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