Mattel 2001 Annual Report Download - page 69

Royalty expense for 2001, 2000 and 1999 was $220.3 million, $258.8 million and $219.9 million,
respectively.
As of December 31, 2001, Mattel had outstanding commitments for 2002 purchases of inventory of
approximately $121 million.
Insurance
Mattel has a wholly-owned insurance subsidiary, Far West Insurance Company, Ltd. (‘‘Far West’’). The
purpose of this subsidiary is to insure Mattel’s workers’ compensation, general and product liability, and
automobile liability risks. Far West insures the first $0.5 million of the workers’ compensation, general liability
and automobile liability risks and the first $1.0 million of Mattel’s product liability risks. Risks in excess of
these amounts are reinsured by various insurance companies that have an ‘‘A’’ or better AM Best rating.
Mattel’s liabilities for unpaid and incurred but not reported claims at December 31, 2001 and 2000 were
$22.7 million and $20.5 million, respectively, and were included in the consolidated balance sheets. Loss
reserves are accrued based upon Mattel’s estimates of the aggregate liability for claims incurred using a study
prepared by an outside 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, several of Mattel’s stockholders filed purported class action complaints
naming Mattel and certain of its present and former officers and directors as defendants. The complaints
generally allege, among other things, that the defendants made false or misleading statements, in the joint
proxy statement for the merger of Mattel and Learning Company and elsewhere, that artificially inflated the
price of Mattel’s common stock.
In March 2000, these shareholder complaints were consolidated into two lead cases: Thurber v. Mattel,
Inc. et al. (containing claims under §10(b) of the 1934 Securities Exchange Act (‘‘Act’’)) and Dusek v. Mattel,
Inc. et al (containing claims under §14(a) of the Act). In January 2001, the Court granted defendants’ motions
to dismiss both Thurber and Dusek, and gave plaintiffs leave to amend. In December 2001, the Court denied
defendants’ motions to dismiss the amended complaints in both Thurber and Dusek. In each case, the plaintiffs
have asked for compensatory damages. Both Thurber and Dusek are currently pending in the United States
District Court for the Central District of California.
Other purported class action litigation has been brought against Mattel as successor to Learning Company
and the former directors of Learning Company on behalf of former stockholders of Broderbund Software, Inc.
who acquired shares of Learning Company in exchange for their Broderbund common stock in connection with
the Learning Company-Broderbund merger on August 31, 1998. The consolidated complaint in In re
Broderbund generally alleges that Learning Company misstated its financial results prior to the time it was
acquired by Mattel. The defendants’ motion to dismiss the complaint in In re Broderbund was granted in May
2001, and the case was dismissed. The In re Broderbund plaintiffs appealed the dismissal, and the case is
currently pending before the Ninth Circuit Court of Appeals. The plaintiffs have asked for compensatory
damages.
Several stockholders have filed derivative complaints on behalf and for the benefit of Mattel, alleging,
among other things, that Mattel’s directors breached their fiduciary duties, wasted corporate assets, and grossly
mismanaged Mattel in connection with Mattel’s acquisition of Learning Company and its approval of severance
packages to certain former executives. These derivative actions have been filed in the Court of Chancery in
Delaware, in Los Angeles Superior Court in California, and in the United States District Court for the Central
61