Hasbro 2007 Annual Report Download - page 36

royalty payment is required at the inception of the agreement. This payment is then recognized in the
consolidated statement of operations as the related sales are made. With respect to the MARVEL and STAR
WARS licenses, the Company had prepaid royalties recorded in both current and non-current assets. Each
reporting period, the Company reflects as current prepaid assets the amount of royalties it expects to reflect in
the statement of operations in the upcoming twelve months. The decrease in prepaid expenses and other
current assets also reflects a decrease in deferred tax assets. Prepaid expenses and other current assets
increased to $243,291 in 2006 from $185,297 in 2005. This increase was primarily due to a royalty advance
paid to MARVEL in 2006, of which approximately $87,400 was recorded in prepaid expenses and $12,930
was shown in other assets at December 31, 2006.
Accounts payable and accrued expenses decreased to $742,122 at December 30, 2007 from $895,311 at
December 31, 2006. The decrease is primarily due to the Company exercising its call option related to
warrants required to be classified as a liability and repurchasing these warrants for $200,000 in cash in the
second quarter of 2007. At December 30, 2006, these warrants had a fair value of $155,630. The decrease is
also a result of the reclassification of the liabilities related to uncertain tax positions as a result of the adoption
of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” at the beginning of 2007. These
decreases were partially offset by increases in accrued royalties primarily due to the significant sales of
TRANSFORMERS movie-related products, accrued advertising due to higher levels of advertising expense in
the fourth quarter of 2007, as well as higher accounts payable due to higher levels of inventory and expenses
as of December 30, 2007. Accounts payable and accrued expenses increased to $895,311 at December 31,
2006 from $863,280 at December 25, 2005. Of this increase, $31,770 related to the increase in fair value of
the Lucas warrants that the Company was required to record as liabilities under SFAS 150. As a result of
SFAS 150, the Company classified these warrants containing a put option as a current liability and adjusted
the amount of this liability to its fair value on a periodic basis. Increases from higher accrued bonus and
incentive payments as a result of the Company’s strong performance in 2006 were offset by decreases in other
accrued amounts, principally accrued royalties.
Cash flows from investing activities were a net utilization of $112,465, $83,604, and $120,671 in 2007,
2006, and 2005, respectively. In July 2007, with the exception of rights to DUNGEONS & DRAGONS, the
Company reacquired the remaining digital gaming rights for its owned or controlled properties held by
Infogrames Entertainment SA (Infogrames). The acquisition price of $19,000 included $18,000 in cash and
$1,000 of non-cash consideration in the form of the return of 39 shares of preferred stock held by the
Company in a subsidiary of Infogrames. During 2005, the Company expended $65,000 to reacquire the digital
gaming rights for certain of its owned or controlled properties from Infogrames. The rights repurchased in
2007 and 2005 were previously held by Infogrames on an exclusive basis as a result of a licensing agreement
entered into during 2000. In addition, in 2005 the Company expended $14,179 to purchase the assets of
Wrebbit Inc., a Montreal-based creator and manufacturer of innovative puzzles. The Company made no
acquisitions in 2006. In 2005, the Company also had proceeds from the sales of property, plant and equipment
of $33,083. These proceeds were primarily from the sale of the Company’s former manufacturing facility in
Spain. During 2007, the Company expended approximately $92,000 on additions to its property, plant and
equipment compared to $82,000 during 2006 and $71,000 during 2005. Of these amounts, 61% in 2007, 63%
in 2006, and 61% in 2005 were for purchases of tools, dies and molds related to the Company’s products. In
2008, the Company expects capital expenditures to increase and be in the range of $100,000 to $115,000.
During the three years ended December 30, 2007, depreciation and amortization of plant and equipment was
$88,804, $67,773, and $78,097, respectively.
The Company commits to inventory production, advertising and marketing expenditures prior to the peak
third and fourth quarter retail selling season. 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 the fourth quarter or early in the first quarter of the subsequent year. This timing difference between
expenditures and cash collections on accounts receivable made it necessary for the Company to borrow
varying amounts during the year. During 2007, 2006 and 2005, the Company primarily utilized cash from
operations and its accounts receivable securitization program to fund its operations.
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