Hasbro 2015 Annual Report Download - page 84

HASBRO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(Thousands of Dollars and Shares Except Per Share Data)
(5) Equity Method Investment
The Company owns an interest in a joint venture, Discovery Family Channel (the “Network”), with
Discovery Communications, Inc. (“Discovery”). The Company has determined that it does not meet the control
requirements to consolidate the Network and accounts for the investment using the equity method of accounting.
The Network was established to create a cable television network in the United States dedicated to high-quality
children’s and family entertainment. In October 2009, the Company purchased an initial 50% share in the
Network for a payment of $300,000 and certain future tax payments based on the value of certain tax benefits
expected to be received by the Company. On September 23, 2014, the Company and Discovery amended their
relationship with respect to the Network and Discovery increased its equity interest in the Network to 60% while
the Company retained a 40% equity interest in the Network. The change in equity interests was accomplished
partly through a redemption of interests owned by the Company and partly through the purchase of interests by
Discovery from the Company. In connection with this reduction in its equity ownership the Company was paid a
cash purchase price of $64,400 by Discovery. In connection with the restructuring of the Network in 2014, the
Company recognized a net expense of $28,326, which includes a charge resulting from an option agreement and
the Company’s share of severance charges and programming write-downs recognized by the Network, partially
offset by a gain from the reduction of amounts due to Discovery under a tax sharing agreement and is primarily
included in other (income) expense, net in the consolidated statements of operations.
In connection with the amendment, the Company and Discovery entered into an option agreement related to
the Company’s remaining 40% ownership in the Network, exercisable during the one-year period following
December 31, 2021. The exercise price of the option agreement is based upon 80% of the then fair market value
of the Network, subject to a fair market value floor. In connection with the amendment, the Company recorded a
charge in other expense in the third quarter of 2014, related to the then fair market value of the option agreement
totaling $25,590. At December 27, 2015, and December 28, 2014, the fair market value of this agreement was
$28,360 and $25,340, respectively and was included as a component of other liabilities related to the fair value of
this option agreement. During 2015 and 2014, the Company recorded losses (gains) of $3,020 and $(250) in other
expense, net relating to the change in value of this agreement.
As a result of the reduction in the Company’s ownership in the Network, the Company also received a
benefit from a reduction in amounts due to Discovery under the existing tax sharing agreement. The present
value of the expected future payments at the acquisition date totaled approximately $67,900 and was recorded as
a component of the Company’s investment in the joint venture. For the year ended December 28, 2014 the
Company recorded a net benefit in other expense related to the reduction in the amounts due to Discovery under
the tax sharing agreement totaling $12,834. The balance of the associated liability, including imputed interest,
was $54,521 and $55,107 at December 27, 2015 and December 28, 2014, respectively, and is included as a
component of other liabilities in the accompanying consolidated balance sheets. During 2015, 2014 and 2013, the
Company made payments under the tax sharing agreement to Discovery of $4,971, $7,010 and $6,541,
respectively.
The Company has a license agreement with the Network that requires the payment of royalties by the
Company to the Network based on a percentage of revenue derived from products related to television shows
broadcast by the joint venture. The license includes a minimum royalty guarantee of $125,000, which was paid in
5 annual installments of $25,000 per year, commencing in 2009, which can be earned out over approximately a
10-year period. The last payment was made in 2013 and is included in other, including long-term advances in the
consolidated statements of cash flows. In connection with the 2014 amendment, the terms of this license were
modified resulting in a benefit recorded to royalties totaling $2,328 in the consolidated statements of operations.
As of December 27, 2015 and December 28, 2014, the Company had $77,482 and $89,328 of prepaid royalties,
respectively, related to this agreement, $14,235 and $12,207, respectively, of which are included in prepaid
expenses and other current assets and $63,247 and $77,121, respectively, of which are included in other assets.
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