Mattel 2002 Annual Report Download - page 81

Commitments
In the normal course of business, Mattel enters into contractual arrangements to obtain and protect Mattel’s
right to create and market certain products, and for future purchases of goods and services to ensure availability
and timely delivery. Such arrangements include royalty payments pursuant to licensing agreements and
commitments for future inventory purchases. Certain of these commitments routinely contain provisions for
guaranteed or minimum expenditures during the terms of the contracts. Current and future commitments for
guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in
other industries.
Licensing and related agreements provide for terms extending from 2003 through 2010 and contain
provisions for future minimum payments as shown in the following table (in thousands):
Minimum
Payments
2003 ..................................................... $ 80,000
2004 ..................................................... 85,000
2005 ..................................................... 78,000
2006 ..................................................... 25,000
2007 ..................................................... 27,000
Thereafter ................................................. 74,000
$369,000
The largest commitment involves Mattel’s agreement with Disney Enterprises, Inc., which expires in
December 2004. This licensing agreement, which contains annual minimum royalty guarantees, permits Mattel to
produce toys based on classic Disney characters such as Mickey Mouse, Winnie the Pooh and the Disney
Princesses, as well as any new infant and preschool toys based on film and television properties created by
Disney.
Royalty expense for 2002, 2001 and 2000 was $209.8 million, $220.3 million and $258.8 million,
respectively.
As of year end 2002, Mattel had outstanding commitments for 2003 and 2004 purchases of inventory
totaling approximately $103 million.
Insurance
Mattel has a wholly-owned subsidiary, Far West Insurance Company, Ltd. (“Far West”), that was
established to insure Mattel’s workers’ compensation, and general, product and automobile liability risks. Far
West insures the first $0.5 million of Mattel’s workers’ compensation, and general and automobile liability risks
and the first $1.0 million of product liability risks. Various insurance companies, that have an “A” or better
AM Best rating at the time the policies are purchased, reinsure Mattel’s risk in excess of the amounts insured by
Far West. Mattel’s liability for reported and incurred but not reported claims at December 31, 2002 and 2001 was
$24.1 million and $22.7 million, respectively, and is included in the consolidated balance sheets. Loss reserves
are accrued based on Mattel’s estimate of the aggregate liability for claims incurred using a study prepared by an
independent actuary.
Litigation
Litigation Related to Learning Company
Following Mattel’s announcement in October 1999 of the expected results of its Learning Company division
for the third quarter of 1999, various Mattel stockholders filed purported class action complaints naming Mattel
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