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 September 27, 1998 Commission file number 1-6682
HASBRO, INC.
--------------------
(Name of Registrant)
Rhode Island O5-0155090
- - ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1027 Newport Avenue, Pawtucket, Rhode Island 02861
---------------------------------------------------
(Principal Executive Offices)
(401) 431-8697
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X or No
--- ---
The number of shares of Common Stock, par value $.50 per share,
outstanding as of November 6, 1998 was 130,816,511.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars Except Share Data)
(Unaudited)
Sep. 27, Sep. 28, Dec. 28,
Assets 1998 1997 1997
--------- --------- ---------
Current assets
Cash and cash equivalents $ 176,486 80,030 361,785
Accounts receivable, less allowance
for doubtful accounts of $56,900,
$52,700 and $51,700 1,030,751 1,153,910 783,008
Inventories:
Finished products 328,757 285,135 198,215
Work in process 16,627 13,273 12,208
Raw materials 38,425 49,371 32,279
--------- --------- ---------
Total inventories 383,809 347,779 242,702
Deferred income taxes 92,748 80,730 96,489
Prepaid expenses 243,513 94,804 89,890
--------- --------- ---------
Total current assets 1,927,307 1,757,253 1,573,874
Property, plant and equipment, net 287,872 279,916 280,603
--------- --------- ---------
Other assets
Cost in excess of acquired net assets,
less accumulated amortization of
$144,503, $128,187 and $128,237 643,136 504,426 486,502
Other intangibles, less accumulated
amortization of $187,554, $121,316
and $135,467 716,123 412,641 478,798
Other 101,866 69,715 79,940
--------- --------- ---------
Total other assets 1,461,125 986,782 1,045,240
--------- --------- ---------
Total assets $3,676,304 3,023,951 2,899,717
========= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(Thousands of Dollars Except Share Data)
(Unaudited)
Sep. 27, Sep. 28, Dec. 28,
Liabilities and Shareholders' Equity 1998 1997 1997
--------- --------- ---------
Current liabilities
Short-term borrowings $ 507,596 462,894 122,024
Trade payables 152,350 120,775 179,156
Accrued liabilities 788,902 469,944 596,033
Income taxes 88,654 117,559 106,333
--------- --------- ---------
Total current liabilities 1,537,502 1,171,172 1,003,546
Long-term debt, excluding current
installments 300,000 148,751 -
Deferred liabilities 80,010 68,924 58,054
--------- --------- ---------
Total liabilities 1,917,512 1,388,847 1,061,600
--------- --------- ---------
Shareholders' equity
Preference stock of $2.50 par
value. Authorized 5,000,000
shares; none issued - - -
Common stock of $.50 par value.
Authorized 300,000,000 shares;
issued 139,799,011, 132,191,745
and 139,799,011 69,900 66,096 69,900
Additional paid-in capital 488,535 279,588 489,447
Retained earnings 1,500,478 1,449,867 1,457,495
Accumulated other comprehensive income (5,216) (7,555) (3,903)
Treasury stock, at cost; 9,109,846,
5,760,479 and 6,357,948 shares (294,905) (152,892) (174,822)
--------- --------- ---------
Total shareholders' equity 1,758,792 1,635,104 1,838,117
--------- --------- ---------
Total liabilities and
shareholders' equity $3,676,304 3,023,951 2,899,717
========= ========= =========
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Thousands of Dollars Except Share Data)
(Unaudited)
Quarter Ended Nine Months Ended
------------------ --------------------
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
-------- -------- --------- ---------
Net Revenues $ 945,498 915,533 2,000,375 2,055,203
Cost of Sales 402,369 403,027 853,776 891,315
-------- -------- --------- ---------
Gross Profit 543,129 512,506 1,146,599 1,163,888
-------- -------- --------- ---------
Expenses
Amortization 19,275 11,741 49,298 32,967
Royalties, Research and
Development 113,755 102,583 263,220 254,339
Advertising 128,053 116,208 257,023 254,418
Selling, Distribution and
Administration 162,705 156,215 439,433 433,285
Acquired Research and
Development 20,000 - 20,000 -
-------- -------- --------- ---------
Total Expenses 443,788 386,747 1,028,974 975,009
-------- -------- --------- ---------
Operating Profit 99,341 125,759 117,625 188,879
-------- -------- --------- ---------
Nonoperating (income) expense
Interest Expense 11,308 9,197 20,036 19,120
Other (Income) Expense, Net (1,568) 1,121 (12,082) (6,112)
-------- -------- --------- ---------
Total nonoperating (income)
expense 9,740 10,318 7,954 13,008
-------- -------- --------- ---------
Earnings Before Income Taxes 89,601 115,441 109,671 175,871
Income Taxes 28,271 38,041 35,095 59,796
-------- -------- --------- ---------
Net Earnings $ 61,330 77,400 74,576 116,075
======== ======== ========= =========
Per Common Share
Net Earnings
Basic $ .47 .61 .56 .91
======== ======== ========= =========
Diluted $ .45 .57 .54 .87
======== ======== ========= =========
Cash Dividends Declared $ .08 .08 .24 .24
======== ======== ========= =========
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 27, 1998 and September 28, 1997
(Thousands of Dollars)
(Unaudited)
1998 1997
------- -------
Cash flows from operating activities
Net earnings $ 74,576 116,075
Adjustments to reconcile net earnings to net cash
utilized by operating activities:
Depreciation and amortization of plant and equipment 69,458 79,232
Other amortization 49,298 32,967
Deferred income taxes (8,141) (3,815)
Acquired research and development 20,000 -
Change in operating assets and liabilities (other
than cash and cash equivalents):
Increase in accounts receivable (241,956) (354,339)
Increase in inventories (113,951) (60,721)
(Increase) Decrease in prepaid expenses (130,678) 15,099
Increase in trade payables and accrued liabilities 59,184 17,009
Other (1,613) 874
------- -------
Net cash utilized by operating activities (223,823) (157,619)
------- -------
Cash flows from investing activities
Additions to property, plant and equipment (87,543) (61,071)
Investments and acquisitions, net of cash acquired (389,441) (164,153)
Other 6,033 4,069
------- -------
Net cash utilized by investing activities (470,951) (221,155)
------- -------
Cash flows from financing activities
Proceeds from borrowings with original maturities
of more than three months 300,850 272,167
Repayments of borrowings with original maturities
of more than three months (25,775) (71,322)
Net proceeds of other short-term borrowings 378,363 147,453
Purchase of common stock (172,574) (99,983)
Stock option transactions 51,579 24,376
Dividends paid (31,817) (28,971)
------- -------
Net cash provided by financing activities 500,626 243,720
------- -------
Effect of exchange rate changes on cash 8,849 (3,887)
------- -------
Decrease in cash and cash equivalents (185,299) (138,941)
Cash and cash equivalents at beginning of year 361,785 218,971
------- -------
Cash and cash equivalents at end of period $176,486 80,030
======= =======
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Nine Months Ended September 27, 1998 and September 28, 19978
(Thousands of Dollars)
(Unaudited)
1998 1997
------- -------
Supplemental information
Cash paid during the period for:
Interest $ 14,931 13,449
Income taxes $ 41,980 85,861
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)
Quarter Ended Nine Months Ended
------------------ ------------------
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
-------- -------- -------- --------
Net earnings $ 61,330 77,400 74,576 116,075
Other comprehensive
earnings (loss) 14,860 (480) (1,313) (27,548)
-------- -------- -------- --------
Total comprehensive earnings $ 76,190 76,920 73,263 88,527
======== ======== ======== ========
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per share Data)
(Unaudited)
(1) In the opinion of management and subject to year-end audit, the
accompanying unaudited interim financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position of the Company as of September 27, 1998 and
September 28, 1997, and the results of operations and cash flows for the
periods then ended.
The results of operations for the nine months ended September 27,
1998, are not necessarily indicative of results to be expected for the full
year.
(2) On May 2, 1997, the Company purchased certain assets of OddzOn
Products and Cap Toys, Inc. (OddzOn). The consideration for this purchase
was $167,379. This acquisition was accounted for using the purchase
accounting method and, based on estimates of fair market value, $43,582 was
allocated to net tangible assets, $76,700 to product rights and $47,097 to
goodwill.
(3) Late in the fourth quarter of 1997, the Company announced a global
integration and profit enhancement program which anticipated the redundancy
of approximately 2,500 employees, principally in manufacturing, and
provided for actions in three principal areas: a continued consolidation of
the Company's manufacturing operations; the streamlining of marketing and
sales, while exiting from certain underperforming markets and product
lines; and the further leveraging of overheads. Of the $140,000 estimated
costs related to these actions, $125,000 was reported as a nonrecurring
charge and $15,000 was reflected in cost of sales. Of the nonrecurring
amount approximately $54,000 related to severance and people costs, $52,000
to property, plant and equipment and leases and $19,000 to product line
related costs. During the first nine months of 1998, approximately 1,900
employees were terminated. The approximate $87,000 accrual remaining at
September 27, 1998, is principally attributable to severance costs, which
will be disbursed over the employee's entitlement period, and remaining
property, plant and equipment costs, which continue to be incurred upon the
transition of the various facilities from production to non-productive
status. The program remains on schedule to be substantially completed by
the end of 1998.
(4) On April 1, 1998, the Company acquired substantially all of the
business and operating assets of Tiger Electronics, Inc. and certain
affiliates (Tiger) for an initial payment of $335,000, subject to post-
closing adjustment, plus the closing date value of inventory, tooling,
equipment and prepaid assets. The estimated total cost of this acquisition
approximates $395,000 and is being accounted for using the purchase
accounting method. Based on current estimates of fair market value,
approximately $42,000 has been allocated to net tangible assets, $213,000
to product rights and $140,000 to goodwill.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars and Shares Except Per share Data)
(Unaudited)
(5) On September 14, 1998, the Company, through its wholly owned
subsidiary, New HIAC Corp. (New HIAC), acquired in excess of 90% of the
outstanding shares of MicroProse, Inc. (MicroProse) through a cash tender
offer of $6.00 for each outstanding share of MicroProse. Upon completion of
this tender offer and through a merger into New HIAC, MicroProse became a
wholly owned subsidiary of the Company and each untendered share was
converted into the right to receive $6.00 in cash. The purchase price,
including the assumption of debt and preference stock, approximated $70,000
and is being accounted for using the purchase accounting method. Based on
estimates of fair market value, approximately $4,000 has been allocated to
net tangible liabilities, $20,000 to product rights, $34,000 to goodwill
and $20,000 to acquired research and development which has been written-
off.
(6) Effective for fiscal 1998, Hasbro adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130).
SFAS 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 130 also requires that an entity classify items of other comprehensive
earnings by their nature in the financial statements and display the
accumulated amount thereof separately within the equity section of the
balance sheet. The Company's other comprehensive earnings (loss) primarily
results from foreign currency translation adjustments.
(7) On November 2, 1998, the Company announced the successful completion
of its cash tender offer to purchase all of the outstanding shares of
Galoob Toys, Inc. (Galoob) at a price of $12.00 per share. After giving
effect to the purchase of the shares tendered, the Company beneficially
owned approximately 93% of the outstanding Galoob shares. Also on November
2, the Company effected a merger pursuant to which Galoob became a wholly-
owned subsidiary of the Company and each untendered Galoob share was
converted into the right to receive $12.00 per share in cash. The total
purchase price of this transaction will approximate $220,000, and will be
accounted for using the purchase accounting method.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars and Shares Except Per share Data)
(Unaudited)
(8) Earnings per share data for the fiscal quarters and nine months ended
September 27, 1998 and September 28, 1997 were computed as follows:
1998 1997
----------------- -----------------
Basic Diluted Basic Diluted
------- ------- ------- -------
Quarter
- - -------
Net earnings $ 61,330 61,330 77,400 77,400
Effect of dilutive securities;
6% Convertible Notes due 1998 - - - 1,433
------- ------- ------- -------
Adjusted net earnings $ 61,330 61,330 77,400 78,833
======= ======= ======= =======
Average shares outstanding 131,368 131,368 126,922 126,922
Effect of dilutive securities;
6% Convertible Notes due 1998 - - - 7,616
Options and warrants - 5,007 - 2,565
------- ------- ------- -------
Equivalent Shares 131,368 136,375 126,922 137,103
======= ======= ======= =======
Earnings per share $ .47 .45 .61 .57
======= ======= ======= =======
Nine Months
- - -----------
Net earnings $ 74,576 74,576 116,075 116,075
Effect of dilutive securities;
6% Convertible Notes due 1998 - - - 4,307
------- ------- ------- -------
Adjusted net earnings $ 74,576 74,576 116,075 120,382
======= ======= ======= =======
Average shares outstanding 132,346 132,346 127,789 127,789
Effect of dilutive securities;
6% Convertible Notes due 1998 - - - 7,627
Options and warrants - 5,258 - 2,390
------- ------- ------- -------
Equivalent Shares 132,346 137,604 127,789 137,806
======= ======= ======= =======
Earnings per share $ .56 .54 .91 .87
======= ======= ======= =======
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
NET REVENUES
- - ------------
Net revenues for the third quarter of 1998 increased approximately 3% to
$945,498, from the $915,533 in the third quarter of 1997, despite the
impact of ongoing and recently accelerated changes in inventory flow
policies at Toys `R Us, a major customer. This revenue increase reflects
the positive impacts from the acquisition of Tiger Electronics, Inc.
(Tiger), in April (see note 4), and increased revenues at Hasbro
Interactive, both partially offset by the previously mentioned Toys 'R Us
volume reductions and the adverse impact of the stronger U.S. dollar, which
reduced revenues by approximately $7,000. For the nine months, revenues
were $2,000,375 and $2,055,203 in 1998 and 1997, respectively. The 1998
nine month amounts were adversely impacted by approximately $26,000 from
the strengthened U.S. dollar, that period's impact of the Toys `R Us
inventory flow policy change and the fact that in 1997 there were three
motion picture releases related to the Company's major entertainment
properties. Partially offsetting these unfavorable impacts was the positive
effect from the Tiger acquisition and increases at Hasbro Interactive.
GROSS PROFIT
- - ------------
The Company's gross margins for the quarter and nine months of 1998, at
57.4% and 57.3%, were improved from the 1997 amounts of 56.0% and 56.6%.
These increases reflect the benefit being experienced from the removal of
excess manufacturing capacity, as addressed within the Company's global
integration and profit enhancement program initiative announced in December
of 1997 (see note 3). Additionally, increased revenues from the Company's
interactive products, which carry a higher gross margin, and an overall
more favorable mix of products sold, both contributed positively.
EXPENSES
- - --------
Amortization expense in both periods of 1998 was greater than in the
comparable periods of 1997, reflecting the Company's recent acquisitions,
including OddzOn in May of 1997 (see note 2) and Tiger in April of 1998.
Royalties, research and development expenses for the quarter increased in
both amount and as a percentage of net revenues from comparable 1997
levels. The royalty component increase reflects the higher rates of Tiger,
Hasbro Interactive and Teletubbies products. Research and development, at
$43,165 and $117,544 for the quarter and nine months of 1998, respectively,
increased in both dollars and as a percentage of net revenues from $37,868
and $106,301 a year ago. These increases reflect both the inclusion of new
units, OddzOn in May 1997, and Tiger in April 1998, and the ongoing
investment to grow Hasbro Interactive. The Company believes that this trend
of increasing royalties, research and development expenses is likely to
continue.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
Advertising expense for each of the third quarter and nine months increased
both in dollars and as a percentage of net revenues. The increase in
dollars reflects the inclusion of Tiger while the increase in percentage
reflects the mix of more non-entertainment based product in 1998, in the
absence of major movie support.
Selling, distribution and administration expenses, which are largely fixed,
increased marginally in amount and as a percentage of net revenues during
each of the third quarter and nine months of 1998 from comparable 1997
levels. These increases reflect the inclusion of Tiger from April 1, as
well as OddzOn for the full nine months.
During the third quarter of 1998, the Company incurred a one-time charge to
write-off the $20,000 appraised value of acquired in-process research and
development of MicroProse, Inc. (MicroProse), which was acquired for
approximately $70,000 on September 14, 1998 (see note 5).
NONOPERATING (INCOME) EXPENSE
- - -----------------------------
Interest expense during the third quarter of 1998 was $11,308 compared with
$9,197 in 1997, and reflects the increased borrowing requirements related
to the funding of the Tiger acquisition and the continuation of the
Company's share repurchase plan. For the nine months of 1998, interest
expense was $20,036 compared with $19,120 in the same period of 1997,
largely for the same reasons. The change in other nonoperating income, in
both the quarter and nine months, reflects the earnings differential
resulting from changes in levels of short-term investments, the impact of
minority investments in certain subsidiaries, as well as foreign exchange
transactions and translation.
INCOME TAXES
- - ------------
Income tax expense for the third quarter of 1998 decreased to 31.6% from
the 33.0% of a year ago. For the nine months of 1998 and 1997, the rates
were 32.0% and 34.0%, respectively. The lower rates in each of the third
quarters compared with each of the nine months, reflect the impact of the
year to date changes made during the respective quarters. The lower 1998
rates reflect the impact of the Tiger acquisition, the implementation of
various tax strategies and the downward trend of the tax on international
earnings due to the continued reorganization of the Company's global
business.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
OTHER INFORMATION
- - -----------------
During the past several years, the Company has experienced a shift in its
revenue pattern wherein the second half of the year has grown in
significance to its overall business and within that half the fourth
quarter has become more prominent. The Company expects that this trend will
continue. This concentration increases the risk of (a) underproduction of
popular items, (b) overproduction of less popular items and (c) failure to
achieve tight and compressed shipping schedules. The business of the
Company is characterized by customer order patterns which vary from year to
year largely because of differences in the degree of consumer acceptance of
a product line, product availability, marketing strategies, and inventory
levels and policies of retailers and differences in overall economic
conditions. Also, quick response inventory management practices now being
used results in fewer orders being placed in advance of shipment and more
orders, when placed, for immediate delivery. As a result, comparisons of
unshipped orders on any date in a given year with those at the same date in
a prior year are not necessarily indicative of sales for the entire year.
In addition, it is a general industry practice that orders are subject to
amendment or cancellation by customers prior to shipment. At the end of its
fiscal October (October 25, 1998 and October 26, 1997) the Company's
unshipped orders were approximately $580,000 and $480,000.
Late in the fourth quarter of 1997, the Company announced a global
integration and profit enhancement program which anticipated the redundancy
of approximately 2,500 employees, principally in manufacturing, and
provided for actions in three principal areas: a continued consolidation of
the Company's manufacturing operations; the streamlining of marketing and
sales, while exiting from certain underperforming markets and product
lines; and the further leveraging of overheads. Of the $140,000 estimated
costs related to these actions, $125,000 was reported as a nonrecurring
charge and $15,000 was reflected in cost of sales. Of the nonrecurring
amount, approximately $54,000 related to severance and people costs,
$52,000 to property, plant and equipment and leases and $19,000 to product
line related costs. During the first nine months of 1998, approximately
1,900 employees were terminated. The approximate $87,000 accrual remaining
at September 27, 1998, is principally attributable to severance, which will
be disbursed over the employee's entitlement period, and remaining
property, plant and equipment costs, which continue to be incurred upon the
transition of the various manufacturing facilities from productive to non-
productive status. The program remains on schedule to be substantially
completed by the end of 1998. The Company estimated its pretax cost savings
from this initiative to be $40,000 in 1998 and $350,000 over the period
1998 through 2002. Because of the unanticipated shortfall in sales to Toys
'R Us during the current year and changes in product mix, factory
utilization rates are not as high as initially anticipated, which could
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
result in the Company not meeting its targeted savings during 1998. Through
the end of September, the Company estimates that it has realized pretax
savings of approximately $20,000 during the first nine months of 1998. The
positive cash flow impact from this program will occur largely in the form
of reduced outflows for payment of costs associated with the manufacture
and sourcing of products.
The Company has developed plans that address its possible exposure from the
impact of the Year 2000. This project is being managed by a global cross-
functional team of employees. The team meets regularly and makes periodic
reports on its progress to a management steering committee, the Audit
Committee of the Board of Directors and the Board of Directors.
The Company has substantially completed the awareness and assessment phases
of this project through the inventorying and assessment of its critical
financial, operational (including imbedded and non-information technology)
and information systems. The renovation phase is now well underway, as a
number of non-compliant systems have been modified or replaced and plans
are in place for the required modifications or replacements of other non-
compliant systems. A planned global 'enterprise' system became operational
at several of the Company's major units during the current year and has
replaced a number of older non-compliant systems. As the global roll-out of
this enterprise system continues, additional Year 2000 compliance will
occur. The Company is now in the validation and implementation phases and
believes that approximately 70% of its mission critical systems are
currently Year 2000 compliant, that an additional 15% will be so by the end
of 1998 and virtually all will be by mid-1999. Excluding costs related to
the enterprise system, the Company's out of pocket costs associated with
becoming Year 2000 compliant have been estimated to approximate $3,000.
These costs are being expensed as incurred and approximately 40% of this
amount has been spent to date.
The Company is also well into the process of reviewing the Year 2000
readiness of its customers, vendors and service providers. This review
process includes both the obtaining of confirmation from these business
partners of their readiness as well as reviews of such readiness by
independent third party consultants. While this review process is ongoing,
nothing has come to the attention of the Company that would lead it to
believe that its material customers, vendors and service providers will
not be Year 2000 ready.
The Company's risk management program includes disaster recovery
contingency plans that will be expanded by mid-year 1999 to include Year
2000 issues and may include, for example, the maintaining and development
of back-up systems and procedures, early identification and selection of
alternative Year 2000 ready suppliers and service providers, revisions to
credit policies and possible temporary increases in levels of inventories.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
Year 2000 readiness has been a senior management priority of the Company
for some time and the Company believes that it is taking such reasonable
and prudent steps as are necessary to mitigate its risks related to Year
2000. However, the effect, if any, on the Company's results of operation
from Year 2000 if it, its customers, vendors or service providers are not
fully Year 2000 compliant cannot be reasonably estimated. Notwithstanding
the above, the most likely impact on the Company would be a reduced level
of activity in the early part of the first quarter of the year 2000, a time
at which, as a result of the seasonality of the Company's business, its
activities in sales, manufacturing and sourcing, are at their low.
Certain statements contained in this discussion contain "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are inherently subject to
known and unknown risks and uncertainties. The Company's actual actions or
results may differ materially from those expected or anticipated in the
forward-looking statements. Specific factors that might cause such a
difference include, but are not limited to, delays in, or increases in the
anticipated cost of, the implementation of planned actions as a result of
unanticipated technical malfunctions or difficulties which would arise
during the validation process or otherwise; the inherent risk that
assurances, warranties, and specifications provided by third parties with
respect to the Company's systems, or such third party's Year 2000
readiness, may prove to be inaccurate, despite the Company's review
process; the continued availability of qualified persons to carry out the
remaining anticipated phases; the risk that governments may not be Year
2000 ready, which could affect the commercial sector in trade, finance and
other areas, notwithstanding private sector Year 2000 readiness; whether,
despite a comprehensive review, the Company has successfully identified all
Year 2000 issues and risks; and the risk that proposed actions and
contingency plans of the Company and third parties with respect to Year
2000 issues may conflict or themselves give rise to additional issues.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The seasonality of the Company's business coupled with certain customer
incentives, mainly in the form of extended payment terms, result in the
interim cash flow statements being not representative of that which may be
expected for the full year. As a result of these extended payment terms,
the majority of the Company's cash collections occur late in the fourth
quarter and early in the first quarter of the subsequent year. As
receivables are collected late in the fourth quarter and through the first
quarter of the subsequent year, cash flow from operations becomes positive
and is used to repay a significant portion of the short-term borrowings.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
As a result, management believes that on an interim basis, rather than
discussing its cash flows, a better understanding of its liquidity and
capital resources can be obtained through a discussion of the various
balance sheet categories. Also, as several of the major categories,
including cash and cash equivalents, accounts receivable, inventories and
short-term borrowings, fluctuate significantly from quarter to quarter,
again due to the seasonality of its business and the extended payment terms
offered, management believes that a comparison to the comparable period in
the prior year is generally more meaningful than a comparison to the prior
year-end.
Receivables, both in dollars and in days sales outstanding, decreased from
September 1997 levels. In amount, receivables were approximately
$1,031,000, or 11% lower and, at 103 days sales outstanding, 24 days less
than the 127 days sales outstanding at the same point in 1997. These
improvements continue to reflect the increased impact of the Company's
letter of credit business and its non-traditional toy and game businesses,
both of which have shorter payment terms. Inventories increased
approximately 10% from 1997 levels, reflecting the inclusion of both Tiger
and MicroProse in 1998. Other current assets increased significantly from
1997 levels, reflecting, in addition to Tiger and MicroProse, an advance
royalty under a key license agreement. Other assets, as a group, increased
approximately $474,000 from their September 1997 levels reflecting the
acquisition of Tiger and MicroProse as well as other acquisitions of
product rights and licenses during the most recent twelve months, all
partially offset by an additional year of amortization expense.
Net borrowings (short- and long-term borrowings less cash and cash
equivalents) increased by approximately $99,500 to $631,110 from $531,615
at September 28, 1997. This increase reflects the utilization of more than
$600,000 of cash during the last twelve months for acquisitions and the
continuation of the Company's share repurchase program, both of which are
traditionally funded through a combination of cash provided by operating
activities and cash provided by external short- and long-term borrowings.
On July 17, 1998, in a public offering, the Company issued $150,000 of
6.15% notes due July 15, 2008 and $150,000 of 6.60% debentures due July 15,
2028. The net proceeds from the sale of these notes was used to repay a
portion of the Company's outstanding short-term debt, primarily incurred in
connection with the acquisition of Tiger. At September 27, 1998, the
Company had committed unsecured lines of credit totaling approximately
$500,000 available to it. It also had available uncommitted lines
approximating $750,000. The Company believes that these amounts, augmented
by a November 2, 1998 $200,000 increase in its committed unsecured lines of
credit, are adequate for its needs. Of these available lines, approximately
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Thousands of dollars)
$525,000 was in use at September 27, 1998. Trade payables and accrued
liabilities both increased from the comparable 1997 levels, largely
reflecting the impact of the unpaid amounts relating to the Tiger
acquisition, royalty advances and the Company's global integration and
profit enhancement program.
RECENT INFORMATION
- - ------------------
On September 28, 1998, the Company announced that it had entered into a
definitive agreement to acquire Galoob Toys, Inc. (Galoob), an
international toy manufacturer whose leading brands include Micro
Machines(R) miniature-scale boys' toys, Star Wars(TM) small-scale figures
and vehicles, Spice Girls(TM) fashion dolls and Pound Puppies(R) mini-
dolls. The purchase price was $12.00 per common share of Galoob, payable in
cash, for a total transaction value of approximately $220 million.
Under terms of the merger agreement, a wholly owned subsidiary of the
Company commenced a tender offer on October 2, 1998 for all of Galoob's
approximately 18 million outstanding common shares. The offer was
conditioned upon, among other things, the termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of
1976 and the tender of a majority of the common shares outstanding on a
diluted basis of Galoob. On November 2, 1998. following the successful
completion of the offer, the transaction was completed, the Company's
subsidiary was merged with Galoob and all remaining Galoob common shares
were converted into the right to receive $12.00 per share in cash.
On November 2, 1998, in a public offering, the Company issued $100,000 of
5.60% notes due November 1, 2005. The net proceeds from the sale of these
notes will be used to repay a portion of the Company's outstanding short-
term commercial paper primarily incurred in connection with the acquisition
of MicroProse and to fund the balance of the purchase price of Tiger.
PART II. Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
On July 17, 1998, in a public offering, the Company issued
$150,000,000 of 6.15% notes due July 15, 2008 and $150,000,000
of 6.60% debentures due July 15, 2028. On November 2, 1998, in
a second public offering, the Company issued $100,000,000 of
5.60% notes due November 1, 2005.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11.1 Computation of Earnings Per Common Share - Nine Months
Ended September 27, 1998 and September 28, 1997.
11.2 Computation of Earnings Per Common Share - Quarter
Ended September 27, 1998 and September 28, 1997.
12 Computation of Ratio of Earnings to Fixed Charges -
Nine Months and Quarter Ended September 27, 1998.
27 Article 5 Financial Data Schedule - Third Quarter 1998
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated September 28, 1998, was
filed by the Company and included the Press Release dated
September 28, 1998, announcing the Company's expected results
for the second half of 1998.
A Current Report on Form 8-K, dated October 15, 1998 was filed
by the Company and included the Press Release dated October 15,
1998, announcing the Company's results for the current quarter.
Consolidated Statements of Earnings (without notes) for the
quarters and nine months ended September 27, 1998 and September
28, 1997 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: November 12, 1998 By: /s/ John T. O'Neill
---------------------
John T. O'Neill
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
HASBRO, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended September 27, 1998
Exhibit Index
Exhibit
No. Exhibits
- - ------- --------
11.1 Computation of Earnings Per Common Share -
Nine Months Ended September 27, 1998 and September 28, 1997
11.2 Computation of Earnings Per Common Share -
Quarter Ended September 27, 1998 and September 28, 1997
12 Computation of Ratio of Earnings to Fixed Charges -
Nine Months and Quarter Ended September 27, 1998
27 Article 5 Financial Data Schedule - Third Quarter 1998
EXHIBIT 11.1
HASBRO, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
Nine Months Ended September 27, 1998 and September 28, 1997
(Thousands of Dollars and Shares Except Per Share Data)
1998 1997
----------------- -----------------
Basic Diluted Basic Diluted
------- ------- ------- -------
Net earnings $ 74,576 74,576 116,075 116,075
Interest and amortization on 6%
convertible notes, net of taxes - - - 4,307
------- ------- ------- -------
Net earnings applicable to
common shares $ 74,576 74,576 116,075 120,382
======= ======= ======= =======
Weighted average number of shares
outstanding:
Outstanding at beginning of
period 133,441 133,441 128,863 128,863
Exercise of stock
options and warrants:
Actual 1,239 1,239 738 738
Assumed - 5,258 - 2,390
Conversion of 6%
convertible notes:
Actual - - 13 13
Assumed - - - 7,627
Purchase of common stock (2,334) (2,334) (1,825) (1,825)
------- ------- ------- -------
Total 132,346 137,604 127,789 137,806
======= ======= ======= =======
Per common share:
Net earnings $ .56 .54 .91 .87
======= ======= ======= =======
EXHIBIT 11.2
HASBRO, INC. AND SUBSIDIARIES
Computation of Earnings Per Common Share
Quarter Ended September 27, 1998 and September 28, 1997
(Thousands of Dollars and Shares Except Per Share Data)
1998 1997
----------------- -----------------
Basic Diluted Basic Diluted
------- ------- ------- -------
Net earnings $ 61,330 61,330 77,400 77,400
Interest and amortization on 6%
convertible notes, net of taxes - - - 1,433
------- ------- ------- -------
Net earnings applicable to
common shares $ 61,330 61,330 77,400 78,833
======= ======= ======= =======
Weighted average number of shares
outstanding:
Outstanding at beginning of
period 132,012 132,012 127,441 127,441
Exercise of stock
options and warrants:
Actual 331 331 144 144
Assumed - 5,007 - 2,565
Conversion of 6%
convertible notes:
Actual - - 7 7
Assumed - - - 7,616
Purchase of common stock (975) (975) (670) (670)
------- ------- ------- -------
Total 131,368 136,375 126,922 137,103
======= ======= ======= =======
Per common share:
Net earnings $ .47 .45 .61 .57
======= ======= ======= =======
EXHIBIT 12
HASBRO, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
Nine Months and Quarter Ended September 27, 1998
(Thousands of Dollars)
Nine
Months Quarter
------- -------
Earnings available for fixed charges:
Net earnings $ 74,576 61,330
Add:
Fixed charges 31,635 15,381
Income taxes 35,095 28,271
------- -------
Total $141,306 104,982
======= =======
Fixed Charges:
Interest on long-term debt $ 3,985 3,985
Other interest charges 16,051 7,323
Amortization of debt expense 45 45
Rental expense representative
of interest factor 11,554 4,028
------- -------
Total $ 31,635 15,381
======= =======
Ratio of earnings to fixed charges 4.47 6.83
======= =======
5
1,000
9-MOS 9-MOS
DEC-27-1998 DEC-28-1997
SEP-27-1998 SEP-28-1997
176,486 80,030
0 0
1,087,651 1,206,610
56,900 52,700
383,809 347,779
1,927,307 1,757,253
544,831 533,812
256,959 253,896
3,676,304 3,023,951
1,537,502 1,171,172
300,000 148,751
0 0
0 0
69,900 66,096
1,688,892 1,569,008
3,676,304 3,023,951
2,000,375 2,055,203
2,000,375 2,055,203
853,776 891,315
853,776 891,315
589,541 541,724
6,669 9,125
20,036 19,120
109,671 175,871
35,095 59,796
74,576 116,075
0 0
0 0
0 0
74,576 116,075
.56 .91
.54 .87
(1) As required under Statement of Financial Accounting Standards No. 128, the
Company has restated its earnings per share into the new 'Basic' and 'Diluted'
amounts. 1997 data in column 2 is provided solely to reflect that change.
