Mattel 2006 Annual Report Download - page 96

Download and view the complete annual report

Please find page 96 of the 2006 Mattel annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 133

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133

in later measurement dates for accounting purposes for those individual grants). These accounting errors related
to grants made to the general population of employees. The review found no such errors associated with any
executive officer or Board member grants and no errors associated with any grants made after 2002.
The unintentional accounting errors associated with the use of incorrect measurement dates for certain grants
caused non-cash compensation expense to be understated by a cumulative amount of $19.3 million ($13.3 million
net of income tax) over the years 1995 through 2005. All of the errors were related to grants made prior to 2003, and
the impact on income from continuing operations was not material to any previously reported period (less than 1%
in every year). Because the errors are not material to any prior period financial statement and the impact on the
current year of correcting the cumulative errors is also not material, a correcting entry to record the cumulative
impact of these errors was recorded in the third quarter of 2006. The entry increased other selling and administrative
expenses by $19.3 million and reduced provision for income taxes by $6.0 million, which resulted in a $13.3 million
reduction in net income. The correcting adjustment also had the effect of increasing noncurrent deferred tax assets
by $3.5 million and additional paid-in capital by $16.8 million as of December 31, 2006.
In January 2007, two additional shareholder derivative lawsuits were filed against Mattel and certain of its
past and present executive officers and members of its Board of Directors in United States District Court for the
Central District of California, alleging that certain stock options grants had been backdated (the “Federal Court
Derivative Shareholder Lawsuits”). The factual allegations in the Federal Court Derivative Shareholder Lawsuits
are identical to those in the State Court Derivative Shareholder Lawsuits.
In light of the results of the review of its historical stock option practices, Mattel does not believe that final
resolution of the State Court Derivative Shareholder Lawsuits or the Federal Court Derivative Shareholder
Lawsuits will have a material adverse impact on its consolidated results of operations or financial position.
Stock Options
In addition to the $19.3 million pre-tax charge for prior period unintentional stock option accounting errors,
Mattel recognized compensation expense of $4.6 million for stock options during the year ended December 31,
2006 as a component of other selling and administrative expenses.
As a result of adopting SFAS No. 123(R) on January 1, 2006, Mattel’s income before income taxes and net
income for the year ended December 31, 2006, are $4.6 million and $2.9 million lower, respectively, than if
Mattel had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per
share for the year ended December 31, 2006 are $0.01 and $0.01 lower, respectively, than if Mattel had
continued to account for share-based compensation under APB Opinion No. 25.
87