Hasbro 2006 Annual Report Download - page 45

Stock-Based Compensation
The Company has a stock-based compensation plan for employees and non-employee members of the
Company’s Board of Directors. Under this plan, the Company grants stock options at or above the fair market
value of the Company’s stock. On December 26, 2005, the first day of fiscal 2006, the Company adopted
SFAS 123R, which requires the Company to measure all stock-based compensation awards using a fair value
method and record such expense in its consolidated financial statements. The Company uses the Black-Scholes
option pricing model to value the stock options that are granted under these plans. The Black-Scholes method
includes four significant assumptions: (1) expected term of the options, (2) risk-free interest rate, (3) expected
dividend yield, and (4) expected stock price volatility. For the Company’s 2006 stock option grant, the
weighted average expected term was approximately 5 years. This amount is based on a review of employees’
exercise history relating to stock options as well as the contractual term of the option. The weighted average
risk-free interest rate used for 2006 stock option grants was 4.98%. This estimate was based on the interest
rate available on U.S. treasury securities with durations that approximate the expected term of the option. For
2006 stock option grants, the weighted average expected dividend yield used was 2.55% which is based on the
Company’s current annual dividend amount divided by the stock price on the date of the grant. The weighted
average expected stock price volatility used for 2006 stock option grants was 24%. This amount was derived
using a combination of historical price volatility over the most recent period approximating the expected term
of the option and implied price volatility. Implied price volatility represents the volatility implied in publicly
traded options on the Company’s stock, which the Company believes represents the expected future volatility
of the Company’s stock price. The Company believes that since this is a market-based estimate, it can provide
a better estimate of expected future volatility.
In July 2006, as part of its employee stock-based compensation plan, the Company issued contingent
stock performance awards, which provide the recipients with the ability to earn shares of the Company’s
common stock based on the Company’s achievement of stated cumulative diluted earnings per share and
cumulative net revenue targets over a ten quarter period beginning July 3, 2006 and ending December 28,
2008. Each award has a target number of shares of common stock associated with such award which may be
earned by the recipient if the Company achieves the stated diluted earnings per share and net revenue targets.
The measurement of the expense related to this award is based on the Company’s current estimate of revenues
and diluted earnings per share over the performance period. Changes in these estimates may impact the
expense recognized related to these awards.
Contractual Obligations and Commercial Commitments
In the normal course of its business, the Company enters into contracts related to obtaining rights to
produce product under license, which may require the payment of minimum guarantees, as well as contracts
related to the leasing of facilities and equipment. In addition, the Company has $494,983 in principal amount
of long-term debt outstanding at December 31, 2006, excluding fair value adjustments. Future payments
required under these and other obligations as of December 31, 2006 are as follows:
Certain Contractual Obligations 2007 2008 2009 2010 2011 Thereafter Total
Payments Due by Fiscal Year
Long-term debt ................. $ — 135,092 — — — 359,891 494,983
Interest payments on long-term
debt ....................... 22,436 22,436 14,128 14,128 14,128 192,058 279,314
Operating lease commitments . ..... 28,149 25,529 21,733 10,979 10,487 22,914 119,791
Future minimum guaranteed
contractual payments ........... 91,890 12,380 13,900 41,810 4,800 — 164,780
Purchase commitments ........... 249,554 — — — — — 249,554
$392,029 195,437 49,761 66,917 29,415 574,863 1,308,422
The Company’s agreement with MARVEL also requires the Company to make minimum expenditures on
marketing and promotional activities, including the spending of at least $15,000 associated with the motion
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