Mattel 2006 Annual Report Download - page 97

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Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of
operations for stock options. Had compensation expense in 2005 and 2004 for nonqualified stock options granted
been determined based on their fair value at the measurement date, consistent with the fair value method of
accounting prescribed by SFAS No. 123, Mattel’s net income and net income per common share would have
been adjusted as follows (amounts in millions, except per share amounts):
For the Year
2005 2004
Net income
As reported ........................................................ $ 417.0 $ 572.7
Pro forma compensation cost, net of tax .................................. (49.0) (32.9)
Pro forma net income ................................................ $ 368.0 $ 539.8
Net income per common share
Basic
As reported ........................................................ $ 1.02 $ 1.37
Pro forma compensation cost, net of tax .................................. (0.12) (0.08)
Pro forma net income per common share—basic ........................... $ 0.90 $ 1.29
Diluted
As reported ........................................................ $ 1.01 $ 1.35
Pro forma compensation cost, net of tax .................................. (0.11) (0.08)
Pro forma net income per common share—diluted ......................... $ 0.90 $ 1.27
The fair value of options granted has been estimated using the Black-Scholes valuation model. The expected
life of the options used in this calculation is the period of time the options are expected to be outstanding, and has
been determined based on historical exercise experience. Expected stock price volatility is based on the historical
volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on
Mattel’s historical annual dividend payout, and the risk-free interest rate is based on the implied yield available
on US Treasury zero-coupon issues. The following weighted average assumptions were used in determining fair
value for options granted:
2006 2005 2004
Options granted at market price
Expected life (in years) ............................................. 5.1 4.9 6.3
Risk-free interest rate ............................................... 4.9% 4.1% 4.0%
Volatility factor ................................................... 28.0% 27.6% 38.5%
Dividend yield .................................................... 2.8% 2.4% 1.2%
88