The options as to which vesting was accelerated have exercise
prices per share ranging from $16.09 to $22.52, and a weighted average exercise price per share of $18.34. As a
result of the acceleration, options for approximately 12.4 million shares became immediately exercisable.
Typically, stock options granted to employees under the Stock Option Plans vest over a three-year period. The
number of shares subject to, and exercise prices of, the options as to which vesting was accelerated remain
unchanged.
With regard to the accelerated options held by Mattel’s executive officers who report directly to Mr. Eckert,
Mattel imposed a restriction consisting of a holding period on shares underlying the portion of such options as to
which vesting was accelerated. Pursuant to this restriction, each such executive officer is required to refrain from
selling any shares acquired upon exercise of any portion of such options that was accelerated, until the earlier of
(a) the date on which the portion of the option being exercised by such executive officer would have become
vested pursuant to the option’s original vesting schedule, or (b) the date on which such executive officer ceases
to be an executive officer of Mattel. The primary purpose of the accelerated vesting was to avoid recognizing
future compensation expense associated with the accelerated stock options under the planned adoption by Mattel
in 2006 of SFAS No. 123(R), Share-Based Payment. Additionally, for financial reporting purposes, there may be
other potential tax benefits derived from accelerating the vesting of outstanding stock options prior to the
adoption of SFAS No. 123(R). Mattel expects the accelerated vesting to reduce the pre-tax stock compensation
expense it otherwise would be required to record by approximately $30 million over the period from 2006
through 2008.
Income Taxes
Certain income and expense items are accounted for differently for financial reporting and income tax
purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year
in which the differences are expected to reverse.
Net Income Per Common Share
Basic net income per common share is computed by dividing reported net income by the weighted average
number of common shares and common shares obtainable upon the exchange of the exchangeable shares of
Mattel’s indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., outstanding during each
period.
Diluted net income per common share is computed by dividing reported net income by the weighted average
number of common shares, common shares obtainable upon the exchange of the exchangeable shares of Mattel’s
indirect wholly-owned Canadian subsidiary, Softkey Software Products Inc., and other common equivalent
shares outstanding during each period. The calculation of common equivalent shares assumes the exercise of
dilutive stock options and warrants, net of assumed treasury share repurchases at average market prices, as
applicable. Nonqualified stock options totaling 27.6 million, 25.3 million and 16.1 million were excluded from
the calculation of diluted net income per common share for 2005, 2004, and 2003, respectively, because they
were anti-dilutive.
A reconciliation of weighted average shares for the years ended December 31 is as follows (in thousands):
2005 2004 2003
Common shares .................................................... 407,402 419,235 437,020
Effect of dilutive securities:
Stock options and restricted stock .................................. 3,637 3,858 5,211
Common and common equivalent shares ................................ 411,039 423,093 442,231
61