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 27, 1999 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 July 25, 1999 was 194,693,412.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars Except Share Data)
(Unaudited)
Jun. 27, Jun. 28, Dec. 27,
Assets 1999 1998 1998
--------- --------- ---------
Current assets
Cash and cash equivalents $ 97,765 180,595 177,748
Accounts receivable, less allowance
for doubtful accounts of $60,200,
$52,400 and $64,400 843,580 600,254 958,826
Inventories:
Finished products 372,917 277,608 283,160
Work in process 12,409 17,215 12,698
Raw materials 48,134 36,815 38,943
--------- --------- ---------
Total inventories 433,460 331,638 334,801
Deferred income taxes 106,895 92,929 100,332
Prepaid expenses 479,220 130,811 218,279
--------- --------- ---------
Total current assets 1,960,920 1,336,227 1,789,986
Property, plant and equipment, net 308,420 281,327 330,355
--------- --------- ---------
Other assets
Cost in excess of acquired net assets,
less accumulated amortization of
$169,332, $138,162 and $152,008 696,614 615,297 704,282
Other intangibles, less accumulated
amortization of $209,620, $154,513
and $192,268 811,423 707,775 837,899
Other 123,760 87,139 131,323
--------- --------- ---------
Total other assets 1,631,797 1,410,211 1,673,504
--------- --------- ---------
Total assets $3,901,137 3,027,765 3,793,845
========= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(Thousands of Dollars Except Share Data)
(Unaudited)
Jun. 27, Jun. 28, Dec. 27,
Liabilities and Shareholders' Equity 1999 1998 1998
--------- --------- ---------
Current liabilities
Short-term borrowings $ 823,202 527,259 372,249
Trade payables 132,787 124,479 209,119
Accrued liabilities 606,435 486,715 729,605
Income taxes 46,954 65,666 55,327
--------- --------- ---------
Total current liabilities 1,609,378 1,204,119 1,366,300
Long-term debt, excluding current
installments 409,937 - 407,180
Deferred liabilities 77,700 77,886 75,570
--------- --------- ---------
Total liabilities 2,097,015 1,282,005 1,849,050
--------- --------- ---------
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 209,694,630, 209,698,516
and 209,698,516 104,847 104,849 104,849
Additional paid-in capital 466,821 453,425 521,316
Retained earnings 1,644,460 1,449,609 1,621,799
Accumulated other comprehensive income (26,009) (20,076) (9,625)
Treasury stock, at cost; 14,860,988,
11,680,232 and 13,523,983 shares (385,997) (242,047) (293,544)
--------- --------- ---------
Total shareholders' equity 1,804,122 1,745,760 1,944,795
--------- --------- ---------
Total liabilities and
shareholders' equity $3,901,137 3,027,765 3,793,845
========= ========= =========
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. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
-------- -------- --------- ---------
Net Revenues $ 874,574 572,057 1,542,972 1,054,877
Cost of Sales 345,026 247,095 601,543 451,407
-------- -------- --------- ---------
Gross Profit 529,548 324,962 941,429 603,470
-------- -------- --------- ---------
Expenses
Amortization 31,918 15,880 57,844 30,023
Royalties, Research and
Development 179,776 82,129 291,718 149,465
Advertising 101,274 73,213 182,358 128,970
Selling, Distribution and
Administration 158,368 141,479 321,649 276,728
-------- -------- --------- ---------
Total Expenses 471,336 312,701 853,569 585,186
-------- -------- --------- ---------
Operating Profit 58,212 12,261 87,860 18,284
-------- -------- --------- ---------
Nonoperating (income) expense
Interest Expense 13,625 6,416 25,598 8,728
Other (Income) Expense, Net (2,209) (2,417) (4,527) (10,514)
-------- -------- --------- ---------
Total nonoperating (income)
expense 11,416 3,999 21,071 (1,786)
-------- -------- --------- ---------
Earnings Before Income Taxes 46,796 8,262 66,789 20,070
Income Taxes 14,507 2,809 20,705 6,824
-------- -------- --------- ---------
Net Earnings $ 32,289 5,453 46,084 13,246
======== ======== ========= =========
Per Common Share
Net Earnings
Basic $ .17 .03 .24 .07
======== ======== ========= =========
Diluted $ .16 .03 .22 .06
======== ======== ========= =========
Cash Dividends Declared $ .06 .05 .12 .10
======== ======== ========= =========
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 27, 1999 and June 28, 1998
(Thousands of Dollars)
(Unaudited)
1999 1998
------- -------
Cash flows from operating activities
Net earnings $ 46,084 13,246
Adjustments to reconcile net earnings to net cash
utilized by operating activities:
Depreciation and amortization of plant and equipment 48,437 43,857
Other amortization 57,844 30,023
Deferred income taxes (6,184) (1,153)
Change in operating assets and liabilities (other
than cash and cash equivalents):
Decrease in accounts receivable 102,603 176,595
Increase in inventories (106,718) (69,208)
Increase in prepaid expenses (264,842) (30,447)
Decrease in trade payables and accrued liabilities (197,450) (254,312)
Other (772) (1,739)
------- -------
Net cash utilized by operating activities (320,998) (93,138)
------- -------
Cash flows from investing activities
Additions to property, plant and equipment (41,130) (47,969)
Purchase of product rights and licenses (13,800) -
Investments and acquisitions, net of cash acquired - (355,000)
Other 3,317 9,019
------- -------
Net cash utilized by investing activities (51,613) (393,950)
------- -------
Cash flows from financing activities
Proceeds from borrowings with original maturities
of more than three months 3,500 850
Repayments of borrowings with original maturities
of more than three months (6) (25,775)
Net proceeds of other short-term borrowings 461,465 433,825
Purchase of common stock (191,345) (107,647)
Stock option transactions 44,396 39,350
Dividends paid (22,196) (21,268)
------- -------
Net cash provided by financing activities 295,814 319,335
------- -------
Effect of exchange rate changes on cash (3,186) (13,437)
------- -------
Decrease in cash and cash equivalents (79,983) (181,190)
Cash and cash equivalents at beginning of year 177,748 361,785
------- -------
Cash and cash equivalents at end of period $ 97,765 180,595
======= =======
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Six Months Ended June 27, 1999 and June 28, 1998
(Thousands of Dollars)
(Unaudited)
1999 1998
------- -------
Supplemental information
Cash paid during the period for:
Interest $ 24,745 8,033
Income taxes $ 32,850 33,495
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)
Quarters Ended Six Months Ended
------------------ ------------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
-------- ------- ------- -------
Net earnings $ 32,289 5,453 46,084 13,246
Other comprehensive
loss (4,774) (7,891) (16,384) (16,173)
-------- ------- ------- -------
Total comprehensive
earnings (loss) $ 27,515 (2,438) 29,700 (2,927)
======== ======= ======= =======
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 27, 1999 and June 28, 1998, and
the results of operations and cash flows for the periods then ended.
The results of operations for the six months ended June 27, 1999 are not
necessarily indicative of results to be expected for the full year.
(2) All share and per share amounts have been adjusted to reflect the three-
for-two stock split paid March 15, 1999.
(3) The Company's other comprehensive earnings (loss) primarily results from
foreign currency translation adjustments.
(4) Hasbro is a worldwide marketer and distributor of family entertainment
products, principally engaged in the development, manufacture and marketing of
toy and game products. During the second quarter of 1999, the Company
redefined its focus and method of managing its business into two major areas,
Toys and Games. Following this organizational adjustment, within its two key
areas, under the provisions of Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, the
Company's reportable segments are U.S. Toys, U.S. Games, International and
Global Operations.
In the United States, the U.S. Toy segment includes the development, marketing
and selling of boys action figures, vehicles and playsets, girls toys,
preschool toys and infant products and creative play products. The U.S. Games
segment includes the development, marketing and selling of traditional board
games and puzzles, handheld electronic games and interactive software games
based on the Company's owned and licensed brands. The Company markets and
sells both toy and game products in non-U.S markets, and develops and manages
certain toy and game products and properties within the International segment.
Global Operations manufactures and sources product for all segments. The
Company also has other segments which develop and market non-traditional toy
and game based product and license certain toy properties. These other
segments do not meet the quantitative thresholds for reportable segments and
have been aggregated.
Segment performance is measured at the operating profit level. Included in
Corporate and eliminations are general corporate expenses, the elimination of
intersegment transactions and assets not identified with a specific segment.
Intersegment sales and transfers are reflected in management reports at
amounts approximating cost.
The accounting policies of the segments are the same as those described in
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
note 1 to the Company's financial statements for the year ended December 27,
1998.
Amounts shown for the first six months of 1999 are not necessarily
representative of those which may be expected for the full year 1999 nor are
those of the first six months of 1998 representative of those actually
experienced for the full year 1998. Similarly, such results are not
necessarily those which would be achieved were each segment an unaffiliated
business enterprise.
Information by segment and a reconciliation to reported amounts for the three
and six months ended June 27, 1999 and June 28, 1998 are as follows.
Three Months
------------
1999 1998
---- ----
Net revenues External Affiliate External Affiliate
-------- --------- -------- ---------
U.S. Toys $ 299,916 11 169,486 -
U.S. Games 312,422 (328) 167,523 (950)
International 201,537 1,260 173,861 624
Global Operations (a) 6,413 276,235 511 204,600
Other segments 54,286 3,285 60,676 3,394
Corporate and eliminations - (280,463) - (207,668)
--------- --------- --------- ---------
$ 874,574 - 572,057 -
========= ========= ========= =========
Six Months
----------
1999 1998
---- ----
Net revenues External Affiliate External Affiliate
-------- --------- -------- ---------
U.S. Toys $ 529,524 - 331,012 61
U.S. Games 511,728 1,356 261,217 (949)
International 349,975 2,970 323,167 1,590
Global Operations (a) 8,625 458,594 873 373,968
Other segments 143,120 8,347 138,608 7,809
Corporate and eliminations - (471,267) - (382,479)
--------- --------- --------- ---------
$1,542,972 - 1,054,877 -
========= ========= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
Quarter ended Six Months ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
---- ---- ---- ----
Operating profit
U.S. Toys $ 33,072 2,521 49,035 2,249
U.S. Games 34,661 14,509 38,631 16,909
International (4,571) (9,312) (24,963) (23,035)
Global Operations (a) (1,940) (4,059) (3,624) (10,222)
Other segments 3,953 7,316 31,027 27,020
Corporate and eliminations (6,963) 1,286 (2,246) 5,363
------- ------- ------- -------
$ 58,212 12,261 87,860 18,284
======= ======= ======= =======
Depreciation
U.S. Toys and U.S. Games (b) $ 3,586 2,083 6,791 4,007
International 2,134 2,200 4,558 4,624
Global Operations 18,420 16,888 28,746 28,507
Other segments 937 676 2,174 1,691
Corporate and eliminations 3,135 2,462 6,168 5,028
------- ------- ------- -------
$ 28,212 24,309 48,437 43,857
======= ======= ======= =======
Amortization of intangibles
U.S. Toys and U.S. Games (b) $ 20,910 8,523 35,998 15,127
International 6,094 3,642 12,044 7,487
Global Operations 564 - 1,015 -
Other segments 4,350 3,715 8,787 7,409
------- ------- ------- -------
$ 31,918 15,880 57,844 30,023
======= ======= ======= =======
Capital additions
U.S. Toys and U.S. Games (b) $ 2,588 2,200 5,180 2,890
International 1,200 14,153 2,029 15,233
Global Operations 15,804 10,816 28,259 19,256
Other segments 484 570 2,174 1,509
Corporate and eliminations 2,507 2,671 3,488 9,081
------- ------- ------- -------
$ 22,583 30,410 41,130 47,969
======= ======= ======= =======
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
June 27, 1999 June 28, 1998
------------- -------------
Total assets
U.S. Toys and U.S. Games (b) $2,485,673 1,741,283
International 872,042 703,060
Global Operations 515,389 363,327
Other segments 315,920 347,948
Corporate and eliminations (287,887) (127,853)
--------- ---------
$3,901,137 3,027,765
========= =========
(a) The Global Operations segment derives substantially all of its revenues
and thus its operating results from intersegment activities.
(b) As a result of the complexity of the Company's organizational changes, it
currently is unable to segregate assets and related expenses between the U.S.
Toys and U.S. Games segments, and thus they are currently reported as one. It
is anticipated that such items will be segregated in the future and will then
be separately reported.
The following table presents consolidated net revenues by classes of principal
products for the quarter and six months ended June 27, 1999 and June 28, 1998.
Quarter ended Six Months ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
---- ---- ---- ----
Boys toys $ 341,900 170,900 573,000 329,800
Games and puzzles 330,700 216,700 539,100 345,100
Interactive software games 39,300 16,300 77,700 34,700
Preschool toys 38,300 44,200 85,500 82,100
Other 124,374 123,957 267,672 263,177
------- ------- --------- ---------
Net revenues $ 874,574 572,057 1,542,972 1,054,877
======= ======= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
(5) Earnings per share data for the fiscal quarters and six months ended June
27, 1999 and June 28, 1998 were computed as follows:
1999 1998
----------------- -----------------
Quarter Basic Diluted Basic Diluted
- - ------- ------- ------- ------- -------
Net earnings $ 32,289 32,289 5,453 5,453
======= ======= ======= =======
Average shares outstanding (in
thousands) 195,330 195,330 198,839 198,839
Effect of dilutive securities;
Options and warrants - 11,722 - 8,502
------- ------- ------- -------
Equivalent shares 195,330 207,052 198,839 207,341
======= ======= ======= =======
Earnings per share $ .17 .16 .03 .03
======= ======= ======= =======
1999 1998
----------------- -----------------
Six Months Basic Diluted Basic Diluted
- - ---------- ------- ------- ------- -------
Net earnings $ 46,084 46,084 13,246 13,246
======= ======= ======= =======
Average shares outstanding (in
thousands) 195,614 195,614 199,252 199,252
Effect of dilutive securities;
Options and warrants - 10,222 - 8,075
------- ------- ------- -------
Equivalent shares 195,614 205,836 199,252 207,327
======= ======= ======= =======
Earnings per share $ .24 .22 .07 .06
======= ======= ======= =======
(6) Late in the fourth quarter of 1997, the Company announced a global
integration and profit enhancement program which anticipated the redundancy of
approximately 2,500 employees, principally in manufacturing, and provided for
actions in three principal areas: a continued consolidation of the Company's
manufacturing operations; the streamlining of marketing and sales, while
exiting from certain underperforming markets and product lines; and the
further leveraging of overheads. Of the $140,000 estimated costs related to
these actions, $125,000 was reported as a nonrecurring charge and $15,000 was
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
reflected in cost of sales. Of the nonrecurring amount, approximately $54,000
related to severance and people costs, $52,000 to property, plant and
equipment and leases and $19,000 to product line related costs. During 1998,
all employees planned for redundancy had their employment terminated. The
approximate $44,000 accrual remaining at June 27, 1999, is principally
attributable to costs associated with lease terminations and closing of
certain facilities, and severance costs, which will be disbursed over the
employee's entitlement period. In the balance sheet, such property, plant and
equipment is included as a component of other assets. The program has been
substantially completed.
(7) The Company made three major acquisitions during 1998, having an
aggregate purchase price of $669,737. On April 1, 1998, the Company acquired
substantially all of the business and operating assets of Tiger Electronics,
Inc. and certain affiliates (Tiger). On September 14, 1998, the Company
acquired MicroProse, Inc. (MicroProse) through a cash tender offer of $6.00
for each outstanding share of MicroProse. Upon completion of a short-form
merger, MicroProse became a wholly-owned subsidiary of the Company and each
untendered share was converted into the right to receive $6.00 in cash. On
October 30, 1998, the Company acquired Galoob Toys, Inc. (Galoob) through a
cash tender offer of $12.00 for each outstanding share of Galoob. Upon
completion of a short-form merger, Galoob became a wholly-owned subsidiary of
the Company and each untendered Galoob share was converted into the right to
receive $12.00 in cash.
These three acquisitions were accounted for using the purchase method, and
accordingly, the net assets acquired have been recorded at their estimated
fair value and the results of their operations included from the dates of
acquisition. Based on estimates of fair market value, $90,494 has been
allocated to net tangible assets, $306,710 to product rights, $252,827 to
goodwill and $20,000 to acquired in-process research and development. The
appraised fair value of this acquired in-process research and development
(interactive game software projects under development at the date of
acquisition) was determined using the discounted cash flow approach,
considered the percentage of completion at the date of acquisition and was
expensed at acquisition.
On a pro forma basis, reflecting these three acquisitions as if they had taken
place at the beginning of the period and after giving effect to adjustments
recording the acquisitions, and excluding the charge for in-process research
and development, unaudited net revenues, net loss and basic and diluted loss
per share for the twenty six weeks ended June 28, 1998 would have been
$1,186,600, $(28,300), $(.14) and $(.14), respectively. These pro forma
results are not indicative of either future performance or actual results
which would have occurred had the acquisitions taken place at the beginning of
the period.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
NET EARNINGS
- - ------------
Net earnings for the 1999 second quarter and six months increased to $32,289
and $46,084, respectively, from 1998 levels of $5,453 and $13,246. Diluted
earnings per share for the second quarter was $.16 in 1999 and $.03 in 1998.
For the six months ended June 1999, diluted earnings per share was $.22 and
$.06 for the same period in 1998. A more detailed discussion of the various
items that impacted net earnings follows.
NET REVENUES
- - ------------
Worldwide net revenues increased 52.9% to $874,574 in the second quarter of
1999 compared to $572,057 in the second quarter of 1998. This increase is due
to significantly higher revenues from STAR WARS product, in conjunction with
the release of STAR WARS: EPISODE I: THE PHANTOM MENACE, FURBY, and increased
volume of Hasbro Interactive games as well as new products including POKEMON.
In addition, the second quarter of 1998 was adversely affected by changes in
inventory flow policies at Toys `R Us which were initiated in the first
quarter of 1998. The stronger US dollar negatively impacted net revenues for
the 1999 second quarter compared to the same period last year by $6,300. For
the six months, revenues were $1,542,972 and $1,054,877 in 1999 and 1998,
respectively. In addition to the second quarter factors noted above, the 1999
six month amounts reflect the impact of Tiger Electronics, Inc. (Tiger), which
was acquired on April 1, 1998, TELETUBBIES, which began shipping in the second
quarter of 1998 and an approximate $7,700 negative impact of the strengthened
U.S. dollar.
GROSS PROFIT
- - ------------
The Company's gross profit margin, expressed as a percentage of net revenues,
was 60.5% and 61.0% for the quarter and six months, respectively, compared to
the 1998 levels of 56.8% and 57.2%. These improvements are attributable
primarily to increased sales of promotional entertainment based and
interactive products which have a higher gross margin and more favorable
material prices, and secondarily to the removal of excess capacity resulting
from the closure of seven manufacturing facilities throughout 1998.
EXPENSES
- - --------
Amortization expense in both periods of 1999 was greater than in the
comparable periods of 1998, reflecting the Company's 1998 acquisitions (see
note 7).
Royalties, research and development expenses for the quarter and year to date
increased in both amount and as a percentage of net revenues from comparable
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
1998 levels. The royalty component increased in both dollars and as a
percentage of net revenues principally reflecting increased volumes of STAR
WARS, and to a lesser extent, increased volumes of Tiger and TELETUBBIES
product, POKEMON product which began shipping in the fourth quarter of 1998,
and product acquired in connection with the Galoob acquisition. The Company
believes this trend of increasing royalty expense is likely to continue in
line with the expected higher percentage of the Company's product arising from
licensed product carrying higher royalty rates. Research and development, at
$51,301 and $94,088 for the quarter and six months of 1999, respectively,
increased in dollars from $39,103 and $74,379 a year ago, while decreasing as
a percentage of higher 1999 net revenues. The increase in amount results
primarily from the Company's 1998 acquisitions as well as continued investment
to expand Hasbro Interactive game titles. Advertising expense for the 1999
second quarter and six months increased in amount while decreasing as a
percentage of net revenues from the comparable periods last year. The
increase in dollars primarily reflects higher advertising expense of Tiger
while the decrease in percentage reflects the mix of more entertainment based
product in the second quarter of 1999; the latter is not as extensively
advertised as the Company's non-entertainment based products.
Selling, distribution and administration expenses, which are largely fixed,
increased in amount and decreased as a percentage of net revenues during both
the second quarter and six months of 1999 from comparable 1998 levels. The
increase in amount for the quarter is due largely to the effect of 1999
increased volume on shipping and warehousing costs. Coupled with this factor,
the inclusion of Tiger for the full six months of 1999 contributes to the
increase over the six months of 1998. The decrease in percentage from 1998
reflects the increase in 1999 revenues and the further leveraging of costs
relating to the 1998 acquisitions of MicroProse and Galoob.
NONOPERATING (INCOME) EXPENSE
- - -----------------------------
Interest expense for the 1999 second quarter and six months was $13,625 and
$25,598, respectively, compared with $6,416 and $8,728 in 1998. This increase
reflects costs associated with borrowing requirements to fund the Company's
1998 acquisitions and the continuation of the share repurchase program,
coupled with the higher level of business activities in 1999. The change in
other nonoperating income, net, in both the quarter and six months, primarily
reflects lower earnings from short-term investments, the impact of minority
investments in certain subsidiaries, as well as the impact of foreign
exchange.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
INCOME TAXES
- - ------------
Income tax expense as a percentage of pretax earnings for the second quarter
and six months of 1999 decreased to 31.0% from the full year 1998 rate of
32.0%, while decreasing from 34.0% in the second quarter and six months of
1998. The decrease in the period to period rates reflects the continued
impact of the Tiger acquisition and the downward trend of the tax on
international earnings due to the reorganization of the Company's global
business.
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. Although the first half of 1999 may represent a greater
proportion of full year revenues than the first half of 1998, principally
because of the May 19, 1999 theatrical release of STAR WARS: EPISOSE 1: THE
PHANTOM MENACE, the Company expects that this trend generally 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, inventory levels, policies of retailers
and differences in overall economic conditions. Also, the quick response
inventory management practices now being used results in fewer orders being
placed in advance of shipment and more orders, when placed, for immediate
delivery. As a result, comparisons of unshipped orders on any date in a given
year with those at the same date in a prior year are not necessarily
indicative of sales for the entire year. In addition, it is a general
industry practice that orders are subject to amendment or cancellation by
customers prior to shipment. At July 25, 1999 and July 26, 1998 the Company's
unshipped orders were approximately $1,060,000 and $670,000, respectively.
Late in the fourth quarter of 1997, the Company announced a global integration
and profit enhancement program which anticipated the redundancy of
approximately 2,500 employees, principally in manufacturing, and provided for
actions in three principal areas: a continued consolidation of the Company's
manufacturing operations; the streamlining of marketing and sales, while
exiting from certain underperforming markets and product lines; and the
further leveraging of overheads. Of the $140,000 estimated costs related to
these actions, $125,000 was reported as a nonrecurring charge and $15,000 was
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
reflected in cost of sales. Of the nonrecurring amount, approximately $54,000
related to severance and people costs, $52,000 to property, plant and
equipment and leases and $19,000 to product line related costs. During 1998,
all employees planned for redundancy had their employment terminated. The
approximate $44,000 accrual remaining at June 27, 1999, is principally
attributable to costs associated with lease terminations and closing of
certain facilities and severance costs, which will be disbursed over the
employee's entitlement period. In the balance sheet, such property, plant and
equipment is included as a component of other assets. The program has been
substantially completed. The Company initially estimated its pretax cost
savings from this initiative to be $40,000 in 1998 and $350,000 over the
period 1998 through 2002. Because of the unanticipated shortfall in sales to
Toys 'R Us during 1998 and product mix, factory utilization rates were not as
high as initially anticipated, which resulted in below target savings in 1998.
The Company estimates that it realized pretax savings of approximately $30,000
for the full year 1998 and approximately $20,000 for the second quarter and
$30,000 for the first six months of 1999. The positive cash flow impact from
this program has and will occur largely in the form of reduced outflows for
payment of costs associated with the manufacture and sourcing of products.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The seasonality of the Company's business coupled with certain customer
incentives, mainly in the form of extended payment terms, result in the
interim cash flow statements not being representative of that which may be
expected for the full year. Historically, 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, 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.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of dollars)
Receivables were $843,580 at the end of June 1999 compared to $600,254 at the
end of June 1998. The increase reflects higher first half revenues and the
impact of 1998 acquisitions, offset by the increased impact of the Company's
letter of credit business and promotional and non-traditional toy and game
business, all of which have shorter payment terms. Inventories increased
30.7% from 1998 levels, reflecting the Company's 1998 acquisitions and build
up for increased 1999 activity. Other current assets increased to $586,115 at
June 1999 from $223,740 at June 1998 reflecting advance royalties under the
STAR WARS license agreement and the impact of the MicroProse acquisition.
Property, plant and equipment and other assets, as a group, increased from
their 1998 levels, reflecting the Company's 1998 acquisitions of MicroProse
and Galoob as well as several acquisitions of product rights and licenses
during the most recent twelve months, all partially offset by twelve
additional months of depreciation and amortization expense.
Net borrowings (short and long-term borrowings less cash and cash equivalents)
increased to $1,135,374 at June 27, 1999 from $346,664 at June 28, 1998. This
reflects the use of approximately $600,000 of cash in the prior twelve months
for acquisitions and the Company's continued repurchase of its common stock,
both of which are traditionally funded through a combination of cash provided
by operating activities and short and long-term borrowings. During the second
quarter, the Company accelerated a portion of its planned 1999 share buyback
through the purchase of 3.1 million shares of its common stock (obtained
through the exercise of a warrant) from DreamWorks LLC, at market price. The
increase in net borrowings is also impacted by the advance royalty payments
made in the fourth quarter of 1998 and second quarter of 1999 under the STAR
WARS license agreement, discussed above. During the year ended December 27,
1998, the Company issued $150,000 of 6.15% notes due July 15, 2008, $100,000
of 5.60% notes due November 1, 2005 and $150,000 of 6.60% debentures due July
15, 2028. At June 27, 1999, the Company had committed unsecured lines of
credit totaling approximately $700,000 available to it. It also had available
uncommitted lines approximating $670,000. The Company believes that these
amounts are adequate for its needs. Of these available lines, approximately
$870,000 was in use at June 27, 1999. Trade payables and accrued liabilities
both increased from the comparable 1998 levels, reflecting the impact of the
Company's 1998 acquisitions and increased level of business activity.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of dollars)
YEAR 2000
- - ---------
The Company has developed plans that address its possible exposure from the
impact of the Year 2000. This project is being managed by a global cross-
functional team of employees. The team meets regularly and makes periodic
reports on its progress to a management steering committee, the Audit
Committee of the Board of Directors and the Board of Directors.
The Company has completed the awareness and assessment phases of this project
through the inventorying and assessment of its critical financial, operational
(including imbedded and non-information technology) and information systems.
The remediation phase is nearing completion, as a number of non-compliant
systems have been modified or replaced and modifications or replacements of
other non-compliant systems are in progress. A planned global 'enterprise'
system became operational at several of the Company's major units during 1998
and the first half of 1999, replacing a number of older non-compliant systems.
As the global rollout of this enterprise system continues, additional Year
2000 compliance will occur in the second half of 1999. The Company is now in
the validation and implementation phases and believes that approximately 95%
of its mission critical systems are currently Year 2000 compliant and 100%
will be compliant or operating under contingency plans, discussed below, by
mid-December 1999. Excluding costs related to the enterprise system, the
Company's out of pocket costs associated with becoming Year 2000 compliant are
estimated to approximate $3,000. These costs are being expensed as incurred
and approximately two-thirds of this amount has been spent to date.
The Company has completed its initial review of the Year 2000 readiness of its
customers, vendors and service providers. This review process included both
obtaining confirmation from these business partners of their readiness as well
as reviews of such readiness at key vendors, by independent third party
consultants. While it intends this review process to be ongoing, nothing has
come to the attention of the Company that would lead it to believe that its
material customers, vendors and service providers will not be Year 2000 ready.
The Company's risk management program includes disaster recovery contingency
plans that have been expanded to include Year 2000 issues. This includes a
review of customer Year 2000 readiness and discontinuing credit or shortening
payment terms accordingly, identification and selection of alternative Year
2000 ready suppliers and service providers and specific contingency plans for
non-compliant systems where implementation of the global enterprise system may
be delayed beyond the end of 1999, specifically legacy system updates and
manual workarounds. In addition, the Company may carry a modest temporary
increase in its inventory of certain items going into 2000 to guard against
any disruption in supply.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
Year 2000 readiness has been a senior management priority of the Company for
some time and the Company believes that it is taking such reasonable and
prudent steps as are necessary to mitigate its risks related to Year 2000.
However, the effect, if any, on the Company's results of operations from Year
2000 if it, its customers, vendors or service providers are not fully Year
2000 compliant cannot be reasonably estimated. Notwithstanding the above, the
most likely impact on the Company would be a reduced level of activity in the
early part of the first quarter of the year 2000, a time at which, as a result
of the seasonality of the Company's business, its activities in sales,
manufacturing and sourcing are at a low point.
Certain statements contained in this discussion contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are inherently subject to known and
unknown risks and uncertainties. The Company's actual actions or results may
differ materially from those expected or anticipated in the forward-looking
statements. Specific factors that might cause such a difference include, but
are not limited to, delays in, or increases in the anticipated cost of, the
implementation of planned actions as a result of unanticipated technical
malfunctions or difficulties which would arise during the validation process
or otherwise; the inherent risk that assurances, warranties, and
specifications provided by third parties with respect to the Company's
systems, or such third party's Year 2000 readiness, may prove to be
inaccurate, despite the Company's review process; the continued availability
of qualified persons to carry out the remaining anticipated phases; the risk
that governments may not be Year 2000 ready, which could affect the commercial
sector in trade, finance and other areas, notwithstanding private sector Year
2000 readiness; whether, despite a comprehensive review, the Company has
successfully identified all Year 2000 issues and risks; and the risk that
proposed actions and contingency plans of the Company and third parties with
respect to Year 2000 issues may conflict or themselves give rise to additional
issues.
RECENT INFORMATION
- - ------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). The effective date of this statement has
recently been delayed to fiscal years beginning after June 15, 2000, requiring
the Company to adopt not later than the beginning of fiscal 2001. SFAS 133
will require that the Company record all derivatives, such as foreign exchange
contracts, on the balance sheet at fair value. Changes in derivative fair
values will either be recognized in earnings as an offset to the changes in
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
the fair value of the related hedged assets, liabilities and firm commitments
or, for forecasted transactions, deferred and recorded as a component of other
shareholders' equity until the hedged transactions occur and are recognized in
earnings. Any portion of a hedging derivative's change in fair value which
does not offset the change in fair value of the underlying exposure will be
immediately recognized in earnings. The Company does not believe adoption of
SFAS 133 will have a material impact on either its financial condition or
results of operations.
PART II. Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On June 18, 1999, the Company issued 3,115,071 shares of common
stock, par value $.50 per share, of the Company (the "Common Stock")
to DreamWorks LLC ("DreamWorks") in exchange for, and upon exercise
of, warrants to purchase 5,737,500 shares of Common Stock at $14.00
per share held by DreamWorks. Such issuance was made in reliance
upon Section 4(2) of the Securities Act of 1933.
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
12, 1999, the Company's shareholders elected the following
persons to the Board of Directors of the Company: Herbert M.
Baum (171,057,975 votes for, 2,203,728 votes withheld), and E.
Gordon Gee (169,791,579 votes for, 3,470,124 votes withheld). The
following persons were reelected to the Board of Directors of the
Company: Sylvia K Hassenfeld (171,006,909 votes for, 2,254,794
votes withheld); Norma T. Pace (171,020,717 votes for, 2,240,986
votes withheld; E. John Rosenwald, Jr. (171,035,841 votes for,
2,225,862 votes withheld; and Alfred J. Verrecchia (171,035,841
votes for, 2,200,863 votes withheld). The Company's shareholders
also approved the 1999 Senior Management Annual Performance Plan by
a vote of 170,357,501 votes for, 2,430,368 votes against and
473,834 abstentions.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation of the Company.
3.2 Certificate of Designations of Series C Junior Participating
Preference Stock of Hasbro, Inc. dated June 29, 1999.
3.3 Certificate of Vote(s) authorizing decrease of a class or
series of any class of shares.
10.1 First Amendment to Hasbro, Inc. Stock Incentive Plan and
Stock Incentive Performance Plan.
10.2 First Amendment to Hasbro, Inc. Stock Option Plan for Non-
Employee Directors
11.1 Computation of Earnings Per Common Share - Six Months
Ended June 27, 1999 and June 28, 1998.
11.2 Computation of Earnings Per Common Share - Quarter
Ended June 27, 1999 and June 28, 1998.
12 Computation of Ratio of Earnings to Fixed Charges -
Six Months and Quarter Ended June 27, 1999.
27 Article 5 Financial Data Schedule - Second Quarter 1999
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated June 16, 1999, was filed to
announce that the Board of Directors approved the extension of the
benefits afforded by the Company's then existing rights plan by
adopting a new shareholder rights plan. Pursuant to the new
shareholder rights plan, one right was issued for each outstanding
share of common stock on June 30, 1999, the expiration date of the
old shareholder rights plan.
A Current Report on Form 8-K, dated July 15, 1999 was filed by
the Company and included the Press Release dated July 15, 1999,
announcing the Company's results for the current quarter.
Consolidated Statements of Earnings (without notes) for the
quarters and six months ended June 27, 1999 and June 28, 1998
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 11, 1999 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 27, 1999
Exhibit Index
Exhibit
No. Exhibits
- - ------- --------
3.1 Restated Articles of Incorporation of the Company.
3.2 Certificate of Designations of Series C Junior Participating
Preference Stock of Hasbro, Inc. dated June 29, 1999.
3.3 Certificate of Vote(s) authorizing decrease of a class or
series of any class of shares.
10.1 First Amendment to Hasbro, Inc. Stock Incentive Plan and
Stock Incentive Performance Plan
10.2 First Amendment to Hasbro, Inc. Stock Option Plan for Non-
Employee Directors
11.1 Computation of Earnings Per Common Share -
Six Months Ended June 27, 1999 and June 28, 1998
11.2 Computation of Earnings Per Common Share -
Quarter Ended June 27, 1999 and June 28, 1998
12 Computation of Ratio of Earnings to Fixed Charges -
Six Months and Quarter Ended June 27, 1999
27 Article 5 Financial Data Schedule - Second Quarter 1999