Mattel Denies Claim of Inflated Earnings, Tells of Licensing Deal With Disney

Mattel Inc. on Wednesday denied allegations by a former executive that it inflated earnings by hiding the costs of past deals with Walt Disney Co. Meanwhile, both companies announced a tentative licensing agreement that expands their relationship.

The allegations were raised in a wrongful-termination lawsuit filed by Michelle Greenwald, who was head of the Mattel division that develops Disney-licensed toys for preschool children. The company said Greenwald was terminated in July during a reorganization of her department.

Ironically, Greenwald is now a vice president for new product development at Disney’s consumer products division, the operation responsible for toy licensing deals, as well as Disney’s retail store operations.

The suit, originally filed in Superior Court in Torrance in October and amended Monday, includes allegations that Mattel inflated earnings by delaying disclosure of the costs of 1994 royalty payments to Disney, allowing top managers to collect millions of dollars in incentive pay linked to the company’s financial performance.

The lawsuit claims that in 1994, Mattel was late in making more than $17 million in royalty payments to Disney for the right to use Disney’s film and television characters. By not including the cost of those obligations in its 1994 accounts, Mattel’s fourth-quarter earnings were overstated by more than 15%, the suit alleges.

“The case is absolutely without merit,” Mattel spokesman Glenn Bozarth said. “We deny each allegation made by the plaintiff.”

Disney spokesman John Dreyer would not comment on the lawsuit, and Greenwald, who joined Disney in November, could not be reached for comment.

The allegations were reported in the Wall Street Journal on Wednesday, as Mattel and Disney announced they had reached a tentative three-year agreement giving Mattel worldwide rights to make toys based on Disney’s future films and television programs. Bozarth said the timing of the announcement was unrelated to court filings or the reports of the lawsuit.

The deal would give Mattel the first shot at striking deals to manufacture toys based on Disney characters--a guarantee that no toy maker has had previously. Disney-licensed products are among the best selling in the toy industry, and Mattel is likely to generate additional sales as a result of the deal.

“Our dream has been to become Disney’s main toy licensee,” said Jill Barad, Mattel’s president and chief operating officer. “And the only piece missing over the years was that we could be involved in all of their major children’s film and television properties. With this agreement, our dream is coming true.”

The agreement was also hailed by Barton K. Boyd, president of Disney Consumer Products.

“We are excited to expand our relationship with Mattel and have its talented staff working with our artists and producers to develop products based on our upcoming motion pictures and TV shows,” Boyd said.

Mattel would not disclose how much it agreed to pay Disney in royalties but said it gave Disney the option rights to purchase $3 million of Mattel stock.

Mattel would receive licensing rights to produce toys based on “Hercules,” Disney’s major animated release planned for 1997.

Mattel was already a major Disney partner before this agreement, but had to negotiate each deal individually. The toy maker has produced toys based on Disney hits such as “Beauty and the Beast,” “Aladdin,” “The Lion King” and “Pocahontas” in recent years.

Mattel has the rights to produce toys based on characters in Disney’s upcoming animated feature “Hunchback of Notre Dame” and a live-action film version of “101 Dalmations,” set for release this year.

The two companies began to develop licensing deals in 1988. Disney toys make up one of four toy lines accounting for 80% of Mattel’s sales. The ever-popular Barbie line of dolls, Hot Wheels car toys and the Fisher-Price division are the three other big money-makers for Mattel, which ranks just ahead of Hasbro as the nation’s leading toy maker.

The Disney deal alone would have bolstered Mattel’s stock, but industry analysts said that good news was offset by concern over the lawsuit. Mattel shares closed down 87.5 cents at $26 on the NYSE after trading as high as $27.50 and as low as $25.125 early in the day.

“This deal will help Mattel maintain the growth they’ve enjoyed the last several years,” said David Leibowitz, managing partner at Burnham Securities in New York. “The suit could be overshadowing this positive development. It’s hard to predict the long-term impact of the lawsuit.”