Hasbro 2006 Annual Report Download - page 46

picture SPIDER-MAN 3, which is included in purchase commitments above. Certain of the future minimum
guaranteed contractual royalty payments are contingent upon the theatrical release of the related entertainment
property.
Included in the Thereafter column above is $249,996 in principal amount of senior convertible debt due
2021. The holders of these debentures may put the notes back to the Company in December 2011 and
December 2016 at the principal amount. At that time, the purchase price may be paid in cash, shares of
common stock or a combination of the two. In addition, at December 31, 2006, these debentures may be
converted to shares at an initial conversion price of $21.60 per share through March 31, 2007, at which time
the contingent conversion feature will be reassessed. If the Company’s stock exceeds $23.76 for at least 20
trading days, within the 30 consecutive trading day period ending on the last trading day of a calendar quarter,
or upon other specified events, the debentures will be convertible at the initial conversion price of $21.60.
In addition to the above, the Company has certain warrants outstanding at December 31, 2006 that
contain a put option that would require the Company to repurchase the warrants for a price to be paid, at the
Company’s election, of either $100,000 in cash or $110,000 in shares of the Company’s common stock, such
stock being valued at the time of the exercise of the option. The Company’s current intent is to settle this put
option in cash if exercised. In accordance with SFAS 150, these warrants are recorded as a current liability in
the amount of $155,630, which represented the fair value of these warrants at December 31, 2006.
In addition, the Company expects to make contributions totaling approximately $7,100 to its pension
plans in 2007. The Company also has letters of credit and related instruments of approximately $71,000 at
December 31, 2006.
Financial Risk Management
The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates
primarily as the result of sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while
marketing those products in more than twenty currencies. Results of operations may be affected primarily by
changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound, Canadian dollar and
Mexican peso and, to a lesser extent, currencies in Latin American and Asia Pacific countries.
To manage this exposure, the Company has hedged a portion of its forecasted foreign currency
transactions using forward foreign exchange contracts. The Company estimates that a hypothetical immediate
10% depreciation of the U.S. dollar against foreign currencies could result in an approximate $22,000 decrease
in the fair value of these instruments. A decrease in the fair value of these instruments would be substantially
offset by decreases in the related forecasted foreign currency transaction.
The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or
short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that
the on-going risk on the net exposure should not be material to its financial condition. In addition, the
Company’s revenues and costs have been and will likely continue to be affected by changes in foreign
currency rates. From time to time, affiliates of the Company may make or receive intercompany loans in
currencies other than their functional currency. The Company manages this exposure at the time the loan is
made by using foreign exchange contracts. Other than as set forth above, the Company does not hedge foreign
currency exposures. The Company reflects all derivatives at their fair value as an asset or liability on the
balance sheet. The Company does not speculate in foreign currency exchange contracts. At December 31,
2006, these contracts had unrealized losses of $2,574, which are recorded in accrued liabilities. Included in
accumulated other comprehensive income at December 31, 2006 are deferred losses of $2,116, net of tax.
At December 31, 2006, the Company had fixed rate long-term debt, excluding fair value adjustments, of
$494,983. At December 31, 2006, the Company had fixed-for-floating interest rate swaps with notional
amounts of $75,000. The interest rate swaps are designed to adjust a portion of the Company’s debt subject to
a fixed interest rate. The interest rate swaps are matched with specific long-term debt issues and are designated
and effective as hedges of the change in the fair value of the associated debt. Changes in fair value of these
contracts are wholly offset in earnings by changes in the fair value of the related long-term debt. At
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