Mattel 2004 Annual Report Download - page 91

Royalty expense for 2004, 2003 and 2002 was $204.5 million, $169.2 million and $209.8 million,
respectively.
As of year end 2004, Mattel had outstanding commitments for purchases of inventory, other assets and
services totaling $188.1 million in fiscal year 2005.
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 per occurrence of Mattel’s workers’ compensation, and general and
automobile liability risks and the first $2.0 million per occurrence 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 year end 2004 and 2003 totaled $20.3 million and $25.0 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
and certain of its present and former officers and directors as defendants.
These shareholder complaints were consolidated into two lead cases, one under §10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), and the other under §14(a) of the Exchange Act. In November
2002, the United States District Court for the Central District of California permitted the actions to proceed as
class actions.
Several stockholders filed related derivative complaints purportedly on behalf of Mattel. Some of the
derivative suits were consolidated into one lawsuit in Los Angeles County Superior Court in California, which
was dismissed for the plaintiff’s failure to make pre-suit demand on the board of directors. An appeal from that
decision was dismissed in July 2003 by stipulation of the parties. Another derivative suit was filed in the
Delaware Court of Chancery, and was dismissed without prejudice in August 2002 in deference to the then-
ongoing California derivative case. A third derivative suit, filed in federal court in the Central District of
California, was dismissed in July 2002, and re-filed in November 2002 as part of the settlement described below.
In November 2002, the parties to the federal cases negotiated and thereafter memorialized in a final
settlement agreement a settlement of all the federal lawsuits in exchange for payment of $122.0 million and
Mattel’s agreement to adopt certain corporate governance procedures. The court granted final approval to the
settlement in September 2003, and judgments were entered accordingly. On October 9, 2003, a group of persons
purporting to be members of the §14(a) class filed a notice of appeal, challenging the manner in which the
$122.0 million was allocated between the §10(b) class and the §14(a) class. Briefing on the appeal is complete,
and in January 2005, the United States Court of Appeals for the Ninth Circuit issued an order directing that the
case be placed on the next available calendar.
At the time of the lawsuits, Mattel maintained directors and officers liability insurance with a maximum
coverage of $120.0 million through several different carriers. One of those carriers, Reliance Insurance
Company, had become insolvent, and was unable to meet its coverage obligation for its $20.0 million excess
layer. As a result, Mattel contributed this $20.0 million layer to the settlement fund, and made a claim against the
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