SECURITIES AND EXCHANGE COMMISSION

                         Washington, D. C.   20549

                                 FORM 10-Q

              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

                   OF THE SECURITIES EXCHANGE ACT OF 1934



For the period ended June 28,September 27, 1998       Commission file number 1-6682


                                HASBRO, INC.
                            --------------------
                            (Name of Registrant)
 
       Rhode Island                                O5-0155090
-
- - ------------------------             ------------------------------------
(State of Incorporation)             (I.R.S. Employer Identification No.)



            1027 Newport Avenue, Pawtucket, Rhode Island  02861
            ---------------------------------------------------
                       (Principal Executive Offices)



                               (401) 431-8697



    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  X  or No
                                 ---       ---

    The number of shares of Common Stock, par value $.50 per share, 
outstanding as of August 7,November 6, 1998 was 131,534,304.130,816,511.



                         
                         HASBRO, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets

                   (Thousands of Dollars Except Share Data)
                                  (Unaudited)

Jun. 28, Jun. 29, Dec. 28, Assets 1998 1997 1997 --------- --------- --------- Current assets Cash and cash equivalents $ 180,595 82,510 361,785 Accounts receivable, less allowance for doubtful accounts of $52,400, $49,600 and $51,700 600,254 714,212 783,008 Inventories: Finished products 277,608 302,213 198,215 Work in process 17,215 16,025 12,208 Raw materials 36,815 49,983 32,279 --------- --------- --------- Total inventories 331,638 368,221 242,702 Deferred income taxes 92,929 78,461 96,489 Prepaid expenses 130,811 110,452 89,890 --------- --------- --------- Total current assets 1,336,227 1,353,856 1,573,874 Property, plant and equipment, net 281,327 296,139 280,603 --------- --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $138,162, $123,524 and $128,237 615,297 508,439 486,502 Other intangibles, less accumulated amortization of $154,513, $114,346 and $135,467 707,775 419,439 478,798 Other 87,139 68,922 79,940 --------- --------- --------- Total other assets 1,410,211 996,800 1,045,240 --------- --------- --------- Total assets $3,027,765 2,646,795HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Thousands of Dollars Except Share Data) (Unaudited) Sep. 27, Sep. 28, Dec. 28, Assets 1998 1997 1997 --------- --------- --------- Current assets Cash and cash equivalents $ 176,486 80,030 361,785 Accounts receivable, less allowance for doubtful accounts of $56,900, $52,700 and $51,700 1,030,751 1,153,910 783,008 Inventories: Finished products 328,757 285,135 198,215 Work in process 16,627 13,273 12,208 Raw materials 38,425 49,371 32,279 --------- --------- --------- Total inventories 383,809 347,779 242,702 Deferred income taxes 92,748 80,730 96,489 Prepaid expenses 243,513 94,804 89,890 --------- --------- --------- Total current assets 1,927,307 1,757,253 1,573,874 Property, plant and equipment, net 287,872 279,916 280,603 --------- --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $144,503, $128,187 and $128,237 643,136 504,426 486,502 Other intangibles, less accumulated amortization of $187,554, $121,316 and $135,467 716,123 412,641 478,798 Other 101,866 69,715 79,940 --------- --------- --------- Total other assets 1,461,125 986,782 1,045,240 --------- --------- --------- Total assets $3,676,304 3,023,951 2,899,717 ========= ========= =========
HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued (Thousands of Dollars Except Share Data) (Unaudited)
Jun. 28, Jun. 29, Dec. 28, Liabilities and Shareholders' Equity 1998 1997 1997 --------- --------- --------- Current liabilities Short-term borrowings $ 527,259 314,288 122,024 Trade payables 124,479 89,967 179,156 Accrued liabilities 486,715 336,112 596,033 Income taxes 65,666 91,151 106,333 --------- --------- --------- Total current liabilities 1,204,119 831,518 1,003,546 Long-term debt, excluding current installments - 149,040 - Deferred liabilities 77,886 67,206 58,054 --------- --------- --------- Total liabilities 1,282,005 1,047,764 1,061,600 --------- --------- --------- Shareholders' equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued - - - Common stock of $.50 par value. Authorized 300,000,000 shares; issued 139,799,011, 132,176,967 and 139,799,011 69,900 66,088 69,900 Additional paid-in capital 488,374 279,798 489,447 Retained earnings 1,449,609 1,382,557 1,457,495 Accumulated other comprehensive income (20,076) (7,075) (3,903) Treasury stock, at cost; 7,786,821, 4,735,697 and 6,357,948 shares (242,047) (122,337) (174,822) --------- --------- --------- Total shareholders' equity 1,745,760 1,599,031 1,838,117 --------- --------- --------- Total liabilities and shareholders' equity $3,027,765 2,646,795HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued (Thousands of Dollars Except Share Data) (Unaudited) Sep. 27, Sep. 28, Dec. 28, Liabilities and Shareholders' Equity 1998 1997 1997 --------- --------- --------- Current liabilities Short-term borrowings $ 507,596 462,894 122,024 Trade payables 152,350 120,775 179,156 Accrued liabilities 788,902 469,944 596,033 Income taxes 88,654 117,559 106,333 --------- --------- --------- Total current liabilities 1,537,502 1,171,172 1,003,546 Long-term debt, excluding current installments 300,000 148,751 - Deferred liabilities 80,010 68,924 58,054 --------- --------- --------- Total liabilities 1,917,512 1,388,847 1,061,600 --------- --------- --------- Shareholders' equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued - - - Common stock of $.50 par value. Authorized 300,000,000 shares; issued 139,799,011, 132,191,745 and 139,799,011 69,900 66,096 69,900 Additional paid-in capital 488,535 279,588 489,447 Retained earnings 1,500,478 1,449,867 1,457,495 Accumulated other comprehensive income (5,216) (7,555) (3,903) Treasury stock, at cost; 9,109,846, 5,760,479 and 6,357,948 shares (294,905) (152,892) (174,822) --------- --------- --------- Total shareholders' equity 1,758,792 1,635,104 1,838,117 --------- --------- --------- Total liabilities and shareholders' equity $3,676,304 3,023,951 2,899,717 ========= ========= ========= See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Thousands of Dollars Except Share Data) (Unaudited)
Quarter Ended Six Months Ended ------------------ -------------------- Jun. 28, Jun. 29, Jun. 28, Jun. 29, 1998 1997 1998 1997 -------- -------- --------- --------- Net Revenues $ 572,057 583,886 1,054,877 1,139,670 Cost of Sales 247,095 252,917 451,407 488,288 -------- -------- --------- --------- Gross Profit 324,962 330,969 603,470 651,382 -------- -------- --------- --------- Expenses Amortization 15,880 11,194 30,023 21,226 Royalties, Research and Development 82,129 87,864 149,465 151,756 Advertising 73,213 66,908 128,970 138,210 Selling, Distribution and Administration 141,479 142,289 276,728 277,070 -------- -------- --------- --------- Total Expenses 312,701 308,255 585,186 588,262 -------- -------- --------- --------- Operating Profit 12,261 22,714 18,284 63,120 -------- -------- --------- --------- Nonoperating (income) expense Interest Expense 6,416 5,493 8,728 9,923 Other (Income) Expense, Net (2,417) (3,062) (10,514) (7,233) -------- -------- --------- --------- Total nonoperating (income) expense 3,999 2,431 (1,786) 2,690 -------- -------- --------- --------- Earnings Before Income Taxes 8,262 20,283 20,070 60,430 Income Taxes 2,809 7,302 6,824 21,755 -------- -------- --------- --------- Net Earnings $ 5,453 12,981 13,246 38,675 ======== ======== ========= ========= Per Common Share Net Earnings Basic $ .04 .10 .10 .30 ======== ======== ========= ========= Diluted $ .04 .10 .10 .30 ======== ======== ========= ========= Cash Dividends Declared $ .08 .08 .16 .16HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Thousands of Dollars Except Share Data) (Unaudited) Quarter Ended Nine Months Ended ------------------ -------------------- Sep. 27, Sep. 28, Sep. 27, Sep. 28, 1998 1997 1998 1997 -------- -------- --------- --------- Net Revenues $ 945,498 915,533 2,000,375 2,055,203 Cost of Sales 402,369 403,027 853,776 891,315 -------- -------- --------- --------- Gross Profit 543,129 512,506 1,146,599 1,163,888 -------- -------- --------- --------- Expenses Amortization 19,275 11,741 49,298 32,967 Royalties, Research and Development 113,755 102,583 263,220 254,339 Advertising 128,053 116,208 257,023 254,418 Selling, Distribution and Administration 162,705 156,215 439,433 433,285 Acquired Research and Development 20,000 - 20,000 - -------- -------- --------- --------- Total Expenses 443,788 386,747 1,028,974 975,009 -------- -------- --------- --------- Operating Profit 99,341 125,759 117,625 188,879 -------- -------- --------- --------- Nonoperating (income) expense Interest Expense 11,308 9,197 20,036 19,120 Other (Income) Expense, Net (1,568) 1,121 (12,082) (6,112) -------- -------- --------- --------- Total nonoperating (income) expense 9,740 10,318 7,954 13,008 -------- -------- --------- --------- Earnings Before Income Taxes 89,601 115,441 109,671 175,871 Income Taxes 28,271 38,041 35,095 59,796 -------- -------- --------- --------- Net Earnings $ 61,330 77,400 74,576 116,075 ======== ======== ========= ========= Per Common Share Net Earnings Basic $ .47 .61 .56 .91 ======== ======== ========= ========= Diluted $ .45 .57 .54 .87 ======== ======== ========= ========= Cash Dividends Declared $ .08 .08 .24 .24 ======== ======== ========= ========= See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 28, 1998 and June 29, 1997 (Thousands of Dollars) (Unaudited)
1998 1997 ------- ------- Cash flows from operating activities Net earnings $ 13,246 38,675 Adjustments to reconcile net earnings to net cash utilized by operating activities: Depreciation and amortization of plant and equipment 43,857 48,297 Other amortization 30,023 21,226 Deferred income taxes (1,153) (2,325) Change in operating assets and liabilities (other than cash and cash equivalents): Decrease in accounts receivable 176,595 87,426 Increase in inventories (69,208) (78,110) (Increase) Decrease in prepaid expenses (30,447) 1 Decrease in trade payables and accrued liabilities (254,312) (185,664) Other (1,739) 739 ------- ------- Net cash utilized by operating activities (93,138) (69,735) ------- ------- Cash flows from investing activities Additions to property, plant and equipment (47,969) (34,655) Investments and acquisitions, net of cash acquired (355,000) (164,153) Other 9,019 1,166 ------- ------- Net cash utilized by investing activities (393,950) (197,642) ------- ------- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 850 70,446 Repayments of borrowings with original maturities of more than three months (25,775) (31,721) Net proceeds of other short-term borrowings 433,825 160,646 Purchase of common stock (107,647) (63,539) Stock option transactions 39,350 18,978 Dividends paid (21,268) (18,801) ------- ------- Net cash provided by financing activities 319,335 136,009 ------- ------- Effect of exchange rate changes on cash (13,437) (5,093) ------- ------- Decrease in cash and cash equivalents (181,190) (136,461) Cash and cash equivalents at beginning of year 361,785 218,971 ------- ------- Cash and cash equivalents at end of period $180,595 82,510HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 27, 1998 and September 28, 1997 (Thousands of Dollars) (Unaudited) 1998 1997 ------- ------- Cash flows from operating activities Net earnings $ 74,576 116,075 Adjustments to reconcile net earnings to net cash utilized by operating activities: Depreciation and amortization of plant and equipment 69,458 79,232 Other amortization 49,298 32,967 Deferred income taxes (8,141) (3,815) Acquired research and development 20,000 - Change in operating assets and liabilities (other than cash and cash equivalents): Increase in accounts receivable (241,956) (354,339) Increase in inventories (113,951) (60,721) (Increase) Decrease in prepaid expenses (130,678) 15,099 Increase in trade payables and accrued liabilities 59,184 17,009 Other (1,613) 874 ------- ------- Net cash utilized by operating activities (223,823) (157,619) ------- ------- Cash flows from investing activities Additions to property, plant and equipment (87,543) (61,071) Investments and acquisitions, net of cash acquired (389,441) (164,153) Other 6,033 4,069 ------- ------- Net cash utilized by investing activities (470,951) (221,155) ------- ------- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 300,850 272,167 Repayments of borrowings with original maturities of more than three months (25,775) (71,322) Net proceeds of other short-term borrowings 378,363 147,453 Purchase of common stock (172,574) (99,983) Stock option transactions 51,579 24,376 Dividends paid (31,817) (28,971) ------- ------- Net cash provided by financing activities 500,626 243,720 ------- ------- Effect of exchange rate changes on cash 8,849 (3,887) ------- ------- Decrease in cash and cash equivalents (185,299) (138,941) Cash and cash equivalents at beginning of year 361,785 218,971 ------- ------- Cash and cash equivalents at end of period $176,486 80,030 ======= =======
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Six Months Ended June 28, 1998 and June 29, 1997 (Thousands of Dollars) (Unaudited)
1998 1997 ------- ------- Supplemental information Cash paid during the period for: Interest $ 8,033 8,017 Income taxes $ 33,495 74,875HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Nine Months Ended September 27, 1998 and September 28, 19978 (Thousands of Dollars) (Unaudited) 1998 1997 ------- ------- Supplemental information Cash paid during the period for: Interest $ 14,931 13,449 Income taxes $ 41,980 85,861 See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Earnings (Thousands of Dollars) (Unaudited) Quarter Ended Nine Months Ended ------------------ ------------------ Sep. 27, Sep. 28, Sep. 27, Sep. 28, 1998 1997 1998 1997 -------- -------- -------- -------- Net earnings $ 61,330 77,400 74,576 116,075 Other comprehensive earnings (loss) 14,860 (480) (1,313) (27,548) -------- -------- -------- -------- Total comprehensive earnings $ 76,190 76,920 73,263 88,527 ======== ======== ======== ======== See accompanying condensed notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (Thousands of Dollars and Shares Except Per share Data) (Unaudited) (1) In the opinion of management and subject to year-end audit, the accompanying unaudited interim financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of June 28,September 27, 1998 and June 29,September 28, 1997, and the results of operations and cash flows for the periods then ended. The results of operations for the sixnine months ended June 28,September 27, 1998, are not necessarily indicative of results to be expected for the full year. (2) On May 2, 1997, the Company purchased certain assets of OddzOn Products and Cap Toys, Inc. (OddzOn). The consideration for this purchase was $167,379. This acquisition was accounted for using the purchase accounting method and, based on estimates of fair market value, $43,582 was allocated to net tangible assets, $76,700 to product rights and $47,097 to goodwill. (3) On April 1, 1998, the Company acquired substantially all of the business and operating assets of Tiger Electronics, Inc. and certain affiliates (Tiger) for an initial payment of $335,000, subject to post- closing adjustment, plus the closing date value of inventory, tooling, equipment and prepaid assets. The estimated total cost of this acquisition approximates $395,000 and is being accounted for using the purchase accounting method. Based on current estimates of fair market value, approximately $42,000 has been allocated to net tangible assets, $213,000 to product rights and $140,000 to goodwill. (4) Late in the fourth quarter of 1997, the Company announced a global integration and profit enhancement program which anticipated the redundancy of approximately 2,500 employees, principally in manufacturing, and provided for actions in three principal areas: a continued consolidation of the Company's manufacturing operations; the streamlining of marketing and sales, while exiting from certain underperforming markets and product lines; and the further leveraging of overheads. Of the $140,000 estimated costs related to these actions, $125,000 was reported as a nonrecurring charge and $15,000 was reflected in cost of sales. Of the nonrecurring amount approximately $54,000 related to severance and people costs, $52,000 to property, plant and equipment and leases and $19,000 to product line related costs. During the first sixnine months of 1998, approximately 1,900 employees were terminated. The approximate $100,000$87,000 accrual remaining at June 28,September 27, 1998, is principally attributable to severance costs, which will be disbursed over the employee's entitlement period, and remaining property, plant and equipment costs, which will notcontinue to be incurred prior toupon the cessationtransition of production at the various facilities.facilities from production to non-productive status. The program remains on schedule to be substantially completed by the end of 1998. (4) On April 1, 1998, the Company acquired substantially all of the business and operating assets of Tiger Electronics, Inc. and certain affiliates (Tiger) for an initial payment of $335,000, subject to post- closing adjustment, plus the closing date value of inventory, tooling, equipment and prepaid assets. The estimated total cost of this acquisition approximates $395,000 and is being accounted for using the purchase accounting method. Based on current estimates of fair market value, approximately $42,000 has been allocated to net tangible assets, $213,000 to product rights and $140,000 to goodwill. HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements continued(continued) (Thousands of Dollars and Shares Except Per share Data) (Unaudited) (5) Earnings perOn September 14, 1998, the Company, through its wholly owned subsidiary, New HIAC Corp. (New HIAC), acquired in excess of 90% of the outstanding shares of MicroProse, Inc. (MicroProse) through a cash tender offer of $6.00 for each outstanding share dataof MicroProse. Upon completion of this tender offer and through a merger into New HIAC, MicroProse became a wholly owned subsidiary of the Company and each untendered share was converted into the right to receive $6.00 in cash. The purchase price, including the assumption of debt and preference stock, approximated $70,000 and is being accounted for using the fiscal quarterspurchase accounting method. Based on estimates of fair market value, approximately $4,000 has been allocated to net tangible liabilities, $20,000 to product rights, $34,000 to goodwill and six months ended June 28, 1998$20,000 to acquired research and June 29, 1997 were computed as follows: 1998 1997 ----------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Quarter - - - ------- Net earnings $ 5,453 5,453 12,981 12,981 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 1,437 ------- ------- ------- ------- Adjusted net earnings $ 5,453 5,453 12,981 14,418 ======= ======= ======= ======= Average shares outstanding 132,560 132,560 127,847 127,847 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 7,630 Options and warrants - 5,668 - 2,129 ------- ------- ------- ------- Equivalent Shares 132,560 138,228 127,847 137,606 ======= ======= ======= ======= Earnings per share $ .04 .04 .10 .10 ======= ======= ======= ======= Six Months - - - ---------- Net earnings $ 13,246 13,246 38,675 38,675 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 2,875 ------- ------- ------- ------- Adjusted net earnings $ 13,246 13,246 38,675 41,550 ======= ======= ======= ======= Average shares outstanding 132,835 132,835 128,223 128,223 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 7,633 Options and warrants - 5,383 - 2,302 ------- ------- ------- ------- Equivalent Shares 132,835 138,218 128,223 138,158 ======= ======= ======= ======= Earnings per share $ .10 .10 .30 .30 ======= ======= ======= ======= HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements, continued (Thousands of Dollars and Shares Except Per share Data) (Unaudited)development which has been written- off. (6) Effective for fiscal 1998, Hasbro adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 also requires that an entity classify items of other comprehensive earnings by their nature in the financial statements and display the accumulated amount thereof separately within the equity section of the balance sheet. The Company's other comprehensive earnings (loss) primarily results from foreign currency translation adjustments. Hasbro's(7) On November 2, 1998, the Company announced the successful completion of its cash tender offer to purchase all of the outstanding shares of Galoob Toys, Inc. (Galoob) at a price of $12.00 per share. After giving effect to the purchase of the shares tendered, the Company beneficially owned approximately 93% of the outstanding Galoob shares. Also on November 2, the Company effected a merger pursuant to which Galoob became a wholly- owned subsidiary of the Company and each untendered Galoob share was converted into the right to receive $12.00 per share in cash. The total comprehensive earnings (loss)purchase price of this transaction will approximate $220,000, and will be accounted for using the purchase accounting method. HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars and Shares Except Per share Data) (Unaudited) (8) Earnings per share data for the fiscal quarters and sixnine months ended June 28,September 27, 1998 and June 29,September 28, 1997 were computed as follows: 1998 1997 ---- --------------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Quarter - - - ------- Net earnings $ 5,453 12,981 Other comprehensive earnings (loss) (7,891) (11,608)61,330 61,330 77,400 77,400 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 1,433 ------- ------- Total comprehensive------- ------- Adjusted net earnings (loss) $ (2,438) 1,37361,330 61,330 77,400 78,833 ======= ======= Six======= ======= Average shares outstanding 131,368 131,368 126,922 126,922 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 7,616 Options and warrants - 5,007 - 2,565 ------- ------- ------- ------- Equivalent Shares 131,368 136,375 126,922 137,103 ======= ======= ======= ======= Earnings per share $ .47 .45 .61 .57 ======= ======= ======= ======= Nine Months - - - --------------------- Net earnings $ 13,246 38,675 Other comprehensive earnings (loss) (16,173) (27,068)74,576 74,576 116,075 116,075 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 4,307 ------- ------- Total comprehensive------- ------- Adjusted net earnings (loss) $ (2,927) 11,60774,576 74,576 116,075 120,382 ======= ======= ======= ======= Average shares outstanding 132,346 132,346 127,789 127,789 Effect of dilutive securities; 6% Convertible Notes due 1998 - - - 7,627 Options and warrants - 5,258 - 2,390 ------- ------- ------- ------- Equivalent Shares 132,346 137,604 127,789 137,806 ======= ======= ======= ======= Earnings per share $ .56 .54 .91 .87 ======= ======= ======= ======= HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) NET REVENUES - - - ------------ Worldwide netNet revenues in local currencies for the secondthird quarter of 1998 were essentially unchangedincreased approximately 3% to $945,498, from the second$915,533 in the third quarter of 1997. The acquisition1997, despite the impact of the operating assets of Tiger Electronics, Inc.ongoing and certain affiliates thereof (Tiger), on April 1, 1998 (see note 3), added approximately $40,000 to net revenues. This increase, however, was offset by ongoingrecently accelerated changes in inventory flow policies at Toys `R Us, coupled with year-over-year differencesa major customer. This revenue increase reflects the positive impacts from the acquisition of Tiger Electronics, Inc. (Tiger), in April (see note 4), and increased revenues at Hasbro Interactive, both partially offset by the timing of movie releases of some of the Company's major entertainment properties. In addition,previously mentioned Toys 'R Us volume reductions and the adverse impact of the stronger U.S. dollar, which reduced revenues by approximately $9,000, resulting in reported revenues of $572,057, compared to $583,886 reported last year.$7,000. For the sixnine months, revenues were $1,054,877$2,000,375 and $1,139,670$2,055,203 in 1998 and 1997, respectively. In addition to the second quarter factors noted above, theThe 1998 sixnine month amounts reflect an approximate $10,000 impact ofwere adversely impacted by approximately $26,000 from the strengthened U.S. dollar, during the first quarter as well as that quarter'speriod's impact of the Toys `R Us inventory flow policy change.change and the fact that in 1997 there were three motion picture releases related to the Company's major entertainment properties. Partially offsetting these unfavorable impacts was the positive effect from the Tiger acquisition and increases at Hasbro Interactive. GROSS PROFIT - - - ------------ While theThe Company's gross marginmargins for the quarter and sixnine months of 1998, at 56.8%57.4% and 57.2%57.3%, were both essentially flat withimproved from the 1997 amounts of 56.7%56.0% and 57.2%, certain56.6%. These increases reflect the benefit being experienced from the removal of excess manufacturing capacity, as addressed within the Company's global integration and profit enhancement program initiatives haveinitiative announced in December of 1997 (see note 3). Additionally, increased margins. Offsetting thisrevenues from the Company's interactive products, which carry a higher gross margin, and an overall more favorable movement, however, was the decrease in salesmix of certain higher margin boys action toys, many of which are tied to entertainment properties which had more visibility in 1997 as a result of various motion picture releases.products sold, both contributed positively. EXPENSES - - - -------- Amortization expense in both periods of 1998 was greater than in the comparable periods of 1997, reflecting the Company's recent acquisitions, including OddzOn in May of 1997 (see note 2) and Tiger in April of 1998. Royalties, research and development expenses for the quarter decreasedincreased in both amount and as a percentage of net revenues from comparable 1997 levels. The royalty component decreased in both dollarsincrease reflects the higher rates of Tiger, Hasbro Interactive and as a percentage of net revenues to rates more comparable with those experienced during the later quarters of 1997.Teletubbies products. Research and development, at $39,103$43,165 and $74,379$117,544 for the quarter and sixnine months of 1998, respectively, increased in both dollars and as a percentage of net revenues from $37,376$37,868 and $68,433$106,301 a year ago. These increases reflect both the inclusion of new units, OddzOn in May 1997, and Tiger in April 1998, and the continuing impactongoing investment to grow Hasbro Interactive. The Company believes that this trend of increasedincreasing royalties, research and development efforts within the Company's Interactive unit as it builds for the future.expenses is likely to continue. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) Advertising expense for each of the secondthird quarter and nine months increased both in dollars and as a percentage of net revenues. The increase in dollars reflects the inclusion of Tiger while the increase in percentage reflects the mix of more non-entertainment based product in 1998, in the absence of major movie support. For the six months, it remained essentially unchanged as a percentage of net revenues while decreasing in amount. This decrease was the result of the greater proportion of first quarter revenues which arose from products not as extensively advertised as many of the Company's other offerings. Selling, distribution and administration expenses, which are largely fixed, decreasedincreased marginally in amount and as a percentage of net revenues during botheach of the secondthird quarter and sixnine months of 1998 from comparable 1997 levels. This, despiteThese increases reflect the inclusion of bothTiger from April 1, as well as OddzOn and Tiger for athe full secondnine months. During the third quarter of 1998. The increase in percentage terms is principally1998, the Company incurred a functionone-time charge to write-off the $20,000 appraised value of the lower levelacquired in-process research and development of MicroProse, Inc. (MicroProse), which was acquired for approximately $70,000 on September 14, 1998 revenues.(see note 5). NONOPERATING (INCOME) EXPENSE - - - ----------------------------- Interest expense during the third quarter $6,416 inof 1998 was $11,308 compared with $5,493$9,197 in 1997, and reflects both the conversion of the Company's 6% Notes into common stock during the fourth quarter of 1997 and the increased borrowing requirements relatingrelated to the funding of the Tiger acquisition.acquisition and the continuation of the Company's share repurchase plan. For the sixnine months of 1998, interest expense was lower than$20,036 compared with $19,120 in the same period of 1997, reflecting the lower first quarter borrowing requirements as well as the two factors previously notedlargely for the second quarter.same reasons. The change in other nonoperating income, in both the quarter and sixnine months, reflects the earnings differential resulting from changes in levels of short-term investments, the impact of minority investments in certain subsidiaries, as well as foreign exchange transactions and translation. INCOME TAXES - - - ------------ Income tax expense for the secondthird quarter and sixof 1998 decreased to 31.6% from the 33.0% of a year ago. For the nine months of 1998 remained constantand 1997, the rates were 32.0% and 34.0%, respectively. The lower rates in each of the third quarters compared with each of the fullnine months, reflect the impact of the year 1997 rateto date changes made during the respective quarters. The lower 1998 rates reflect the impact of 34%, while decreasing from 36% in the second quarterTiger acquisition, the implementation of various tax strategies and six monthsthe downward trend of 1997. The decrease in the periodtax on international earnings due to period rates resulted principally from the continued reorganization of the Company's global business, which reduced the tax on international earnings.business. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) OTHER INFORMATION - - - ----------------- During the past several years, the Company has experienced a shift in its revenue pattern wherein the second half of the year has grown in significance to its overall business and within that half the fourth quarter has become more prominent. The Company expects that this trend will continue. This concentration increases the risk of (a) underproduction of HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, and inventory levels and policies of retailers and differences in overall economic conditions. Also, quick response inventory management practices now being used results in fewer orders being placed in advance of shipment and more orders, when placed, for immediate delivery. As a result, comparisons of unshipped orders on any date in a given year with those at the same date in a prior year are not necessarily indicative of sales for the entire year. In addition, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. At the end of its fiscal July (July 26,October (October 25, 1998 and July 27,October 26, 1997) the Company's unshipped orders were approximately $670,000$580,000 and $860,000.$480,000. Late in the fourth quarter of 1997, the Company announced a global integration and profit enhancement program which anticipated the redundancy of approximately 2,500 employees, principally in manufacturing, and provided for actions in three principal areas: a continued consolidation of the Company's manufacturing operations; the streamlining of marketing and sales, while exiting from certain underperforming markets and product lines; and the further leveraging of overheads. Of the $140,000 estimated costs related to these actions, $125,000 was reported as a nonrecurring charge and $15,000 was reflected in cost of sales. Of the nonrecurring amount, approximately $54,000 related to severance and people costs, $52,000 to property, plant and equipment and leases and $19,000 to product line related costs. During the first sixnine months of 1998, approximately 1,900 employees were terminated. The approximate $100,000$87,000 accrual remaining at June 28,September 27, 1998, is principally attributable to severance, which will be disbursed over the employee's entitlement period, and remaining property, plant and equipment costs, which will notcontinue to be incurred prior toupon the cessationtransition of production at the various facilities.manufacturing facilities from productive to non- productive status. The program remains on schedule to be substantially completed by the end of 1998. The Company estimated its pretax cost savings from this initiative to be $40,000 in 1998 and $350,000 over the period 1998 through 2002. Because of the unanticipated shortfall in sales to Toys 'R Us during the current year and changes in product mix, factory utilization rates are not as high as initially anticipated, which could HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) result in the Company not meeting its targeted savings during 1998. Through the end of September, the Company estimates that it has realized pretax savings of approximately $20,000 during the first nine months of 1998. The positive cash flow impact from this program will occur largely in the form of reduced outflows for payment of costs associated with the manufacture and sourcing of products. The Company has developed plans that address its possible exposure from the impact of the Year 2000. This project is being managed by a global cross- functional team of employees. The team meets regularly and makes periodic reports on its progress to a management steering committee, the Audit Committee of the Board of Directors and the Board of Directors. The Company has substantially completed the awareness and assessment phases of this project through the inventorying and assessment of its critical financial, operational (including imbedded and non-information technology) and information systems. The renovation phase is now well underway, as a number of non-compliant systems have been modified or replaced and plans are in place for the required modifications or replacements of other non- compliant systems. A planned global 'enterprise' system became operational at several of the Company's major units during the current year and has replaced a number of older non-compliant systems. As the global roll-out of this enterprise system continues, additional Year 2000 compliance will occur. The Company is now in the validation and implementation phases and believes that approximately 70% of its mission critical systems are currently Year 2000 compliant, that an additional 15% will be so by the end of 1998 and virtually all will be by mid-1999. Excluding costs related to the enterprise system, the Company's out of pocket costs associated with becoming Year 2000 compliant have been estimated to approximate $3,000. These costs are being expensed as incurred and approximately 40% of this amount has been spent to date. The Company is also well into the process of reviewing the Year 2000 readiness of its customers, vendors and service providers. This review process includes both the obtaining of confirmation from these business partners of their readiness as well as reviews of such readiness by independent third party consultants. While this review process is ongoing, nothing has come to the attention of the Company that would lead it to believe that its material customers, vendors and service providers will not be Year 2000 ready. The Company's risk management program includes disaster recovery contingency plans that will be expanded by mid-year 1999 to include Year 2000 issues and may include, for example, the maintaining and development of back-up systems and procedures, early identification and selection of alternative Year 2000 ready suppliers and service providers, revisions to credit policies and possible temporary increases in levels of inventories. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) Year 2000 readiness has been a senior management priority of the Company for some time and the Company believes that it is taking such reasonable and prudent steps as are necessary to mitigate its risks related to Year 2000. However, the effect, if any, on the Company's results of operation from Year 2000 if it, its customers, vendors or service providers are not fully Year 2000 compliant cannot be reasonably estimated. Notwithstanding the above, the most likely impact on the Company would be a reduced level of activity in the early part of the first quarter of the year 2000, a time at which, as a result of the seasonality of the Company's business, its activities in sales, manufacturing and sourcing, are at their low. Certain statements contained in this discussion contain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual actions or results may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, delays in, or increases in the anticipated cost of, the implementation of planned actions as a result of unanticipated technical malfunctions or difficulties which would arise during the validation process or otherwise; the inherent risk that assurances, warranties, and specifications provided by third parties with respect to the Company's systems, or such third party's Year 2000 readiness, may prove to be inaccurate, despite the Company's review process; the continued availability of qualified persons to carry out the remaining anticipated phases; the risk that governments may not be Year 2000 ready, which could affect the commercial sector in trade, finance and other areas, notwithstanding private sector Year 2000 readiness; whether, despite a comprehensive review, the Company has successfully identified all Year 2000 issues and risks; and the risk that proposed actions and contingency plans of the Company and third parties with respect to Year 2000 issues may conflict or themselves give rise to additional issues. LIQUIDITY AND CAPITAL RESOURCES - - - ------------------------------- The seasonality of the Company's business coupled with certain customer incentives, mainly in the form of extended payment terms, result in the interim cash flow statements being not representative of that which may be expected for the full year. As a result of these extended payment terms, the majority of the Company's cash collections occur late in the fourth quarter and early in the first quarter of the subsequent year. As receivables are collected late in the fourth quarter and through the first quarter of the subsequent year, cash flow from operations becomes positive and is used to repay a significant portion of the short-term borrowings. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) As a result, management believes that on an interim basis, rather than discussing its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, again due to the seasonality of its business and the extended payment terms offered, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior year-end. Receivables, both in dollars and in days sales outstanding, decreased from JuneSeptember 1997 levels. In amount, receivables were approximately $114,000,$1,031,000, or 16%11% lower and, at 95103 days sales outstanding, 1624 days less than the 111127 days sales outstanding at the same point in 1997. These improvements continue to reflect the increased impact of the Company's letter of credit business and its non- traditionalnon-traditional toy and game businesses, both of which have shorter payment terms. Inventories decreasedincreased approximately 10% from 1997 levels, despitereflecting the inclusion of both Tiger and MicroProse in 1998,1998. Other current assets increased significantly from 1997 levels, reflecting, the Company's effortsin addition to manage them more efficiently.Tiger and MicroProse, an advance royalty under a key license agreement. Other assets, as a group, increased approximately $415,000$474,000 from their JuneSeptember 1997 levels reflecting the acquisition of Tiger and MicroProse as well as other acquisitions of product rights and licenses during the most recent twelve months, all partially offset by an additional year of amortization expense. Net borrowings (short- and long-term borrowings less cash and cash equivalents) decreasedincreased by approximately $34,000$99,500 to $346,664$631,110 from $380,818$531,615 at June 29,September 28, 1997. This decrease occurred despiteincrease reflects the fact thatutilization of more than $500,000$600,000 of cash was utilized during the last twelve months for acquisitions and the continuation of the Company's share repurchase program. At June 28, 1998, the Company had committed unsecured linesprogram, both of credit totaling approximately $550,000 available to it. It also had available uncommitted lines approximating $750,000. The Company believes that these amountswhich are adequate for its needs. Of these available lines, approximately $540,000 was in use at June 28, 1998. Trade payablestraditionally funded through a combination of cash provided by operating activities and accrued liabilities both increased from the comparable 1997 levels, reflecting the impact of the unpaid amounts relating to the Tiger acquisitioncash provided by external short- and the Company's global integration and profit enhancement program. RECENT INFORMATION - - - ------------------ During the quarter, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The Company is currently reviewing the provisions of SFAS 133, which must be adopted not HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) later than the beginning of the Company's fiscal 2000, but does not believe that it will have a material impact on either the Company's financial condition or its results of operations.long-term borrowings. On July 15,17, 1998, in a public offering, the Company issued $150,000 of 6.15% notes due July 15, 2008 and $150,000 of 6.60% debentures due July 15, 2028. The net proceeds from the sale of these notes will bewas used to repay a portion of the Company's outstanding short-term debt, primarily incurred in connection with the acquisition of Tiger. At September 27, 1998, the Company had committed unsecured lines of credit totaling approximately $500,000 available to it. It also had available uncommitted lines approximating $750,000. The Company believes that these amounts, augmented by a November 2, 1998 $200,000 increase in its committed unsecured lines of credit, are adequate for its needs. Of these available lines, approximately HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) $525,000 was in use at September 27, 1998. Trade payables and accrued liabilities both increased from the comparable 1997 levels, largely reflecting the impact of the unpaid amounts relating to the Tiger acquisition, royalty advances and the Company's global integration and profit enhancement program. RECENT INFORMATION - - ------------------ On August 12,September 28, 1998, the Company announced that it had entered into a definitive agreement to acquire MicroProse,Galoob Toys, Inc. (MicroProse)(Galoob), a 17-year publisher of popular simulation, 3-D actionan international toy manufacturer whose leading brands include Micro Machines(R) miniature-scale boys' toys, Star Wars(TM) small-scale figures and strategy games for the personal computer.vehicles, Spice Girls(TM) fashion dolls and Pound Puppies(R) mini- dolls. The purchase price is $6.00was $12.00 per common share of MicroProse,Galoob, payable in cash. Thecash, for a total transaction value of approximately $220 million. Under terms of the transaction is approximately $70 million, including assumed debt and redeemable preferred stock. Closing is expected in September of 1998. Themerger agreement, calls for a wholly owned subsidiary of the Company to commencecommenced a tender offer no later than August 18,on October 2, 1998 for all of MicroProse'sGaloob's approximately 18 million outstanding common shares. The offer will bewas conditioned upon, among other things, the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and the tender of a majority of the common shares outstanding on a fully diluted basis of MicroProse. FollowingGaloob. On November 2, 1998. following the consummationsuccessful completion of the offer, the transaction was completed, the Company's subsidiary will bewas merged with MicroProseGaloob and anyall remaining MicroProseGaloob common shares will bewere converted into the right to receive $6.00$12.00 per share in cash. On November 2, 1998, in a public offering, the Company issued $100,000 of 5.60% notes due November 1, 2005. The net proceeds from the sale of these notes will be used to repay a portion of the Company's outstanding short- term commercial paper primarily incurred in connection with the acquisition of MicroProse and to fund the balance of the purchase price of Tiger. PART II. Other Information Item 1. Legal Proceedings. None. Item 2. Changes in Securities. On July 15,17, 1998, in a public offering, the Company issued $150,000,000 of 6.15% notes due July 15, 2008 and $150,000,000 of 6.60% debentures due July 15, 2028. On November 2, 1998, in a second public offering, the Company issued $100,000,000 of 5.60% notes due November 1, 2005. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. At the Company's Annual Meeting of Shareholders held on May 13, 1998, the Company's shareholders reelected the following persons to the Board of Directors of the Company: Claudine B. Malone (110,059,507 votes for, 1,209,763 votes withheld); Alan R. Batkin (110,063,694 votes for, 1,205,576 votes withheld); Morris W. Offit (103,279,297 votes for, 7,989,973 votes withheld; Carl Spielvogel (103,273,532 votes for, 7,995,738 votes withheld; and Paul Wolfowitz (110,156,771 votes for, 1,112,499 votes withheld). There were no votes against any nominee and no broker nonvotes.None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 11.1 Computation of Earnings Per Common Share - SixNine Months Ended June 28,September 27, 1998 and June 29,September 28, 1997. 11.2 Computation of Earnings Per Common Share - Quarter Ended June 28,September 27, 1998 and June 29,September 28, 1997. 12 Computation of Ratio of Earnings to Fixed Charges - SixNine Months and Quarter Ended June 28,September 27, 1998. 27 Article 5 Financial Data Schedule - SecondThird Quarter 1998 (b) Reports on Form 8-K A Current Report on Form 8-K, dated July 14, 1998, was filed by the Company in connection with the issuance of an aggregate amount of $300,000,000 of long-term debt. The filing included the following exhibits: Underwriting Agreement, dated July 14, 1998, by and among the Registrant and Bear, Stearns & Co. Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated; Terms Agreement dated July 14, 1998, by and among the Registrant and Bear, Stearns & Co. Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated; Indenture, dated July 17, 1998, by and between the Registrant and Citibank, N.A., as Trustee; Form of Note (Global); Form of Debenture (Global); Opinion of Phillip H. Waldoks, Esq., Senior Vice President - Corporate Legal Affairs and Secretary of the Registrant, as to the legality of the securities being registered; and Consent of Phillip H. Waldoks, Esq., Senior Vice President - Corporate Legal Affairs and Secretary of the Registrant. A Current Report on Form 8-K, dated July 16,September 28, 1998, was filed by the Company and included the Press Release dated July 16,September 28, 1998, announcing the Company's expected results for the second half of 1998. A Current Report on Form 8-K, dated October 15, 1998 was filed by the Company and included the Press Release dated October 15, 1998, announcing the Company's results for the current quarter. Consolidated Statements of Earnings (without notes) for the quarters and sixnine months ended June 28,September 27, 1998 and June 29,September 28, 1997 and Consolidated Condensed Balance Sheets (without notes) as of said dates were also filed. A Current Report on Form 8-K, dated July 17, 1998, was filed by the Company in connection with the issuance of an aggregate amount of $300,000,000 of long-term debt. The filing included a Statement of Eligibility under the Trust Indenture Act of 1939 of a Corporation Designated to Act as Trustee on Form T-1, completed by Citibank, N.A. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HASBRO, INC. ------------ (Registrant) Date: AugustNovember 12, 1998 By: /s/ John T. O'Neill --------------------- John T. O'Neill Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) HASBRO, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q For the Period Ended June 28,September 27, 1998 Exhibit Index Exhibit No. Exhibits - - - ------- -------- 11.1 Computation of Earnings Per Common Share - SixNine Months Ended June 28,September 27, 1998 and June 29,September 28, 1997 11.2 Computation of Earnings Per Common Share - Quarter Ended June 28,September 27, 1998 and June 29,September 28, 1997 12 Computation of Ratio of Earnings to Fixed Charges - SixNine Months and Quarter Ended June 28,September 27, 1998 27 Article 5 Financial Data Schedule - SecondThird Quarter 1998