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 July 2, 2000 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 30, 2000 was 172,309,426.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars Except Share Data)
(Unaudited)
Jul. 2, Jun. 27, Dec. 26,
Assets 2000 1999 1999
--------- --------- ---------
Current assets
Cash and cash equivalents $ 188,545 97,765 280,159
Accounts receivable, less allowance
for doubtful accounts of $62,700,
$60,200 and $65,000 573,869 843,580 1,084,118
Inventories:
Finished products 414,262 372,917 348,058
Work in process 43,051 12,409 13,470
Raw materials 50,847 48,134 47,043
--------- --------- ---------
Total inventories 508,160 433,460 408,571
Deferred income taxes 127,142 106,895 115,646
Prepaid expenses 329,137 479,220 243,158
--------- --------- ---------
Total current assets 1,726,853 1,960,920 2,131,652
Property, plant and equipment, net 320,176 308,420 318,825
--------- --------- ---------
Other assets
Cost in excess of acquired net assets,
less accumulated amortization of
$212,804, $169,332, and $193,947 808,863 696,614 806,092
Other intangibles, less accumulated
amortization of $308,393, $209,620
and $300,632 917,546 811,423 949,789
Other 241,778 123,760 256,990
--------- --------- ---------
Total other assets 1,968,187 1,631,797 2,012,871
--------- --------- ---------
Total assets $4,015,216 3,901,137 4,463,348
========= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(Thousands of Dollars Except Share Data)
(Unaudited)
Jul. 2, Jun. 27, Dec. 26,
Liabilities and Shareholders' Equity 2000 1999 1999
--------- --------- ---------
Current liabilities
Short-term borrowings $ 363,375 823,202 714,669
Trade payables 163,733 132,787 284,772
Accrued liabilities 679,662 606,435 983,280
Income taxes 37,809 46,954 88,606
--------- --------- ---------
Total current liabilities 1,244,579 1,609,378 2,071,327
Long-term debt, excluding current
installments 1,168,959 409,937 420,654
Deferred liabilities 99,857 77,700 92,392
--------- --------- ---------
Total liabilities 2,513,395 2,097,015 2,584,373
--------- --------- ---------
Shareholders' equity
Preference stock of $2.50 par
value. Authorized 5,000,000
shares; none issued - - -
Common stock of $.50 par value.
Authorized 600,000,000 shares;
issued 209,694,630, 209,694,630
and 209,694,630 104,847 104,847 104,847
Additional paid-in capital 473,946 466,821 468,329
Deferred compensation (14,795) - -
Retained earnings 1,765,166 1,644,460 1,764,110
Accumulated other comprehensive income (50,140) (26,009) (32,982)
Treasury stock, at cost; 37,414,109,
14,860,988 and 16,710,620 shares (777,203) (385,997) (425,329)
--------- --------- ---------
Total shareholders' equity 1,501,821 1,804,122 1,878,975
--------- --------- ---------
Total liabilities and
shareholders' equity $4,015,216 3,901,137 4,463,348
========= ========= =========
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
------------------ --------------------
Jul. 2, Jun. 27, Jul. 2, Jun. 27,
2000 1999 2000 1999
-------- -------- --------- ---------
Net Revenues $ 778,373 874,574 1,551,854 1,542,972
Cost of Sales 298,043 345,026 598,344 601,543
-------- -------- --------- ---------
Gross Profit 480,330 529,548 953,510 941,429
-------- -------- --------- ---------
Expenses
Amortization 31,928 31,918 64,784 57,844
Royalties, Research and
Development 135,150 179,776 261,189 291,718
Advertising 77,732 101,274 147,091 182,358
Selling, Distribution and
Administration 198,974 158,368 403,710 321,649
-------- -------- --------- ---------
Total Expenses 443,784 471,336 876,774 853,569
-------- -------- --------- ---------
Operating Profit 36,546 58,212 76,736 87,860
-------- -------- --------- ---------
Nonoperating (income) expense
Interest Expense 28,198 13,625 49,641 25,598
Other (Income) Expense, Net (1,073) (2,209) (4,249) (4,527)
-------- -------- --------- ---------
Total nonoperating (income)
expense 27,125 11,416 45,392 21,071
-------- -------- --------- ---------
Earnings Before Income Taxes 9,421 46,796 31,344 66,789
Income Taxes 2,921 14,507 9,717 20,705
-------- -------- --------- ---------
Net Earnings $ 6,500 32,289 21,627 46,084
======== ======== ========= =========
Per Common Share
Net Earnings
Basic $ .04 .17 .12 .24
======== ======== ========= =========
Diluted $ .04 .16 .12 .22
======== ======== ========= =========
Cash Dividends Declared $ .06 .06 .12 .12
======== ======== ========= =========
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended July 2, 2000 and June 27, 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
------- -------
Cash flows from operating activities
Net earnings $ 21,627 46,084
Adjustments to reconcile net earnings to net cash
utilized by operating activities:
Depreciation and amortization of plant and equipment 49,128 48,437
Other amortization 64,784 57,844
Deferred income taxes 7,501 (6,184)
Compensation earned under restricted stock programs 1,566 -
Change in operating assets and liabilities (other
than cash and cash equivalents):
Decrease in accounts receivable 499,364 102,603
Increase in inventories (107,517) (106,718)
Increase in prepaid expenses (91,923) (264,842)
Decrease in trade payables and accrued liabilities (451,732) (197,450)
Other (2,609) (772)
------- -------
Net cash utilized by operating activities (9,811) (320,998)
------- -------
Cash flows from investing activities
Additions to property, plant and equipment (59,394) (41,130)
Investments and acquisitions, net of cash acquired (29,472) (13,800)
Other (6,141) 3,317
------- -------
Net cash utilized by investing activities (95,007) (51,613)
------- -------
Cash flows from financing activities
Proceeds from borrowings with original maturities
of more than three months 888,525 3,500
Repayments of borrowings with original maturities
of more than three months (148,324) (6)
Net (repayments) proceeds of other short-term
borrowings (332,654) 461,465
Purchase of common stock (367,544) (191,345)
Stock option transactions 1,751 44,396
Dividends paid (21,814) (22,196)
------- -------
Net cash provided by financing activities 19,940 295,814
------- -------
Effect of exchange rate changes on cash (6,736) (3,186)
------- -------
Decrease in cash and cash equivalents (91,614) (79,983)
Cash and cash equivalents at beginning of year 280,159 177,748
------- -------
Cash and cash equivalents at end of period $188,545 97,765
======= =======
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Six Months Ended July 2, 2000 and June 27, 1999
(Thousands of Dollars)
(Unaudited)
2000 1999
------- -------
Supplemental information
Cash paid during the period for:
Interest $ 26,996 24,745
Income taxes $ 71,570 32,850
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)
Quarter Ended Six Months Ended
------------------ ------------------
Jul. 2, Jun. 27, Jul. 2, Jun. 27,
2000 1999 2000 1999
-------- ------- ------- -------
Net earnings $ 6,500 32,289 21,627 46,084
Other comprehensive
loss (7,129) (4,774) (17,158) (16,384)
-------- ------- ------- -------
Total comprehensive
earnings (loss) $ (629) 27,515 4,469 29,700
======== ======= ======= =======
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 July 2, 2000 and June 27, 1999, and
the results of operations and cash flows for the periods then ended. Certain
1999 balances have been reclassified to conform to current year presentation.
The year to date period ended July 2, 2000 is a 27-week period while the year
to date period ended June 27, 1999 is a 26-week period.
The results of operations for the six months ended July 2, 2000 are not
necessarily indicative of results to be expected for the full year.
(2) The Company's other comprehensive earnings (loss) primarily results from
foreign currency translation adjustments.
(3) During 2000, the Company issued restricted stock and granted deferred
restricted stock units to certain key employees. At July 2, 2000, these
awards, net of forfeitures, aggregated the equivalent of 681,000 shares. These
shares or units are nontransferable and subject to forfeiture for periods
prescribed by the Company. Upon granting of these awards, unearned
compensation equivalent to the market value at the date of grant is charged to
shareholders' equity and subsequently amortized over the periods during which
the restrictions lapse, generally 3 years. During 2000, the Company also
conditionally awarded 370,000 deferred restricted shares under the Long Term
Incentive Program (LTIP) under the Company's omnibus employee stock plans.
This award is conditional upon the Company reaching certain volume, earnings
per share and stock price benchmarks within a three year performance cycle,
with payout over the two years following that cycle. Unearned compensation
equivalent to the market value of shares awarded was recorded at the date of
award and is being amortized over a five-year period. Adjustments are made to
compensation expense for changes in market value and achievement of financial
goals. Amortization of deferred, unearned compensation relating to the
restricted stock and deferred restricted stock units, and shares awarded under
the LTIP of $1,293 and $273, respectively, was recorded in the six months of
2000.
(4) Hasbro is a worldwide marketer and distributor of children's and family
entertainment products and services, principally engaged in the design,
manufacture and marketing of games and toys ranging from traditional to high-
tech. The Company is focused on managing its business in two major areas,
Toys and Games. Within these two major areas, the Company's reportable
segments are U.S. Toys, Games, International and Global Operations.
In the United States, the U.S. Toy segment includes the design, marketing and
selling of boys action figures, vehicles and playsets, girls toys, preschool
toys and infant products and creative play products. The Games segment
includes the development, marketing and selling of traditional board games and
puzzles, handheld electronic games, electronic interactive plush, children's
consumer electronics, electronic learning aids, trading card and role-playing
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
games and interactive software games based on the Company's owned and licensed
brands. Within the International segment, the Company develops, markets and
sells both toy and game products in non-U.S. markets. Global Operations
manufactures and sources product for the majority of the Company's segments.
The Company also has other segments which license certain toy and game
properties and which develop and market non-traditional toy and game based
product realizing more than half of their revenues and the majority of their
operating profit in the first half of the year, which is contra-seasonal to
the rest of the Company's business. These other segments do not meet the
quantitative thresholds for reportable segments and have been combined for
reporting purposes.
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.
As a result of the complexity of the Company's organizational changes, it is
unable to segregate 1999 assets between the U.S. Toys and Games segments, and
thus they are reported as one. Assets are segregated in 2000 and are
separately reported for that period. The total of U.S. Toys and Games assets
in 2000 is presented for comparative purposes only, and is not used by
management in assessing segment performance in 2000. Certain asset related
expense items, including depreciation and amortization of intangibles, have
been allocated to segments in 1999 based upon estimates in order to arrive at
segment operating profit. In the fourth quarter of 1999, the Company's Games
segment acquired Wizards of the Coast, Inc. Prospectively, management of the
Company's interactive software games international units, currently part of
the Games segment, will be assumed by International segment management. The
Company will reclassify the related revenues, operating profit and total
assets of this portion of the business in segment disclosure when it is
completed for management reporting purposes. These changes are not expected to
be material.
The accounting policies of the segments are the same as those described in
Note 1 to the Company's Consolidated Financial Statements for the fiscal year
ended December 26, 1999.
Results shown for the quarter and six months are not necessarily
representative of those which may be expected for the full year 2000 nor were
those of the comparable 1999 periods representative of those actually
experienced for the full year 1999. Similarly, such results are not
necessarily those which would be achieved were each segment an unaffiliated
business enterprise.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
Information by segment and a reconciliation to reported amounts for the three
and six months ended July 2, 2000 and June 27, 1999 are as follows.
Three Months
------------
2000 1999
---- ----
Net revenues External Affiliate External Affiliate
-------- --------- -------- ---------
U.S. Toys $ 105,597 2,658 299,916 11
Games 432,337 (7,709) 312,422 (328)
International 199,233 (308) 201,537 1,260
Global Operations (a) 2,727 187,544 6,413 276,235
Other segments 38,479 4,693 54,286 3,285
Corporate and eliminations - (186,878) - (280,463)
--------- --------- --------- --------
$ 778,373 - 874,574 -
========= ========= ========= ========
Six Months
----------
2000 1999
---- ----
Net revenues External Affiliate External Affiliate
-------- --------- -------- ---------
U.S. Toys $ 228,564 2,856 529,524 -
Games 842,869 26,727 511,728 1,356
International 365,064 (974) 349,975 2,970
Global Operations (a) 5,202 375,532 8,625 458,594
Other segments 110,155 8,367 143,120 8,347
Corporate and eliminations - (412,508) - (471,267)
---------- --------- --------- ---------
$ 1,551,854 - 1,542,972 -
========== ========= ========= =========
Quarter ended Six Months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
---- ---- ---- ----
Operating profit (loss)
U.S. Toys $(22,242) 33,072 (52,427) 49,035
Games 72,825 34,661 147,155 38,631
International 1,513 (4,571) (10,061) (24,963)
Global Operations (a) (2,262) (1,940) (3,082) (3,624)
Other segments (6,039) 3,953 (21) 31,027
Corporate and eliminations (7,249) (6,963) (4,828) (2,246)
------- ------- ------- -------
$ 36,546 58,212 76,736 87,860
======= ======= ======= =======
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
July 2, 2000 June 27, 1999
------------- -------------
Total assets
U.S. Toys (b) $ 368,010 -
Games (b) 2,183,263 -
--------- ---------
U.S. Toys and Games (b) $2,551,273 2,485,673
International 903,592 872,042
Global Operations 465,381 515,389
Other segments 293,217 315,920
Corporate and eliminations (198,247) (287,887)
--------- ---------
$4,015,216 3,901,137
========= =========
(a) The Global Operations segment derives substantially all of its revenues
and operating results from intersegment activities.
(b) As a result of the complexity of the Company's organizational changes, it
is unable to segregate 1999 assets between the U.S. Toys and Games segments,
and thus they are reported as one for 1999. Certain asset related expense
items including depreciation and amortization of intangibles have been
allocated to 1999 segment results based upon estimates in order to arrive at
segment operating profit.
The following table presents consolidated net revenues by classes of principal
products for the quarters and six months periods ended July 2, 2000 and June
27, 1999.
Quarter ended Six Months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
------- ------- ------- -------
Boys toys $ 159,700 341,900 300,600 573,000
Games and puzzles 479,100 330,700 919,700 539,100
Interactive software games 18,900 39,300 40,800 77,700
Preschool toys 35,700 38,300 74,400 85,500
Other 84,973 124,374 216,354 267,672
------- ------- --------- ---------
Net revenues $ 778,373 874,574 1,551,854 1,542,972
======= ======= ========= =========
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
(5) Earnings per share data for the quarters and six months ended July 2,
2000 and June 27, 1999 were computed as follows:
2000 1999
----------------- -----------------
Quarter Basic Diluted Basic Diluted
------- ------- ------- ------- -------
Net earnings $ 6,500 6,500 32,289 32,289
======= ======= ======= =======
Average shares outstanding (in
thousands) 171,621 171,621 195,330 195,330
Effect of dilutive securities;
Options and warrants - 1,118 - 11,722
------- ------- ------- -------
Equivalent shares 171,621 172,739 195,330 207,052
======= ======= ======= =======
Earnings per share $ .04 .04 .17 .16
======= ======= ======= =======
2000 1999
----------------- -----------------
Six Months Basic Diluted Basic Diluted
---------- ------- ------- ------- -------
Net earnings $ 21,627 21,627 46,084 46,084
======= ======= ======= =======
Average shares outstanding (in
thousands) 180,925 180,925 195,614 195,614
Effect of dilutive securities;
Options and warrants - 947 - 10,222
------- ------- ------- -------
Equivalent shares 180,925 181,872 195,614 205,836
======= ======= ======= =======
Earnings per share $ .12 .12 .24 .22
======= ======= ======= =======
(6) On December 7, 1999, the Company announced a program to further
consolidate manufacturing and sourcing activities and product lines, as well
as streamline and further regionalize marketing, sales and research and
development activities worldwide. Costs associated with this consolidation
program, recorded in the fourth quarter of 1999, amounted to $141,575, of
which $64,232 was recorded as a restructuring charge and $77,343 in various
other operating expense categories.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)
(Thousands of Dollars)
(Unaudited)
The significant components of the plan include the closing of two factories
in Mexico and the United Kingdom, reducing capacity at the remaining three
factories, shifting production to third party manufacturers in the Far East
and further consolidation and regionalization of the International marketing
and sales structure. Actions under the plan commenced in December 1999 and are
expected to be completed by the end of fiscal 2000. There have been no
material changes to the plan to date. The restructuring charge of $64,232
represented approximately $38,700 of cash charges for severance benefits for
termination of approximately 2,200 employees, which will be disbursed over the
employee's entitlement period, $14,300 of cash charges for lease and facility
closing costs to be expended over the contractual lease terms and closing
process and non-cash charges of $11,200 for fixed asset write-offs, arising
primarily in the manufacturing area. Of the cash amount, approximately $4,700
was paid prior to December 26, 1999 for severance benefits relating to
approximately 200 employees terminated prior to year end. Non-cash charges
relating to fixed asset write-offs were credited to the respective line items
on the balance sheet. Details of activity in the restructuring plan for the
six month period follow:
Balance at Balance at
Dec. 26, Jul. 2,
1999 Activity 2000
------- -------- -------
Severance $ 34,000 (16,400) 17,600
Lease and facility closing costs 14,300 (5,000) 9,300
------- ------- -------
$ 48,300 (21,400) 26,900
======= ======= =======
Employee redundancies by area:
Manufacturing and sourcing activities 1,700 (1,190) 510
Research, product development, marketing
sales and administration 300 (250) 50
------- ------- -------
2,000 (1,440) 560
======= ======= =======
The remaining severance liability represents cash charges for severance
benefits for employees not yet terminated and amounts for employees made
redundant which will be disbursed over the employee's entitlement period. The
balance in lease and facility closing costs will be expended over the
contractual lease term and closing process.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
NET EARNINGS AND SEGMENT RESULTS
--------------------------------
Net earnings for the second quarter ended July 2, 2000 decreased approximately
80% to $6,500 from 1999 levels of $32,289. For the six month period, net
earnings decreased approximately 53% to $21,627 from 1999 of $46,084. Diluted
earnings per share for the quarter was $.04 and $.16, and $.12 and $.22 for
the six months in 2000 and 1999, respectively. Net revenues and operating
profits for the quarter and six months increased in two of the Company's three
major business segments, Games and, in local currencies, International, but
decreased in U.S. Toys from comparable 1999 levels. Operating profit of the
Games segment was favorably impacted compared to last year primarily by the
inclusion of Wizards of the Coast, Inc. (Wizards), which was acquired on
September 30, 1999. The overall increase in operating profit of the Games
segment was negatively impacted by approximately 35% in the quarter and 32%
for the six months by an increase in operating loss compared to the prior year
periods related to the Company's offering of interactive game products. Also
negatively impacting Games segment operating profits, to a lesser degree, was
an approximate 80% and 63% decline in shipments of Furby in the quarter and
six months, respectively, from 1999. Games segment operating profit reflects
expenses of approximately $5,000 in the second quarter and $7,000 for the six
months on Games.com, the Company's internet gaming initiative. International
segment revenues were essentially unchanged for the quarter and increased 4%
for the six months in U. S. dollars. An International segment operating loss
in 1999 compares with operating profit and a significantly reduced operating
loss for the second quarter and six months of 2000, respectively. The six
months of 2000 includes 27 weeks compared to 26 weeks in the comparable period
of 1999. A more detailed discussion of items impacting consolidated net
earnings and segment results follows.
NET REVENUES
------------
Worldwide net revenues decreased 11.0% to $778,373 in the second quarter of
2000 compared to $874,574 in the second quarter of 1999. This decrease is due
to reduced revenues, primarily in the U.S. Toy segment, from STAR WARS product
relating to the May, 1999 release of STAR WARS: EPISODE I: THE PHANTOM MENACE.
Decreased revenues in the Games segment from reduced shipments of FURBY and
sales of interactive software games also contributed to the revenue decline
from 1999. Partially offsetting this reduction was the addition of revenues
resulting from increased shipments of POKEMON related product across all
segments over the comparable period in 1999, and the addition of the trading
card and role-playing games from Wizards of the Coast, Inc. (Wizards), which
was acquired in the fourth quarter of 1999. Continued softness in the demand
for interactive games may continue to negatively impact revenues of the Games
segment for the remainder of fiscal 2000. The stronger US dollar negatively
impacted worldwide net revenues for the 2000 second quarter compared to the
same period last year by $17,500. For the six months, revenues were
$1,551,854 and $1,542,972 in 2000 and 1999, respectively. In addition to the
second quarter factors noted above, the 2000 six month amounts reflect an
approximate $33,200 negative impact of the strengthened U.S. dollar. The
strong U.S. dollar may continue to have a negative impact on revenues for the
remainder of 2000.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
GROSS PROFIT
------------
The Company's gross profit margin, expressed as a percentage of net revenues,
was 61.7% and 61.4% for the quarter and six months respectively, compared to
the 1999 levels of 60.5% and 61.0%. The Company's gross margin was favorably
impacted in the quarter and six months by revenues arising from shipments of
trading card games, acquired through Wizards. This benefit has been partially
offset by decreased revenues from STAR WARS, FURBY and interactive software
games, all of which also carry high gross margins. Continued high oil prices
during the remainder of 2000 may negatively impact our resin and
transportation costs.
EXPENSES
--------
Amortization expense for the second quarter of 2000 was consistent with 1999,
while greater in dollars over the comparable six month period. This reflects
higher amortization of the company's entertainment based property rights in
1999, consistent with revenues in that period, while the six months of 2000
reflects the amortization of intangible assets relating to the Wizards
acquisition.
Royalties, research and development expenses for the quarter and year to date
decreased in both amount and as a percentage of net revenues from comparable
1999 levels. The royalty component decreased in both dollars and as a
percentage of net revenues principally reflecting decreased volumes of STAR
WARS products, primarily in the US Toy segment, and FURBY products in the
Games segment. This decrease was somewhat offset by royalties incurred across
all segments relating to POKEMON products. Revenues derived from entertainment
based properties, such as STAR WARS and POKEMON, and their corresponding
royalties, while continuous over the life of a contract, are generally higher
in amount in the year a theatrical release takes place. It is anticipated that
operating profit will also generally be higher in these years. The degree to
which revenues, royalties and operating profits fluctuate is dependent not
only on theatrical release dates, but on video release dates as well. Research
and development, was $48,807 and $98,577 for the quarter and six months of
2000 respectively, compared to $51,301 and $94,088 in the comparable periods
of a year ago. For both periods, this represents an increased percentage of
2000 net revenues. Advertising expense for the 2000 second quarter and six
months decreased in amount and as a percentage of net revenues from the
comparable periods last year. The decrease reflects a mix of less heavily
advertised products shipped in 2000 than in the comparable periods of 1999.
Selling, distribution and administration expenses, which are largely fixed,
increased in amount and as a percentage of net revenues in both the second
quarter and six months of 2000 from comparable 1999 levels. The increase in
amount is due primarily to the Games segment's fourth quarter 1999 acquisition
of Wizards, which has higher selling, distribution and administrative costs
associated with its retail stores and worldwide trading card and role-playing
game tournament sponsorship.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
NONOPERATING (INCOME) EXPENSE
-----------------------------
Interest expense for the 2000 second quarter and six months was $28,198 and
$49,641, respectively, compared with $13,625 and $25,598 in 1999. This
increase reflects costs associated with borrowing requirements to fund the
Company's 1998 acquisitions, the fourth quarter 1999 acquisition of Wizards,
and the Company's share repurchase program all partially offset by the
availability of funds generated from operations. Other (income) expense was
essentially unchanged from 1999.
INCOME TAXES
------------
Income tax expense as a percentage of pretax earnings for the second quarter
and six months of 2000 was 31.0%, unchanged from the full year 1999 rate.
OTHER INFORMATION
-----------------
During the fourth quarter of 1999 the Games segment acquired Wizards. The
trading card and role playing games associated with that acquisition are a
year round business, less dependent on the fourth quarter holiday retail
selling season than traditional toys and other forms of games. In 1999, the
second quarter and first half were positively impacted by the May 19, 1999
theatrical release of STAR WARS: EPISODE 1: THE PHANTOM MENACE. The Company
expects the second half of the year and within that half, the fourth quarter,
to be more significant to its overall business for the full year in 2000. 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. The trend of retailers over
the past few years has been to purchase product within or close to the fourth
quarter holiday consumer selling season, which includes Christmas. Quick
response inventory management practices now being used result in fewer orders
being placed in advance of shipment and more orders, when placed, for
immediate delivery. Consequently, unshipped orders on any date in a given 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 30, 2000 and July 25,
1999, the Company's unshipped orders were approximately $870,000 and
$1,060,000, respectively. In addition to the above factors, many of the
Company's new product introductions are planned for the second half of the
year. For those planned new products containing electronic components, a
worldwide shortage of electronic components may impact the Company's ability
to meet customer demands for those products.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Thousands of dollars)
On December 7, 1999, the Company announced a program to further consolidate
manufacturing and sourcing activities and product lines, as well as streamline
and further regionalize marketing, sales and research and development
activities worldwide. The plan resulted in cost savings of approximately
$3,100 and $6,100, respectively, in the second quarter and six months of 2000.
The components of activity in the plan and the balance remaining at the end of
the quarter are as follows:
Balance at Balance at
Dec. 26, Jul. 2,
1999 Activity 2000
------- -------- -------
Severance $ 34,000 (16,400) 17,600
Lease and facility closing costs 14,300 (5,000) 9,300
------- ------- -------
$ 48,300 (21,400) 26,900
======= ======= =======
Employee redundancies by area:
Manufacturing and sourcing activities 1,700 (1,190) 510
Research, product development, marketing
sales and administration 300 (250) 50
------- ------- -------
2,000 (1,440) 560
======= ======= =======
The significant components of the plan include the closing of two factories,
in Mexico and the United Kingdom, the reduction of capacity at the remaining
three factories, the shift of production to third party manufacturers in the
Far East and further consolidation and regionalization of the International
marketing and sales structure. Actions under the plan commenced in December
1999 and are expected to be completed by the end of fiscal 2000. The remaining
severance liability represents cash charges for severance benefits for
employees not yet terminated and amounts for employees made redundant which
will be disbursed over the employee's entitlement period. The balance in lease
and facility closing costs will be expended over the contractual lease terms
and closing process. The Company expects to generate pre-tax savings of
approximately $16,000 in 2000 and $23,000 per year thereafter from these
actions.
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 outstanding
short-term debt.
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of dollars)
Because of this seasonality in cash flow, management believes that on an
interim basis, rather than discussing only its cash flows, a better
understanding of its liquidity and capital resources can be obtained through a
discussion of the various balance sheet categories as well. 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,
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.
Cash flows utilized by operating activities were $9,811 and $320,998 for the
six months ended July 2, 2000 and June 27, 1999 respectively. Receivables
were $573,869 at July 2, 2000 compared to $843,580 at the end of the 1999
comparable period. The decrease reflects the reduced second quarter revenues
in comparison with the second quarter of 1999, combined with the shorter
payment terms associated with trading card games. Inventories increased 17.2%
from 1999 levels, primarily reflecting the Company's fourth quarter 1999
acquisition of Wizards. In addition to finished product, Wizards maintains a
higher level of raw materials and work in process than the Company's pre-
existing toys and games, due to the special paper and printing requirements of
trading card games. Other current assets decreased to $456,279 from $586,115,
reflecting the partial use of prepaid royalties existing at June 27, 1999
offset in part by the acquisition of Wizards. Trade payables and accrued
liabilities increased to $843,395 from $739,222 in 1999. The increase
primarily relates to the acquisition of Wizards.
Property, plant and equipment and other assets, as a group, increased from
their 1999 levels, reflecting the Company's fourth quarter 1999 acquisition of
Wizards, partially offset by assets of approximately $76,200 written off or
written down to fair market value in connection with the Company's 1999
consolidation program, and twelve additional months of depreciation and
amortization expense.
Net cash provided by financing activities of $19,940 in the six months of 2000
compares with $295,814 in 1999. Net borrowings (short and long-term borrowings
less cash and cash equivalents) increased to $1,343,789 at July 2, 2000 from
$1,135,374 at June 27, 1999. This reflects the use of approximately $780,000
of cash in the prior twelve months for investments and 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. On March 15, 2000, the Company
issued $750 million of debt securities in the form of $550 million of 7.95%
notes due March 15, 2003 and $200 million of 8.50% notes due March 15, 2006.
The Company used the proceeds of these notes to pay down short term debt
primarily incurred in connection with the acquisition of Wizards and the
repurchase of shares of its common stock, including a portion of the proceeds
for the repurchase of shares under a Modified Dutch Auction Tender Offer,
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of dollars)
which was initiated and completed in the first six months of 2000. Included in
short-term borrowings is $2,200 of current installments of long-term debt. At
July 2, 2000, the Company had committed unsecured lines of credit totaling
approximately $715,000 available to it. It also had available uncommitted
lines approximating $615,000. The Company believes that these amounts are
adequate for its needs. Of these available lines, approximately $390,000 was
in use at July 2, 2000.
EURO CONVERSION
---------------
Certain member countries of the European Union established fixed conversion
rates between their existing currencies and the European Economic Monetary
Union common currency, or Euro. While the Euro was introduced on January 1,
1999, member countries will continue to use their existing currencies through
January 1, 2002, with the transition period for full conversion to the Euro
ending June 30, 2002. Transition to the Euro creates certain issues for the
Company with respect to upgrading information technology systems for 2002 full
use requirements, reassessing currency risk, product pricing, amending
business and financial contracts as well as processing tax and accounting
records. The Company has and will continue to address these transition issues
and does not expect the Euro conversion to have a material effect on the
results of operations or financial condition of the Company.
FORWARD-LOOKING STATEMENTS
--------------------------
This discussion contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements
include, without limitation, any statement that may predict, forecast,
indicate or imply future results, performance or achievements, and may contain
the use of forward-looking words or phrases such as "anticipate," "believe,"
"could," "expect," "intend," "may," "planned," "potential," "should," "will,"
and "would" or any variations of such words with similar meanings. These
forward-looking statements are inherently subject to known and unknown risks
and uncertainties. A variety of factors could cause actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the forward-looking statements. These factors
include, but are not limited to, the Company's ability to manufacture, source
and ship new and continuing product in a timely manner and customers' and
consumers' acceptance of new and continuing products at prices that will be
sufficient to profitably recover development, manufacturing, marketing,
royalty and other costs of the products; the impact of competition on revenue,
margins and other aspects of the Company's business, including the ability to
secure, maintain and renew popular licenses and the ability to attract and
retain talented employees in a competitive environment; economic conditions,
including higher fuel prices, currency fluctuations and government regulations
and other actions in the various markets in which the Company operates; the
impact of market conditions, third party actions or approvals and the impact
of competition that could delay or increase the cost of implementation of the
HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations, Continued
(Thousands of dollars)
consolidation program or alter planned actions and reduce actual results; the
risk that anticipated benefits of acquisitions may not occur or be delayed or
reduced in their realization; with respect to the Company's online game site
initiative, in addition to the factors set forth above, technical difficulties
in adapting games to online format and establishing the online game site that
could delay or increase the cost of the site becoming operational; the
acceptance by customers of the games and other products and services to be
offered at the online game site; and other risks and uncertainties as are or
may be detailed from time to time in the Company's public announcements and
filings with the SEC such as Forms 8-K, 10-Q and 10-K. The Company undertakes
no obligation to revise the forward-looking statements contained in this
discussion or to update the forward-looking statements to reflect events or
circumstances occurring after the date of this discussion.
RECENT INFORMATION
------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 was amended by SFAS
138 in June 2000.The Company will adopt this statement on January 1, 2001.
SFAS 133 will require that the Company record all derivatives, such as foreign
exchange contracts, in the balance sheet at fair value. Changes in derivative
fair values will either be recognized in earnings as an offset to the changes
in 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. The ineffective portion of a hedging
derivative's change in fair value will be immediately recognized in earnings.
The impact of SFAS 133 on the Company's financial statements will depend on
several factors, including interpretive guidance issued from the FASB, the
extent of the Company's hedging activities and use of equity and other
financial derivatives, the Company's ability to forecast foreign currency
transactions compared to actual results and the effectiveness of the hedging
instruments used. However, the Company does not believe adoption of SFAS 133
will have a material impact on either the Company's financial condition or its
results of operations.
On August 9, 2000, the Company announced that Alfred J. Verrecchia was
promoted to President and Chief Operating Officer of the Company. Mr.
Verrecchia replaces Herbert M. Baum, who resigned from the Company on August
8, 2000 to accept a position at The Dial Corporation.
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
17, 2000, the Company's shareholders reelected the following
persons to the Board of Directors of the Company: Alan G.
Hassenfeld (141,938,349 votes for, 2,953,398 votes withheld),
Harold P. Gordon(141,947,402 votes for, 2,944,345 votes withheld),
Marie Josee Kravis (141,906,676 votes for, 2,985,071 votes
withheld), and Preston Robert Tisch (141,702,985 votes for,
3,188,762 votes withheld).
The Company's shareholders also approved an amendment to the Stock
Incentive Performance Plan by a vote of 141,462,619 votes for,
2,933,760 votes against, while 495,368 abstained. The Company's
shareholders also approved an amendment to the Restated Articles of
Incorporation of the Company to increase the number of shares of
common stock which Hasbro is authorized to issue from 300,000,000
to 600,000,000 by a vote of 134,777,620 votes for, 9,593,695 votes
against, while 520,432 abstained.
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 a decrease of class or
series of any class of shares.
3.4 Amendment to Articles of Incorporation, dated June 28, 2000.
11.1 Computation of Earnings Per Common Share - Six Months
Ended July 2, 2000 and June 27, 1999.
11.2 Computation of Earnings Per Common Share - Quarter
Ended July 2, 2000 and June 27, 1999.
12 Computation of Ratio of Earnings to Fixed Charges -
Six Months and Quarter Ended July 2, 2000.
27 Article 5 Financial Data Schedule - Second Quarter 2000
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated July 20, 2000 was filed by
the Company and included the Press Release dated July 20, 2000,
announcing the Company's results for the current quarter.
Consolidated Statements of Earnings (without notes) for the
quarters and six months ended July 2, 2000 and June 27, 1999
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 16, 2000 By: /s/ Alfred J. Verrecchia
-------------------------
President and
Chief Operating Officer 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 July 2, 2000
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 a decrease of class or
series of any class of shares.
3.4 Amendment to Articles of Incorporation, dated June 28, 2000.
11.1 Computation of Earnings Per Common Share - Six Months
Ended July 2, 2000 and June 27, 1999.
11.2 Computation of Earnings Per Common Share - Quarter
Ended July 2, 2000 and June 27, 1999.
12 Computation of Ratio of Earnings to Fixed Charges -
Six Months and Quarter Ended July 2, 2000.
27 Article 5 Financial Data Schedule - Second Quarter 2000
