Mattel 2006 Annual Report Download - page 95

The number of shares of common stock available for grant under the 2005 Plan is subject to an aggregate
limit of 50 million shares and is further subject to share-counting rules as provided in the 2005 Plan. As a result
of such share-counting rules, full-value grants such as grants of restricted stock or restricted stock units count
against shares remaining available for grant at a higher rate than grants of stock options and stock appreciation
rights. Each stock option or stock appreciation right grant is treated as using one available share for each share
actually subject to such grant, whereas each full-value grant is treated as using three available shares for each
share actually subject to such full-value grant. The 2005 Plan contains detailed provisions with regard to
share-counting.
Effective January 1, 2006, Mattel adopted the fair value recognition provisions of SFAS No. 123(R) using
the modified-prospective transition method. Prior to January 1, 2006, Mattel applied the recognition and
measurement principles of APB Opinion No. 25, and related interpretations in accounting for its employee stock
compensation plans. The amount of additional compensation expense that would have resulted if Mattel had
applied the fair value recognition provisions of SFAS No. 123 was included as a proforma disclosure in the
financial statement footnotes.
Prior to January 1, 2006, Mattel presented all benefits of tax deductions resulting from the exercise of
share-based compensation as operating cash flows in the statements of cash flows. SFAS No. 123(R) requires the
benefits of tax deductions in excess of the compensation cost recognized for those options (“excess tax benefits”)
be classified as financing cash flows and benefits of tax deductions less than the compensation cost recognized
for those options (“shortfalls”) be classified as operating cash flows. Excess tax benefits reflected as a financing
cash inflow totaled $12.0 million during the year ended December 31, 2006. Excess tax benefits (shortfalls)
reflected as operating cash inflows (outflows) totaled $(3.5) million, $4.3 million, and $(0.4) million during the
years ended December 31, 2006, 2005, and 2004, respectively.
On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the
acceleration of vesting of options for approximately 12.4 million shares with an exercise price of $16.09 or
greater granted to employees other than Mattel’s Chairman and Chief Executive Officer. Vesting was not
accelerated as to stock options held by any member of the Board of Directors. The primary purpose of the
accelerated vesting was to avoid recognizing future compensation expense associated with the accelerated stock
options under SFAS No. 123(R). Additionally, for financial reporting purposes, there may be other potential tax
benefits derived from accelerating the vesting of stock options.
As of December 31, 2006, total unrecognized compensation cost related to unvested share-based payments
totaled $29.3 million and is expected to be recognized over a weighted-average period of 2.5 years.
Stock Option Review
In August 2006, two derivative shareholder lawsuits were filed against Mattel and certain of its past and
present executive officers and members of its Board of Directors in Los Angeles County Superior Court, alleging
that certain stock option grants had been backdated (the “State Court Derivative Shareholder Lawsuits”). During
the third quarter of 2006, Mattel commenced and completed a comprehensive review of its historical stock option
practices for grants made during the period from the fourth quarter of 1993 through the third quarter of 2006.
Outside legal counsel participated in this review, including performing certain investigative procedures.
The review found that there had been no backdating of stock option grants, no misconduct or manipulation
associated with stock option grant dates, no intentional deviations from generally accepted accounting principles,
and no material inaccuracies with respect to the current or historical financial statements of Mattel. The review
did identify some administrative procedural deficiencies that resulted in unintentional accounting errors,
principally relating to situations in which, as of the grant date approved by the Compensation Committee, an
aggregate number of options to be granted was approved and the exercise price for the options was established,
but the allocation of those options to certain individual employee recipients was not yet finalized (thus resulting
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