Hasbro 2007 Annual Report Download - page 12

with the mid-year releases of SPIDER-MAN 3 and TRANSFORMERS and in 2005 with the mid-year release
of STAR WARS III: REVENGE OF THE SITH, this concentration is not as pronounced due to the higher
level of sales that occur around and just prior to the time of the motion picture theatrical release.
The toy and game business is also characterized by customer order patterns which vary from year to year
largely because of differences each year in the degree of consumer acceptance of product lines, product
availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major
motion pictures for which we have product licenses, and changes in overall economic conditions. As a result,
comparisons of our unshipped orders on any date with those at the same date in a prior year are not
necessarily indicative of our sales for that year. Moreover, quick response inventory management practices
result in fewer orders being placed significantly in advance of shipment and more orders being placed for
immediate delivery. Retailers are timing their orders so that they are being filled by suppliers, such as us,
closer to the time of purchase by consumers. Unshipped orders at January 27, 2008 and January 28, 2007 were
approximately $149,000 and $192,000, respectively. It is a general industry practice that orders are subject to
amendment or cancellation by customers prior to shipment. The backlog of unshipped orders at any date in a
given year can also be affected by programs that we may employ to incent customers to place orders and
accept shipments early in the year. These programs follow general industry practices. The programs that we
plan to employ to promote sales in 2008 are substantially the same as those we employed in 2007.
Historically, we commit to the majority of our inventory production and advertising and marketing
expenditures for a given year prior to the peak third and fourth quarter retail selling season. Our accounts
receivable increase during the third and fourth quarter as customers increase their purchases to meet expected
consumer demand in the holiday season. Due to the concentrated timeframe of this selling period, payments
for these accounts receivable are generally not due until later in the fourth quarter or early in the first quarter
of the subsequent year. The timing difference between expenses paid and revenues collected sometimes makes
it necessary for us to borrow varying amounts during the year. During 2007, we utilized cash from our
operations, proceeds from our accounts receivable securitization program, and borrowings under our secured
amended and restated revolving credit agreement as well as our uncommitted lines of credit to meet our cash
flow requirements. In addition to the above sources of cash, in September 2007, we issued $350,000 of notes
that are due in 2017 (the “Notes”). The proceeds from the Notes were primarily used to repay our short-term
borrowings while the remainder of the proceeds were used for general corporate purposes.
Royalties, Research and Development
Our success is dependent on innovation through the continuing development of new products and the
redesign of existing products for continued market acceptance. In 2007, 2006, and 2005, we spent $167,194,
$171,358, and $150,586, respectively, on activities relating to the development, design and engineering of new
products and their packaging (including products brought to us by independent designers) and on the
improvement or modification of ongoing products. Much of this work is performed by our internal staff of
designers, artists, model makers and engineers.
In addition to the design and development work performed by our own staff, we deal with a number of
independent toy and game designers for whose designs and ideas we compete with other toy and game
manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the
agreements require us to pay the designer a royalty on our net sales of the item. These designer royalty
agreements, in some cases, also provide for advance royalties and minimum guarantees.
We also produce a number of toys and games under trademarks and copyrights utilizing the names or
likenesses of characters from movies, television shows and other entertainment media, for whose rights we
compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty
on our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or
product lines in specified territories. In many instances, advance royalties and minimum guarantees are
required by these license agreements. In 2007, 2006, and 2005, we incurred $316,807, $169,731, and
$247,283, respectively, of royalty expense. A portion of this expense relates to amounts paid in prior years as
royalty advances. Our royalty expenses in any given year vary depending upon the timing of movie releases
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