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 March 31, 1996 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 April 26, 1996 was 87,046,187. HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Thousands of Dollars Except Share Data) (Unaudited) Mar. 31, Apr. 2, Dec. 31, Assets 1996 1995 1995 -------- -------- -------- Current assets Cash and cash equivalents $ 136,860 189,777 161,030 Accounts receivable, less allowance for doubtful accounts of $49,800, $49,700 and $48,800 528,632 475,813 791,111 Inventories: Finished products 246,270 198,587 240,126 Work in process 18,145 22,334 22,093 Raw materials 70,652 56,017 53,401 --------- --------- --------- Total inventories 335,067 276,938 315,620 Deferred income taxes 85,131 83,474 85,849 Prepaid expenses 90,830 86,849 71,888 --------- --------- --------- Total current assets 1,176,520 1,112,851 1,425,498 Property, plant and equipment, net 307,217 308,469 313,240 --------- --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $103,332, $87,335 and $99,404 478,264 489,918 473,388 Other intangibles, less accumulated amortization of $84,421, $62,761 and $79,648 373,514 357,373 343,624 Other 68,345 61,152 60,638 --------- --------- --------- Total other assets 920,123 908,443 877,650 --------- --------- --------- Total assets $2,403,860 2,329,763 2,616,388 ========= ========= ========= HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued (Thousands of Dollars Except Share Data) (Unaudited) Mar. 31, Apr. 2, Dec. 31, Liabilities and Shareholders' Equity 1996 1995 1995 -------- -------- -------- Current liabilities Short-term borrowings $ 93,402 162,736 119,987 Trade payables 107,607 115,259 198,328 Accrued liabilities 315,601 309,950 433,567 Income taxes 111,270 106,007 117,982 --------- --------- --------- Total current liabilities 627,880 693,952 869,864 Long-term debt, excluding current installments 149,987 150,000 149,991 Deferred liabilities 72,409 65,809 70,921 --------- --------- --------- Total liabilities 850,276 909,761 1,090,776 --------- --------- --------- Shareholders' equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued - - - Common stock of $.50 par value. Authorized 300,000,000 shares; issued 88,087,198, 88,085,802 and 88,086,108 44,044 44,043 44,043 Additional paid-in capital 306,327 280,896 279,288 Retained earnings 1,215,639 1,086,070 1,201,242 Cumulative translation adjustments 20,148 22,473 23,450 Treasury stock, at cost, 1,019,161, 450,559 and 741,237 shares (32,574) (13,480) (22,411) --------- --------- --------- Total shareholders' equity 1,553,584 1,420,002 1,525,612 --------- --------- --------- Total liabilities and shareholders' equity $2,403,860 2,329,763 2,616,388 ========= ========= ========= 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 -------------------- Mar. 31, Apr. 2, 1996 1995 -------- -------- Net revenues $538,685 526,503 Cost of sales 237,771 232,572 ------- ------- Gross profit 300,914 293,931 ------- ------- Expenses Amortization 9,799 9,243 Royalties, research and development 54,422 55,084 Advertising 70,276 70,233 Selling, distribution and administration 125,365 120,803 ------- ------- Total expenses 259,862 255,363 ------- ------- Operating profit 41,052 38,568 ------- ------- Nonoperating (income) expense Interest expense 4,906 5,823 Other (income), net (2,963) (2,512) ------- ------- Total nonoperating expense 1,943 3,311 ------- ------- Earnings before income taxes 39,109 35,257 Income taxes 14,744 13,574 ------- ------- Net earnings $ 24,365 21,683 ======= ======= Per common share Net earnings $ .28 .25 ======= ======= Cash dividends declared $ .10 .08 ======= ======= See accompanying condensed notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Quarters Ended March 31, 1996 and April 2, 1995 (Thousands of Dollars) (Unaudited) 1996 1995 ---- ---- Cash flows from operating activities Net earnings $ 24,365 21,683 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of plant and equipment 18,678 19,224 Other amortization 9,799 9,243 Deferred income taxes 1,991 (5,112) Change in operating assets and liabilities (other than cash and cash equivalents): Decrease in accounts receivable 258,408 257,841 Increase in inventories (18,196) (22,261) Increase in prepaid expenses (18,678) (15,843) Decrease in trade payables and accrued liabilities (215,994) (162,280) Other 1,658 (6,958) ------- ------- Net cash provided by operating activities 62,031 95,537 ------- ------- Cash flows from investing activities Additions to property, plant and equipment (13,811) (16,044) Investments and acquisitions, net of cash acquired (21,296) (102,413) Other (7,228) 168 ------- ------- Net cash utilized by investing activities (42,335) (118,289) ------- ------- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 5,778 - Repayments of borrowings with original maturities of more than three months (21,905) (10) Net (repayments) proceeds of other short-term borrowings (8,851) 72,338 Purchase of common stock (14,969) (312) Stock option transactions 4,380 2,296 Dividends paid (6,977) (6,130) ------- ------- Net cash (utilized) provided by financing activities (42,544) 68,182 ------- ------- Effect of exchange rate changes on cash (1,322) 7,319 ------- ------- (Decrease) increase in cash and cash equivalents (24,170) 52,749 Cash and cash equivalents at beginning of year 161,030 137,028 ------- ------- Cash and cash equivalents at end of period $136,860 189,777 ======= ======= Supplemental information Cash paid during the period for: Interest $ 2,206 2,951 Income taxes $ 10,890 10,827 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 March 31, 1996 and April 2, 1995, and the results of operations and cash flows for the periods then ended. The quarter ended March 31, 1996 consisted of thirteen weeks while the quarter ended April 2, 1995 consisted of fourteen weeks. The results of operations for the quarter ended March 31, 1996, are not necessarily indicative of results to be expected for the full year. (2) During the first quarter of 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121). The adoption of SFAS 121 did not have a material impact on either the Company's financial condition or its results of operations. (3) Earnings per common share are based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during each period. Common stock equivalents include stock options and warrants for the period prior to their exercise. Under the treasury stock method, the unexercised options and warrants are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common stock at the average market price during the period. For each of the reported periods the difference between primary and fully diluted earnings per share was not significant. HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) NET REVENUES - - ------------ Net revenues for the first quarter of 1996 were $538,685, compared with the $526,503 reported for the same period of 1995. Increased United States volume, particularly within the Hasbro Toy Group, was the major factor in this growth. In the major international markets, the Company's revenues, both in local currencies and dollars, were generally lower than during the same period of a year ago. The first quarter of 1996 included 13 weeks while 1995 included 14. GROSS PROFIT - - ------------ The gross profit margin, expressed as a percentage of net revenues, increased marginally to 55.9% from the 1995 level of 55.8%. While the Company's cost of certain raw materials, primarily plastics and paper, is decreasing in 1996, the impact of these decreases are not fully realized as the inventories sold during the first quarter were substantially purchased or produced during the fourth quarter of 1995. EXPENSES - - -------- Royalties, research and development expenses for the quarter decreased in both amount and as a percentage of revenues from 1995 levels. The royalty component increased in both, reflecting the increased revenues and the change in mix of products sold. Research and development was $30,119 for the quarter compared to $32,564 in 1995. This decrease reflects the Company's efforts to better manage such expenses as well as the second quarter 1995 discontinuance by the Company of its efforts to develop a mass-market virtual reality game system. The current quarter advertising remained constant in amount with that of the comparable period of 1995 while decreasing as a percentage of net revenues to 13.0% from 13.3%. This can largely be attributed to the lower portion of the Company's revenues coming from the international marketing units which generally have higher advertising to sales ratios than do the United States groups. The Company's selling, distribution and administration expenses increased, both in amount and as a percentage of net revenues, from their respective 1995 amounts. Contributing to the increases was approximately $2,400 of third-party costs associated with an unsolicited business combination proposal. Also contributing was the impact of the Company's new operations including Larami, acquired in February 1995, and the K'nex units and Scandinavia, which were not fully operational during the first quarter of 1995. NONOPERATING (INCOME) EXPENSE - - ----------------------------- Interest expense decreased approximately 16% from the 1995 first quarter amount, reflecting lower interest rates in the international markets, the primary area of first quarter borrowings. 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 of retailers and differences in overall economic conditions. Also, more retailers are using quick response inventory management practices which results in fewer orders being placed in advance of requested 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 April (April 28, 1996 and April 30, 1995) the Company's unshipped orders were approximately $380,000 and $400,000, respectively. During both 1994 and 1993, the Company incurred certain restructuring costs. The 1994 actions, completed in the first quarter of 1995, resulted in the termination of approximately 600 employees, of which approximately 100 were management positions. The closure of the Company's Netherlands manufacturing facility, which was the major portion of the 1993 charge, originally planned for the second quarter of 1994, was delayed until the first quarter of 1995 due to the time necessary to comply with local requirements. This resulted in the severance of approximately 200 additional employees. While impractical to quantify, the Company believes that it is receiving the anticipated benefits from these actions. Substantially all of the liabilities established for these restructurings have been satisfied. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- Because of the seasonality of the Company's business coupled with certain customer incentives, mainly in the form of extended payment terms, the interim cash flow statements are not representative of that which may be expected for the full year. As a result of these extended payment terms, the majority of the Company's cash collections occur late in the fourth quarter and early in the first quarter of the subsequent year. While a large portion of these receivables are of a quality which would allow their sale, alleviating the need for much of its interim financing, the Company believes it to be more cost effective to use its available funds and short-term borrowings to finance them. Late in its fourth quarter and through 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. 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. Cash and cash equivalents at March 31, 1996, were approximately 25% less than their 1995 level. The Company attempts to keep its cash and cash equivalents at the lowest level possible whenever it has short-term borrowings, although at times the cash available and the borrowing requirement may be in different countries and currencies which may make it impractical to substitute one for the other. Receivables were approximately $53,000 greater than at the same time in 1995, largely due to the increased United States sales occurring in the latter portion of the fourth quarter of 1995 and the first quarter of 1996. Inventories, up approximately the same amount from the prior year reflects the Company's planned actions necessary to have available product to provide faster and more complete shipment of customer orders. Other assets, as a group, increased marginally from their level a year ago, primarily resulting from the Company's acquisitions of product rights and licenses during the most recent twelve months, largely offset by twelve additional months of amortization expense. Short-term borrowings, at $93,402 were approximately $70,000, or 43% less than last year, again reflecting funds generated from operations within the most recent twelve months available to reduce such borrowings. At March 31, 1996, the Company had committed unsecured lines of credit totaling approximately $590,000 available to it. It also had available uncommitted lines approximating $930,000. The Company believes that these amounts are adequate for its needs. Of these available lines, approximately $110,000 was in use at March 31, 1996. RECENT INFORMATION - - ------------------ During 1996, the Company will adopt Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages, but does not require, companies to adopt a new accounting method, recording the estimated fair value of employee stock options as compensation expense. If such new method is not adopted, proforma disclosure must be provided in a note to the financial statements. As the Company plans to provide the required proforma disclosure only, the adoption of SFAS 123, will not have a material impact on either the Company's financial condition or its results of operations. PART II. Other Information Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4 Amendment No. 3 to Revolving Credit Agreement, dated as of May 10, 1996, among the Company, certain banks (the "Banks") and The First National Bank of Boston, as agent for the Banks. 11 Computation of Earnings Per Common Share - Quarters Ended March 31, 1996 and April 2, 1995. 12 Computation of Ratio of Earnings to Fixed Charges - Quarter Ended March 31, 1996. 27 Financial Data Schedule. (b) Reports on Form 8-K A Current Report on Form 8-K dated April 18, 1996 was filed by the Company and included the Press Release dated April 18, 1996 announcing the Company's results for the current quarter. Consolidated Statements of Earnings (without notes) for the quarters ended March 31, 1996 and April 2, 1995 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: May 14, 1996 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 March 31, 1996 Exhibit Index Exhibit No. Exhibits - - ------- -------- 4 Amendment No. 3 to Revolving Credit Agreement 11 Statement re computation of per share earnings - quarter 12 Statement re computation of ratios 27 Financial Data Schedule