Mattel 2007 Annual Report Download - page 82

Determining the fair value of share-based awards at the measurement date requires judgment, including
estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
the expected dividends. 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 most recent actual annual dividend payout, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life.
Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
The following weighted average assumptions were used in determining the fair value of options granted:
2007 2006 2005
Expected life (in years) .................................................... 4.7 5.1 4.9
Risk-free interest rate ...................................................... 4.6% 4.9% 4.1%
Volatility factor .......................................................... 22.8% 28.0% 27.6%
Dividend yield ........................................................... 2.8% 2.8% 2.4%
Weighted average fair value per granted option ................................. $4.76 $4.51 $4.56
On December 28, 2005, the Compensation Committee of the Board of Directors of Mattel approved the
acceleration of vesting of all outstanding unvested stock options with an exercise price of $16.09 or greater
granted to employees other than Robert A. Eckert, Mattel’s Chairman and Chief Executive Officer, under the
Amended and Restated Mattel 1996 Stock Option Plan, the Amended and Restated Mattel 1999 Stock Option
Plan and the Mattel, Inc. 2005 Equity Compensation Plan (collectively, the “Stock Option Plans”). Options held
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 were not
modified.
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 upon adoption of SFAS No. 123(R)
by Mattel in 2006. Additionally, for financial reporting purposes, there were other potential tax benefits derived
from accelerating the vesting of outstanding stock options prior to the adoption of SFAS No. 123(R).
Mattel recognized compensation expense of $7.4 million and $23.9 million for stock options during 2007
and 2006, respectively, as a component of other selling and administrative expenses. Stock option expense in
2006 included $19.3 million related to prior period unintentional stock option accounting errors (see “Note 8 to
the Consolidated Financial Statements—Share-Based Payments”). Prior to January 1, 2006, no compensation
expense was recognized in the consolidated statements of operations for stock options. Compensation expense
recognized related to grants of restricted stock and restricted stock units (“RSUs”) to certain employees and
non-employee Board members was $14.8 million and $3.6 million in 2007 and 2006, respectively. As of
December 31, 2007, total unrecognized compensation cost related to unvested share-based payments totaled
$54.4 million and is expected to be recognized over a weighted-average period of 2.2 years.
72