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 29, 1997 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 8, 1997 was 126,977,710. HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Thousands of Dollars Except Share Data) (Unaudited) Jun. 29, Jun. 30, Dec. 29, Assets 1997 1996 1996 --------- --------- --------- Current assets Cash and cash equivalents $ 82,510 69,998 218,971 Accounts receivable, less allowance for doubtful accounts of $49,600, $51,200 and $46,600 714,212 683,906 807,149 Inventories: Finished products 302,213 312,863 209,903 Work in process 16,025 26,619 16,810 Raw materials 49,983 58,617 46,534 --------- --------- --------- Total inventories 368,221 398,099 273,247 Deferred income taxes 78,461 83,115 78,031 Prepaid expenses 110,452 77,721 109,191 --------- --------- --------- Total current assets 1,353,856 1,312,839 1,486,589 Property, plant and equipment, net 296,139 305,772 313,545 --------- --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $123,524, $107,321 and $115,312 508,439 473,594 460,467 Other intangibles, less accumulated amortization of $114,346, $90,281 and $102,387 419,439 370,129 364,987 Other 68,922 65,180 75,921 --------- --------- --------- Total other assets 996,800 908,903 901,375 --------- --------- --------- Total assets $2,646,795 2,527,514 2,701,509 ========= ========= ========= HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued (Thousands of Dollars Except Share Data) (Unaudited) Jun. 29, Jun. 30, Dec. 29, Liabilities and Shareholders' Equity 1997 1996 1996 --------- --------- --------- Current liabilities Short-term borrowings $ 314,288 288,872 120,736 Trade payables 89,967 106,444 174,337 Accrued liabilities 336,112 293,937 399,896 Income taxes 91,151 79,891 135,849 --------- --------- --------- Total current liabilities 831,518 769,144 830,818 Long-term debt, excluding current installments 149,040 149,920 149,382 Deferred liabilities 67,206 72,066 69,263 --------- --------- --------- Total liabilities 1,047,764 991,130 1,049,463 --------- --------- --------- 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 132,176,967, 88,088,526 and 132,160,293 66,088 44,044 66,080 Additional paid-in capital 279,798 305,915 282,922 Retained earnings 1,378,073 1,211,565 1,362,791 Foreign currency translation (2,591) 17,137 21,487 Treasury stock, at cost; 4,735,697, 1,251,853 and 3,297,628 shares (122,337) (42,277) (81,234) --------- --------- --------- Total shareholders' equity 1,599,031 1,536,384 1,652,046 --------- --------- --------- Total liabilities and shareholders' equity $2,646,795 2,527,514 2,701,509 ========= ========= ========= 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. 29, Jun. 30, Jun. 29, Jun. 30, 1997 1996 1997 1996 -------- -------- --------- --------- Net revenues $583,886 511,609 1,139,670 1,050,294 Cost of sales 252,917 234,184 488,288 471,955 ------- ------- --------- --------- Gross profit 330,969 277,425 651,382 578,339 ------- ------- --------- --------- Expenses Amortization 11,194 10,007 21,226 19,806 Royalties, research and development 87,864 64,356 151,756 118,778 Advertising 66,908 66,171 138,210 136,447 Selling, distribution and administration 142,289 124,909 277,070 250,274 ------- ------- --------- --------- Total expenses 308,255 265,443 588,262 525,305 ------- ------- --------- --------- Operating profit 22,714 11,982 63,120 53,034 ------- ------- --------- --------- Nonoperating (income) expense Interest expense 5,493 5,353 9,923 10,259 Other (income), net (3,062) (2,514) (7,233) (5,477) ------- ------- --------- --------- Total nonoperating expense 2,431 2,839 2,690 4,782 ------- ------- --------- --------- Earnings before income taxes 20,283 9,143 60,430 48,252 Income taxes 7,302 3,157 21,755 17,901 ------- ------- --------- --------- Net earnings $ 12,981 5,986 38,675 30,351 ======= ======= ========= ========= Per common share Net earnings $ .10 .05 .30 .23 ======= ======= ========= ========= Cash dividends declared $ .08 .07 .16 .14 ======= ======= ========= ========= See accompanying condensed notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 29, 1997 and June 30, 1996 (Thousands of Dollars) (Unaudited) 1997 1996 ------- ------- Cash flows from operating activities Net earnings $ 38,675 30,351 Adjustments to reconcile net earnings to net cash utilized by operating activities: Depreciation and amortization of plant and equipment 48,297 45,843 Other amortization 21,226 19,806 Deferred income taxes (2,325) 2,882 Change in operating assets and liabilities (other than cash and cash equivalents): Decrease in accounts receivable 87,426 101,284 Increase in inventories (78,110) (83,079) Decrease (increase) in prepaid expenses 1 (6,145) Decrease in trade payables and accrued liabilities (185,664) (266,450) Other 739 3,553 ------- ------- Net cash utilized by operating activities (69,735) (151,955) ------- ------- Cash flows from investing activities Additions to property, plant and equipment (34,655) (40,943) Investments and acquisitions, net of cash acquired (164,153) (21,300) Other 1,166 (8,310) ------- ------- Net cash utilized by investing activities (197,642) (70,553) ------- ------- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 70,446 96,026 Repayments of borrowings with original maturities of more than three months (31,721) (30,990) Net proceeds of other short-term borrowings 160,646 106,278 Purchase of common stock (63,539) (28,869) Stock option transactions 18,978 7,991 Dividends paid (18,801) (15,688) ------- ------- Net cash provided by financing activities 136,009 134,748 ------- ------- Effect of exchange rate changes on cash (5,093) (3,272) ------- ------- Decrease in cash and cash equivalents (136,461) (91,032) Cash and cash equivalents at beginning of year 218,971 161,030 ------- ------- Cash and cash equivalents at end of period $ 82,510 69,998 ======= ======= HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Six Months Ended June 29, 1997 and June 30, 1996 (Thousands of Dollars) (Unaudited) 1997 1996 ------- ------- Supplemental information Cash paid during the period for: Interest $ 8,017 8,799 Income taxes $ 74,875 48,790 See accompanying condensed notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (Thousands of Dollars) (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 29, 1997 and June 30, 1996, and the results of operations and cash flows for the periods then ended. 	The results of operations for the six months ended June 29, 1997, 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/Cap Toys). The consideration for this purchase is currently estimated by the Company to be $161,434. Accounting for this acquisition using the purchase method, the Company has allocated the purchase price based on preliminary estimates of fair market value which included $40,610 of net tangible assets, $63,100 of property rights and licenses and $57,724 of cost in excess of net assets acquired. The Consolidated Statements of Earnings include the results of OddzOn/Cap Toys from date of acquisition. (3)	Per share data have been adjusted to reflect the three-for-two stock split paid March 21, 1997. (4)	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. For each of the reported periods the difference between primary and fully diluted earnings per share was not significant. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) NET REVENUES - - ------------ Net revenues for the second quarter and six months of 1997 were $583,886 and $1,139,670, respectively, up from the $511,609 and $1,050,294 reported for the same periods of 1996. Revenue growth continued to be driven by the strength of the Company's range of boys' products, including those associated with three of its major entertainment properties, Star Wars(R), Jurassic Park(TM) and Batman(TM). Also contributing to revenue growth in the United States markets was Hasbro's acquisition of certain assets of OddzOn Products and Cap Toys (OddzOn/Cap), during the month of May, which brought with it such well known brands as Koosh(R) balls, Vortex(TM) sport products and Cap Toy's line of interactive candy. Internationally, significant local currency growth was experienced in Canada, Mexico and in Latin America where the Company has three newly established operations, as well as more moderate growth in several other countries. The negative effect of the strengthened dollar, which this quarter amounted to approximately $10 million, reduced the impact of these gains. Hasbro Interactive also contributed to revenue growth as its worldwide line of CD- ROM games continued to be very well accepted. GROSS PROFIT - - ------------ The Company's gross profit margin, expressed as a percentage of net revenues, increased in comparison to 1996 levels; for the quarter to 56.7% from 54.2%, and for the six months to 57.2% from 55.1%. The mix of products sold, including the favorable impact of lower levels of sales made at less than normal margins, contributed to this improvement. Adversely impacting gross margin for both the quarter and six months were unfavorable changes in foreign currency rates. EXPENSES - - -------- Royalties, research and development expenses for the second quarter and six months increased both in amount and when expressed as a percentage of net revenues. The increases were primarily attributable to the royalty component, reflecting the increased revenues and the change in the mix of the products sold. Research and development was $37,376 and $68,433 for the quarter and six months of 1997, respectively, compared with $35,391 and $65,510 for the same periods of 1996. Advertising expense for both the second quarter and six months increased marginally in amount but decreased as a percentage of net revenues. As in the first quarter, the decreased percentage is the result of several factors including the lower portion of the Company's revenues coming from its international marketing units, which generally have higher advertising to sales ratios than do the United States groups. Also contributing was the leverage resulting from the major entertainment properties, particularly with respect to the United States boys' products. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) The Company's selling, distribution and administration expenses for the quarter, when expressed as a percentage of revenues, remained constant with those of a year ago, although increasing in amount. Contributing to the increase was the impact of the Company's new operations in Latin America and the OddzOn/Cap acquisition. For the six months, selling, distribution and administration expenses increased in both amount and percentage, again reflecting the impact of these new units. NONOPERATING (INCOME) EXPENSE - - ----------------------------- Net nonoperating expense for the quarter and six months of 1997 decreased by $408 and $2,092, respectively. The primary contributors to these reductions were increased interest income and gains on investments, both partially offset by increased losses on foreign exchange transactions. INCOME TAXES - - ------------ Income tax expense as a percentage of pretax earnings for the quarter and six months of 1997 was 36% while a year ago it was 34.5% and 37.1%, respectively. The lower percentage in the second quarter of 1996 was attributable to the implementation during the quarter of certain tax strategies which impacted the year to date results. The decrease in the six month rate of 1997 from that of a year ago reflects the effect of these strategies as well as changes in Hasbro's operations in the third quarter of 1996. These strategies and changes realize tax benefits for certain international operating losses and contribute to a reduction in state income taxes. 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 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 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 HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) amendment or cancellation by customers prior to shipment. At the end of its fiscal July (July 27, 1997 and July 28, 1996) the Company's unshipped orders were approximately $860,000 and $890,000. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- Because of the seasonality of the Company's business coupled with certain customer incentives, mainly in the form of extended payment terms, the interim cash flow statements are 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. 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, when measured in days sales outstanding, show a four-day improvement over 1996, although in amount were approximately $30,000, or 4% greater, than at the same time a year ago. A major portion of the increase in amount is attributable to the recently acquired OddzOn/Cap units as well as the new Latin American operations. In spite of the increases related to these new units, inventories were less than those of the same period in the prior year, as the Company continued efforts to balance reduced levels with customers' needs for prompt fulfillment of their orders. Other assets, as a group, increased substantially from their 1996 levels, largely due to the approximate $121,000 of intangible assets acquired in the OddzOn/Cap transaction. Net borrowings (short- and long-term borrowings less cash) were only $12,000 above the 1996 level, even though approximately $161,000 of cash was utilized for the OddzOn/Cap acquisition and more than $118,000 during the last twelve months for the continuation of Hasbro's share repurchase program. At June 29, 1997, the Company had committed unsecured lines of credit totaling approximately $550,000 available to it. It also had available uncommitted lines approximating $750,000. The Company believes that these amounts are adequate for its needs. Of these available lines, approximately $340,000 was in use at June 29, 1997. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) RECENT INFORMATION - - ------------------ During the quarter, The Financial Accounting Standards Board issued two pronouncements which Hasbro will adopt in fiscal 1998. The first, Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The second, Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), establishes requirements for the reporting of certain information in its financial statements about the operating segments of a business enterprise. Both SFAS 130 and SFAS 131 relate to disclosure of financial information and, as such, will not have any impact on the Company's financial condition or its results of operations. PART II. Other Information Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None 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 14, 1997, the Company's shareholders reelected the following persons to the Board of Directors of the Company: Harold P. Gordon (114,842,921 votes for, 1,115,596 votes withheld); Alex Grass (114,856,468 votes for, 1,102,049 votes withheld); Alan G. Hassenfeld (114,839,052 votes for, 1,119,465 votes withheld; Marie Josee Kravis (114,882,870 votes for, 1,075,647 votes withheld; and Preston Robert Tisch (114,832,940 votes for, 1,125,577 votes withheld). There were no votes against any nominee and no broker nonvotes. In addition, the Company's shareholders ratified the selection of KPMG Peat Marwick LLP as the independent public accountants for the Company for the 1997 fiscal year by a vote of 115,725,967 for, 34,032 against, 198,518 abstentions and no broker nonvotes. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4 Amendment No. 4 to Revolving Credit Agreement, dated as of May 14, 1997, among the Company, certain banks (the "Banks") and BankBoston, N.A., as agent for the Banks. 11.1 Computation of Earnings Per Common Share - Six Months Ended June 29, 1997 and June 30, 1996. 11.2 Computation of Earnings Per Common Share - Quarter Ended June 29, 1997 and June 30, 1996. 12 Computation of Ratio of Earnings to Fixed Charges - Six Months and Quarter Ended June 29, 1997. 27 Article 5 Financial Data Schedule - Second Quarter 1997 (b) Reports on Form 8-K A Current Report on Form 8-K, dated July 17, 1997, was filed by the Company and included the Press Release dated July 17, 1997, announcing the Company's results for the current quarter. Consolidated Statements of Earnings (without notes) for the quarters and six months ended June 29, 1997 and June 30, 1996 and Consolidated Condensed Balance Sheets (without notes) as of said dates were also filed. 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: August 13, 1997 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 29, 1997 Exhibit Index Exhibit No. Exhibits - - ------- -------- 4 Amendment No. 4 to Revolving Credit Agreement, dated as of May 14, 1997, among the Company, certain banks (the "Banks") and BankBoston, N.A., as agent for the Banks. 11.1 Computation of Earnings Per Common Share - Six Months Ended June 29, 1997 and June 30, 1996 11.2 Computation of Earnings Per Common Share - Quarter Ended June 29, 1997 and June 30, 1996 12 Computation of Ratio of Earnings to Fixed Charges - Six Months and Quarter Ended June 29, 1997 27 Article 5 Financial Data Schedule - Second Quarter 1997