EXHIBIT 13
HASBRO, INC. AND SUBSIDIARIES
Selected Information Contained in
Annual Report to Shareholders
for the Year Ended December 29, 1996
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- - -------------------------------------------------------------------------
The Company's Common Stock, Par Value $.50 per share (the "Common Stock"), is
traded on the American and London Stock Exchanges. The following table sets
forth the high and low sales prices as reported on the Composite Tape of the
American Stock Exchange and the cash dividends declared per share of Common
Stock, each as adjusted to reflect the three-for-two stock split declared on
February 19, 1997 for payment on March 21, 1997, for the periods listed.
Sales Prices
---------------- Cash Dividends
Period High Low Declared
- - ------ ---- --- --------------
1995
1st Quarter $22 1/2 18 7/8 $.05
2nd Quarter 23 1/2 20 7/8 .05
3rd Quarter 22 1/4 19 3/4 .05
4th Quarter 21 3/4 19 .05
1996
1st Quarter $31 1/4 19 1/4 $.07
2nd Quarter 25 3/4 23 1/2 .07
3rd Quarter 25 1/2 21 1/4 .07
4th Quarter 29 3/8 24 5/8 .07
The approximate number of holders of record of the Company's Common Stock as
of February 28, 1997 was 4,200.
Dividends
---------
Declaration of dividends is at the discretion of the Company's Board of
Directors and will depend upon the earnings, financial condition of the
Company and such other factors as the Board of Directors deems appropriate.
Payment of dividends is further subject to restrictions contained in
agreements relating to the Company's outstanding long-term debt. At December
29, 1996, under the most restrictive agreement the full amount of retained
earnings is free of restrictions.
On February 20, 1997, the Company announced both a three-for-two stock split,
payable in the form of a 50% stock dividend, and a quarterly cash dividend of
$.08 per share, which represents a 20% increase from that previously in
effect. The stock split was paid on March 21, 1997 to shareholders of record
on March 7, 1997, and the dividend is payable on May 15, 1997 to shareholders
of record on May 1, 1997.
SELECTED FINANCIAL DATA
- - -----------------------
(Thousands of Dollars and Shares Except per share Data and Ratios)
Fiscal Year
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Statement of
Earnings Data:
Net revenues $3,002,370 2,858,210 2,670,262 2,747,176 2,541,055
Net earnings
before cumulative
effect of change
in accounting
principles $ 199,912 155,571 179,315 200,004 179,164
Net earnings $ 199,912 155,571 175,033 200,004 179,164
Per Common Share
Data: (1)
Net earnings
before cumulative
effect of change
in accounting
principles $ 1.52 1.18 1.34 1.48 1.34
Net earnings $ 1.52 1.18 1.31 1.48 1.34
Cash dividends
declared $ .27 .21 .19 .16 .13
Balance Sheet Data:
Total assets $2,701,509 2,616,388 2,378,375 2,293,018 2,082,766
Long-term debt $ 149,382 149,991 150,000 200,510 206,189
Ratio of Earnings
to Fixed Charges (2) 7.51 5.82 7.58 8.59 7.08
Weighted Average
Number of Common
Shares (1) 131,856 132,379 133,996 135,046 133,629
(1) Adjusted to reflect the three-for-two stock split paid March 21, 1997.
(2) For purposes of calculating the ratio of earnings to fixed charges,
fixed charges include interest, amortization of debt expense and
one-third of rentals, and earnings available for fixed charges
represent earnings before fixed charges and income taxes.
MANAGEMENT'S REVIEW
- - -------------------
Summary
- - -------
A percentage analysis of results of operations follows:
1996 1995 1994
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of sales 44.3 43.3 43.5
----- ----- -----
Gross profit 55.7 56.7 56.5
Amortization 1.3 1.4 1.4
Royalties, research and development 10.6 10.7 10.2
Advertising 13.9 14.6 14.9
Selling, distribution and administration 18.8 19.4 18.5
Discontinued development project and
restructuring charges - 1.1 .5
Interest expense 1.1 1.3 1.1
Other income, net (.2) (.6) (1.0)
----- ----- -----
Earnings before income taxes and cumulative
effect of change in accounting principles 10.2 8.8 10.9
Income taxes 3.5 3.4 4.2
----- ----- -----
Earnings before cumulative effect of change
in accounting principles 6.7 5.4 6.7
Cumulative effect of change in accounting
principles - - (.1)
----- ----- -----
Net earnings 6.7% 5.4% 6.6%
===== ===== =====
(Thousands of Dollars Except Share Data)
Results of Operations
- - ---------------------
Net revenues for 1996 were $3,002,370 compared to $2,858,210 and $2,670,262
for 1995 and 1994, respectively. Within the United States market, games and
puzzles enjoyed another year of record revenues. The classic brands, such as
Monopoly(R) and Scrabble(R), continued to appeal to consumers. The refreshed
Trivial Pursuit(R) and Yahtzee(R) lines and newer products, including Puzz 3-
D(TM), Jumanji(TM) and Goosebumps(TM), also received very favorable consumer
acceptance. In Hasbro's first full year in the CD-ROM interactive game
market, seven of its thirteen products in this line, including Monopoly, now
in its second-year, exceeded 100,000 units in sales. Within the toy area,
boys' toys again were led by action figures, with both Star Wars(R) and
Batman(R) proving to be popular, even in a year with limited entertainment
support. Hasbro's line of Nerf(R) sports products also grew significantly, up
almost 25%. Both the activities range, with such favorites as Play Doh(R),
completing its 40th year, and Easy Bake(R) Oven, and new Wonder World(TM)
products, and the girls' area, due to a strong large doll segment, had
increased volume. The preschool arena, however, was disappointing,
experiencing a significant decline in revenues from those of the prior year.
In the international market, both in their local currencies and in dollars,
revenues were essentially flat with those of a year ago. Within Europe,
Germany continued to be a difficult market for the Company, as was Spain.
Elsewhere, the Asian units, Canada and Mexico all showed growth both in their
local currencies and in U.S. dollars. The growth in 1995 from 1994 was
primarily attributable to the United States game and puzzle lines and the
overall international market. In the aggregate, changed foreign currency
rates had a negative impact of approximately $29,000 in 1996 and a favorable
impact of approximately $30,000 in 1995.
The Company's gross profit margin decreased to 55.7% from 56.7% in 1995 which
had improved slightly from 56.5% in 1994. The change in 1996 results from a
combination of factors including a greater volume of products sold at less
than normal margins, higher tooling costs, unfavorable foreign exchange
rates, increased unabsorbed overheads in the Company's European manufacturing
facilities resulting from reduced production levels, all partially offset by
reduced raw material commodity costs, specifically paper board and plastic
resin.
Amortization expense, which includes amortization of both property rights and
cost in excess of net assets acquired, of $40,064 compares with $38,471 in
1995 and $36,903 in 1994. These increases were attributable to the
acquisitions during the respective years.
Expenditures for royalties, research and development increased to $319,494
from $304,704 in 1995, while in 1994 they were $273,039. Included in these
amounts are expenditures for research and development of $152,487 in 1996,
$148,057 in 1995 and $135,406 in 1994. As percentages of net revenues,
research and development was 5.1% in 1996, which is not materially different
than the 5.2% in 1995 and 5.1% in 1994. The added development efforts in 1996
related to the Company's interactive game products substantially offset the
reduction in expenses related to its virtual reality efforts in 1995 and 1994
(see below). The increased royalties in 1996 and 1995, both in amount and as
a percentage of net revenues, when compared with 1994, were primarily
attributable to the higher proportion of the Company's revenues arising from
licensed products.
Advertising expenses, after remaining relatively constant at 14.6% and 14.9%
of net revenues in 1995 and 1994, respectively, decreased in 1996 to 13.9%.
This decrease reflects both the reduced proportion of the Company's revenues
attributable to its international units, which traditionally have higher
advertising to sales ratios than do the United States units, and the reduced
overall level of advertising expenditures.
During 1996, selling, distribution and administration costs decreased to
18.8% of revenues from 19.4% in 1995 and 18.5% in 1994. The 1996 percentage
reflects a return to a level more closely approximating that experienced in
years prior to 1995. The increase in 1995 resulted from investment spending
in certain newly organized and acquired operations, an overall rise in the
Company's costs associated with distributing its products and the impact of
general increases in expense levels, including costs associated with the 53rd
week of operations included in that fiscal year.
During the second quarter of 1995, Hasbro discontinued its efforts, begun in
1992, related to the development of a mass-market virtual reality game
system. These efforts produced such a game system, but at a price judged to
be too expensive for the mass-market. The impact of this decision on the
quarter was a charge of $31,100, the estimated costs associated with such
action. Approximately half of the charge resulted from the expensing of
software development costs related to both the operating system and games for
the system. These costs were previously capitalized under the provisions of
Statement of Financial Accounting Standards No. 86. The remaining amount
represented provisions for costs associated with discontinuing this project,
including the termination of contractual agreements relating to the
development of the system and games, the write-off of certain fixed assets
and various other cancellation/termination costs.
During 1994, the Company completed a restructuring of its Domestic Toy Group,
merging its Hasbro Toy, Playskool, Playskool Baby, Kenner and Kid Dimension
units into one organization, the Hasbro Toy Group, and also announced a
consolidation of its United States manufacturing facilities. To provide for
these and other immaterial restructuring costs, the Company recorded a
$12,500 pretax charge during the third quarter of that year. This amount
included facility costs, severance and other related costs.
Interest expense was $31,465 during 1996 compared to $37,588 during 1995 and
$30,789 in 1994. The decrease during the current year reflected the impact of
lower interest rates and the availability of funds generated from operations
during 1995. The increase in 1995 from 1994 reflected the effect of increased
interest rates as well as the Company's increased use of funds for
acquisitions.
Other income of $6,091 in 1996 compares with $16,566 and $26,681 in 1995 and
1994, respectively. The decrease of approximately $10,000 in 1996 is largely
the result of decreased earnings from available funds. These funds,
principally in the international units, are invested on a short-term basis
locally. During 1994, the Company disposed of its minority investments in
J.W. Spear & Sons PLC and Virgin Interactive Entertainment plc, realizing an
aggregate pretax gain of approximately $23,000.
Income tax expense as a percentage of pretax earnings in 1996 decreased to
34.9% from 38.4% and 38.5% in 1995 and 1994, respectively. This decrease
resulted from changes in Hasbro's operations as well as the impact of
strategies implemented during 1996. These strategies realized tax benefits
for certain current and prior year international operating losses, allowed a
reduction in the deferred tax asset valuation allowance and reduced state
income taxes. In addition, the impact of nondeductible amortization was less
due to the higher level of earnings.
Liquidity and Capital Resources
- - -------------------------------
The Company continued to have a strong and highly liquid balance sheet with
cash and cash equivalents of $218,971 at December 29, 1996. Cash and cash
equivalents were $161,030 and $137,028 at December 31, 1995 and December 25,
1994, respectively.
Hasbro generated in excess of $225,000 of net cash from its operating
activities in each of 1996, 1995 and 1994. Included in the 1996 amount was a
net utilization of $52,347 for changes in operating assets and liabilities.
Contributing to this utilization were accounts receivable, which were
approximately 2% greater than in 1995. This reflects the approximate $83,000
increase in fourth quarter sales, much of which, under Hasbro's normal
trading terms, becomes due after the end of the Company's fiscal year,
partially reduced by the non-recourse sale of certain receivables totaling
$65,000. Inventories decreased by more than 13% in the current year, also
impacted by the higher level of fourth quarter shipments. Also utilizing
funds were prepaid expenses and other current assets, which increased and
accounts payable and accrued liabilities, which decreased. Both of these
changes were largely due to the timing of certain payments. During 1995
operating assets and liabilities utilized $67,117, primarily in accounts
receivable and inventories. Receivables were approximately 10% greater in
1995 than in 1994, reflecting both the increased level of fourth quarter
sales and the impact of new operations. Inventories, up more than 25%, also
reflected the impact of new operations and expanded product lines as well as
a planned increase to allow faster and more complete shipment of customer
orders. Partially offsetting these utilizations was the increase in trade
payables and other accrued liabilities which reflected the increased and
expanded levels of operations. The net change in operating assets and
liabilities provided a relatively small amount of cash to the Company in
1994.
Cash flows from investing activities were a net utilization of funds during
all three reported years; $127,286, $209,331 and $244,178 in 1996, 1995 and
1994, respectively. During each of the three years, the Company expended an
average of approximately $100,000 in additions to its property, plant and
equipment. Of these amounts, 57% in 1996, 56% in 1995 and 43% in 1994 were
for purchases of tools, dies and molds related to the Company's products.
During those three years, depreciation and amortization expenses were
$98,201, $91,437 and $85,368, respectively. During 1996, Hasbro made several
small acquisitions and investments, none of which were significant. In 1995
the Company purchased certain products, primarily the Super Soaker(TM) line,
and other assets from the Larami group of companies for $88,135 and made
several other smaller investments. During 1994, the Company purchased certain
game and puzzle assets of Western Publishing Company, Inc. and the Games
Division of John Waddington PLC for an aggregate purchase price of $176,194
and made several other investments. The $59,322 of proceeds from sale of
investments in 1994 relates to the transactions previously discussed.
As part of the traditional marketing strategies of the toy industry, many
sales made early in the year are not due for payment until the fourth quarter
or early in the first quarter of the subsequent year, thus making it
necessary for the Company to borrow significant amounts pending these
collections. During the year the Company borrowed through the issuance of
commercial paper and short-term lines of credit to fund its seasonal working
capital requirements in excess of funds available from operations. During
1997, the Company expects to fund these needs in a similar manner and
believes that the funds available to it are adequate to meet its needs. At
March 2, 1997, the Company's unused committed and uncommitted lines of
credit, including a $440,000 revolving credit agreement, were in excess of
$1,100,000.
During 1996 and 1994, net financing activities utilized approximately $90,000
of Hasbro's funds, while in 1995 it provided a small amount. Throughout 1996,
the Company met its seasonal working capital requirements through short-term
borrowings, as in prior years. During the year, the Company also repurchased
in excess of $80,000 of its common stock in the open market. In 1994, the
Company repaid more than $53,000 of long-term debt, including the early
redemption of its $50,000 subordinated variable rate notes. Several equity
transactions also required the utilization of funds during 1994. These
included the repurchase of more than $26,000 of the Company's common stock in
the open market and approximately $16,000 in payments to exercising
warrantholders in lieu of issuing shares of common stock.
Under prior authorizations of the Board of Directors (the Board) and the
Executive Committee of the Board, the Company repurchased 3,415,800 shares of
its common stock during 1996 and may repurchase up to an additional 5,685,750
shares (both amounts expressed in post-split shares). The Company anticipates
that it will continue such purchases in the future when it deems conditions
to be favorable. The shares acquired under these programs are being used for
corporate purposes including issuance upon the exercise of stock options.
Foreign Currency Activity
- - -------------------------
The Company manages its foreign exchange exposure in various ways including
forward exchange contracts and the netting of foreign exchange exposure. In
addition, where possible, the Company minimizes its foreign asset exposure by
borrowing in foreign currencies. Its policy is not to enter into derivative
financial instruments for speculative purposes. It does, however, enter into
certain foreign currency forward exchange contracts to protect itself from
adverse currency rate fluctuations on identifiable foreign currency
commitments, primarily for future purchases of inventory. Such contracts are
denominated in currencies of major industrial countries and entered into with
creditworthy banks for terms of less than twelve months. At both December 29,
1996 and December 31, 1995, outstanding contracts related to purchases of
either U.S. dollars or Hong Kong dollars. The Company does not anticipate any
material adverse impact on its results of operations or financial position
from these contracts.
The Economy and Inflation
- - -------------------------
The Company continued to experience a difficult economic environment
throughout much of the world during 1996. The principal market for the
Company's products is the retail sector where certain customers have
experienced economic difficulty. The Company closely monitors the
creditworthiness of its customers and adjusts credit policies and limits as
it deems appropriate.
The effect of inflation on the Company's operations during 1996 was not
significant and the Company will continue its policy of monitoring costs and
adjusting prices accordingly.
Other Information
- - -----------------
The Company's revenue pattern continues to show the second half of the year
more significant to its overall business and within that half, the fourth
quarter most prominent. The Company believes that this will continue in 1997.
The Company is not aware of any material amounts of potential exposure
relating to environmental matters and does not believe its compliance costs
or liabilities to be material to its operating results or financial position.
Hasbro will be adopting Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125), in 1997. The adoption of SFAS 125
is not expected to have any material impact on Hasbro's results of
operations, financial condition or cash flows.
Statements of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128), and No. 129, Disclosure of Information about Capital Structure
(SFAS 129), were issued by the Financial Accounting Standards Board in
February 1997. Hasbro will adopt both SFAS 128 and SFAS 129 in 1997 and is
currently reviewing the provisions of each to determine their impact, if any,
on its operating results or financial position.
On February 10, 1997, Hasbro and Russ Berrie and Company, Inc. (Russ Berrie)
announced an agreement in principle for Hasbro to acquire the assets of Russ
Berrie subsidiaries Cap Toys, Inc. and Oddzon Products, Inc. for $166,000,
subject to adjustment based on the net tangible value of assets sold. The
agreement in principle is subject to the execution and delivery of a
definitive contract and the satisfaction of the conditions to be contained
therein, including, without limitation, the receipt of regulatory and other
consents and approvals. It is anticipated that the transaction will be
consummated in the second quarter of 1997.
On February 20, 1997, Hasbro announced both a three-for-two stock split and a
quarterly cash dividend of $.08 per share, which represents a 20% increase
from that previously in effect. The stock split, in the form of a 50% stock
dividend, was paid on March 21, 1997 to shareholders of record on March 7,
1997, and the dividend is payable on May 15, 1997 to shareholders of record
on May 1, 1997. On February 14, the Company announced the establishment of a
dividend reinvestment and cash stock purchase program for its shareholders of
record and employees.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - -------------------------------------------
See attached pages.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Hasbro, Inc.:
We have audited the accompanying consolidated balance sheets of
Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the fiscal years in the three-year period ended
December 29, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995
and the results of their operations and their cash flows for each of the
fiscal years in the three-year period ended December 29, 1996 in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Providence, Rhode Island
February 5, 1997
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 29, 1996 and December 31, 1995
(Thousands of Dollars Except Share Data)
Assets 1996 1995
------ ---- ----
Current assets
Cash and cash equivalents $ 218,971 161,030
Accounts receivable, less allowance for
doubtful accounts of $46,600 in 1996
and $48,800 in 1995 807,149 791,111
Inventories 273,247 315,620
Prepaid expenses and other current assets 187,222 157,737
--------- ---------
Total current assets 1,486,589 1,425,498
Property, plant and equipment, net 313,545 313,240
--------- ---------
Other assets
Cost in excess of acquired net assets, less
accumulated amortization of $115,312 in 1996
and $99,404 in 1995 460,467 473,388
Other intangibles, less accumulated amortization
of $102,387 in 1996 and $79,648 in 1995 364,987 343,624
Other 75,921 60,638
--------- ---------
Total other assets 901,375 877,650
--------- ---------
Total assets $2,701,509 2,616,388
========= =========
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 29, 1996 and December 31, 1995
(Thousands of Dollars Except Share Data)
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ---- ----
Current liabilities
Short-term borrowings $ 120,736 119,987
Trade payables 174,337 198,328
Accrued liabilities 399,896 433,567
Income taxes 135,849 117,982
--------- ---------
Total current liabilities 830,818 869,864
Long-term debt 149,382 149,991
Deferred liabilities 69,263 70,921
--------- ---------
Total liabilities 1,049,463 1,090,776
--------- ---------
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 132,160,293 shares
in 1996 and 88,086,108 shares in 1995 66,080 44,043
Additional paid-in capital 282,922 279,288
Retained earnings 1,362,791 1,201,242
Foreign currency translation 21,487 23,450
Treasury stock, at cost, 3,297,628 shares in
1996 and 741,237 shares in 1995 (81,234) (22,411)
--------- ---------
Total shareholders' equity 1,652,046 1,525,612
--------- ---------
Total liabilities and shareholders' equity $2,701,509 2,616,388
========= =========
See accompanying notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Fiscal Years Ended in December
(Thousands of Dollars Except Share Data)
1996 1995 1994
---- ---- ----
Net revenues $3,002,370 2,858,210 2,670,262
Cost of sales 1,328,897 1,237,197 1,161,479
--------- --------- ---------
Gross profit 1,673,473 1,621,013 1,508,783
--------- --------- ---------
Expenses
Amortization 40,064 38,471 36,903
Royalties, research and development 319,494 304,704 273,039
Advertising 418,003 417,886 397,094
Selling, distribution and administration 563,645 555,280 493,570
Discontinued development project and
restructuring charges - 31,100 12,500
--------- --------- ---------
Total expenses 1,341,206 1,347,441 1,213,106
--------- --------- ---------
Operating profit 332,267 273,572 295,677
--------- --------- ---------
Nonoperating (income) expense
Interest expense 31,465 37,588 30,789
Other (income), net (6,091) (16,566) (26,681)
--------- --------- ---------
Total nonoperating expense 25,374 21,022 4,108
--------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principles 306,893 252,550 291,569
Income taxes 106,981 96,979 112,254
--------- --------- ---------
Earnings before cumulative effect
of change in accounting principles 199,912 155,571 179,315
Cumulative effect of change in
accounting principles - - ( 4,282)
--------- --------- ---------
Net earnings $ 199,912 155,571 175,033
========= ========= =========
Per common share
Earnings before cumulative effect
of change in accounting principles $ 1.52 1.18 1.34
========= ========= =========
Net earnings $ 1.52 1.18 1.31
========= ========= =========
Cash dividends declared $ .27 .21 .19
========= ========= =========
See accompanying notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Thousands of Dollars)
Additional Foreign Total
Common Paid-in Retained Currency Treasury Shareholders'
Stock Capital Earnings Translation Stock Equity
--------- --------- --------- --------- --------- ---------
Balance, December 26, 1993 $ 43,898 296,823 920,956 15,006 - 1,276,683
Net earnings - - 175,033 - - 175,033
Purchase of treasury stock - - - - (26,140) (26,140)
Stock option and warrant
transactions 145 (14,672) - - 9,421 (5,106)
Dividends declared - - (24,573) - - (24,573)
Currency translation - - - (480) - (480)
--------- --------- --------- --------- --------- ---------
Balance, December 25, 1994 44,043 282,151 1,071,416 14,526 (16,719) 1,395,417
Net earnings - - 155,571 - - 155,571
Purchase of treasury stock - - - - (15,228) (15,228)
Stock option and warrant
transactions - (2,872) - - 9,536 6,664
Dividends declared - - (28,050) - - (28,050)
Currency translation and other - 9 2,305 8,924 - 11,238
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 44,043 279,288 1,201,242 23,450 (22,411) 1,525,612
Net earnings - - 199,912 - - 199,912
Three-for-two stock split 22,027 (22,027) - - - -
Purchase of treasury stock - - - - (83,657) (83,657)
Stock option and warrant
transactions - 25,063 - - 24,834 49,897
Dividends declared - - (34,559) - - (34,559)
Currency translation and other 10 598 (3,804) (1,963) - (5,159)
--------- --------- --------- --------- --------- ---------
Balance, December 29, 1996 $ 66,080 282,922 1,362,791 21,487 (81,234) 1,652,046
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended in December
(Thousands of Dollars)
1996 1995 1994
---- ---- ----
Cash flows from operating activities
Net earnings $199,912 155,571 175,033
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization of plant
and equipment 98,201 91,437 85,368
Other amortization 40,064 38,471 36,903
Deferred income taxes (8,120) (9,149) (1,245)
Gain on investments (18) (474) (25,284)
Discontinued development cost - 13,256 -
Change in operating assets and liabilities
(other than cash and cash equivalents):
(Increase) decrease in accounts
receivable (22,418) (66,658) 9,871
Decrease (increase) in inventories 42,959 (64,686) 28,678
(Increase) in prepaid expenses and
other current assets (37,036) (1,633) (3,142)
(Decrease) increase in trade payables
and other current liabilities (35,852) 65,860 (22,231)
Other 2,301 5,405 (166)
------- ------- -------
Net cash provided by operating
activities 279,993 227,400 283,785
------- ------- -------
Cash flows from investing activities
Additions to property, plant and
equipment (101,946) (100,639) (110,944)
Investments and acquisitions, net of
cash acquired (33,027) (117,406) (192,379)
Sale of investments 318 1,715 59,322
Other 7,369 6,999 (177)
------- ------- -------
Net cash utilized by investing
activities (127,286) (209,331) (244,178)
------- ------- -------
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Fiscal Years Ended in December
(Thousands of Dollars)
1996 1995 1994
---- ---- ----
Cash flows from financing activities
Proceeds from borrowings with original
maturities of more than three months 265,017 433,646 -
Repayments of borrowings with original
maturities of more than three months (255,636) (416,515) (53,736)
Net (payments) proceeds of other
short-term borrowings (6,116) 20,997 18,938
Purchase of common stock (83,657) (15,228) (26,140)
Stock option and warrant transactions 17,745 6,664 (5,106)
Dividends paid (32,959) (27,190) (23,711)
------- ------- -------
Net cash (utilized) provided by
financing activities (95,606) 2,374 (89,755)
------- ------- -------
Effect of exchange rate changes on cash 840 3,559 922
------- ------- -------
Increase (decrease) in cash and
cash equivalents 57,941 24,002 (49,226)
Cash and cash equivalents at beginning
of year 161,030 137,028 186,254
------- ------- -------
Cash and cash equivalents at end
of year $218,971 161,030 137,028
======= ======= =======
Supplemental information
Cash paid during the year for
Interest $ 29,430 39,050 33,471
Income taxes $ 92,670 81,179 99,601
See accompanying notes to consolidated financial statements
HASBRO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Thousands of Dollars Except Share Data)
(1) Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of Hasbro,
Inc. and all significant majority-owned subsidiaries (Hasbro or the
Company). Investments in affiliates representing 20% to 50% ownership
interest are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated.
Preparation of Financial Statements
-----------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and notes thereto. Actual results could differ from those estimates.
Fiscal Year
-----------
Hasbro's fiscal year ends on the last Sunday in December. The fiscal
years ended December 29, 1996 and December 25, 1994 were fifty-two week
periods while the fiscal year ended December 31, 1995 was a fifty-three
week period.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all cash balances and highly liquid
investments purchased with a maturity to the Company of three months or
less.
Inventories
-----------
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Long-Lived Assets
-----------------
During the first quarter of 1996, Hasbro adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed Of (SFAS 121). The
Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying value may not be
recoverable. Recoverability is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. Adoption of SFAS 121 had no material impact to
the Company.
Cost in Excess of Net Assets Acquired and Other Intangibles
-----------------------------------------------------------
Approximately 90% of Hasbro's goodwill results from the 1984 acquisition
of Milton Bradley Company (Milton Bradley), including its Playskool and
international units, and the 1991 acquisition of Tonka Corporation
(Tonka), including its Kenner, Parker Brothers and international units,
and is being amortized on the straight-line method over forty years.
Substantially all of the other intangibles consist of the cost of
acquired product rights. These rights, which were valued at their
acquisition based on the anticipated future cash flows from the
underlying product lines, are being amortized over five to twenty-five
years using the straight-line method. In establishing the value of such
rights, the Company considers, but does not individually value, existing
copyrights, trademarks, patents, license agreements and other product-
related rights. Approximately 34% of these other intangibles relate to
the acquisition of Milton Bradley and Tonka and an additional 49%
relates to Hasbro's acquisitions during 1995 and 1994. (See note 2)
Depreciation and Amortization
-----------------------------
Depreciation and amortization are computed using accelerated and
straight-line methods to amortize the cost of property, plant and
equipment over their estimated useful lives. The principal lives, in
years, used in determining depreciation rates of various assets are:
land improvements 15 to 19, buildings and improvements 15 to 25 and
machinery and equipment 3 to 12.
Tools, dies and molds are amortized over a three year period or their
useful lives, whichever is less, using an accelerated method.
Income Taxes
------------
Hasbro uses the asset and liability approach for financial accounting
and reporting for income taxes. Deferred income taxes have not been
provided on undistributed earnings of international subsidiaries as
substantially all of such earnings are indefinitely reinvested by the
Company.
Foreign Currency Translation
----------------------------
Foreign currency assets and liabilities are translated into dollars at
current rates, and revenues, costs and expenses are translated at
average rates during each reporting period. Current earnings include
gains or losses resulting from foreign currency transactions, other than
those relating to intercompany transactions of a long-term investment
nature. Those gains and losses, as well as those resulting from
translation of financial statements, are shown as a separate component
of shareholders' equity.
Pension Plans, Postretirement and Postemployment Benefits
---------------------------------------------------------
Hasbro, except for certain international subsidiaries, has pension plans
covering substantially all of its full-time employees. Pension expense
is based on actuarial computations of current and future benefits. The
Company's policy is to fund amounts which are required by applicable
regulations and which are tax deductible. The estimated amounts of
future payments to be made under other retirement programs are being
accrued currently over the period of active employment and are also
included in pension expense.
Hasbro has a contributory postretirement health and life insurance plan
covering substantially all employees who retire under any of its United
States defined benefit pension plans and meet certain age and length of
service requirements. It also has several plans covering certain groups
of employees which may provide benefits to such employees following
their period of employment but prior to their retirement.
Research and Development
------------------------
Research and product development costs for 1996, 1995 and 1994 were
$152,487, $148,057 and $135,406, respectively.
Advertising
-----------
Production costs of commercials and programming are charged to
operations in the fiscal year during which the production is first
aired. The costs of other advertising, promotion and marketing programs
are charged to operations in the fiscal year incurred.
Risk Management Contracts
-------------------------
Hasbro does not enter into derivative financial instruments for
speculative purposes. In the normal course of business, however, the
Company employs off-balance sheet forward exchange contracts to manage
its exposure to fluctuations in foreign currency exchange rates. Gains
and losses deferred under hedge accounting provisions are subsequently
included in the measurement of the related foreign currency transaction.
Earnings Per Common Share
-------------------------
Earnings per common share are based on the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding
during each period. Common stock equivalents include stock options and
warrants for the period prior to their exercise. Under the treasury
stock method, the unexercised options and warrants are assumed to be
exercised at the beginning of the period or at issuance, if later. The
assumed proceeds are then used to purchase common stock at the average
market price during the period.
The weighted average number of shares outstanding, adjusted to reflect
the three-for-two stock split declared February 19, 1997 (note 9), used
in the computation of earnings per common share was 131,856,140,
132,379,059 and 133,996,128 in 1996, 1995 and 1994, respectively.
The difference between primary and fully diluted earnings per share was
not significant for any year.
(2) Acquisitions
------------
During February 1995, Hasbro purchased certain products and other assets
from the Larami group of companies for $88,135. Accounting for this
acquisition using the purchase method, the Company allocated the
purchase price based on estimates of fair market value which included
$9,053 of net tangible assets, $76,100 of product rights and $2,982 of
goodwill.
(3) Inventories
-----------
1996 1995
---- ----
Finished products $209,903 240,126
Work in process 16,810 22,093
Raw materials 46,534 53,401
------- -------
$273,247 315,620
======= =======
(4) Property, Plant and Equipment
-----------------------------
1996 1995
---- ----
Land and improvements $ 14,543 14,845
Buildings and improvements 205,408 207,129
Machinery and equipment 257,499 229,882
------- -------
477,450 451,856
Less accumulated depreciation 215,172 187,650
------- -------
262,278 264,206
Tools, dies and molds, net of
amortization 51,267 49,034
------- -------
$313,545 313,240
======= =======
Expenditures for maintenance and repairs which do not materially extend
the life of the assets are charged to operations.
(5) Short-Term Borrowings
---------------------
Hasbro has available unsecured committed and uncommitted lines of credit
from various banks approximating $550,000 and $790,000, respectively.
Substantially all of the short-term borrowings outstanding at the end of
1996 and 1995 represent bank borrowings related to international units
made under these lines of credit. The weighted average interest rates of
the outstanding borrowings were 5.0% and 6.2%, respectively. Hasbro's
working capital needs were fulfilled by borrowing under these lines of
credit and through the issuance of commercial paper, both of which were
on terms and at interest rates generally extended to companies of
comparable creditworthiness. Included as part of the committed line is
$440,000 available from a revolving credit agreement. This agreement
contains certain restrictive covenants with which the Company is in
compliance. Compensating balances and facility fees were not material.
(6) Accrued Liabilities
-------------------
1996 1995
---- ----
Royalties $ 81,053 77,752
Advertising 83,694 111,853
Payroll and management incentives 32,879 36,205
Other 202,270 207,757
------- -------
$399,896 433,567
======= =======
(7) Long-Term Debt
--------------
Long-term debt of $149,382 and $149,991 at December 29, 1996 and
December 31, 1995, respectively, consists of Hasbro's 6% Convertible
Subordinated Notes Due 1998. These notes are convertible into common
stock at a conversion price of $19.55 per share, are redeemable, at a
premium, by the Company and interest on them is paid semi-annually.
(8) Income Taxes
------------
Income taxes attributable to earnings before income taxes are:
1996 1995 1994
---- ---- ----
Current
United States $ 58,580 54,979 60,539
State and local 9,033 9,309 10,417
International 47,488 41,840 42,543
------- ------- -------
115,101 106,128 113,499
------- ------- -------
Deferred
United States 4,309 (5,122) 1,924
State and local 406 (483) 180
International (12,835) (3,544) (3,349)
------- ------- -------
(8,120) (9,149) (1,245)
------- ------- -------
$106,981 96,979 112,254
======= ======= =======
Certain tax benefits are not reflected in income taxes in the statements
of earnings. Such benefits of $6,793 in 1996, $6,532 in 1995 and $9,800
in 1994, relate primarily to stock options.
A reconciliation of the statutory United States federal income tax rate
to Hasbro's effective income tax rate is as follows:
1996 1995 1994
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net
of federal income tax effect 2.0 2.3 2.4
Amortization of goodwill 1.6 1.9 1.6
International earnings taxed at
rates other than the United States
statutory rate (1.1) (.3) (.7)
Reduction of valuation allowance (1.1) - -
Other, net (1.5) (.5) .2
---- ---- ----
34.9% 38.4% 38.5%
==== ==== ====
The components of earnings before income taxes are as follows:
1996 1995 1994
---- ---- ----
United States $208,864 151,094 177,672
International 98,029 101,456 113,897
------- ------- -------
$306,893 252,550 291,569
======= ======= =======
The components of deferred income tax expense arise from various
temporary differences and relate to items included in the statements of
earnings.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 29, 1996
and December 31, 1995 are:
1996 1995
---- ----
Deferred tax assets:
Accounts receivable $ 25,643 28,433
Inventories 10,650 14,671
Net operating loss carryovers 24,266 18,677
Operating expenses 34,039 36,024
Postretirement benefits 12,136 11,834
Other 39,971 39,281
------- -------
Gross deferred tax assets 146,705 148,920
Valuation allowance (7,724) (15,869)
------- -------
Net deferred tax assets 138,981 133,051
------- -------
Deferred tax liabilities:
Property rights and property, plant
and equipment 52,229 59,760
Other 9,563 6,787
------- -------
Gross deferred tax liabilities 61,792 66,547
------- -------
Net deferred income taxes $ 77,189 66,504
======= =======
Hasbro has a valuation allowance for deferred tax assets at December 29,
1996 of $7,724, which is a decrease of $8,145 from the $15,869 at
December 31, 1995. Such decrease relates primarily to the current and
expected future utilization of certain international tax losses from
prior years. The remaining allowance pertains to other international
operating loss carryforwards, some of which have no expiration and
others that will expire beginning in 1997. If fully realized, future
income tax expense will be reduced by $7,724.
Based on Hasbro's history of taxable income and the anticipation of
sufficient taxable income in years when the temporary differences are
expected to become tax deductions, it believes that it will realize the
benefit of the deferred tax assets, net of the existing valuation
allowance. Of the deferred tax assets, approximately 67% are expected to
be realized during the next two fiscal years.
Deferred income taxes of $78,031 and $85,849 at the end of 1996 and
1995, respectively, are included as a component of prepaid expenses and
other current assets, and $16,123 and $4,007, respectively, are included
as a component of other assets. At the same dates, deferred income taxes
of $16,017 and $22,198, respectively, are included as a component of
deferred liabilities.
The cumulative amounts of undistributed earnings of Hasbro's
international subsidiaries held for reinvestment amounted to
approximately $307,000 at December 29, 1996 and $289,000 at December 31,
1995.
(9) Capital Stock
-------------
Preference Share Purchase Rights
--------------------------------
Hasbro maintains a Preference Share Purchase Right plan (the Rights
Plan). Under the terms of the Rights Plan, each share of common stock is
accompanied by a Preference Share Purchase Right. Each Right is only
exercisable under certain circumstances and, until exercisable, the
Rights are not transferable apart from Hasbro's common stock. When
exercisable, each Right will entitle its holder to purchase until June
30, 1999, in certain merger or other business combination or
recapitalization transactions, at the Right's then current exercise
price, a number of the acquiring company's or Hasbro's, as the case may
be, common shares having a market value at that time of twice the
Right's exercise price. Under certain circumstances, the rightholder
may, at the option of the Board of Directors of Hasbro (the Board),
receive shares of Hasbro's stock in exchange for Rights.
Prior to the acquisition by the person or group of beneficial ownership
of a certain percentage of Hasbro's common stock, the Rights are
redeemable for $.00444 per Right. The Rights Plan contains certain
exceptions with respect to the Hassenfeld family and related entities.
Common Stock
------------
On February 19, 1997, the Board declared a three-for-two stock split,
payable in the form of a 50% stock dividend, on March 21, 1997 to
shareholders of record on March 7, 1997. Appropriate changes, to reflect
the split, have been effected in the stock options and other securities
exercisable for or convertible into Hasbro's common stock.
Except for the balance sheet presentation of the December 31, 1995
outstanding and treasury shares, all share and per share amounts have
been adjusted to reflect this split.
In August 1990, the Board authorized the purchase of up to 6,750,000
shares of the Company's common stock and in June 1994, the Executive
Committee of the Board authorized the purchase of up to an additional
7,500,000 shares. At December 29, 1996, a balance of 5,685,750 shares
remained under these authorizations.
(10) Employee Stock Options and Warrants
-----------------------------------
Hasbro has a Non-Qualified Stock Option Plan, an Incentive Stock Option
Plan, a 1992 Stock Incentive Plan, a Stock Incentive Performance Plan
and a Stock Option Plan for Non-Employee Directors (collectively, the
plans). During 1996, Hasbro adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS 123) but, as
permitted, continues to apply Accounting Principles Board Opinion No. 25
(APB 25) in accounting for the plans. Under APB 25, no compensation cost
is recognized. A comparison of the Company's net earnings and earnings
per share as reported and pro forma as they would have been had
compensation cost been determined consistent with SFAS 123 follows:
1996 1995
---- ----
Net earnings: As reported $199,912 155,571
Pro forma 196,911 154,802
======= =======
Earnings per share: As reported $ 1.52 1.18
Pro forma 1.49 1.17
======= =======
As the provisions of SFAS 123 have not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Hasbro has reserved 14,955,055 shares of its common stock for issuance
upon exercise of options granted or to be granted under the plans. These
options generally vest in equal annual amounts over three to five years.
The plans provide that options be granted at exercise prices not less
than market value on the date the option is granted and options are
adjusted for such changes as stock splits and stock dividends. No
options are exercisable for periods of more than ten years after date of
grant. Although certain of the plans permit the granting of awards in
the form of stock options, stock appreciation rights, stock awards and
cash awards, to date, only stock options have been granted.
The changes in outstanding options and warrants for the three years
ended December 29, 1996 follow:
Weighted
Average
Shares (in Exercise
thousands) Price
------- -------
Outstanding at December 26, 1993 10,684 $16.11
Granted 1,869 19.97
Exercised (2,991) 11.67
Expired or canceled (757) 19.15
------
Outstanding at December 25, 1994 8,805 18.17
Granted 1,108 22.71
Exercised (475) 11.34
Expired or canceled (561) 20.91
------
Outstanding at December 31, 1995 8,877 18.93
Granted 6,339 21.75
Exercised (1,236) 14.47
Expired or canceled (345) 22.17
------
Outstanding at December 29, 1996 13,635 $20.56
====== =====
The number of shares exercisable and the weighted average exercise price
for such shares at the end of 1996, 1995 and 1994 were 6,585,280 at
$19.32, 4,727,262 at $16.89 and 3,264,852 at $14.63, respectively. At the
end of 1996, by range of exercise prices, the number of shares
represented by outstanding options and warrants with their weighted
average exercise price and weighted average remaining contractual life,
in years, and the number of shares represented by exercisable options and
warrants with their weighted average exercise price were:
Outstanding Exercisable
------------------------ ------------------
Exercise Price Shares Price Life Shares Price
------------- ---------- ----- ---- ---------- -----
$ 5.06 - 9.83 955,623 $ 7.57 3.1 955,623 $ 7.57
========== ===== ==== ========== =====
$16.67 - 19.75 2,291,923 $18.39 6.7 1,575,507 $18.30
========== ===== ==== ========== =====
$20.21 - 28.99 10,387,438 $22.23 6.8 4,054,150 $22.48
========== ===== ==== ========== =====
The weighted average fair value of options granted in 1996 and 1995 were
$6.93 and $6.44, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in
1996 and 1995, respectively: risk-free interest rates of 5.51% and 7.19%;
expected dividend yields of 1.13% and 1.18%; expected volatility of
approximately 21% and lives of 5.9 years for both years.
(11) Pension, Postretirement and Postemployment Benefits
---------------------------------------------------
Pension Benefits
----------------
Hasbro's net pension and profit sharing cost for 1996, 1995 and 1994 was
approximately $15,700, $12,200 and $12,500, respectively.
United States Plans
-------------------
Substantially all United States employees are covered under at least one
of several non-contributory defined benefit plans maintained by the
Company. Benefits under the major plans, covering non-union employees,
are based primarily on salary and years of service. Benefits under other
plans are based primarily on fixed amounts for specified years of
service.
The net periodic pension cost of these plans included the following
components:
1996 1995 1994
---- ---- ----
Benefits earned during the year $ 8,583 6,304 7,029
Interest cost on projected benefits 9,868 9,492 8,219
Actual return on plan assets (23,227) (31,154) (521)
Net amortization and deferral 11,763 21,153 (8,429)
------ ------ ------
$ 6,987 5,795 6,298
====== ====== ======
The funded status and the amounts recognized in Hasbro's balance sheets
relating to these plans are:
1996 1995
----------------------- -----------------------
Plans With Plans With Plans With Plans With
Assets Accumulated Assets Accumulated
Exceeding Benefits Exceeding Benefits
Accumulated Exceeding Accumulated Exceeding
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
Actuarial present value of:
Vested benefits $103,870 6,591 98,149 8,303
Nonvested benefits 3,205 673 3,162 199
------- ------ ------- ------
Accumulated benefit
obligation 107,075 7,264 101,311 8,502
Effect of assumed
increase in
compensation level 29,542 3,469 27,972 5,997
------- ------ ------- ------
Projected benefit
obligation 136,617 10,733 129,283 14,499
Net assets available
for benefits 162,641 - 137,292 919
------- ------ ------- ------
Plan assets in excess
of (less than)
projected benefits $ 26,024 (10,733) 8,009 (13,580)
======= ====== ======= ======
Consisting of:
Unrecognized net
asset $ 1,372 - 1,715 -
Unrecognized prior
service cost (6,085) (4,474) (815) (4,310)
Unrecognized net gain
(loss) 32,406 2,818 9,407 (1,984)
Accrued pension
recognized in the
balance sheet (1,669) (9,077) (2,298) (7,286)
------- ------ ------- ------
$ 26,024 (10,733) 8,009 (13,580)
======= ====== ======= ======
The assets of the funded plans are managed by investment advisors and
consist primarily of pooled indexed and actively managed bond and stock
funds. The projected benefits have been determined using assumed
discount rates of 7.75% for 1996, 7.25% for 1995 and 8.5% for 1994 and,
for all years, an assumed long-term rate of compensation increase of 5%
and an assumed long-term rate of return on plan assets of 9%.
Hasbro also has a profit sharing plan covering substantially all of its
United States non-union employees. The plan provides for an annual
discretionary contribution by the Company which for 1996, 1995 and 1994
was approximately $5,000, $4,800 and $5,100, respectively.
International Plans
-------------------
Pension coverage for employees of Hasbro's international subsidiaries is
provided, to the extent deemed appropriate, through separate defined
benefit and defined contribution plans. These plans were neither
significant individually nor in the aggregate.
Postretirement Benefits
-----------------------
Hasbro provides certain postretirement health care and life insurance
benefits to eligible United States employees who retire and have either
attained age 65 with 5 years of service or age 55 with 10 years of
service. The cost of providing these benefits on behalf of employees who
retired prior to 1993 is and will continue to be substantially borne by
the Company. The cost of providing benefits on behalf of employees who
retire after 1992 is shared, with the employee contributing an
increasing percentage of the cost, resulting in an employee-paid plan
after the year 2002. The plan is not funded.
The accumulated benefit obligation relating to this plan at December 29,
1996 and December 31, 1995 consists of:
1996 1995
---- ----
Retired employees $17,632 17,873
Fully eligible active employees 1,021 952
Other active employees 5,909 5,322
------ ------
$24,562 24,147
====== ======
The net periodic postretirement benefit cost included the following
components:
1996 1995 1994
---- ---- ----
Benefits earned during the period $ 289 267 403
Interest cost on projected benefits 1,727 1,822 1,709
------ ------ ------
$ 2,016 2,089 2,112
====== ====== ======
For measuring the expected postretirement benefit obligation, an 8.6%
annual rate of increase in the per capita cost of covered health care
benefits was assumed for 1996 and a rate of 9.2% for 1995 and 1994. The
1996 rate was further assumed to decrease gradually to 5% in 2012. The
1995 and 1994 rates were assumed to decrease to 6% over this same
period. All were assumed to remain constant after 2012. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% in 1996, 7.25% in 1995 and 8.5% in 1994.
If the health care cost trend rate were increased one percentage point
in each year, the accumulated postretirement benefit obligation at
December 31, 1996 would have increased by approximately 10% and the
aggregate of the benefits earned during the period and the interest cost
would have each increased by approximately 11%.
Postemployment Benefits
-----------------------
Hasbro has several plans covering certain groups of employees which may
provide benefits to such employees following their period of active
employment but prior to their retirement. These plans include certain
severance plans which provide benefits to employees involuntarily
terminated and certain plans which continue the Company's health and
life insurance contributions for employees who have left Hasbro's employ
under terms of its long-term disability plan.
At the beginning of 1994, Hasbro adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112). SFAS 112 requires that the cost
of certain postemployment benefits be accrued over the employee service
period which was a change from the Company's prior practice of recording
such benefits when incurred. The effect of initially applying SFAS 112,
net of a deferred tax benefit of $2,513, was recorded as the cumulative
effect of change in accounting principles.
(12) Leases
------
Hasbro occupies certain manufacturing facilities and sales offices and
uses certain equipment under various operating lease arrangements. The
rent expense under such arrangements, net of sublease income which is
not material, for 1996, 1995 and 1994 amounted to $46,092, $43,486 and
$39,186, respectively.
Minimum rentals, net of minimum sublease income which is not material,
under long-term operating leases for the five years subsequent to 1996
and in the aggregate are as follows:
1997 $ 33,749
1998 24,539
1999 20,056
2000 15,619
2001 13,995
Later years 100,452
-------
$208,410
=======
All leases expire prior to 2014. Real estate taxes, insurance and
maintenance expenses are generally obligations of the Company. It is
expected that in the normal course of business, leases that expire will
be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than
the amounts shown for 1996.
In addition, Hasbro leases certain facilities which, as a result of
prior restructurings, are no longer in use. Future costs relating to
such facilities were included as a component of the restructuring charge
and are not included in the table above.
(13) Discontinued Development Project and Restructuring Charges
----------------------------------------------------------
During the second quarter of 1995, Hasbro discontinued its efforts,
begun in 1992, to develop a mass-market virtual reality game system.
These efforts produced such a game system, but at a price judged to be
too expensive for the mass-market. The impact of this decision was a
charge of $31,100 for the estimated costs associated with such action.
Approximately half of the charge resulted from the expensing of software
development costs, previously capitalized under the provisions of
Statement of Financial Accounting Standards No. 86, related to both the
operating system and games for the system. The remaining amount
represented provisions for costs associated with discontinuance of this
project, including the termination of contractual agreements relating to
the development of the system and games, the write-off of certain fixed
assets and various other cancellation/termination costs. Substantially
all of the liabilities established for this action have been paid.
During the third quarter of 1994, Hasbro recorded a restructuring charge
of $12,500, primarily related to the reorganization of its Domestic Toy
Group and the consolidation of its United States manufacturing
operations. Substantially all of the liabilities established for these
actions, which included provisions for severance payments, outplacement
services and the continuation of certain fringe benefits, primarily
medical and dental, have been paid.
(14) Financial Instruments
---------------------
Hasbro's financial instruments include cash and cash equivalents,
accounts receivable, short- and long-term borrowings, accounts payable,
accrued liabilities and foreign currency forward exchange contracts. At
December 29, 1996, the carrying value of these instruments approximated
their fair value based on current market prices and rates. As estimates
of these fair values are subjective and involve uncertainties and
judgments, they cannot be determined with precision. Any changes in
assumptions would affect these estimates.
Hasbro enters into certain foreign currency forward exchange contracts
to protect itself from adverse currency rate fluctuations on
identifiable foreign currency commitments made in the ordinary course of
business. These contracts, which relate to future purchases of
inventory, are denominated in currencies of major industrial countries
and entered into with creditworthy banks for terms of not more than
twelve months. The Company does not anticipate any material adverse
effect on its results of operations or financial position from these
contracts. (See note 15)
(15) Commitments and Contingencies
-----------------------------
Hasbro had unused open letters of credit of approximately $20,000 and
$18,000 at December 29, 1996 and December 31, 1995, respectively.
Hasbro had the equivalent of approximately $35,000 and $42,000 of
forward exchange contracts outstanding at December 29, 1996 and December
31, 1995, respectively. These contracts have been entered into to hedge
firm commitments for the purchase of products, principally from the Far
East. Gains and losses deferred under hedge accounting provisions are
subsequently included in the measurement of the related foreign currency
transaction. The aggregate amount of gains and losses resulting from
foreign currency transactions was not material.
Hasbro is involved in various claims and legal actions substantially
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's future results of operations or
liquidity.
(16) Segment Reporting
-----------------
Industry and Geographic Information
-----------------------------------
Hasbro operates primarily in one industry segment which includes the
development, manufacture and marketing of toy products and related items
and the licensing of certain related properties.
As Hasbro operates internationally, it is exposed to the risk of changes
in social, political and economic conditions inherent in such
operations.
Information about Hasbro's operations in different geographic areas,
determined by the location of the subsidiary or unit, for each of the
fiscal years in the three-year period ended December 1996 follows.
Hasbro's primary operations in areas outside of the United States
include Western Europe, Canada, Mexico, Australia and New Zealand and
Hong Kong. As the international areas have similar business environments
and the Company's operations in those areas are similar, they are
presented as one category.
1996 1995 1994
---- ---- ----
Net revenues:
United States $1,642,569 1,550,454 1,530,928
International 1,359,801 1,307,756 1,139,334
--------- --------- ---------
$3,002,370 2,858,210 2,670,262
========= ========= =========
Operating profit:
United States $ 201,312 146,841 169,782
International 130,955 126,731 125,895
--------- --------- ---------
$ 332,267 273,572 295,677
========= ========= =========
Identifiable assets:
United States $1,793,915 1,782,276 1,612,982
International 907,594 834,112 765,393
--------- --------- ---------
$2,701,509 2,616,388 2,378,375
========= ========= =========
Certain of Hasbro's international units sell products, primarily on a
letter of credit basis, directly to United States customers, and certain
United States units sell products to international customers, primarily
in Latin America. Were such transactions reported by the geographic
destination of the sale rather than the geographic location of the unit
making the sale, United States revenues would be increased and
international revenues decreased by $135,010, $71,998 and $36,666 in
1996, 1995 and 1994, respectively.
Other Information
-----------------
Hasbro markets its products primarily to customers in the retail sector.
Although the Company closely monitors the creditworthiness of its
customers, adjusting credit policies and limits as deemed appropriate, a
substantial portion of its customers' ability to discharge amounts owed
is dependent upon the retail economic environment.
Sales to the Company's two largest customers, Toys R Us, Inc. and Wal-
Mart Stores, Inc., amounted to 22% and 13%, respectively, of
consolidated net revenues during 1996 and 21% and 12%, respectively,
during each of 1995 and 1994.
Hasbro purchases certain components and accessories used in its
manufacturing process and certain finished products from manufacturers
in the Far East. The Company's reliance on external sources of
manufacturing can be shifted, over a period of time, to alternative
sources of supply for products it sells, should such changes be
necessary. However, if Hasbro were prevented from obtaining products
from a substantial number of its current Far East suppliers due to
political, labor or other factors beyond its control, the Company's
operations would be disrupted while alternative sources of product were
secured. The imposition of trade sanctions by the United States against
a class of products imported by Hasbro from, or the loss of "most
favored nation" trading status by the Peoples Republic of China could
significantly increase the cost of the Company's products imported into
the United States from China.
(17) Quarterly Financial Data (Unaudited)
------------------------------------
1996
----
Quarter
------------------------------------
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
Net revenues $538,685 511,609 845,148 1,106,928 3,002,370
Gross profit $300,914 277,425 472,875 622,259 1,673,473
Earnings before
income taxes $ 39,109 9,143 104,934 153,707 306,893
Net earnings $ 24,365 5,986 70,469 99,092 199,912
======= ======= ======= ========= =========
Per common share
Earnings $ .18 .05 .54 .75 1.52
Market price
High $ 31 1/4 25 3/4 25 1/2 29 3/8 31 1/4
Low $ 19 1/4 23 1/2 21 1/4 24 5/8 19 1/4
Cash dividends
declared $ .07 .07 .07 .07 .27
======= ======= ======= ========= =========
1995
----
Quarter
-------------------------------------
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
Net revenues $526,503 481,854 826,165 1,023,688 2,858,210
Gross profit $293,931 267,769 465,313 594,000 1,621,013
Earnings (loss)
before income
taxes $ 35,257 (24,217)(a) 103,370 138,140 252,550
Net earnings
(loss) $ 21,683 (14,893) 63,572 85,209 155,571
======= ======= ======= ========= =========
Per common share
Earnings (loss) $ .16 (.11) .48 .64 1.18
Market price
High $ 22 1/2 23 1/2 22 1/4 21 3/4 23 1/2
Low $ 18 7/8 20 7/8 19 3/4 19 18 7/8
Cash dividends
declared $ .05 .05 .05 .05 .21
======= ======= ======= ========= =========
1994
----
Quarter
------------------------------------
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
Net revenues $489,133 444,324 796,222 940,583 2,670,262
Gross profit $280,933 241,146 444,093 542,611 1,508,783
Earnings before
income taxes and
cumulative ef-
fect of change
in accounting
principles $ 43,443 2,657 122,196(a) 123,273 291,569
Net earnings $ 22,435 1,634 75,151 75,813 175,033
======= ======= ======= ======= =========
Per common share
Earnings before
cumulative ef-
fect of change
in account-
ing principles $ .20 .01 .56 .57 1.34
Earnings $ .17 .01 .56 .57 1.31
Market price
High $ 24 3/8 24 21 3/8 22 1/4 24 3/8
Low $ 22 1/4 18 3/4 18 3/4 18 1/2 18 1/2
Cash dividends
declared $ .05 .05 .05 .05 .19
======= ======= ======= ======= =========
(a) Includes the effect of nonrecurring charges in 1995 of $31,100 relating
to a discontinued development project and in 1994, $12,500 relating to
restructuring of operations. (See note 13)