FORM 10-K

HASBRO INC - has
Filed: February 22, 2006 (period: December 25, 2005)
Annual report which provides a comprehensive overview of the company for the past year

Table of Contents

10-K - HASBRO, INC.

PART I

Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders

PART II

Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures
Item 9A. Item 9B. Other Information

PART III

Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions Item 14. Principal Accountant Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules SIGNATURES Exhibit Index EX-10.(W) (EX-10(W) SECOND AMENDMENT TO 1992 STOCK INCENTIVE PLAN)
EX-10.(X) (EX-10(X) THIRD AMENDMENT TO 1995 STOCK INCENTIVE PERFORMANCE PLAN) EX-10.(BB) (EX-10(BB) THIRD AMENDMENT TO THE 1997 EMPLOYEE NON-QUALIFIED STOCK PLAN) EX-10.(NN) (EX-10(NN) THIRD AMENDMENT TO DEFERRED COMPENSATION PLAN) EX-10.(VV) (EX-10(VV) SECOND AMENDMENT 2003 STOCK INCENTIVE PERFORMANCE PLAN) EX-11 (EX-11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS) EX-12 (EX-12 STATEMENT RE COMPUTATION OF RATIOS) EX-21 (EX-21 SUBSIDIARIES OF THE REGISTRANT) EX-23 (EX-23 CONSENT OF KPMG LLP) EX-31.1 (EX-31.1 SECTION 302 CERTIFICATION OF CEO) EX-31.2 (EX-31.2 SECTION 302 CERTIFICATION OF CFO) EX-32.1 (EX-32.1 SECTION 906 CERTIFICATION OF CEO) EX-32.2 (EX-32.2 SECTION 906 CERTIFICATION OF CFO)
Source: HASBRO INC, 10-K, February 22, 2006
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 2005 Commission file number 1-6682
(Exact Name of Registrant, As Specified in its Charter)

Hasbro, Inc.

Rhode Island

(State of Incorporation)

05-0155090
(I.R.S. Employer Identification No.)
1027 Newport Avenue, Pawtucket, Rhode Island
(Address of Principal Executive Offices)

(Zip Code)

Registrants telephone number, including area code (401) 431-8697 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock Preference Share Purchase Rights
New York Stock Exchange New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes or No. Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes or No. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes or No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one:) Large accelerated filer Accelerated filer Non-Accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes or No. The aggregate market value on June 24, 2005 (the last business day of the Companys second quarter) of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the stock, was approximately $3,265,605,760. The registrant does not have non-voting common stock outstanding. The number of shares of common stock outstanding as of February 9, 2006 was 177,988,289. DOCUMENTS INCORPORATED BY REFERENCE Portions of our definitive proxy statement for our 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

we seek to grow our international business by continuing to expand into Eastern Europe and emerging markets in Asia and Latin America. Key international brands for 2005 included MILTON BRADLEY and PARKER BROTHERS games, STAR WARS, ACTION MAN, FURBY, FURREAL FRIENDS, BEYBLADE, PLAY-DOH, PLAYSKOOL, MONOPOLY, and MAGIC: THE GATHERING. In 2006 our Canadian and Mexican operations are being moved into our new North American segment along with the U.S. Toys and Games segments. Our other international operations, primarily in Europe, the Asia Pacific region and Latin America, will be managed as separate geographic units under common leadership within our International segment. Other Segments In our Operations segment, we source production of substantially all of our toy products and certain of our game products through unrelated manufacturers in various Far East countries, principally China, using a Hong Kong based subsidiary for quality control and order coordination purposes. See Manufacturing and Importing below for more details concerning overseas manufacturing. In 2006 our Global Operations segment will continue to source product for our marketing and sales subsidiaries, and is expected to also manage our manufacturing operations in North America and Europe. Our other segment, the Hasbro Properties Group, generates revenue through the out-licensing worldwide of certain of our intellectual properties to third parties for promotional and merchandising uses in businesses which do not compete directly with our own product offerings. Other Information To further extend our range of products in the various segments of our business, we have Hong Kong operations that sell our toy and game products directly to retailers, primarily on a direct import basis. These sales are reflected in the revenue of the related segment where the customer resides. Certain of our products are licensed to other companies for sale in selected countries where we do not otherwise have a direct business presence. During the 2005 fiscal year, revenues generated from the sale of STAR WARS products produced under our license with Lucas Licensing and Lucasfilm were approximately $494,000, which was 16% of our consolidated net revenues in 2005. No other line of products constituted 10% or more of our consolidated net revenues in 2005. No individual line of products accounted for 10% or more of our consolidated net revenues during our 2004 fiscal year. During the 2003 fiscal year, revenues from our BEYBLADE line of products were 11% of our consolidated net revenues. No other line of products constituted 10% or more of our consolidated revenues in 2003. Working Capital Requirements Our working capital needs are primarily financed through cash generated from operations and, when necessary, short-term borrowings and proceeds from our accounts receivable securitization program. Our borrowings and the use of our accounts receivable program generally reach peak levels during the fourth quarter of each year. This corresponds to the time of year when our receivables also generally reach peak levels as part of the production and shipment of product in preparation for the holiday shipping season. Our historical revenue pattern is one in which the second half of the year is more significant to our overall business than the first half and, within the second half of the year, the fourth quarter is the more prominent. The strategy of retailers has been to make a higher percentage of their purchases of toy and game products within or close to the fourth quarter holiday consumer buying season, which includes Christmas. This trend has become more pronounced over the past few years and we expect that it will continue. 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 a product line, 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 4

as strikes or port delays, that interfere with the shipment of goods, particularly from the Far East, during the months leading up to the holiday purchasing season. The continuing consolidation of our retail customer base means that economic difficulties or changes in the purchasing policies of our major customers could have a significant impact on us. We depend upon a relatively small retail customer base to sell the majority of our products. For the fiscal year ended December 25, 2005, Wal-Mart Stores, Inc., Toys R Us, Inc., and Target Corporation accounted for approximately 24%, 12% and 12%, respectively, of our consolidated net revenues and our five largest customers, including Wal-Mart, Toys R Us and Target, in the aggregate accounted for approximately 53% of our consolidated net revenues. While the consolidation of our customer base may provide certain benefits to us, such as potentially more efficient product distribution and other decreased costs of sales and distribution, this consolidation also means that if one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could harm our business, financial condition and results of operations. Increased concentration among our customers could also negatively impact our ability to negotiate higher sales prices for our products and could result in lower gross margins than would otherwise be obtained if there were less consolidation among our customers. In addition, the bankruptcy or other lack of success of one or more of our significant retail customers could negatively impact our revenues and bad debt expense. We may not realize the full benefit of our licenses if the licensed material has less market appeal than expected or if sales revenue from the licensed products is not sufficient to earn out the minimum guaranteed royalties. An important part of our business involves obtaining licenses to produce products based on various theatrical releases, such as STAR WARS movies. The license agreements we enter to obtain these rights usually require us to pay minimum royalty guarantees that may be substantial, and in some cases may be greater than what we are ultimately able to recoup from actual sales, which could result in write-offs of such amounts that would harm our results of operations. At December 25, 2005, we had $126,515 of prepaid royalties, $37,107 of which are included in prepaid expenses and other current assets and $89,408 of which are included in other assets. Under the terms of existing contracts as of December 25, 2005, we are required to pay future minimum guaranteed royalties and other licensing fees totaling approximately $66,770. Acquiring or renewing licenses may require the payment of minimum guaranteed royalties that we consider to be too high to be profitable, which may result in losing licenses we currently hold when they become available for renewal, or missing business opportunities for new licenses. As a licensee, we have no guaranty that a particular brand will translate into successful toy or game products. In addition to contracts existing as of the end of our 2005 fiscal year, in January 2006, we entered into a license arrangement with Marvel Entertainment, Inc., and its subsidiary Marvel Characters, Inc. This license arrangement, which grants us the right to produce certain products based on Marvels characters for five years for retail sales beginning in 2007, requires us to make guaranteed minimum payments in the amount of up to $205,000. There is no guarantee that we will sell enough licensed merchandise under the agreement to earn-out the $205,000 in guaranteed payments and make a profit. We anticipate that the shorter theatrical duration for movie releases will make it increasingly difficult for us to sell licensed products based on entertainment properties and may lead our customers to reduce their demand for these products in order to minimize inventory risk. Furthermore, there can be no assurance that a successful brand will continue to be successful or maintain a high level of sales in the future. In the event that we are not able to acquire or maintain advantageous licenses, our revenues and profits may be harmed. 11

$674,544, or 21.5% of net revenues in 2003. The decrease in 2004 from 2003 reflects lower expenses resulting from the Companys cost reduction and business efficiency initiatives, and lower levels of performance incentive bonus provisions relating to lower revenues and operating earnings. Additionally, the 2003 amount included costs associated with the Companys closure of its retail stores operated under the Wizards of the Coast and Gamekeeper names. Interest Expense Interest expense decreased to $30,537 in 2005 from $31,698 in 2004 and $52,462 in 2003. Decreased interest expense, resulting from lower levels of debt, were largely offset by increased interest expense as a result of higher interest rates. The decrease in interest expense mainly reflects the Companys strategy to reduce its long-term debt. The Company repurchased or repaid principal amounts of long-term debt of $93,303 in 2005, $56,697 in 2004, and $368,937 in 2003. Approximately 72% of the decrease in interest expense from 2003 to 2004 was attributable to lower levels of short-term and long-term debt in 2004 than in 2003 with the remaining 28% decrease in interest expense due to lower effective interest rates, primarily the result of interest rate swap agreements that reduce the amount of the Companys debt subject to fixed interest rates. The Company will continue to review the amount of long-term debt outstanding as part of its strategic capital structure objective of maintaining a debt to capitalization ratio between 25% and 30%. Other (Income) Expense, Net Other income, net of $30,929 for the year ended December 25, 2005 compares to other expense, net of $1,226 and $48,090 for the years ended December 26, 2004 and December 28, 2003. Other income, net in 2005 primarily consists of interest income of $24,157, which compares to $7,729 in 2004 and $4,377 in 2003. The increase in interest income primarily relates to increases in invested cash balances in 2005. Other income, net in 2005 also includes non-cash income of $2,080 compared to $12,710 in 2004 and a non-cash charge to earnings of $13,630 in 2003, related to the change in the fair value of certain warrants required to be classified as a liability. These warrants are required to be adjusted to their fair value each quarter through earnings. The fair value of these warrants is primarily affected by the Companys stock price, but is also affected by the Companys stock price volatility and dividends, as well as risk-free interest rates. Assuming the Companys stock volatility and dividend payments, as well as risk-free interest rates remain constant, the fair value of the warrants would increase and the Company would recognize a charge to earnings as the price of the Companys stock increases. If the price of the Companys stock decreases and the Companys stock volatility, dividend payments, and the risk-free interest rates remain constant, the fair value of the warrants will decrease and the Company will recognize income. Based on a hypothetical increase in the Companys stock price to $22.00 per share at December 25, 2005 from its actual price of $20.36 a share on that date, the Company would have recognized a non-cash charge of approximately $7,790 rather than actual non-cash income recorded of $2,080 for the year ended December 25, 2005, to reflect the change in the fair value of the warrants from their fair value of $125,940 at December 26, 2004. Other expense, net in 2004 also includes a $8,988 write-down of the value of the common stock of Infogrames, held by the Company as an available-for-sale investment. This write-down resulted from an other-than-temporary decline in the fair value of this investment. Other expense, net in 2003 includes a loss on extinguishment of debt of $20,342 relating to the 8.50% Notes due 2006, repurchased pursuant to a tender offer in the fourth quarter of 2003. Under the tender offer, the Company repurchased notes totaling $167,257 in aggregate principal amount. Income Taxes Income tax expense was 31.8% of pretax earnings in 2005 compared with 24.6% of pretax earnings in 2004 and 28.3% of pretax earnings in 2003. Income tax expense for 2005 includes approximately $25,800 related to the repatriation in the fourth quarter of 2005 of $547,000 of foreign earnings pursuant to the special 28

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Hasbro, Inc.: We have audited the accompanying consolidated balance sheets of Hasbro, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the fiscal years in the three-year period ended December 25, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hasbro, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 25, 2005, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Hasbro, Inc.s internal control over financial reporting as of December 25, 2005, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2006, expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over financial reporting. As discussed in note 1 to the consolidated financial statements, during the fourth quarter of 2004, the Company adopted Emerging Issues Task Force Issue 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share. As discussed in note 6 to the consolidated financial statements, effective June 30, 2003, the first day of the Companys third quarter of fiscal 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity.

/s/ KPMG LLP Providence, Rhode Island February 21, 2006 38
HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 25, 2005 and December 26, 2004 (Thousands of dollars except share data)

2005 2004

ASSETS Current assets Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $29,800 in 2005 and $37,000 in 2004 Inventories Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Other assets Goodwill Other intangibles, net Other Total other assets Total assets LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Short-term borrowings Current portion of long-term debt Accounts payable Accrued liabilities Total current liabilities Long-term debt, excluding current portion Deferred liabilities Total liabilities Shareholders equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued Common stock of $.50 par value. Authorized 600,000,000 shares; issued 209,694,630 shares in 2005 and 2004 Additional paid-in capital Deferred compensation Retained earnings Accumulated other comprehensive earnings Treasury stock, at cost, 31,744,960 shares in 2005 and 32,379,369 shares in 2004 Total shareholders equity Total liabilities and shareholders equity
942,268 523,232 179,398 185,297 1,830,195 164,045
725,002 578,705 194,780 219,735 1,718,222 206,934 469,726 637,929 207,849 1,315,504 3,240,660
467,061 613,433 226,409 1,306,903 $ 3,301,143
14,676 32,770 152,468 710,812 910,726 495,619 171,322 1,577,667
17,959 324,124 167,585 638,943 1,148,611 302,698 149,627 1,600,936 104,847 380,745 (98) 1,721,209 82,388 (649,367) 1,639,724 3,240,660
104,847 358,199 (24) 1,869,007 15,348 (623,901) 1,723,476 $ 3,301,143
See accompanying notes to consolidated financial statements. 39
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Operations Fiscal Years Ended in December (Thousands of dollars except per share data)
Net revenues Cost of sales Gross profit Expenses Amortization Royalties Research and product development Advertising Selling, distribution and administration Total expenses Operating profit Nonoperating (income) expense Interest expense Other (income) expense, net Total nonoperating (income) expense Earnings before income taxes and cumulative effect of accounting change Income taxes Net earnings before cumulative effect of accounting change Cumulative effect of accounting change, net of tax Net earnings Per common share Net earnings before cumulative effect of accounting change Basic Diluted Net earnings Basic Diluted Cash dividends declared
$ 3,087,627 1,286,271 1,801,356 102,035 247,283 150,586 366,371 624,560 1,490,835 310,521 30,537 (30,929) (392) 310,913 98,838 212,075 212,075
2,997,510 1,251,657 1,745,853 70,562 223,193 157,162 387,523 614,401 1,452,841 293,012 31,698 1,226 32,924 260,088 64,111 195,977 195,977

(93,303) (3,685) (48,030) 45,278 (58,901) (158,641) (46) 217,266 725,002 $ 942,268 $ $ 33,265 32,962
(57,974) (6,598) 25,836 (37,088) (75,824) 6,540 204,255 520,747 725,002 35,781 40,647
(389,279) 309 (3,378) 39,892 (20,851) (373,307) 9,406 25,375 495,372 520,747 64,189 28,354
See accompanying notes to consolidated financial statements. 41
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders Equity (Thousands of dollars)
Additional Paid-in Deferred Capital Compensation Accumulated Other Comprehensive Earnings Total Shareholders Equity

Common Stock

Retained Earnings

Treasury Stock

Balance, December 29, 2002 Net earnings Other comprehensive earnings Comprehensive earnings Reclass of liabilities potentially settleable in common stock Stock option and warrant transactions Restricted stock activity Dividends declared Balance, December 28, 2003 Net earnings Other comprehensive earnings Comprehensive earnings Stock option and warrant transactions Restricted stock activity Dividends declared Balance, December 26, 2004 Net earnings Other comprehensive loss Comprehensive earnings Stock option and warrant transactions Purchases of Treasury Stock Restricted stock activity Dividends declared Balance, December 25, 2005

$ 104,847

458,130

(613)

1,430,950 157,664

(46,814) 77,298

(755,134)
1,191,366 157,664 77,298 234,962 (107,669) 108,746 (1,244) (20,921) 1,405,240 195,977 51,904 247,881 28,(42,461) 1,639,724 212,075 (67,040) 145,035 50,950 (48,030) 74 (64,277) 1,723,476

104,847

(107,669) 48,106 (689) 397,878

(66) (679)

(20,921) 1,567,693 195,977

30,484 51,904

60,640 (489) (694,983)

(16,748) (385) 380,745

581 (98)
(42,461) 1,721,209 212,075

82,388 (67,040)

45,720 (104) (649,367)

$ 104,847

(22,546) 358,199

74 (24)

(64,277) 1,869,007

15,348

73,496 (48,030) (623,901)
See accompanying notes to consolidated financial statements. 42
HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Thousands of Dollars and Shares Except Per Share Data) (1) Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Hasbro, Inc. and all majority-owned subsidiaries (Hasbro or the Company). Investments representing 20% to 50% ownership interest in other companies are accounted for using the equity method. The Company had no equity method investments at December 25, 2005 that were material to the consolidated financial statements. All significant intercompany balances and transactions have been eliminated. Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates. Reclassifications Certain amounts in the 2004 and 2003 consolidated financial statements have been reclassified to conform to the 2005 presentation. Fiscal Year Hasbros fiscal year ends on the last Sunday in December. Each of the fiscal years in the three-year period ended December 25, 2005 was a fifty-two week period. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and highly liquid investments purchased with a maturity to the Company of three months or less. The Company recorded interest income of $24,157, $7,729 and $4,377 in 2005, 2004, and 2003, respectively. Marketable Securities Marketable securities are comprised of investments in publicly-traded securities, classified as available-for-sale, and are recorded at market value with unrealized gains or losses, net of tax, reported as a component of accumulated other comprehensive earnings within shareholders equity until realized. Unrealized losses are evaluated to determine the nature of the losses. If the losses are determined to be other than temporary, the basis of the security is adjusted and the loss is recognized in earnings at that time. These securities are included in other assets in the accompanying consolidated balance sheets. Accounts Receivable and Allowance for Doubtful Accounts Credit is granted to customers predominantly on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year with regard to the financial performance, cash generation, financing availability and liquidity status of each customer. The majority of customers are reviewed at least annually; more frequent reviews are performed based on the customers financial condition and the level of credit being extended. For customers on credit who are experiencing financial difficulties, management performs additional financial analyses before shipping orders. The Company uses a variety of financial transactions based on availability and cost, to increase the collectibility of certain of its accounts, including letters of credit, credit insurance, factoring with unrelated third parties, and requiring cash in advance of shipping. 43

HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Thousands of Dollars and Shares Except Per Share Data) projected future foreign currency transactions. These over-the-counter contracts, which hedge future purchases of inventory and other cross-border currency requirements not denominated in the functional currency of the unit, are primarily denominated in United States and Hong Kong dollars, Euros and United Kingdom pound sterling and are entered into with counterparties who are major financial institutions. The Company believes any risk related to default by a counterparty to be remote. Hasbro does not enter into derivative financial instruments for speculative purposes. At the inception of the contracts, Hasbro designates its derivatives as either cash flow or fair value hedges. The Company formally documents all relationships between hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking various hedge transactions. All hedges designated as cash flow hedges are linked to forecasted transactions and the Company assesses, both at the inception of the hedge and on an on-going basis, the effectiveness of the derivatives used in hedging transactions in offsetting changes in the cash flows of the hedged items. The ineffective portion of a hedging derivative is immediately recognized in the consolidated statements of operations. The Company records all derivatives, such as foreign currency exchange contracts, on the balance sheet at fair value. Changes in the derivative fair values that are designated effective and qualify as cash flow hedges are deferred and recorded as a component of accumulated other comprehensive earnings (AOCE) until the hedged transactions occur and are then recognized in the consolidated statements of operations. The Companys foreign currency contracts hedging anticipated cash flows are designated as cash flow hedges. When it is determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting prospectively. Any gain or loss deferred through that date remains in AOCE until the forecasted transaction occurs, at which time it is reclassified to the consolidated statements of operations. To the extent the transaction is no longer deemed probable of occurring, hedge accounting treatment is discontinued prospectively and amounts deferred would be reclassified to the consolidated statements of operations. In the event hedge accounting requirements are not met, gains and losses on such instruments are included currently in the statements of operations. The Company uses derivatives to hedge intercompany loans denominated in foreign currencies. Due to the short-term nature of the contracts involved, the Company does not use hedge accounting for these contracts. The Company also uses interest rate swap agreements to adjust the amount of long-term debt subject to fixed interest rates. The interest rate swaps are matched with specific long-term debt obligations and are designated and effective as fair value hedges of the change in fair value of those debt obligations. These agreements are recorded at their fair value as an asset or liability. Gains and losses on these contracts are included currently in the consolidated statements of operations and are wholly offset by changes in the fair value of the related long-term debt. These hedges are considered to be perfectly effective under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138 (collectively SFAS 133). The interest rate swap contracts are with a number of major financial institutions in order to minimize counterparty credit risk. The Company believes that it is unlikely that any of its counterparties will be unable to perform under the terms of the contracts. Accounting for Stock-Based Compensation At December 25, 2005, the Company had stock-based employee compensation plans and plans for non-employee members of the Companys Board of Directors, which are described more fully in note 10. As permitted by Statement of Financial Accounting Standards No. 123, as amended by No. 148, Accounting for Stock-Based Compensation, (collectively SFAS 123) Hasbro accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As required by the Companys existing stock plans, stock options are 47

6,836 174,183 296,607 477,626 348,646 128,980 35,065 $ 164,045
18,727 211,414 310,130 540,271 369,885 170,386 36,548 206,934
Expenditures for maintenance and repairs which do not materially extend the life of the assets are charged to operations. (4) Goodwill and Intangibles Goodwill and certain intangible assets relating to rights obtained in the Companys acquisition of Milton Bradley in 1984 and Tonka in 1991 are not amortized. These rights were determined to have indefinite lives and total approximately $75,700. The Companys other intangible assets are amortized over their remaining useful lives, and accumulated amortization of these other intangibles is reflected in other intangibles, net in the accompanying consolidated balance sheet. The Company performs an annual impairment test for goodwill and intangible assets with indefinite lives. This annual impairment test is performed in the fourth quarter of the Companys fiscal year. In addition, if an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim impairment test at that time. For the three fiscal years ended December 25, 2005, no such events occurred. The Company completed its annual impairment tests in the fourth quarters of 2005, 2004 and 2003, which indicated that there was no impairment. 51
HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Thousands of Dollars and Shares Except Per Share Data) A portion of the Companys goodwill and other intangible assets reside in the Corporate segment of the business. For purposes of testing pursuant to Statement of Financial Accounting Standards No. 142, these assets are allocated to the reporting units within the Companys operating segments. Including this allocation, the changes in carrying amount of goodwill, by operating segment for the years ended December 25, 2005 and December 26, 2004 are as follows:
U.S. Toys Games Intl Total
2005 Balance at Dec. 26, 2004 Foreign exchange translation Balance at Dec. 25, Balance at Dec. 28, 2003 Goodwill acquired(a) Foreign exchange translation Other(b) Balance at Dec. 26, 2004

HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Thousands of Dollars and Shares Except Per Share Data) (8) Income Taxes Income taxes attributable to earnings before income taxes and cumulative effect of accounting change are:
Current United States State and local International Deferred United States State and local International
76,642 7,147 39,081 122,870
3,786 (497) 26,198 29,487 28,019 2,402 4,203 34,624 64,111
21,198 3,229 21,848 46,275 27,909 2,392 (7,527) 22,774 69,049
(20,611) (1,767) (1,654) (24,032) $ 98,838
The cumulative effect of accounting change in 2003 is shown net of tax on the statement of operations. There was no tax expense or benefit related to this amount. On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The Act created a one-time incentive for U.S. corporations to repatriate undistributed earnings from their international subsidiaries by providing an 85% dividends-received deduction for certain international earnings. The deduction was available to corporations during the tax year that includes October 22, 2004 or in the immediately subsequent tax year. In the fourth quarter of 2005, the Companys Board of Directors approved a plan to repatriate approximately $547,000 in foreign earnings, which was completed in December 2005. The tax expense related to this repatriation was $25,844. Certain tax benefits (expenses) are not reflected in income taxes in the statements of operations. Such benefits of $8,426 in 2005, $6,675 in 2004, and $6,108 in 2003, relate primarily to stock options. In 2005, 2004 and 2003, the deferred tax portion of the total benefit (expense) was $4,563, $(283), and $(2,199), respectively. A reconciliation of the statutory United States federal income tax rate to Hasbros effective income tax rate is as follows:
Statutory income tax rate State and local income taxes, net One time dividend Tax on international earnings Fair value adjustment of liabilities potentially settleable in common stock Change in valuation allowance Settlement of IRS examination Other, net
35.0% 0.8 8.3 (12.2) (0.2) (1.4) 1.5 31.8%
35.0% 0.5 (12.9) (1.7) 2.7 1.0 24.6%
35.0% 1.5 (13.8) 1.9 2.4 1.3 28.3%
HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Thousands of Dollars and Shares Except Per Share Data) The components of earnings before income taxes and cumulative effect of accounting change, determined by tax jurisdiction, are as follows:

HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Thousands of Dollars and Shares Except Per Share Data) At December 25, 2005, the Company had approximately $171,551 in outstanding purchase commitments. Hasbro is party to certain legal proceedings, none of which, individually or in the aggregate, is deemed to be material to the financial condition of the Company. (15) Segment Reporting Segment and Geographic Information Hasbro is a worldwide leader in childrens and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys ranging from traditional to high-tech. The Companys main reportable segments for the three years ended December 25, 2005 are U.S. Toys, Games and International. In addition, the Company has one other segment, Operations, which meets the quantitative thresholds for reportable segments. In the United States, the U.S. Toys segment includes the development, marketing and selling of boys action figures, vehicles and playsets, girls toys, preschool toys and infant products, creative play products, electronic interactive products, childrens consumer electronics, electronic learning aids and toy-related specialty products. The Games segment includes the development, manufacturing, marketing and selling of traditional board games and puzzles, electronic games, as well as trading card and role-playing games. Within the International segment, the Company develops, manufactures, markets and sells both toy and game products in non-U.S. markets. The Operations segment sources finished product for the majority of the Companys segments. The Company also has other segments that primarily license out certain toy and game properties and a retail segment, which operated retail stores prior to December 2003. The Company announced the closure of these stores in December 2003. These other segments do not meet the quantitative thresholds for reportable segments and have been combined for reporting purposes. Segment performance is measured at the operating profit level. Included in Corporate and eliminations are general corporate expenses, the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. Certain shared costs are allocated to segments based upon foreign exchange rates fixed at the beginning of the year, with adjustment to actual foreign exchange rates included in Corporate and eliminations. The accounting policies of the segments are the same as those described in note 1 to the consolidated financial statements. Information by segment and a reconciliation to reported amounts are as follows:

(dd) (ee) (ff) (gg) (hh) (ii) (jj) (kk) (ll) (mm) (nn) (oo) (pp) (qq) (rr) (ss) (tt)
Form of Deferred Restricted Stock Unit Agreement. (Incorporated by reference to Exhibit 10(hh) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2000, File No. 1-6682.) Form of Employment Agreement between the Company and six Company executives. (Incorporated by reference to Exhibit 10(v) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) Form of Amendment, dated as of March 10, 2000, to Form of Employment Agreement included as Exhibit 10(ee) above. (Incorporated by reference to Exhibit 10(ff) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 26, 1999, File No. 1-6682.) Hasbro, Inc. Retirement Plan for Directors. (Incorporated by reference to Exhibit 10(x) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 30, 1990, File No. 1-6682.) First Amendment to Hasbro, Inc. Retirement Plan for Directors, dated April 15, 2003. (Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.) Second Amendment to Hasbro, Inc. Retirement Plan for Directors. (Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period ended June 27, 2004, File No. 1-6682.) Form of Directors Indemnification Agreement. (Incorporated by reference to Appendix B to the Companys definitive proxy statement for its 1988 Annual Meeting of Shareholders, File No. 1-6682.) Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10(cc) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 26, 1993, File No. 1-6682.) First Amendment to Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors, dated April 15, 2003. (Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.) Second Amendment to Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors, dated July 17, 2003. (Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the period ended September 28, 2003, File No. 1-6682.) Third Amendment to Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors, dated December 15, 2005. Hasbro, Inc. 1994 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Appendix A to the Companys definitive proxy statement for its 1994 Annual Meeting of Shareholders, File No. 1-6682.) First Amendment to the 1994 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the period ended June 27, 1999, File No. 1-6682.) Form of Stock Option Agreement for Non-Employee Directors under the Hasbro, Inc. 1994 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10(w) to the Companys Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1994, File No. 1-6682.) Hasbro, Inc. 2003 Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Appendix B to the Companys definitive proxy statement for its 2003 Annual Meeting of Shareholders, File No. 1-6682.) Hasbro, Inc. 2004 Senior Management Annual Performance Plan. (Incorporated by reference to Appendix B to the Companys definitive proxy statement for its 2004 Annual Meeting of Shareholders, File No. 1-6682.) Hasbro, Inc. 2003 Stock Incentive Performance Plan. (Incorporated by reference to Appendix D to the Companys definitive proxy statement for its 2003 Annual Meeting of Shareholders, File No. 1-6682.) 88

EXHIBIT 10(w) SECOND AMENDMENT TO HASBRO, INC. 1992 STOCK INCENTIVE PLAN The Hasbro, Inc. 1992 Stock Incentive Plan (the "1992 Plan"), as amended, is hereby further amended in the manner set forth below by this second amendment (the "Second Amendment"). The effective date for this Second Amendment is December 23, 2005. 1. Section 16(b)(1) of the 1992 Plan is hereby deleted and replaced in its entirety with the following:
"(1) Upon the occurrence of an event constituting a Change in Control, all awards outstanding on such date shall become 100% vested and the then value of such awards, less all applicable withholding taxes, shall be paid to the participant in cash (or, in the case of Stock Options, SARs, Stock Awards and any other awards providing for equity in the Company, either in cash or in shares of Common Stock, or in any combination thereof, as may be determined by the Committee in its sole and absolute discretion) as soon as may be practicable. Upon such payment, such awards shall be cancelled." 2. A new Section 16(b)(4) is hereby added to the 1992 Plan as follows:
"(4) In the event that the Committee determines pursuant to Section 16(b)(1) above to pay participants the value of an equity award in shares of Common Stock, the number of shares of Common Stock to be paid to each participant will be determined by taking the cash value which would have been paid if the Committee had elected to pay in cash, computed in accordance with Section 16(b)(2) above, and dividing such value by the Payout Fair Market Value of the Common Stock. No fractional shares of Common Stock will be issued. The value of any fractional share amount will be paid to the participant in cash. For purposes of this Plan the term "Payout Fair Market Value" shall mean the average of the Fair Market Values of the Stock for the ten trading days immediately preceding the date on which the Change in Control shall have occurred."
EXHIBIT 10(x) THIRD AMENDMENT TO HASBRO, INC. 1995 STOCK INCENTIVE PERFORMANCE PLAN The Hasbro, Inc. 1995 Stock Incentive Performance Plan (the "1995 Plan"), as amended, is hereby further amended in the manner set forth below by this third amendment (the "Third Amendment"). The effective date for this Third Amendment is December 23, 2005. 1. Section 16(b)(1) of the 1995 Plan is hereby deleted and replaced in its entirety with the following:
"(1) Upon the occurrence of an event constituting a Change in Control, all awards outstanding on such date shall become 100% vested and the then value of such awards, less all applicable withholding taxes, shall be paid to the participant in cash (or, in the case of Stock Options, SARs, Stock Awards and any other awards providing for equity in the Company, either in cash or in shares of Common Stock, or in any combination thereof, as may be determined by the Committee in its sole and absolute discretion) as soon as may be practicable. Upon such payment, such awards shall be cancelled." 2. A new Section 16(b)(4) is hereby added to the 1995 Plan as follows:

MORE ITEMS!

Weve Kept Them a Secret Until NOW!
All Secret Items have a limited supply.
Was $298-$348 Computer Tower with Keyboard and Mouse* (Brand/model may vary by store. Minimum 5 per store.)

148 72

Purchase an XBOX 360 Pro Console and receive a

50 Wal-Mart Gift Card.

Was $19.96 Each Garth Brooks CD Boxed Set or Garth Brooks DVD Boxed Set

Was $298-$348

XBOX 360 Pro Console*

(Minimum 6 per store.)

Use your Wal-Mart Gift Card to buy these great games!

Was $89.96

VTech V.Flash Game System*

Was $169.00

Fisher-Price ESPN Fast Action Football*

Was $149.52

20 Boys ESPN X-Games BMX MotoBike*
Was $238.24 Nerf Showtime Hoops 10-in-1 Electronic Games*

Friday, November 24 ONLY

All Secret Items have a limited supply. *One per customer. No rain checks.
Prices not valid in Alaska, Hawaii, Oklahoma, Utah, Wisconsin, Canada and Puerto Rico. For the store location nearest you, please call 1-800-881-9180 or check online at Walmart.com. WAL-MARTS ADVERTISED MERCHANDISE POLICYWe intend to have every advertised item in stock. However, we may not offer some items in all locations and quantity or availability may vary due to unexpected demand or other circumstances beyond our control. If an advertised item is out of stock at your Wal-Mart, upon your request, we will issue you a Rain Check so that you can purchase the item at the advertised price when it becomes available. In addition, we may offer to sell you a similar item at the advertised price or a comparable price reduction. One-Time Offer items, Bonus items, items identified as being available in limited quantities, and items that are not carried at your Wal-Mart do not qualify for Rain Checks or offers of substitute items. ONE-TIME OFFER items are items that we carry at a special price for a limited time or that we do not intend to continue to carry on a regular basis. BONUS items are items that include a bonus amount of the same item or an additional bonus item at no extra cost. ROLLBACK means that the advertised price is even lower than the previously offered Every Day Low Price. In all cases, we reserve the right to limit quantities to normal retail purchases or one per customer or household, and to exclude dealers. Our advertising circular may vary by geographic region, and any particular regional circular will apply only to stores in that region. Offers and limitations void where prohibited by law. We apologize for, but will not be bound by, any errors in our advertisements. 2006 Wal-Mart Stores, Inc. Printed in the USA.

5to1 1am

Was $198.96 Was $29.72
KitchenAid Classic 4 -Quart Stand Mixer*

GE 17qt. Roaster Oven*

Was $894
RCA 52 Widescreen Projection HDTV*

(Minimum 3 per store)

Was $46.42

Was $24.88

GE 0.7 cu. ft. Microwave Oven*
Mr. Coffee 12 Cup Coffee Maker*

Was $19.87-21.87

George Ladies Fleece Robe* S-XL, 2X, 3X

Was $23.44-$48.44

Was $4.24 Each 30x52 HomeTrends Bath Towel Assorted Colors
HomeTrends 250 Thread Count Sheet Set Full, Queen and King $14.00, Twin $9.00, Assorted Colors

Was $129.86

Inatable 6 Snowman Family Snow Globe*