Hasbro 2006 Annual Report Download - page 42

these debentures may also put the notes back to Hasbro in December 2011 and December 2016 at the original
principal amount. At that time, the purchase price may be paid in cash, shares of common stock or a
combination of the two, at the Company’s discretion. While the Company’s current intent is to settle in cash
any puts exercised, there can be no guarantee that the Company will have the funds necessary to settle this
obligation in cash. On December 1, 2005, the holders of these debentures had the option to put these notes
back to Hasbro. On that date, the Company redeemed $4 of these notes in cash.
The Company has remaining principal amounts of long-term debt at December 31, 2006 of approximately
$494,983. As detailed below in Contractual Obligations and Commercial Commitments, this debt is due at
varying times from 2008 through 2028. In addition, the Company is committed to guaranteed royalty and other
contractual payments of approximately $91,890 in 2007, which includes $70,000 of royalty commitments
related to a contract signed in January 2006 with Marvel Entertainment, Inc. and Marvel Characters, Inc. Also,
as detailed in Contractual Obligations and Commercial Commitments, the Company has certain warrants,
currently recorded in accrued liabilities, that may be settleable for, at the Company’s option, $100,000 in cash
or $110,000 in the Company’s stock, such stock being valued at the time of the exercise of the option. The
Company believes that cash from operations, including the securitization facility, and, if necessary, its line of
credit, will allow the Company to meet these and other obligations listed. The Company will continue to
review the amount of long-term debt outstanding as part of its strategic capital structure objective of
maintaining a debt to capitalization ratio between 25% and 30%.
In July 2006, the Company’s Board of Directors authorized the repurchase of up to $350,000 in common
stock, replacing a fully utilized prior authorization of $350,000 dated May 2005. Purchases of the Company’s
common stock may be made in the open market or through privately negotiated transactions. The Company
has no obligation to repurchase shares under the open authorization, and the timing, actual number, and the
value of the shares that are repurchased will depend on a number of factors, including the price of the
Company’s stock. The Company may suspend or discontinue the program at any time and there is no
expiration date. In 2006, the Company repurchased 22,767 shares at an average price of $20.03 under these
authorizations. The total cost of these repurchases, including transaction costs, was $456,744.
Critical Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. As such, management is required to make certain
estimates, judgments and assumptions that it believes are reasonable based on the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods presented. The significant
accounting policies which management believes are the most critical to aid in fully understanding and
evaluating the Company’s reported financial results include sales allowances, inventory valuation, recoverabil-
ity of goodwill and intangible assets, recoverability of royalty advances and commitments, pension costs and
obligations, and stock-based compensation.
Sales Allowances
Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue
when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the
customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is
added to royalty revenue and reflected as net revenues in the consolidated statements of operations. The
Company routinely commits to promotional sales allowance programs with customers. These allowances
primarily relate to fixed programs, which the customer earns based on purchases of Company products during
the year. Discounts are recorded as a reduction of related revenue at the time of sale. While many of the
allowances are based on fixed amounts, certain of the allowances, such as the returns allowance, are based on
market data, historical trends and information from customers and are therefore subject to estimation. For its
allowance programs that are not fixed, such as returns, the Company estimates these amounts using a
combination of historical experience and current market conditions. These estimates are reviewed periodically
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