SEC Filing | Hasbro, Inc.

SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 29, 1996 Commission file number 1-6682 ----------------- ------ Hasbro, Inc. -------------------- (Name of Registrant) Rhode Island 05-0155090 - - ------------------------ ------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 1027 Newport Avenue, Pawtucket, Rhode Island 02861 -------------------------------------------------- (Address of Principal Executive Offices) (401) 431-8697 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock American Stock Exchange Preference Share Purchase Rights American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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[ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the price at which the stock was sold on March 21, 1997 was $3,256,098,356. The number of shares of Common Stock outstanding as of March 21, 1997 was 128,553,801. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's definitive proxy statement for its 1997 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report. Selected information contained in registrant's Annual Report to Shareholders for the fiscal year ended December 29, 1996, is included as Exhibit 13, and incorporated by reference into Parts I and II of this Report. PART I ITEM 1. BUSINESS -------- (a) General Development of Business ------------------------------- The Company designs, manufactures and markets a diverse line of toy products and related items throughout the world. Included in its offerings are games and puzzles, preschool, boys' action and girls' toys, dolls, plush products and infant products, including infant apparel. The Company also licenses various tradenames, characters and other property rights for use in connection with the sale by others of noncompeting toys and non-toy products. Except as expressly indicated or unless the context otherwise requires, as used herein, the "Company" means Hasbro, Inc., a Rhode Island corporation organized on January 8, 1926, and its subsidiaries. During 1996, the Company began to take steps to become more brands driven and globally focused. The new focus is designed to allow the development of brands globally, which will provide greater coordination of key brands from a world-wide perspective, while still recognizing regional differences. It also will allow for the development of a blueprint for the global coordination of production and sourcing requirements. During 1997 the Company will continue to operate through its three primary units, Games, Toys and International while at the same time determining additional steps necessary to implement this focus and have a new organizational structure in place and operational in 1998. (b) Description of Business Products -------------------------------- The Company's products are categorized for marketing purposes as follows: (i) Hasbro Toy Group ---------------- The Hasbro Toy Group develops and markets infant, preschool, activity, boys and girls products in the United States, primarily utilizing the Playskool(R), Tonka(R) and Kenner(R) brands. The infant and preschool items are principally marketed under the Playskool brand and are specifically designed for preschool children, toddlers and infants. Playskool's line of infant and juvenile items consists of products for very young children, including the 1-2-3 High Chair(TM), Musical Dream Screen(TM), Soft Walkin' Wheels(R), the Steady Steps(R) line of walkers and other infant accessories such as bibs, training cups and feeding items, soft toys and rattles. New products in 1997 include Snuzzles(TM) stuffed animals, blanket and bedtime book as well as Busy Shake, Rattle 'n Roll(TM). The preschool line includes such well known products as Lincoln Logs(R), Tinkertoy(R), Mr. Potato Head(R), 1-2-3 Bike(TM) and the "Busy(R)" line of toys; electronic items including Talking Barney(R); various role play products including Lovin' Sounds Nursery(R), Magic Tea Party(R) and the Playskool(R) Playstore; sports toys such as 1-2-3 Baseball(TM) and My First In-Line Skates(TM), and woodboard puzzles utilizing various licensed and proprietary characters. New items for 1997 include Huff'n Puff Vacuum(TM), an expanded line of Magic Touch(TM) Talking Books and a line of products based on the new television series, Arthur(TM). The Hasbro Toy Group also offers activity items for both girls and boys including Wonder World(TM) and the Fantastic Sticker Factory(TM) as well as such classic lines as Play-Doh(R), Easy-Bake(R) Oven and the Spirograph(R) design toy. New offerings for 1997 include Nerf(R) Orf(TM), a lightweight compound which can be molded and also bounces, several products which can be used to make colorful paper creations, and Fantastic Cel Painter(TM). Its girls' items include the Raggedy Ann(R) and Raggedy Andy(R) line of rag dolls along with a large doll line which includes the Baby Go Bye Bye(TM), Juice 'n Cookies Baby Alive(R) and Baby All Gone(R). Included in its new introductions for 1997 are Baby Did It(TM) and Newborn Baby Check-Up(R) large dolls, several fashion dolls and accessories based on Sabrina, the Teenage Witch(TM) and Crystal's Secrets(TM) playsets. In boys' toys it offers a wide range of products, many of which are tied to entertainment properties, including Star Wars(R), and Batman(R) action figures and accessories. It also offers such classic properties as G.I. Joe(R), Starting Line-Up(R), The Transformers(R), the Tonka(R) line of trucks and vehicles, including the XRC(R) radio-controlled vehicles, the Nerf(R) line of soft action play equipment and the Larami(R) Super Soaker(TM) line of water products. New introductions for 1997 include action figures and accessories tied to the re-release of the Star Wars trilogy and the new Batman and Jurassic Park(R) movies, several collectible figurines of NASCAR drivers, as part of Starting Lineup, a Winner's Circle(TM) line of die cast vehicle assortments, including stock cars and dragsters, MicroVerse(TM), a series of miniature playsets, and several Classic Tonka Edition vehicles, celebrating the 50th anniversary of Tonka trucks. (ii) Hasbro Games Group ------------------ The Hasbro Games Group develops and markets games and puzzles under the Milton Bradley(R) and Parker Brothers(R) brands. Milton Bradley maintains a line of board, strategy and word games, skill and action games and travel games with a diversified line of more than 200 games and puzzles for children and adults. Its staple items include Battleship(R), The Game of Life(R), Scrabble(R), Chutes and Ladders(R), Candy Land(R), Trouble(R), Mousetrap(R), Operation(R), Hungry Hungry Hippos(R), Connect Four(R), Twister(R) and Big Ben(R) Puzzles. The Company also provides games and puzzles for the entire family, including such games as Yahtzee(R), Parcheesi(R), Aggravation(R), Jenga(R) and Scattergories(R) and Puzz 3-D(R), a series of three dimensional jigsaw puzzles. Items added to the Milton Bradley line for 1997 include Chicken Croquet(TM), Planet Hollywood(TM), The Game and a series of 3-D Sculpture Puzzles(TM). The Parker Brothers brand markets a full line of games for families, children and adults. Its classic line of family board games includes Monopoly(R), Clue(R), Sorry!(R), Risk(R), Boggle(R), Ouija(R) and Trivial Pursuit(R), some of which have been in the Parker Brothers' line for more than 50 years. The Company also markets traditional card games such as Mille Bornes(R), Rook(R) and Rack-O(R), games for adults such as Outburst(R) and Catch Phrase(R), a line of Playskool(R) Games for children, including Kanga- Banga Roo(TM) and Mr. Potato Head Pals(TM), as well as a line of puzzles. New to the Parker Brothers' line in 1997 are the Pooh Musical Hide 'N Seek Game, a Star Wars Limited Collectors Edition of Monopoly(R), a hand-held electronic version of Sorry! and a series of children's and adult puzzles using photographs and illustrations licensed from the National Geographic Society(TM). (iii) Hasbro Interactive ------------------ During 1995, Parker Brothers developed and marketed a CD-ROM version of Monopoly(R), allowing interactive gameplay on a computer as well as through the Internet. In 1996, this product was transferred to a newly formed subsidiary, Hasbro Interactive, Inc. which also developed and marketed, both within the United States and internationally, additional interactive CD-ROM games during 1996, including Risk, Battleship and, for younger children, Tonka Construction(TM). During 1997, it plans to introduce additional interactive products including Sorry!, Outburst and several existing titles in a format to allow play on the Sony(R) Playstation(TM). Hasbro Interactive also recently announced an agreement in principle with Microsoft Corporation under which many of its game players using Hasbro Interactive CD-ROM products will be able to participate in multi-player games free of charge via the Microsoft(R) Internet Gaming Zone. (iv) International ------------- The Company conducts its international operations through subsidiaries in more than 25 countries which sell a representative range of the global brands and products marketed in the United States together with some items which are sold only internationally. Throughout the world, the Company markets products sourced by a Hong Kong subsidiary working primarily through unrelated manufacturers in various Far East countries, and in the Americas it also markets products supplied by the Company's Mexican and U.S. manufacturing operations. Additionally, subsidiaries in Europe market products primarily manufactured by the Company in Ireland and Spain; those in Australia and New Zealand, products manufactured by the Company in New Zealand; and in Canada, certain products which it assembles in Canada from components supplied by the Company's U.S. and Mexican operations. The Company has small investments in joint ventures in India and the Peoples Republic of China which manufacture and sell products both to the Company and unaffiliated customers. The Company also has Hong Kong units which market directly to retailers a line of high quality, low priced toys, games and related products, primarily on a direct import basis. In addition, certain toy products are licensed to other toy companies to manufacture and sell product in certain international markets where the Company does not otherwise have a presence. Working Capital Requirements ---------------------------- Production has been financed historically by means of short-term borrowings which reach peak levels during September through November of each year when receivables also generally reach peak levels. The revenue pattern of the Company continues to shift with the second half of the year growing in significance to its overall business and, within that half, the fourth quarter becoming more prominent. The Company expects that this trend will continue. The toy business is also characterized by customer order patterns which vary from year to year largely because of differences each year 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. As a result, comparisons of unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of sales for that entire given year. 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. The Company's unshipped orders at March 2, 1997 and March 3, 1996 were approximately $215,000,000 and $170,000,000, respectively. Also, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. The backlog at any date in a given year can be affected by programs the Company may employ to induce its customers to place orders and accept shipments early in the year. This method is a general industry practice. The programs the Company is employing to promote sales in 1997 are not substantially different from those employed in 1996. As part of the traditional marketing strategies of the toy industry, many sales made early in the year are not due for payment until the fourth quarter or early in the first quarter of the subsequent year, thus making it necessary for the Company to borrow significant amounts pending these collections. During the year, the Company relies on internally generated funds and short-term borrowing arrangements, including commercial paper, to finance its working capital needs. Currently, the Company has available to it unsecured lines of credit, which it believes are adequate, of approximately $1,340,000,000 including a $440,000,000 revolving credit agreement with a group of banks which is also used as a back-up to commercial paper issued by the Company. Research and Development ------------------------ The Company's business is based to a substantial extent on the continuing development of new products and the redesigning of existing items for continuing market acceptance. In 1996, 1995 and 1994, approximately $152,487,000, $148,057,000 and $135,406,000, respectively, were incurred on activities relating to the development, design and engineering of new products and their packaging (including items brought to the Company by independent designers) and to the improvement or modification of ongoing products. Much of this work is performed by the Company's staff of designers, artists, model makers and engineers. In addition to its own staff, the Company deals with a number of independent toy designers for whose designs and ideas the Company competes with other toy manufacturers. Rights to such designs and ideas, when acquired by the Company, are usually exclusive under agreements requiring the Company to pay the designer a royalty on the Company's net sales of the item. These designer royalty agreements in some cases provide for advance royalties and minimum guarantees. The Company also produces a number of toys under trademarks and copyrights utilizing the names or likenesses of familiar movie, television and comic strip characters, for whose rights the Company competes with other toy manufacturers. Licensing fees are generally paid as a royalty on the Company's net sales of the item. Licenses for the use of characters are generally exclusive for specific products or product lines in specified territories. In many instances, advance royalties and minimum guarantees are required by character license agreements. Marketing and Sales ------------------- The Company's products are sold nationally and internationally to a broad spectrum of customers including wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and other retailers, large and small. The Company and its subsidiaries employ their own sales forces which account for nearly all of the sales of their products. Remaining sales are generated by independent distributors who sell the Company's products principally in areas of the world where the Company does not otherwise maintain a presence. The Company maintains showrooms in New York and selected other major cities world-wide as well as at most of its subsidiary locations. Although the Company has more than 2,000 customers in the United States and Canada, most of which are wholesalers, distributors or large chain stores, there has been significant consolidation at the retail level over the last several years. In other countries, the Company has in excess of 20,000 customers, many of which are individual retail stores. During 1996, sales to the Company's two largest customers represented 22% and 13% of consolidated net revenues. The Company advertises many of its toy and game products extensively on television. The Company generally advertises selected items in its product groups in a manner designed to promote the sale of other specific items in those product groups. Each year, the Company introduces its new products at its New York City showrooms at the time of the American International Toy Fair in February. It also introduces some of its products to major customers during the last half of the prior year. In 1996, the Company spent approximately $418,003,000 in advertising, promotion and marketing programs compared to $417,886,000 in 1995 and $397,094,000 in 1994. Manufacturing and Importing --------------------------- The Company manufactures its products in facilities within the United States and various other countries (see "Properties"). Most of its products are manufactured from basic raw materials such as plastic and cardboard which are readily available but which may be subject to significant fluctuations in price. The Company's manufacturing process includes injection molding, blow molding, metal stamping, printing, box making, assembly and wood processing. The Company purchases certain components and accessories used in its toys and some finished items from United States manufacturers as well as from manufacturers in the Far East, which is the largest manufacturing center of toys in the world, and other countries. The 1996 implementation of the General Agreement on Tariffs and Trade reduced or eliminated customs duties on many products imported by the Company. The Company believes that the manufacturing capacity of its facilities and the supply of components, accessories and completed products which it purchases from unaffiliated manufacturers is adequate to meet the foreseeable demand for the products which it markets. The Company's reliance on external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply for products it sells, should such changes be necessary. However, if the Company is prevented from obtaining products from a substantial number of its current Far East suppliers due to political, labor or other factors beyond its control, the Company's operations would be disrupted while alternative sources of product were secured. The imposition of trade sanctions by the United States against a class of products imported by the Company from, or the loss of "most favored nation" trading status by the People's Republic of China could significantly increase the cost of the Company's products imported into the United States from China. The Company makes its own tools and fixtures but purchases dies and molds principally from independent United States and international sources. Several of the Company's United States production departments operate on a two-shift basis and its molding departments operate on a continuous basis through most of the year. Competition ----------- The Company's business is highly competitive and it competes with several large and many small United States and international manufacturers. The Company is a worldwide leader in the design, manufacture and marketing of toys, games and infant care products. Employees --------- The Company employs approximately 13,000 persons worldwide, approximately 6,500 of whom are located in the United States. Trademarks, Copyrights and Patents ---------------------------------- The Company's products are protected, for the most part and in as many countries as practical, by registered trademarks, copyrights and patents to the extent that such protection is available and meaningful. The loss of such rights concerning any particular product would not have a material adverse effect on the Company's business, although the loss of such protection for a number of significant items might have such an effect. Government Regulation --------------------- The Company's toy products sold in the United States are subject to the provisions of the Consumer Product Safety Act (the "CPSA"), The Federal Hazardous Substances Act (the "FHSA") and the regulations promulgated thereunder. The CPSA empowers the Consumer Product Safety Commission (the "CPSC") to take action against hazards presented by consumer products, including the formulation and implementation of regulations and uniform safety standards. The CPSC has the authority to seek to declare a product "a banned hazardous substance" under the CPSA and to ban it from commerce. The CPSC can file an action to seize and condemn an "imminently hazardous consumer product" under the CPSA and may also order equitable remedies such as recall, replacement, repair or refund for the product. The FHSA provides for the repurchase by the manufacturer of articles which are banned. Similar laws exist in some states and cities within the United States and in Canada, Australia and Europe. The Company maintains laboratories which have testing and other procedures intended to maintain compliance with the CPSA and FHSA. Notwithstanding the foregoing, there can be no assurance that all of the Company's products are or will be hazard free. While the Company neither has had any material product recalls nor knows of any currently, should any such problem arise, it could have an effect on the Company depending on the product and could affect sales of other products. The Children's Television Act of 1990 and the rules promulgated thereunder by the United States Federal Communications Commission as well as the laws of certain countries place certain limitations on television commercials during children's programming. The Company maintains programs to comply with various United States federal, state, local and international requirements relating to the environment, plant safety and other matters. Forward-Looking Information --------------------------- From time to time, Hasbro may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements are inherently subject to risks and uncertainties, many of which are known by, or self-evident to, the investing public. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause its actual results and experience to differ materially from the anticipated results or other expectations expressed in its forward- looking statements. The risks and uncertainties that may affect the operations, performance, development and results of Hasbro's business include the following: 1) Hasbro's dependence on its timely development and introduction of new products and the acceptance, by both the customer and consumer, of new and continuing products; 2) The impact of competition on revenue and margins; 3) The impact of differing economic conditions in Hasbro's various international markets as well as the effect of currency fluctuations on reportable income; 4) The continuing trend of increased concentration of Hasbro's revenues in the second half and fourth quarter of the year, together with the increased reliance by retailers on quick response inventory management practices, increases the risk of the Company's underproduction of popular items, overproduction of less popular items and failure to achieve tight and compressed shipping schedules; and 5) Other risks and uncertainties as are or may be detailed from time to time in Hasbro's public announcements and filings with the Securities and Exchange Commission. (c) Financial Information About International and United States ----------------------------------------------------------- Operations and Export Sales --------------------------- The information required by this item is included in note 16 of Notes to Consolidated Financial Statements in Exhibit 13 to this Report and is incorporated herein by reference. ITEM 2. PROPERTIES ---------- Lease Square Type of Expiration Location Use Feet Possession Dates - - -------- --- ------ ---------- ---------- Rhode Island - - ------------ Pawtucket Executive, Sales & Marketing Offices & Product Development 343,000 Owned -- Pawtucket Administrative Office 23,000 Owned -- East Providence Administrative Office 120,000 Leased 1999 Central Falls Manufacturing 261,500 Owned -- Massachusetts - - ------------- East Longmeadow Office, Manufacturing & Warehouse 1,147,500 Owned -- East Longmeadow Office, Manufacturing & Warehouse 254,400 Owned -- East Longmeadow Warehouse 500,000 Leased 1998 Beverly Office 100,000 Owned -- New Jersey - - ---------- Northvale Warehouse 75,000 Leased 2002 Mt. Laurel Office 11,000 Leased 1997 New York - - -------- New York Office & Showroom 70,300 Leased 2000 New York Offices & Showrooms 32,300 Leased 1999 Ohio - - ---- Cincinnati Office 161,000 Leased 2007 Cincinnati Warehouse 33,000 Leased 1999 Pennsylvania - - ------------ Allentown Warehouses 574,500 Leased 1997 Lease Square Type of Expiration Location Use Feet Possession Dates - - -------- --- ------ ---------- ---------- South Carolina - - -------------- Easley Manufacturing 31,500 Leased 1997 Easley Manufacturing 75,000 Owned -- Easley Manufacturing 29,000 Owned -- Texas - - ----- El Paso Manufacturing & Warehouse 373,000 Owned -- El Paso Manufacturing & Warehouse 696,100 Leased 1998 El Paso Warehouses 455,000 Leased 1997 Vermont - - ------- Fairfax Manufacturing 43,000 Owned -- Washington - - ---------- Seattle Office & Warehouse 125,100 Leased(1) 1997 Australia - - --------- Lidcombe Office & Warehouse 161,400 Leased 2002 Eastwood Office 16,900 Leased 1997 Austria - - ------- Vienna Office 2,500 Leased 1997 Belgium - - ------- Brussels Office & Showroom 20,700 Leased 1997 Canada - - ------ Montreal Office, Manufacturing & Showroom 133,900 Leased 1997 Mississauga Sales Office & Showroom 16,300 Leased 1998 Montreal Warehouse 88,100 Leased 1997 Peoples Republic of China - - ------------------------- Guangzhou Warehouse 9,600 Leased 1997 Denmark - - ------- Glostrup Office 9,200 Leased 1999 Lease Square Type of Expiration Location Use Feet Possession Dates - - -------- --- ------ ---------- ---------- England - - ------- Uxbridge Office & Showroom 94,500 Leased 2013 Castlegate Office & Manufacturing 400,000 Leased 1997 Paddock Wood Office 30,000 Leased 1997 Finland - - ------- Helsinki Office 8,000 Leased 1998 France - - ------ Le Bourget du Lac Office, Manufacturing & Warehouse 108,300 Owned -- Savoie Technolac Office 33,500 Owned -- Creutzwald Warehouse 108,700 Owned -- Gresy Warehouse 265,000 Leased 1997 Germany - - ------- Dietzenbach Office 39,400 Leased 1998 Soest Office & Warehouse 156,300 Owned -- Greece - - ------ Athens Office & Warehouse 176,500 Leased 1997 Hong Kong - - --------- Kowloon Office 18,600 Leased 2000 Kowloon Office 16,100 Leased 2000 Shatkin Office & Warehouse 17,800 Leased 1997 Hungary - - ------- Budapest Office 6,300 Leased 1997 Ireland - - ------- Waterford Office, Manufacturing & Warehouse 244,400 Owned -- Israel - - ------ Jerusalem Office 2,700 Leased 1998 Italy - - ----- Milan Office & Showroom 12,100 Leased 2002 Lease Square Type of Expiration Location Use Feet Possession Dates - - -------- --- ------ ---------- ---------- Japan - - ----- Tokyo Office 7,200 Leased 1998 Malaysia - - ------- Selangor Darul Ehsan Office 6,800 Leased 1997 Mexico - - ------ Tijuana Office & Manufacturing 143,800 Leased 1998 Tijuana Manufacturing 205,000 Leased 1998 Tijuana Warehouse 143,800 Leased 1998 Reyna Office 16,100 Leased 2001 Juarez Manufacturing 169,500 Owned -- Venados Warehouses 118,100 Leased 1999 The Netherlands - - --------------- Ter Apel Office & Warehouse 139,300 Owned -- Ter Apel Warehouse 39,700 Leased 1997 New Zealand - - ----------- Auckland Office, Manufacturing & Warehouse 110,900 Leased 2005 Norway - - ------ Asker Office 6,500 Leased 1999 Poland - - ------ Warsaw Office 5,000 Leased 1998 Portugal - - -------- Estoril-Lisboa Office 2,900 Leased 1997 Singapore - - --------- Singapore Office & Warehouse 9,300 Leased 1997 Spain - - ----- Valencia Office, Manufacturing & Warehouse 115,100 Leased 1999 Valencia Office 27,600 Leased 2011 Valencia Manufacturing & Warehouse 201,900 Leased 2011 Valencia Warehouse 48,100 Leased 1997 Lease Square Type of Expiration Location Use Feet Possession Dates - - -------- --- ------ ---------- ---------- Sweden - - ------ Vosby Office 7,400 Leased 1998 Switzerland - - ----------- Mutschellen Office & Warehouse 23,400 Leased 1997 Taiwan - - ------ TPE County Warehouse 14,400 Leased 1998 Wales - - ----- Newport Warehouse 76,000 Leased 2003 Newport Warehouse 52,000 Owned -- (1) In addition, at this location the Port of Seattle operates a 400,000 square foot distribution facility pursuant to an agreement with the Company. In addition to the above listed facilities, the Company either owns or leases various other properties approximating 150,000 square feet which are utilized in its operations. The Company also either owns or leases an aggregate of approximately 1,000,000 square feet not currently being utilized in its operations. Most of these properties are being leased, subleased or offered for sublease or sale. A portion of this space not used in the Company's operations represent facilities used by Tonka Corporation units prior to its acquisition by the Company. The foregoing properties consist, in general, of brick, cinder block or concrete block buildings which the Company believes are in good condition and well maintained. ITEM 3. LEGAL PROCEEDINGS ----------------- The Company is party to certain legal proceedings, substantially involving routine litigation incidental to the Company's business, none of which, individually or in the aggregate, is deemed to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None. EXECUTIVE OFFICERS OF THE REGISTRANT - - ------------------------------------ The following persons are the executive officers of the Company and its subsidiaries and divisions. Such executive officers are elected annually. The position and office listed below are the principal position(s) and office(s) held by such person with the Company, subsidiary or divisions employing such person. The persons listed below generally also serve as officers and directors of the Company's various subsidiaries at the request and convenience of the Company. Period Serving in Current Name Age Position and Office Held Position - - ---- --- ------------------------ ---------- Alan G. Hassenfeld 48 Chairman of the Board, President and Chief Executive Officer Since 1989 Harold P. Gordon (1) 59 Vice Chairman Since 1995 George R. Ditomassi, Jr. (2) 62 Executive Vice President and President, Global Innovation Since 1996 Adam Klein (3) 45 Executive Vice President, Global Strategy and Development Since 1996 John T. O'Neill 52 Executive Vice President and Chief Financial Officer Since 1989 Alfred J. Verrecchia(4) 54 Executive Vice President and President, Global Operations Since 1996 Virginia H. Kent (5) 42 President, Global Brands and Product Development Since 1996 E. David Wilson (6) 59 President, Hasbro Americas Since 1996 Dan D. Owen (7) 48 President, Hasbro, USA Since 1996 Richard B. Holt 55 Senior Vice President and Controller Since 1992 Cynthia S. Reed (8) 41 Senior Vice President and General Counsel Since 1995 Phillip H. Waldoks (9) 44 Senior Vice President - Corporate Legal Affairs and Secretary Since 1995 Russell L. Denton 52 Vice President and Treasurer Since 1989 (1) Prior thereto, Partner, Stikeman, Elliott (law firm). (2) Prior thereto, Chief Operating Officer, Games and International. (3) Prior thereto, President, Klein & Co. (consulting firm specializing in managing strategic change); Chief Executive Officer of Bowmat Ltd. (a South African manufacturer and distributor of construction related materials) from 1992 through 1993. (4) Prior thereto, Chief Operating Officer, Domestic Toy Operations. (5) Prior thereto, General Manager, Girls/Boys/Nerf, from 1994 to 1996; prior thereto, Senior Vice President, Marketing, Kenner, from 1993 to 1994; prior thereto, Vice President, Marketing, Kenner. (6) Prior thereto, President Hasbro Games Group, from 1995 to 1996; prior thereto, President, Milton Bradley. (7) Prior thereto, President, Hasbro Toy Group, from 1994 to 1996; prior thereto, President, Playskool. (8) Prior thereto, Vice President - Legal. (9) Prior thereto, Senior Vice President - Corporate Legal Affairs. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED ----------------------------------------------------- STOCKHOLDER MATTERS ------------------- The information required by this item is included in Market for the Registrant's Common Equity and Related Stockholder Matters in Exhibit 13 to this Report and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA ----------------------- The information required by this item is included in Selected Financial Data in Exhibit 13 to this Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS ------------------------- The information required by this item is included in Management's Review in Exhibit 13 to this Report and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The information required by this item is included in Financial Statements and Supplementary Data in Exhibit 13 to this Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None. PART III ITEMS 10, 11, 12 and 13. The information required by these items is included in registrant's definitive proxy statement for the 1997 Annual Meeting of Shareholders and is incorporated herein by reference, except that the sections under the headings (a) "Comparison of Five Year Cumulative Total Shareholder Return Among Hasbro, S&P 500 and Russell 1000 Consumer Discretionary Economic Sector" and accompanying material and (b) "Report of the Compensation and Stock Option Committee of the Board of Directors" in the definitive proxy statement shall not be deemed "filed" with the Securities and Exchange Commission or subject to Section 18 of the Securities Exchange Act of 1934. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) Financial Statements, Financial Statement Schedules and Exhibits ---------------------------------------------------------------- (1) Financial Statements -------------------- Included in PART II of this report: Independent Auditors' Report Consolidated Balance Sheets at December 29, 1996 and December 31, 1995 Consolidated Statements of Earnings for the Three Fiscal Years Ended in December 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Three Fiscal Years Ended in December 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Three Fiscal Years Ended in December 1996, 1995 and 1994 Notes to Consolidated Financial Statements (2) Financial Statement Schedules ----------------------------- Included in PART IV of this Report: Report of Independent Certified Public Accountants on Financial Statement Schedule For the Three Fiscal Years Ended in December 1996, 1995 and 1994: Schedule II - Valuation and Qualifying Accounts and Reserves Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. (3) Exhibits -------- The Company will furnish to any shareholder, upon written request, any exhibit listed below upon payment by such shareholder to the Company of the Company's reasonable expenses in furnishing such exhibit. Exhibit - - ------- 3. Articles of Incorporation and Bylaws (a) Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit (c)(2) to the Company's Current Report on Form 8-K, dated July 15, 1993, File No. 1-6682.) (b) Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (3) to the Company's Current Report on Form 8-K, dated February 16, 1996, File No. 1-6682.) 4. Instruments defining the rights of security holders, including indentures. (a) Revolving Credit Agreement, dated as of June 22, 1992, among the Company, certain banks (the "Banks"), and The First National Bank of Boston, as agent for the Banks (the "Agent"). (Incorporated by reference to Exhibit 4(a) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (b) Subordination Agreement, dated as of June 22, 1992, among the Company, certain subsidiaries of the Company, and the Agent. (Incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (c) Amendment No. 1, dated as of April 1, 1994, to Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended March 27, 1994, File No. 1-6682.) (d) Amendment No. 2, dated as of May 1, 1995, to the Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended April 2, 1995, File No. 1-6682.) (e) Amendment No. 3, dated as of May 10, 1996, to the Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended March 31, 1996, File No. 1-6682.) 10. Material Contracts (a) Lease between Hasbro Canada Inc. (formerly named Hasbro Industries (Canada) Ltd.) and Central Toy Manufacturing Co. ("Central Toy"), dated December 23, 1976. (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-14, File No. 2-92550.) (b) Lease between Hasbro Canada Inc. and Central Toy, together with an Addendum thereto, each dated as of May 1, 1987. (Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (c) Agreement between the Company and Bear, Stearns & Co. Inc., dated as of January 16, 1996.(Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, File No. 1-6682.) Executive Compensation Plans and Arrangements (d) Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 2-78018.) (e) Amendment No. 1 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 28, 1986, File No. 1-6682.) (f) Amendment No. 2 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (g) Amendment No. 3 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1988, File No. 1-6682.) (h) Amendment No. 4 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (i) Form of Incentive Stock Option Agreement for incentive stock options. (Incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (j) Form of Non Qualified Stock Option Agreement under the Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1988, File No. 1-6682.) (k) Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-14, File No. 2-92550.) (l) Amendment No. 1 to Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 28, 1986, File No. 1-6682.) (m) Amendment No. 2 to Non Qualified Stock Option Plan. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1987 Annual Meeting of Shareholders, File No. 1-6682.) (n) Amendment No. 3 to Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (o) Form of Stock Option Agreement (For Employees) under the Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (p) 1992 Stock Incentive Plan (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1992 Annual Meeting of Shareholders, File No. 1-6682.) (q) Form of Stock Option Agreement (For Employees) under the 1992 Stock Incentive Plan and the Stock Incentive Performance Plan. (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (r) Form of Stock Option Agreement (For Participants in the Long Term Incentive Program) under the 1992 Stock Incentive Plan and the Stock Incentive Performance Plan. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (s) Form of Employment Agreement between the Company and nine executive officers of the Company. (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (t) Hasbro, Inc. Retirement Plan for Directors. (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 30, 1990, File No. 1-6682.) (u) Form of Director's Indemnification Agreement. (Incorporated by reference to Appendix B to the Company's definitive proxy statement for its 1988 Annual Meeting of Shareholders, File No. 1-6682.) (v) Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors.(Incorporated by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 26, 1993, File No. 1-6682.) (w) Hasbro, Inc. Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, File No. 1-6682.) (x) Form of Stock Option Agreement for Non-Employee Directors under the Hasbro, Inc. Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1994, File No. 1-6682.) (y) Hasbro, Inc. Senior Management Annual Performance Plan. (Incorporated by reference to Appendix B to the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, File No. 1-6682.) (z) Hasbro, Inc. Stock Incentive Performance Plan. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, File No. 1-6682.) (aa) Employment Agreement, dated as of January 1, 1996, between the Company and Harold P. Gordon. (Incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, File No. 1-6682.) (bb) Severance And Settlement Agreement And Release, dated as of December 20, 1995, and addendum thereto, between the Company and Dan D. Owen. (Incorporated by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, File No. 1-6682.) (cc) Amendment, effective as of January 1, 1997 to Severance and Settlement Agreement and Release between the Company and Dan D. Owen. (dd) Employee Non-Qualified Stock Plan. 11. Statement re computation of per share earnings 12. Statement re computation of ratios 13. Selected information contained in Annual Report to Shareholders 22. Subsidiaries of the registrant 24. Consents of experts and counsel (a) Consent of KPMG Peat Marwick LLP 27. Financial data schedule The Company agrees to furnish the Securities and Exchange Commission, upon request, a copy of each agreement with respect to long-term debt of the Company, the authorized principal amount of which does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. (b) Reports on Form 8-K ------------------- A Current Report on Form 8-K dated February 6, 1997 was filed to announce the Company's results for the quarter and year ended December 29, 1996. Consolidated statements of earnings (without notes) for the quarter and year ended December 29, 1996 and December 31, 1995 and consolidated condensed balance sheets (without notes) as of said dates were also filed. (c) Exhibits -------- See (a)(3) above (d) Financial Statement Schedules ----------------------------- See (a)(2) above INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Hasbro, Inc.: Under date of February 5, 1997, we reported on the consolidated balance sheets of Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995 and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the fiscal years in the three-year period ended December 29, 1996, as contained in the 1996 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10- K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule listed in Item 14 (a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ KPMG Peat Marwick LLP Providence, Rhode Island February 5, 1997 SCHEDULE II HASBRO, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Fiscal Years Ended in December (Thousands of Dollars) Provision Balance at Charged to Write-Offs Balance Beginning of Costs and Other And at End of Year Expenses Additions Other (a) Year ------------ ---------- ------------ ----------- --------- Valuation accounts deducted from assets to which they apply - for doubtful accounts receivable: 1996 $48,800 5,834 - (8,034) $46,600 ====== ====== ====== ====== ====== 1995 $51,000 5,860 - (8,060) $48,800 ====== ====== ====== ====== ====== 1994 $54,200 5,120 - (8,320) $51,000 ====== ====== ====== ====== ====== (a) Includes write-offs, recoveries of previous write-offs and translation adjustments. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By: /s/ Alan G. Hassenfeld Date: March 28, 1997 ------------------------- --------------- Alan G. Hassenfeld Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - - --------- ----- ---- /s/ Alan G. Hassenfeld - - ---------------------------- Chairman of the Board, March 28, 1997 Alan G. Hassenfeld President, Chief Executive Officer and Director (Principal Executive Officer) /s/ John T. O'Neill - - ---------------------------- Executive Vice President March 28, 1997 John T. O'Neill and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Alan R. Batkin - - ---------------------------- Director March 28, 1997 Alan R. Batkin /s/ George R. Ditomassi, Jr. - - ---------------------------- Director March 28, 1997 George R. Ditomassi, Jr. /s/ Harold P. Gordon - - ---------------------------- Director March 28, 1997 Harold P. Gordon /s/ Alex Grass - - ---------------------------- Director March 28, 1997 Alex Grass /s/ Sylvia K. Hassenfeld - - ---------------------------- Director March 28, 1997 Sylvia K. Hassenfeld /s/ Marie-Josee Kravis - - ---------------------------- Director March 28, 1997 Marie-Josee Kravis - - ---------------------------- Director March , 1997 Claudine B. Malone - - ---------------------------- Director March , 1997 Morris W. Offit /s/ Norma T. Pace - - ---------------------------- Director March 28, 1997 Norma T. Pace /s/ E. John Rosenwald, Jr. - - ---------------------------- Director March 28, 1997 E. John Rosenwald, Jr. /s/ Carl Spielvogel - - ---------------------------- Director March 28, 1997 Carl Spielvogel /s/ Henry Taub - - ---------------------------- Director March 28, 1997 Henry Taub /s/ Preston Robert Tisch - - ---------------------------- Director March 28, 1997 Preston Robert Tisch - - ---------------------------- Director March , 1997 Paul Wolfowitz /s/ Alfred J. Verrecchia - - ---------------------------- Director March 28, 1997 Alfred J. Verrecchia HASBRO, INC. Annual Report on Form 10-K for the Year Ended December 29, 1996 Exhibit Index Exhibit - - ------- 3. Articles of Incorporation and Bylaws (a) Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit (c)(2) to the Company's Current Report on Form 8-K, dated July 15, 1993, File No. 1-6682.) (b) Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (3) to the Company's Current Report on Form 8-K, dated February 16, 1996, File No. 1-6682.). 4. Instruments defining the rights of security holders, including indentures (a) Revolving Credit Agreement, dated as of June 22, 1992, among the Company, certain banks (the "Banks"), and The First National Bank of Boston, as agent for the Banks (the "Agent"). (Incorporated by reference to Exhibit 4(a) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (b) Subordination Agreement, dated as of June 22, 1992, among the Company, certain subsidiaries of the Company, and the Agent. (Incorporated by reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (c) Amendment No. 1, dated as of April 1, 1994, to Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended March 27, 1994, File No. 1-6682.) (d) Amendment No. 2, dated as of May 1, 1995, to Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended April 2, 1995, File No. 1-6682.) (e) Amendment No. 3, dated as of May 10, 1996, to Revolving Credit Agreement among the Company, the Banks and the Agent. (Incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the Period Ended March 31, 1996, File No. 1-6682.) 10. Material Contracts (a) Lease between Hasbro Canada Inc. (formerly named Hasbro Industries (Canada) Ltd.) and Central Toy Manufacturing Co. ("Central Toy"), dated December 23, 1976. (Incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-14, File No. 2-92550.) (b) Lease between Hasbro Canada Inc. and Central Toy, together with an Addendum thereto, each dated as of May 1, 1987. (Incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (c) Agreement between the Company and Bear, Stearns & Co. Inc., dated as of January 16, 1996. Incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996, File No. 1-6682.) Executive Compensation Plans and Arrangements (d) Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. 2-78018.) (e) Amendment No. 1 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 28, 1986, File No. 1-6682.) (f) Amendment No. 2 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (g) Amendment No. 3 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1988, File No. 1-6682.) (h) Amendment No. 4 to Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (i) Form of Incentive Stock Option Agreement for incentive stock options. (Incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1987, File No. 1-6682.) (j) Form of Non Qualified Stock Option Agreement under the Employee Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1988, File No. 1-6682.) (k) Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-14, File No. 2-92550.) (l) Amendment No. 1 to Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 28, 1986, File No. 1-6682.) (m) Amendment No. 2 to Non Qualified Stock Option Plan. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1987 Annual Meeting of Shareholders, File No. 1-6682.) (n) Amendment No. 3 to Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (o) Form of Stock Option Agreement (For Employees) under the Non Qualified Stock Option Plan. (Incorporated by reference to Exhibit 10(t) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (p) 1992 Stock Incentive Plan (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1992 Annual Meeting of Shareholders, File No. 1-6682.) (q) Form of Stock Option Agreement (For Employees) under the 1992 Stock Incentive Plan and the Stock Incentive Performance Plan. (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (r) Form of Stock Option Agreement (For Participants in the Long Term Incentive Program) under the 1992 Stock Incentive Plan and the Stock Incentive Performance Plan. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 27, 1992, File No. 1-6682.) (s) Form of Employment Agreement between the Company and nine executive officers of the Company. (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1989, File No. 1-6682.) (t) Hasbro, Inc. Retirement Plan for Directors. (Incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 30, 1990, File No. 1-6682.) (u) Form of Director's Indemnification Agreement. (Incorporated by reference to Appendix B to the Company's definitive proxy statement for its 1988 Annual Meeting of Shareholders, File No. 1-6682.) (v) Hasbro, Inc. Deferred Compensation Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 26, 1993, File No. 1-6682.) (w) Hasbro, Inc. Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, File No. 1-6682.) (x) Form of Stock Option Agreement for Non-Employee Directors under the Hasbro, Inc. Stock Option Plan for Non-Employee Directors. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 25, 1994, File No. 1-6682.) (y) Hasbro, Inc. Senior Management Annual Performance Plan. (Incorporated by reference to Appendix B to the Company's definitive proxy statement for its 1994 Annual Meeting of Shareholders, File No. 1-6682.) (z) Hasbro, Inc. Stock Incentive Performance Plan. (Incorporated by reference to Appendix A to the Company's definitive proxy statement for its 1995 Annual Meeting of Shareholders, File No. 1-6682.) (aa) Employment Agreement, dated as of January 1, 1996, between the Company and Harold P. Gordon. (Incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, File No. 1-6682.) (bb) Severance And Settlement Agreement And Release, dated as of December 20, 1995, and addendum thereto, between the Company and Dan D. Owen. (Incorporated by reference to Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1995, File No. 1-6682.) (cc) Amendment, effective as of January 1, 1997 to Severance and Settlement agreement and Release between the Company and Dan D. Owen. (dd) Employee Non-Qualified Stock Plan. 11. Statement re computation of per share earnings 12. Statement re computation of ratios 13. Selected information contained in Annual Report to Shareholders 22. Subsidiaries of the registrant 24. Consents of experts and counsel (a) Consent of KPMG Peat Marwick LLP 27. Financial data schedule

EXHIBIT 10 (cc) Amendment, Effective as of January 1, 1997, to Severance and Settlement Agreement and Release, dated December 20, 1995 Amendment, effective as of the 1st day of January, 1997, to Severance and Settlement Agreement and Release, dated December 20, 1995, as clarified by letter agreement dated March 28, 1996 (collectively, the "Agreement") between Hasbro, Inc. (the "Company") and Dan D. Owen (the "Employee"). WHEREAS, in light of certain organizational changes at the Company affecting the Employee, the Company and the Employee wish to amend the terms of the Employee's severance arrangements as set forth in the Agreement; NOW, THEREFORE, in consideration of the promises and conditions set forth herein, the sufficiency of which is hereby acknowledged, the Company and the Employee agree to amend the Agreement as follows: 1. The fourth sentence of paragraph 1 of the Agreement is hereby replaced in its entirety with the following two sentences: "In addition, all stock options exercisable on the date of (a) the involuntary termination by the Company without cause of the Employee's employment or (b) the constructive termination of the Employee's employment shall be exercisable for a period of six months from the date of such termination, notwithstanding anything to the contrary in the Employee's stock option agreements with the Company. Notwithstanding anything to the contrary in Employee's stock option agreements with the Company, all stock options (other than premium-priced stock options granted under the Company's long term incentive program) that would become vested within six months of (a) the involuntary termination by the Company without cause of the Employee's employment or (b) the constructive termination of the Employee's employment shall continue to vest as if Employee were employed for a period of six months after such termination (the "Post-Termination Vested Options"), such Post-Termination Vested Options to be exercisable by the Employee for three months after such vesting in accordance with the terms of this sentence." 2. The seventh sentence of paragraph 1 of the Agreement is amended to read in its entirety as follows: "For purposes of this Agreement, a constructive termination of the Employee's employment shall occur if the Employee voluntarily terminates employment on or prior to June 30, 1998." 3. The following shall be added as a new paragraph 15 to the Agreement: 15. "Termination". This Agreement and the obligations of the Company and the Employee under this Agreement (other than the obligations of the Employee under paragraph 4 of this Agreement, which shall survive the termination of this Agreement) shall terminate if an involuntary termination by the Company without cause of the Employee's employment or a constructive termination of the Employee's employment shall not have occurred by June 30, 1998." 4. The Employee acknowledges that he has been given twenty-one (21) days to consider this Amendment and that the Company advised him to consult with an attorney of his own choosing prior to signing this Amendment. The Employee may revoke this Amendment for a period of seven (7) days after the execution of this Amendment, and the Amendment shall not be effective or enforceable until the expiration of this seven (7) day revocation period. 5. The Employee affirms that no other promises or agreements of any kind have been made to or with him by any person or entity whatsoever to cause him to sign this Agreement, and that he fully understands the meaning and intent of this Agreement. The Employee states and represents that he has had an opportunity to fully discuss and review the terms of this Amendment with an attorney. The Employee further states and represents that he has carefully read this Amendment; understands the contents herein, freely and voluntarily assents to all of the terms and conditions hereof, and signs his name of his own free act. IN WITNESS WHEREOF, the parties have executed this Amendment on the dates written below. HASBRO, INC. By: /s/ Harold P. Gordon Date: 2-4-97 --------------------- ------ Vice Chairman By: /s/ Dan D. Owen Date: 2-3-97 --------------------- ------ Employee

EXHIBIT 10 (dd) HASBRO, INC. EMPLOYEE NON-QUALIFIED STOCK PLAN 1. Purpose ------- The purpose of the Employee Non-Qualified Stock Plan (the "Plan") is to advance the interests of Hasbro, Inc. ("Hasbro") and to increase shareholder value by providing Employees with a proprietary interest in the growth and performance of Hasbro and with incentives for continued service with Hasbro, its subsidiaries and affiliates. 2. Term ---- The Plan shall be effective upon approval thereof by the Compensation and Stock Option Committee (the "Committee") of the Board of Directors of Hasbro (the "Board") on February 13, 1997 and shall remain in effect until December 31, 2002 unless extended or sooner terminated by the Committee or the Board. After termination of the Plan, no future awards may be granted but previously made awards shall remain outstanding in accordance with their applicable terms and conditions and the terms and conditions of the Plan. 3. Plan Administration ------------------- The Committee shall be responsible for administering the Plan. The Committee shall be comprised of two or more members of the Board who qualify to administer this Plan as contemplated by Rule 16b-3 or any successor rule ("Rule 16b-3") under the Securities Exchange Act of 1934 (the "1934 Act"). The Committee shall have full and exclusive power to interpret, construe and implement the Plan and any rules, regulations, guidelines or agreements adopted hereunder and to adopt, alter and repeal such rules, regulations and guidelines for carrying out the Plan as it may deem necessary or proper. These powers shall include, but not be limited to, (i) determination of the type or types of awards to be granted under the Plan; (ii) determination of the terms and conditions of any awards under the Plan (including, but not limited to, the option or award price, any vesting restrictions or forfeiture provisions (including, but not limited to, the power to accelerate any vesting restrictions and waive, in whole or in part, any forfeiture provisions) and the term of the award (including, but not limited to, the power to extend the term of any award)); (iii) determination of whether to adjust other terms and conditions, at any time or from time to time, of any award, including with respect to performance goals and measurements applicable to performance-based awards pursuant to the terms of the Plan; (iv) determination of to what extent and under what circumstances shares and other amounts payable with respect to an award shall be deferred; (v) determination of whether, to what extent and under what circumstances awards may be settled, paid or exercised in cash, shares, other securities, or other awards, or other property, or canceled, forfeited or suspended; (vi) adoption of modifications, amendments, procedures, subplans and the like as are necessary to comply with provisions of the laws of other countries in which the Company may operate in order to assure the viability of awards granted under the Plan and to enable participants employed in such other countries to receive advantages and benefits under the Plan and such laws; (vii) subject to the rights of participants, modification, change, amendment or cancellation of any award to correct an administrative error; and (viii) taking any other action the Committee deems necessary or desirable for the administration of the Plan. In making any determination under the Plan, the Committee shall be entitled to rely on reports, opinions or statements of officers or employees of the Company as well as those of counsel, public accountants and other professional or expert persons. All determinations, interpretations, and other decisions under or with respect to the Plan or any award by the Committee shall be final, conclusive and binding upon all parties, including without limitation, the Company, any Employee and any other person with rights to any award under the Plan and no member of the Committee shall be subject to individual liability with respect to the Plan. The Committee shall act only by a majority of its members then in office, except the Committee may delegate to any one or more directors of the Company who are also officers of the Company any or all of its duties, powers and authority under the Plan pursuant to such conditions or limitations as the Committee may establish, except that only the Committee may make any determinations regarding Employees who are subject to Section 16 of the 1934 Act. 4. Eligibility ----------- Any Employee of the Company shall be eligible to receive an award under the Plan, as the Committee in its sole discretion shall determine from time to time, except that no director who is not employed by the Company shall be eligible to receive any awards under the Plan. In this Plan, the term "Employee" shall have the same definition as that set forth in General Instruction A to Form S-8 promulgated under the Securities Act of 1933, as amended, and the term "Company" shall mean Hasbro and any entity that is directly or indirectly controlled by Hasbro. 5. Shares of Stock Subject to the Plan ----------------------------------- The aggregate number and class of shares which may be made the subject of awards granted pursuant to the Plan is Four Million (4,000,000) shares of common stock of Hasbro, par value $.50 per share (the "Common Stock"), subject in each case to adjustment as provided in Section 6, provided, however, that the number of shares which may be made the subject of awards granted (a) in any one year may not exceed more than 5% of the outstanding Common Stock and (b) in any five year period may not exceed 10% of the outstanding Common Stock. Such shares may be made available from authorized and unissued shares of Common Stock or shares of Common Stock held in Hasbro's treasury. If any shares subject to an award are forfeited, cancelled or reacquired by the Company (including, but not limited to, any stock option or stock appreciation right ("SAR") which is not exercised in full) and the participant did not receive any benefits of ownership in such shares (other than voting rights or dividends that may have accumulated but due to forfeiture, cancellation or reacquisition were never realized by the participant), shares subject to such award shall again be available for distribution in connection with awards under the Plan. In addition, where an SAR or other award is settled in cash or any form other than shares, then the shares covered by these settlements shall not be deemed issued and shall remain available for issuance under the Plan. Notwithstanding anything in this Plan to the contrary, any shares that are issued by the Company, and any awards that are granted by, or become obligations of, the Company, through the assumption by the Company of, or in substitution for, outstanding awards previously granted by an acquired company shall not be counted against the shares available for issuance under the Plan and the terms and conditions of any such awards shall be the original terms and conditions thereof as adjusted by or pursuant to the acquisition agreement. 6. Adjustments and Reorganizations ------------------------------- The Committee may make such adjustments as it deems appropriate to meet the intent of the Plan in the event of changes that impact the Company's share price or share status, provided that any such actions are consistently and equitably applicable to all affected participants. In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders, or any other change affecting shares, such adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change shall be made with respect to (i) the aggregate number of shares that may be issued under the Plan; (ii) the number of shares subject to awards under the Plan; and/or (iii) the price per share for any outstanding stock options, SARs and other awards under the Plan. 7. Awards ------ The Committee shall determine the type or types of award(s) to be made to each participant under the Plan and shall approve the terms and conditions governing these awards in accordance with Section 12. Awards may include but are not limited to those listed in this Section 7. Awards may be granted singly, in combination or in tandem (i.e. so that the settlement or payment of one automatically reduces or cancels the other). Awards may also be made in combination or in tandem with, in replacement of, as alternatives to, or as the payment form for, grants or rights under any other employee or compensation plan of the Company, including the plan of any acquired entity. (a) "Stock Option" is a grant of a right to purchase a specified number of shares of Common Stock during a specified period at a specified or determinable price. The purchase price of each option shall be not less than the Fair Market Value of the Common Stock subject to the stock option on the date of grant. A stock option may be exercised in whole or in installments, which may be cumulative. All stock options shall be non-qualified options. The price at which shares of Common Stock may be purchased under a stock option shall be paid in full at the time of the exercise in cash or such other method as provided by the Committee at the time of grant in the award agreement, including, but not limited to, tendering Common Stock or surrendering a stock award, valued in each case, at Fair Market Value on the date of tender or surrender, surrendering a cash award, or any combination thereof. (b) "Stock Appreciation Right" is a right to receive a payment, in cash and/or Common Stock, as determined by the Committee, equal to all or part of the excess of the Fair Market Value of a specified number of shares of Common Stock on the date the SAR is exercised over the exercise or designated price of the SAR as set forth in the applicable award agreement, which shall not be less than the Fair Market Value of the Common Stock subject to the stock appreciation right on the date of grant. The Committee, in its discretion, may grant a participant the right to receive from the Company all or a portion of the tax liability incurred or to be incurred by a participant as a result of awards made to or settled by him or her hereunder on such terms and conditions as the Committee may determine. (c) "Stock Award' is an award made in shares of Common Stock or denominated in units of shares of Common Stock. All or part of any stock award may be subject to conditions established by the Committee, and set forth in the award agreement, which may include, but are not limited to, continuous service with the Company, achievement of specific business objectives, and other measurements of individual, business unit or Company performance. (d) "Cash Award" is an award denominated in cash that would constitute a "derivative security", for purposes of Rule 16b-3, if not awarded pursuant to a plan satisfying the provisions of Rule 16b-3. The payment of a cash award may be subject to such restrictions and conditions as may be established by the Committee, and as set forth in the award agreement, including, but not limited to, continuous service with the Company, achievement of specific business objectives, and other measurement of individual, business unit or Company performance. A cash award may be made by the Committee, in its discretion, in respect of all or a portion of the tax liability incurred or to be incurred by a participant as a result of awards made to or settled by him or her under the Plan. 8. Dividends and Dividend Equivalents ---------------------------------- The Committee may provide that awards denominated in stock earn dividends or dividend equivalents. Such dividend equivalents may be paid currently or may be credited to an account established by the Committee under the Plan in the name of the participant. In addition, dividends or dividend equivalents paid on outstanding awards or issued shares may be credited to such account rather than paid currently. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including, but not limited to, reinvestment in additional shares or share equivalents. 9. Deferrals and Settlements ------------------------- Payment of awards may be in the form of cash, shares, other awards, or in combinations thereof as the Committee shall determine at the time of grant, and with such restrictions as it may impose. The Committee may also require or permit participants to elect to defer the issuance of shares or the settlement of awards in cash under such rules and procedures as it may establish under the Plan. It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts or the payment or crediting of dividend equivalents on deferred settlements denominated in shares. 10. Fair Market Value ----------------- Fair Market Value for purposes of the Plan shall mean the average of the high and low sales prices of the Common Stock as reported in The Wall Street Journal for the American Exchange Composite Transactions or similar successor consolidated transactions reports for the relevant date (or the comparable consolidated transaction reports for any other national securities exchange or NASDAQ National Market Issues, if Hasbro Common Stock is admitted for trading or quotation on said exchange or market), or, if no sales of Common Stock were made on said exchange or market on that date, the average of the high and low prices of Common Stock as reported in said composite transactions report for the preceding day on which sales of Common Stock were made on said exchange or market. If Hasbro's Common Stock is not then trading on an exchange or quoted in NASDAQ National Market Issues, then Fair Market Value shall be the mean between the bid and asked prices for the relevant over-the counter transaction on such date, or if there are not such transactions, then Fair Market Value shall be determined in good faith by the Committee. Notwithstanding the foregoing, for purposes of valuing shares delivered to the Company by a participant in payment of the exercise price of an option pursuant to Section 7 hereof and shares delivered or withheld in payment of applicable tax withholding pursuant to Section 14 hereof, if the participant sells, on a national securities exchange, or on NASDAQ or over- the-counter, the shares acquired on the same day as the date of exercise, the "Fair Market Value" of the shares so delivered or withheld to be the actual sales price of the shares so sold. Under no circumstances shall Fair Market Value be less than the par value of the Common Stock. 11. Transferability and Exercisability ---------------------------------- Except as the Committee may in its sole discretion authorize all awards under the Plan will be nontransferable and shall not be assignable, alienable, saleable or otherwise transferable by the participant other than by will, the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder, unless otherwise determined by the Committee in its sole discretion during the life of the participant, awards under the Plan shall be exercisable only by him or her or by his or her guardian or legal representative. 12. Award Agreements ---------------- Awards under the Plan shall be evidenced by an agreement as shall be approved by the Committee that sets forth the terms, conditions and limitations of an award. The Committee may amend agreements theretofore entered into, either prospectively or retroactively, including, but not limited to, the acceleration of vesting of an award, and the extension of time to exercise an award, except that, no such amendment shall affect the award in a materially adverse manner without the consent of the participant. 13. Plan Amendment -------------- The Committee may amend, alter, extend the term of, increase or decrease the number of shares of stock subject to or discontinue the Plan at any time, except that no such amendment shall affect any outstanding awards in a materially adverse manner under the Plan without the consent of the holders thereof. 14. Tax Withholding --------------- The Company shall have the right to deduct from any settlement of an award made under the Plan, including the delivery or vesting of shares, an amount sufficient to cover withholding required by law for any federal, state, local or foreign taxes or to take such other action as may be necessary to satisfy any such withholding obligations including, but not limited to, requiring the payment by the participant to the Company of any such amounts. Any participant may deliver shares or direct the Company that shares be withheld to satisfy required tax withholding and such shares shall be valued at the Fair Market Value as of the settlement date of the applicable award in accordance with the terms and conditions of the award agreement. 15. Financial Assistance -------------------- If the Committee determines that such action is advisable, the Company may assist any person to whom an award has been granted in obtaining financing from the Company or from a bank or other third party, on such terms as are determined by the Committee, and in such amount as is required to accomplish the purposes of the Plan, including, without limitation, to permit the exercise of an award and/or the payment of any taxes in respect thereof. Such assistance may take any form that the Committee deems appropriate, including, but not limited to, a direct loan from the Company, a guarantee of the obligation by the Company, or the maintenance by the Company of deposits with such bank or third party. 16. Change in Control ----------------- Notwithstanding anything to the contrary in the Plan, the following shall apply to all outstanding awards granted under the Plan: (a) Definitions: The following definitions shall apply to this Section: A "Change in Control", unless otherwise defined by the Committee, shall mean: A. The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of either (i) the then outstanding shares of Common Stock of Hasbro (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding voting securities of Hasbro entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Hasbro or any of its subsidiaries, (ii) any acquisition by Hasbro or any of its subsidiaries, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Hasbro or any of its subsidiaries, (iv) any acquisition by Alan or Sylvia Hassenfeld, members of their respective immediate families, or heirs of Alan or Sylvia Hassenfeld or of any member of their respective immediate families, the Sylvia Hassenfeld Trust, the Merrill Hassenfeld Trust, the Alan Hassenfeld Trust, the Hassenfeld Foundation, any trust or foundation established by or for the primary benefit of any of the foregoing or controlled by one or more of any of the foregoing, or any affiliates or associates (as such terms are defined in Rule 12b-2 promulgated under the 1934 Act) of any of the foregoing or (v) any acquisition by any corporation with respect to which, following such acquisition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and the Outstanding Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be; or B. Individuals who, as the effective date of the Plan constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents; or C. Approval by the shareholders of Hasbro of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be; or D. Approval by the shareholders of Hasbro of (i) a complete liquidation or dissolution of Hasbro or (ii) the sale or other disposition of all or substantially all of the assets of Hasbro, other than to a corporation, with respect to which following such sale or other disposition, more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Common Stock and Outstanding Voting Securities, as the case may be. "CIC Price" shall mean the higher of (1) the highest price paid for a share of Common Stock in the transaction or series of transactions pursuant to which a Change in Control of the Company shall have occurred, or (2) the highest reported sales price of a share of Common Stock during the 60 day period immediately preceding the date upon which the event constituting a Change in Control shall have occurred. To the extent that the consideration paid in any transaction or series of transactions described in (1) above consists in whole or in part of non-cash consideration, the value of such non-cash consideration shall be determined in the sole discretion of the Board. (b) Acceleration of Vesting and Treatment of Stock Awards, Stock Options, SARs and Cash Awards (1) Upon the occurrence of an event constituting a Change in Control, all stock awards (and related dividends or dividend equivalents, if any), stock options, SARs and cash awards outstanding on such date shall become 100% vested. (2) In the event of a merger or consolidation in which the Company is not the surviving corporation, as well as a merger or consolidation which would constitute a Change of Control under Section 16.C. above (whether or not the Company is the surviving corporation), the agreement of merger or consolidation may provide (i) that the stock awards, stock options, SARs or cash awards are unaffected by the merger or consolidation, (ii) for substituted stock awards, stock options, SARs or cash awards by the surviving corporation for those stock awards, stock options, SARs or cash awards granted hereunder or (iii) for the assumption of such awards, options or SARs by the surviving corporation, in which case the Committee in its sole discretion, may provide for such substitution or assumption with such adjustments to the awards, options and SARs granted hereunder as the Committee shall in its sole discretion determine. Alternatively, the Committee may, at its sole discretion, cancel all awards, options and SARs granted hereunder upon payment by the Company to the participants in cash. The amount of cash to be paid shall be determined by multiplying the number of such awards, as the case may be, by (i) in the case of stock awards, the CIC Price, (ii) in the case of stock options, the difference between the exercise price per share and the CIC Price, if higher, (iii) in the case of SARs, the difference between the exercise or designated price per share and the CIC Price, if higher; (iv) in the case of cash awards where the performance period, if any, has not been completed upon the occurrence of a Change in Control, the maximum value of such awards as determined by the Committee at the time of grant, without regard to the performance criteria, if any, applicable to such award; and (v) in the case of cash awards where the performance period, if any, has been completed on or prior to the occurrence of a Change in Control, the value of such award as determined in accordance with the award agreement. In addition, all accrued dividends and dividend equivalents or interest accrued on deferred settlements shall be paid. 17. Options With Respect to Shares Surrendered to Exercise Options -------------------------------------------------------------- The Committee, in its discretion, may provide at the time of the award or subsequent thereto, in the award agreement granting an option pursuant to Section 12 hereunder, or in a separate agreement, that in the event a participant exercises an option, making payment of the option price by an exchange of shares of Common Stock previously owned by the participant for at least six months, in the manner permitted by the Committee pursuant to Section 7 hereof, such participant shall automatically be issued a new option to purchase additional shares equal to the number of shares of previously owned Common Stock so exchanged. Such new option shall have an option price equal to not less than the Fair Market Value of the Common Stock on the date such new option is granted, and shall have an exercise period which commences one year from the date of grant of the new option and expires on the same date as did that of the original option exercised pursuant to the exchange. 18. Unfunded Plan ------------- Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company and any participant or other person. To the extent any person holds any rights by virtue of a grant awarded under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. 19. Right of First Refusal ---------------------- At the time of grant of any award or acceleration of any vesting term, the Committee may provide that shares received as a result of such grant or accelerated vesting shall be subject to a right of first refusal pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell at a price no greater than the then Fair Market Value of the shares, subject to such other terms and conditions as the Committee may specify. 20. Miscellaneous ------------- No person shall have any claim or right to be granted an award under the Plan, and no participant shall have any right by reason of the grant of any award under the Plan to continued employment by the Company. Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such eligible individuals are similarly situated. No participant shall have any right with respect to the Plan, or in any award, contingent or otherwise, until written evidence of the award shall have been delivered to the recipient and all the terms, conditions and provisions of the Plan and the award applicable to such recipient have been met. A participant shall have no rights as a shareholder until he or she becomes the holder of record. 21. General Restriction ------------------- Each award shall be subject to the requirement that, if at any time the Committee shall determine, in its sole discretion, that the listing, registration or qualification of any award under the Plan upon any securities exchange or under any state, federal or foreign law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such award or the exercise or settlement thereof, no such award may be exercised or settled in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The Committee may require each participant purchasing or receiving shares pursuant to an award to represent to and agree with the Company in writing that such participant is acquiring the shares without a view to the distribution thereof. All certificates for shares, or other securities delivered under the Plan shall be subject to such stock transfer stop orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed and any applicable state, federal, or foreign law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 22. Governing Law ------------- The validity, construction and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the state of Rhode Island and applicable federal law. 23. Successors and Assigns ---------------------- The Plan shall be binding on all successors and permitted assigns of a participant, including, but not limited to, the estate of such participant and the executor, administrator or trustee of such estate, the guardian or legal representative of the participant. 24. Effect on the Company's 1992 Stock Incentive Plan, Stock Incentive ------------------------------------------------------------------ Performance Plan and Other Compensation Arrangements ---------------------------------------------------- The adoption of the Plan shall have no effect on awards made or to be made pursuant to the Company's existing 1992 Stock Incentive Plan, Stock Incentive Performance Plan and other compensation arrangements. Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation plans or arrangements for its employees.

EXHIBIT 11 HASBRO, INC. AND SUBSIDIARIES Computation of Earnings Per Share (Thousands of Dollars and Shares Except Per Share Data) 1996 1995 1994 --------------- --------------- --------------- Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted ------- ------- ------- ------- ------- ------- Net earnings before cumulative effect of change in accounting principles $199,912 199,912 155,571 155,571 179,315 179,315 Interest and amortization on convertible notes, net of taxes - 5,757 - 5,763 - 5,764 ------- ------- ------- ------- ------- ------- Net earnings before cumulative effect of change in accounting principles applicable to common shares 199,912 205,669 155,571 161,334 179,315 185,079 Cumulative effect of change in accounting principles - - - - (4,282) (4,282) ------- ------- ------- ------- ------- ------- Net earnings applicable to common shares $199,912 205,669 155,571 161,334 175,033 180,797 ======= ======= ======= ======= ======= ======= Weighted average number of shares outstanding: (a) Outstanding at beginning of period 131,017 131,017 131,293 131,293 131,693 131,693 Exercise of stock options and warrants: Actual 502 502 306 306 458 458 Assumed 1,816 2,152 864 995 2,292 2,292 Conversion of convertible notes: Actual 6 6 - - - - Assumed - 7,666 - 7,671 - 7,671 Purchase of common stock (1,485) (1,485) (84) (84) (447) (447) ------- ------- ------- ------- ------- ------- Total 131,856 139,858 132,379 140,181 133,996 141,667 ======= ======= ======= ======= ======= ======= Per common share: (a) Earnings before cumulative effect of change in accounting principles $ 1.52 1.47 1.18 1.15 1.34 1.31 Cumulative effect of change in accounting principles - - - - (.03) (.03) ------- ------- ------- ------- ------- ------- Net earnings $ 1.52 1.47 1.18 1.15 1.31 1.28 ======= ======= ======= ======= ======= ======= (a) Adjusted to reflect the three-for-two stock split declared on February 19, 1997 for payment on March 21, 1997.

EXHIBIT 12 HASBRO, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges Fiscal Years Ended in December (Thousands of Dollars) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Earnings available for fixed charges: Net earnings $199,912 155,571 175,033 200,004 179,164 Add: Cumulative effect of change in accounting principles - - 4,282 - - Fixed charges 47,174 52,422 44,280 42,839 48,050 Taxes on income 106,981 96,979 112,254 125,206 113,212 ------- ------- ------- ------- ------- Total $354,067 304,972 335,849 368,049 340,426 ======= ======= ======= ======= ======= Fixed charges: Interest on long-term debt $ 9,258 9,267 11,179 10,178 16,932 Other interest charges 22,207 28,321 19,610 19,636 18,959 Amortization of debt expense 339 339 429 386 623 Rental expense representa- tive of interest factor 15,370 14,495 13,062 12,639 11,536 ------- ------- ------- ------- ------- Total $ 47,174 52,422 44,280 42,839 48,050 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 7.51 5.82 7.58 8.59 7.08 ======= ======= ======= ======= =======

EXHIBIT 13 HASBRO, INC. AND SUBSIDIARIES Selected Information Contained in Annual Report to Shareholders for the Year Ended December 29, 1996 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - - ------------------------------------------------------------------------- The Company's Common Stock, Par Value $.50 per share (the "Common Stock"), is traded on the American and London Stock Exchanges. The following table sets forth the high and low sales prices as reported on the Composite Tape of the American Stock Exchange and the cash dividends declared per share of Common Stock, each as adjusted to reflect the three-for-two stock split declared on February 19, 1997 for payment on March 21, 1997, for the periods listed. Sales Prices ---------------- Cash Dividends Period High Low Declared - - ------ ---- --- -------------- 1995 1st Quarter $22 1/2 18 7/8 $.05 2nd Quarter 23 1/2 20 7/8 .05 3rd Quarter 22 1/4 19 3/4 .05 4th Quarter 21 3/4 19 .05 1996 1st Quarter $31 1/4 19 1/4 $.07 2nd Quarter 25 3/4 23 1/2 .07 3rd Quarter 25 1/2 21 1/4 .07 4th Quarter 29 3/8 24 5/8 .07 The approximate number of holders of record of the Company's Common Stock as of February 28, 1997 was 4,200. Dividends --------- Declaration of dividends is at the discretion of the Company's Board of Directors and will depend upon the earnings, financial condition of the Company and such other factors as the Board of Directors deems appropriate. Payment of dividends is further subject to restrictions contained in agreements relating to the Company's outstanding long-term debt. At December 29, 1996, under the most restrictive agreement the full amount of retained earnings is free of restrictions. On February 20, 1997, the Company announced both a three-for-two stock split, payable in the form of a 50% stock dividend, and a quarterly cash dividend of $.08 per share, which represents a 20% increase from that previously in effect. The stock split was paid on March 21, 1997 to shareholders of record on March 7, 1997, and the dividend is payable on May 15, 1997 to shareholders of record on May 1, 1997. SELECTED FINANCIAL DATA - - ----------------------- (Thousands of Dollars and Shares Except per share Data and Ratios) Fiscal Year ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Statement of Earnings Data: Net revenues $3,002,370 2,858,210 2,670,262 2,747,176 2,541,055 Net earnings before cumulative effect of change in accounting principles $ 199,912 155,571 179,315 200,004 179,164 Net earnings $ 199,912 155,571 175,033 200,004 179,164 Per Common Share Data: (1) Net earnings before cumulative effect of change in accounting principles $ 1.52 1.18 1.34 1.48 1.34 Net earnings $ 1.52 1.18 1.31 1.48 1.34 Cash dividends declared $ .27 .21 .19 .16 .13 Balance Sheet Data: Total assets $2,701,509 2,616,388 2,378,375 2,293,018 2,082,766 Long-term debt $ 149,382 149,991 150,000 200,510 206,189 Ratio of Earnings to Fixed Charges (2) 7.51 5.82 7.58 8.59 7.08 Weighted Average Number of Common Shares (1) 131,856 132,379 133,996 135,046 133,629 (1) Adjusted to reflect the three-for-two stock split paid March 21, 1997. (2) For purposes of calculating the ratio of earnings to fixed charges, fixed charges include interest, amortization of debt expense and one-third of rentals, and earnings available for fixed charges represent earnings before fixed charges and income taxes. MANAGEMENT'S REVIEW - - ------------------- Summary - - ------- A percentage analysis of results of operations follows: 1996 1995 1994 ---- ---- ---- Net revenues 100.0% 100.0% 100.0% Cost of sales 44.3 43.3 43.5 ----- ----- ----- Gross profit 55.7 56.7 56.5 Amortization 1.3 1.4 1.4 Royalties, research and development 10.6 10.7 10.2 Advertising 13.9 14.6 14.9 Selling, distribution and administration 18.8 19.4 18.5 Discontinued development project and restructuring charges - 1.1 .5 Interest expense 1.1 1.3 1.1 Other income, net (.2) (.6) (1.0) ----- ----- ----- Earnings before income taxes and cumulative effect of change in accounting principles 10.2 8.8 10.9 Income taxes 3.5 3.4 4.2 ----- ----- ----- Earnings before cumulative effect of change in accounting principles 6.7 5.4 6.7 Cumulative effect of change in accounting principles - - (.1) ----- ----- ----- Net earnings 6.7% 5.4% 6.6% ===== ===== ===== (Thousands of Dollars Except Share Data) Results of Operations - - --------------------- Net revenues for 1996 were $3,002,370 compared to $2,858,210 and $2,670,262 for 1995 and 1994, respectively. Within the United States market, games and puzzles enjoyed another year of record revenues. The classic brands, such as Monopoly(R) and Scrabble(R), continued to appeal to consumers. The refreshed Trivial Pursuit(R) and Yahtzee(R) lines and newer products, including Puzz 3- D(TM), Jumanji(TM) and Goosebumps(TM), also received very favorable consumer acceptance. In Hasbro's first full year in the CD-ROM interactive game market, seven of its thirteen products in this line, including Monopoly, now in its second-year, exceeded 100,000 units in sales. Within the toy area, boys' toys again were led by action figures, with both Star Wars(R) and Batman(R) proving to be popular, even in a year with limited entertainment support. Hasbro's line of Nerf(R) sports products also grew significantly, up almost 25%. Both the activities range, with such favorites as Play Doh(R), completing its 40th year, and Easy Bake(R) Oven, and new Wonder World(TM) products, and the girls' area, due to a strong large doll segment, had increased volume. The preschool arena, however, was disappointing, experiencing a significant decline in revenues from those of the prior year. In the international market, both in their local currencies and in dollars, revenues were essentially flat with those of a year ago. Within Europe, Germany continued to be a difficult market for the Company, as was Spain. Elsewhere, the Asian units, Canada and Mexico all showed growth both in their local currencies and in U.S. dollars. The growth in 1995 from 1994 was primarily attributable to the United States game and puzzle lines and the overall international market. In the aggregate, changed foreign currency rates had a negative impact of approximately $29,000 in 1996 and a favorable impact of approximately $30,000 in 1995. The Company's gross profit margin decreased to 55.7% from 56.7% in 1995 which had improved slightly from 56.5% in 1994. The change in 1996 results from a combination of factors including a greater volume of products sold at less than normal margins, higher tooling costs, unfavorable foreign exchange rates, increased unabsorbed overheads in the Company's European manufacturing facilities resulting from reduced production levels, all partially offset by reduced raw material commodity costs, specifically paper board and plastic resin. Amortization expense, which includes amortization of both property rights and cost in excess of net assets acquired, of $40,064 compares with $38,471 in 1995 and $36,903 in 1994. These increases were attributable to the acquisitions during the respective years. Expenditures for royalties, research and development increased to $319,494 from $304,704 in 1995, while in 1994 they were $273,039. Included in these amounts are expenditures for research and development of $152,487 in 1996, $148,057 in 1995 and $135,406 in 1994. As percentages of net revenues, research and development was 5.1% in 1996, which is not materially different than the 5.2% in 1995 and 5.1% in 1994. The added development efforts in 1996 related to the Company's interactive game products substantially offset the reduction in expenses related to its virtual reality efforts in 1995 and 1994 (see below). The increased royalties in 1996 and 1995, both in amount and as a percentage of net revenues, when compared with 1994, were primarily attributable to the higher proportion of the Company's revenues arising from licensed products. Advertising expenses, after remaining relatively constant at 14.6% and 14.9% of net revenues in 1995 and 1994, respectively, decreased in 1996 to 13.9%. This decrease reflects both the reduced proportion of the Company's revenues attributable to its international units, which traditionally have higher advertising to sales ratios than do the United States units, and the reduced overall level of advertising expenditures. During 1996, selling, distribution and administration costs decreased to 18.8% of revenues from 19.4% in 1995 and 18.5% in 1994. The 1996 percentage reflects a return to a level more closely approximating that experienced in years prior to 1995. The increase in 1995 resulted from investment spending in certain newly organized and acquired operations, an overall rise in the Company's costs associated with distributing its products and the impact of general increases in expense levels, including costs associated with the 53rd week of operations included in that fiscal year. During the second quarter of 1995, Hasbro discontinued its efforts, begun in 1992, related to the development of a mass-market virtual reality game system. These efforts produced such a game system, but at a price judged to be too expensive for the mass-market. The impact of this decision on the quarter was a charge of $31,100, the estimated costs associated with such action. Approximately half of the charge resulted from the expensing of software development costs related to both the operating system and games for the system. These costs were previously capitalized under the provisions of Statement of Financial Accounting Standards No. 86. The remaining amount represented provisions for costs associated with discontinuing this project, including the termination of contractual agreements relating to the development of the system and games, the write-off of certain fixed assets and various other cancellation/termination costs. During 1994, the Company completed a restructuring of its Domestic Toy Group, merging its Hasbro Toy, Playskool, Playskool Baby, Kenner and Kid Dimension units into one organization, the Hasbro Toy Group, and also announced a consolidation of its United States manufacturing facilities. To provide for these and other immaterial restructuring costs, the Company recorded a $12,500 pretax charge during the third quarter of that year. This amount included facility costs, severance and other related costs. Interest expense was $31,465 during 1996 compared to $37,588 during 1995 and $30,789 in 1994. The decrease during the current year reflected the impact of lower interest rates and the availability of funds generated from operations during 1995. The increase in 1995 from 1994 reflected the effect of increased interest rates as well as the Company's increased use of funds for acquisitions. Other income of $6,091 in 1996 compares with $16,566 and $26,681 in 1995 and 1994, respectively. The decrease of approximately $10,000 in 1996 is largely the result of decreased earnings from available funds. These funds, principally in the international units, are invested on a short-term basis locally. During 1994, the Company disposed of its minority investments in J.W. Spear & Sons PLC and Virgin Interactive Entertainment plc, realizing an aggregate pretax gain of approximately $23,000. Income tax expense as a percentage of pretax earnings in 1996 decreased to 34.9% from 38.4% and 38.5% in 1995 and 1994, respectively. This decrease resulted from changes in Hasbro's operations as well as the impact of strategies implemented during 1996. These strategies realized tax benefits for certain current and prior year international operating losses, allowed a reduction in the deferred tax asset valuation allowance and reduced state income taxes. In addition, the impact of nondeductible amortization was less due to the higher level of earnings. Liquidity and Capital Resources - - ------------------------------- The Company continued to have a strong and highly liquid balance sheet with cash and cash equivalents of $218,971 at December 29, 1996. Cash and cash equivalents were $161,030 and $137,028 at December 31, 1995 and December 25, 1994, respectively. Hasbro generated in excess of $225,000 of net cash from its operating activities in each of 1996, 1995 and 1994. Included in the 1996 amount was a net utilization of $52,347 for changes in operating assets and liabilities. Contributing to this utilization were accounts receivable, which were approximately 2% greater than in 1995. This reflects the approximate $83,000 increase in fourth quarter sales, much of which, under Hasbro's normal trading terms, becomes due after the end of the Company's fiscal year, partially reduced by the non-recourse sale of certain receivables totaling $65,000. Inventories decreased by more than 13% in the current year, also impacted by the higher level of fourth quarter shipments. Also utilizing funds were prepaid expenses and other current assets, which increased and accounts payable and accrued liabilities, which decreased. Both of these changes were largely due to the timing of certain payments. During 1995 operating assets and liabilities utilized $67,117, primarily in accounts receivable and inventories. Receivables were approximately 10% greater in 1995 than in 1994, reflecting both the increased level of fourth quarter sales and the impact of new operations. Inventories, up more than 25%, also reflected the impact of new operations and expanded product lines as well as a planned increase to allow faster and more complete shipment of customer orders. Partially offsetting these utilizations was the increase in trade payables and other accrued liabilities which reflected the increased and expanded levels of operations. The net change in operating assets and liabilities provided a relatively small amount of cash to the Company in 1994. Cash flows from investing activities were a net utilization of funds during all three reported years; $127,286, $209,331 and $244,178 in 1996, 1995 and 1994, respectively. During each of the three years, the Company expended an average of approximately $100,000 in additions to its property, plant and equipment. Of these amounts, 57% in 1996, 56% in 1995 and 43% in 1994 were for purchases of tools, dies and molds related to the Company's products. During those three years, depreciation and amortization expenses were $98,201, $91,437 and $85,368, respectively. During 1996, Hasbro made several small acquisitions and investments, none of which were significant. In 1995 the Company purchased certain products, primarily the Super Soaker(TM) line, and other assets from the Larami group of companies for $88,135 and made several other smaller investments. During 1994, the Company purchased certain game and puzzle assets of Western Publishing Company, Inc. and the Games Division of John Waddington PLC for an aggregate purchase price of $176,194 and made several other investments. The $59,322 of proceeds from sale of investments in 1994 relates to the transactions previously discussed. As part of the traditional marketing strategies of the toy industry, many sales made early in the year are not due for payment until the fourth quarter or early in the first quarter of the subsequent year, thus making it necessary for the Company to borrow significant amounts pending these collections. During the year the Company borrowed through the issuance of commercial paper and short-term lines of credit to fund its seasonal working capital requirements in excess of funds available from operations. During 1997, the Company expects to fund these needs in a similar manner and believes that the funds available to it are adequate to meet its needs. At March 2, 1997, the Company's unused committed and uncommitted lines of credit, including a $440,000 revolving credit agreement, were in excess of $1,100,000. During 1996 and 1994, net financing activities utilized approximately $90,000 of Hasbro's funds, while in 1995 it provided a small amount. Throughout 1996, the Company met its seasonal working capital requirements through short-term borrowings, as in prior years. During the year, the Company also repurchased in excess of $80,000 of its common stock in the open market. In 1994, the Company repaid more than $53,000 of long-term debt, including the early redemption of its $50,000 subordinated variable rate notes. Several equity transactions also required the utilization of funds during 1994. These included the repurchase of more than $26,000 of the Company's common stock in the open market and approximately $16,000 in payments to exercising warrantholders in lieu of issuing shares of common stock. Under prior authorizations of the Board of Directors (the Board) and the Executive Committee of the Board, the Company repurchased 3,415,800 shares of its common stock during 1996 and may repurchase up to an additional 5,685,750 shares (both amounts expressed in post-split shares). The Company anticipates that it will continue such purchases in the future when it deems conditions to be favorable. The shares acquired under these programs are being used for corporate purposes including issuance upon the exercise of stock options. Foreign Currency Activity - - ------------------------- The Company manages its foreign exchange exposure in various ways including forward exchange contracts and the netting of foreign exchange exposure. In addition, where possible, the Company minimizes its foreign asset exposure by borrowing in foreign currencies. Its policy is not to enter into derivative financial instruments for speculative purposes. It does, however, enter into certain foreign currency forward exchange contracts to protect itself from adverse currency rate fluctuations on identifiable foreign currency commitments, primarily for future purchases of inventory. Such contracts are denominated in currencies of major industrial countries and entered into with creditworthy banks for terms of less than twelve months. At both December 29, 1996 and December 31, 1995, outstanding contracts related to purchases of either U.S. dollars or Hong Kong dollars. The Company does not anticipate any material adverse impact on its results of operations or financial position from these contracts. The Economy and Inflation - - ------------------------- The Company continued to experience a difficult economic environment throughout much of the world during 1996. The principal market for the Company's products is the retail sector where certain customers have experienced economic difficulty. The Company closely monitors the creditworthiness of its customers and adjusts credit policies and limits as it deems appropriate. The effect of inflation on the Company's operations during 1996 was not significant and the Company will continue its policy of monitoring costs and adjusting prices accordingly. Other Information - - ----------------- The Company's revenue pattern continues to show the second half of the year more significant to its overall business and within that half, the fourth quarter most prominent. The Company believes that this will continue in 1997. The Company is not aware of any material amounts of potential exposure relating to environmental matters and does not believe its compliance costs or liabilities to be material to its operating results or financial position. Hasbro will be adopting Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125), in 1997. The adoption of SFAS 125 is not expected to have any material impact on Hasbro's results of operations, financial condition or cash flows. Statements of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128), and No. 129, Disclosure of Information about Capital Structure (SFAS 129), were issued by the Financial Accounting Standards Board in February 1997. Hasbro will adopt both SFAS 128 and SFAS 129 in 1997 and is currently reviewing the provisions of each to determine their impact, if any, on its operating results or financial position. On February 10, 1997, Hasbro and Russ Berrie and Company, Inc. (Russ Berrie) announced an agreement in principle for Hasbro to acquire the assets of Russ Berrie subsidiaries Cap Toys, Inc. and Oddzon Products, Inc. for $166,000, subject to adjustment based on the net tangible value of assets sold. The agreement in principle is subject to the execution and delivery of a definitive contract and the satisfaction of the conditions to be contained therein, including, without limitation, the receipt of regulatory and other consents and approvals. It is anticipated that the transaction will be consummated in the second quarter of 1997. On February 20, 1997, Hasbro announced both a three-for-two stock split and a quarterly cash dividend of $.08 per share, which represents a 20% increase from that previously in effect. The stock split, in the form of a 50% stock dividend, was paid on March 21, 1997 to shareholders of record on March 7, 1997, and the dividend is payable on May 15, 1997 to shareholders of record on May 1, 1997. On February 14, the Company announced the establishment of a dividend reinvestment and cash stock purchase program for its shareholders of record and employees. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ------------------------------------------- See attached pages. INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Hasbro, Inc.: We have audited the accompanying consolidated balance sheets of Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the fiscal years in the three-year period ended December 29, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 29, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Providence, Rhode Island February 5, 1997 HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 29, 1996 and December 31, 1995 (Thousands of Dollars Except Share Data) Assets 1996 1995 ------ ---- ---- Current assets Cash and cash equivalents $ 218,971 161,030 Accounts receivable, less allowance for doubtful accounts of $46,600 in 1996 and $48,800 in 1995 807,149 791,111 Inventories 273,247 315,620 Prepaid expenses and other current assets 187,222 157,737 --------- --------- Total current assets 1,486,589 1,425,498 Property, plant and equipment, net 313,545 313,240 --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $115,312 in 1996 and $99,404 in 1995 460,467 473,388 Other intangibles, less accumulated amortization of $102,387 in 1996 and $79,648 in 1995 364,987 343,624 Other 75,921 60,638 --------- --------- Total other assets 901,375 877,650 --------- --------- Total assets $2,701,509 2,616,388 ========= ========= HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued December 29, 1996 and December 31, 1995 (Thousands of Dollars Except Share Data) Liabilities and Shareholders' Equity 1996 1995 ------------------------------------ ---- ---- Current liabilities Short-term borrowings $ 120,736 119,987 Trade payables 174,337 198,328 Accrued liabilities 399,896 433,567 Income taxes 135,849 117,982 --------- --------- Total current liabilities 830,818 869,864 Long-term debt 149,382 149,991 Deferred liabilities 69,263 70,921 --------- --------- Total liabilities 1,049,463 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 132,160,293 shares in 1996 and 88,086,108 shares in 1995 66,080 44,043 Additional paid-in capital 282,922 279,288 Retained earnings 1,362,791 1,201,242 Foreign currency translation 21,487 23,450 Treasury stock, at cost, 3,297,628 shares in 1996 and 741,237 shares in 1995 (81,234) (22,411) --------- --------- Total shareholders' equity 1,652,046 1,525,612 --------- --------- Total liabilities and shareholders' equity $2,701,509 2,616,388 ========= ========= See accompanying notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years Ended in December (Thousands of Dollars Except Share Data) 1996 1995 1994 ---- ---- ---- Net revenues $3,002,370 2,858,210 2,670,262 Cost of sales 1,328,897 1,237,197 1,161,479 --------- --------- --------- Gross profit 1,673,473 1,621,013 1,508,783 --------- --------- --------- Expenses Amortization 40,064 38,471 36,903 Royalties, research and development 319,494 304,704 273,039 Advertising 418,003 417,886 397,094 Selling, distribution and administration 563,645 555,280 493,570 Discontinued development project and restructuring charges - 31,100 12,500 --------- --------- --------- Total expenses 1,341,206 1,347,441 1,213,106 --------- --------- --------- Operating profit 332,267 273,572 295,677 --------- --------- --------- Nonoperating (income) expense Interest expense 31,465 37,588 30,789 Other (income), net (6,091) (16,566) (26,681) --------- --------- --------- Total nonoperating expense 25,374 21,022 4,108 --------- --------- --------- Earnings before income taxes and cumulative effect of change in accounting principles 306,893 252,550 291,569 Income taxes 106,981 96,979 112,254 --------- --------- --------- Earnings before cumulative effect of change in accounting principles 199,912 155,571 179,315 Cumulative effect of change in accounting principles - - ( 4,282) --------- --------- --------- Net earnings $ 199,912 155,571 175,033 ========= ========= ========= Per common share Earnings before cumulative effect of change in accounting principles $ 1.52 1.18 1.34 ========= ========= ========= Net earnings $ 1.52 1.18 1.31 ========= ========= ========= Cash dividends declared $ .27 .21 .19 ========= ========= ========= See accompanying notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Thousands of Dollars)

HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years Ended in December (Thousands of Dollars) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Net earnings $199,912 155,571 175,033 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization of plant and equipment 98,201 91,437 85,368 Other amortization 40,064 38,471 36,903 Deferred income taxes (8,120) (9,149) (1,245) Gain on investments (18) (474) (25,284) Discontinued development cost - 13,256 - Change in operating assets and liabilities (other than cash and cash equivalents): (Increase) decrease in accounts receivable (22,418) (66,658) 9,871 Decrease (increase) in inventories 42,959 (64,686) 28,678 (Increase) in prepaid expenses and other current assets (37,036) (1,633) (3,142) (Decrease) increase in trade payables and other current liabilities (35,852) 65,860 (22,231) Other 2,301 5,405 (166) ------- ------- ------- Net cash provided by operating activities 279,993 227,400 283,785 ------- ------- ------- Cash flows from investing activities Additions to property, plant and equipment (101,946) (100,639) (110,944) Investments and acquisitions, net of cash acquired (33,027) (117,406) (192,379) Sale of investments 318 1,715 59,322 Other 7,369 6,999 (177) ------- ------- ------- Net cash utilized by investing activities (127,286) (209,331) (244,178) ------- ------- ------- HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued Fiscal Years Ended in December (Thousands of Dollars) 1996 1995 1994 ---- ---- ---- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 265,017 433,646 - Repayments of borrowings with original maturities of more than three months (255,636) (416,515) (53,736) Net (payments) proceeds of other short-term borrowings (6,116) 20,997 18,938 Purchase of common stock (83,657) (15,228) (26,140) Stock option and warrant transactions 17,745 6,664 (5,106) Dividends paid (32,959) (27,190) (23,711) ------- ------- ------- Net cash (utilized) provided by financing activities (95,606) 2,374 (89,755) ------- ------- ------- Effect of exchange rate changes on cash 840 3,559 922 ------- ------- ------- Increase (decrease) in cash and cash equivalents 57,941 24,002 (49,226) Cash and cash equivalents at beginning of year 161,030 137,028 186,254 ------- ------- ------- Cash and cash equivalents at end of year $218,971 161,030 137,028 ======= ======= ======= Supplemental information Cash paid during the year for Interest $ 29,430 39,050 33,471 Income taxes $ 92,670 81,179 99,601 See accompanying notes to consolidated financial statements HASBRO, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Thousands of Dollars Except Share Data) (1) Summary of Significant Accounting Policies ------------------------------------------ Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of Hasbro, Inc. and all significant majority-owned subsidiaries (Hasbro or the Company). Investments in affiliates representing 20% to 50% ownership interest are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated. Preparation of Financial Statements ----------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates. Fiscal Year ----------- Hasbro's fiscal year ends on the last Sunday in December. The fiscal years ended December 29, 1996 and December 25, 1994 were fifty-two week periods while the fiscal year ended December 31, 1995 was a fifty-three week period. Cash and Cash Equivalents ------------------------- Cash and cash equivalents include all cash balances and highly liquid investments purchased with a maturity to the Company of three months or less. Inventories ----------- Inventories are valued at the lower of cost (first-in, first-out) or market. Long-Lived Assets ----------------- During the first quarter of 1996, Hasbro adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to be Disposed Of (SFAS 121). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. Adoption of SFAS 121 had no material impact to the Company. Cost in Excess of Net Assets Acquired and Other Intangibles ----------------------------------------------------------- Approximately 90% of Hasbro's goodwill results from the 1984 acquisition of Milton Bradley Company (Milton Bradley), including its Playskool and international units, and the 1991 acquisition of Tonka Corporation (Tonka), including its Kenner, Parker Brothers and international units, and is being amortized on the straight-line method over forty years. Substantially all of the other intangibles consist of the cost of acquired product rights. These rights, which were valued at their acquisition based on the anticipated future cash flows from the underlying product lines, are being amortized over five to twenty-five years using the straight-line method. In establishing the value of such rights, the Company considers, but does not individually value, existing copyrights, trademarks, patents, license agreements and other product- related rights. Approximately 34% of these other intangibles relate to the acquisition of Milton Bradley and Tonka and an additional 49% relates to Hasbro's acquisitions during 1995 and 1994. (See note 2) Depreciation and Amortization ----------------------------- Depreciation and amortization are computed using accelerated and straight-line methods to amortize the cost of property, plant and equipment over their estimated useful lives. The principal lives, in years, used in determining depreciation rates of various assets are: land improvements 15 to 19, buildings and improvements 15 to 25 and machinery and equipment 3 to 12. Tools, dies and molds are amortized over a three year period or their useful lives, whichever is less, using an accelerated method. Income Taxes ------------ Hasbro uses the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes have not been provided on undistributed earnings of international subsidiaries as substantially all of such earnings are indefinitely reinvested by the Company. Foreign Currency Translation ---------------------------- Foreign currency assets and liabilities are translated into dollars at current rates, and revenues, costs and expenses are translated at average rates during each reporting period. Current earnings include gains or losses resulting from foreign currency transactions, other than those relating to intercompany transactions of a long-term investment nature. Those gains and losses, as well as those resulting from translation of financial statements, are shown as a separate component of shareholders' equity. Pension Plans, Postretirement and Postemployment Benefits --------------------------------------------------------- Hasbro, except for certain international subsidiaries, has pension plans covering substantially all of its full-time employees. Pension expense is based on actuarial computations of current and future benefits. The Company's policy is to fund amounts which are required by applicable regulations and which are tax deductible. The estimated amounts of future payments to be made under other retirement programs are being accrued currently over the period of active employment and are also included in pension expense. Hasbro has a contributory postretirement health and life insurance plan covering substantially all employees who retire under any of its United States defined benefit pension plans and meet certain age and length of service requirements. It also has several plans covering certain groups of employees which may provide benefits to such employees following their period of employment but prior to their retirement. Research and Development ------------------------ Research and product development costs for 1996, 1995 and 1994 were $152,487, $148,057 and $135,406, respectively. Advertising ----------- Production costs of commercials and programming are charged to operations in the fiscal year during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the fiscal year incurred. Risk Management Contracts ------------------------- Hasbro does not enter into derivative financial instruments for speculative purposes. In the normal course of business, however, the Company employs off-balance sheet forward exchange contracts to manage its exposure to fluctuations in foreign currency exchange rates. Gains and losses deferred under hedge accounting provisions are subsequently included in the measurement of the related foreign currency transaction. Earnings Per Common Share ------------------------- 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. The weighted average number of shares outstanding, adjusted to reflect the three-for-two stock split declared February 19, 1997 (note 9), used in the computation of earnings per common share was 131,856,140, 132,379,059 and 133,996,128 in 1996, 1995 and 1994, respectively. The difference between primary and fully diluted earnings per share was not significant for any year. (2) Acquisitions ------------ During February 1995, Hasbro purchased certain products and other assets from the Larami group of companies for $88,135. Accounting for this acquisition using the purchase method, the Company allocated the purchase price based on estimates of fair market value which included $9,053 of net tangible assets, $76,100 of product rights and $2,982 of goodwill. (3) Inventories ----------- 1996 1995 ---- ---- Finished products $209,903 240,126 Work in process 16,810 22,093 Raw materials 46,534 53,401 ------- ------- $273,247 315,620 ======= ======= (4) Property, Plant and Equipment ----------------------------- 1996 1995 ---- ---- Land and improvements $ 14,543 14,845 Buildings and improvements 205,408 207,129 Machinery and equipment 257,499 229,882 ------- ------- 477,450 451,856 Less accumulated depreciation 215,172 187,650 ------- ------- 262,278 264,206 Tools, dies and molds, net of amortization 51,267 49,034 ------- ------- $313,545 313,240 ======= ======= Expenditures for maintenance and repairs which do not materially extend the life of the assets are charged to operations. (5) Short-Term Borrowings --------------------- Hasbro has available unsecured committed and uncommitted lines of credit from various banks approximating $550,000 and $790,000, respectively. Substantially all of the short-term borrowings outstanding at the end of 1996 and 1995 represent bank borrowings related to international units made under these lines of credit. The weighted average interest rates of the outstanding borrowings were 5.0% and 6.2%, respectively. Hasbro's working capital needs were fulfilled by borrowing under these lines of credit and through the issuance of commercial paper, both of which were on terms and at interest rates generally extended to companies of comparable creditworthiness. Included as part of the committed line is $440,000 available from a revolving credit agreement. This agreement contains certain restrictive covenants with which the Company is in compliance. Compensating balances and facility fees were not material. (6) Accrued Liabilities ------------------- 1996 1995 ---- ---- Royalties $ 81,053 77,752 Advertising 83,694 111,853 Payroll and management incentives 32,879 36,205 Other 202,270 207,757 ------- ------- $399,896 433,567 ======= ======= (7) Long-Term Debt -------------- Long-term debt of $149,382 and $149,991 at December 29, 1996 and December 31, 1995, respectively, consists of Hasbro's 6% Convertible Subordinated Notes Due 1998. These notes are convertible into common stock at a conversion price of $19.55 per share, are redeemable, at a premium, by the Company and interest on them is paid semi-annually. (8) Income Taxes ------------ Income taxes attributable to earnings before income taxes are: 1996 1995 1994 ---- ---- ---- Current United States $ 58,580 54,979 60,539 State and local 9,033 9,309 10,417 International 47,488 41,840 42,543 ------- ------- ------- 115,101 106,128 113,499 ------- ------- ------- Deferred United States 4,309 (5,122) 1,924 State and local 406 (483) 180 International (12,835) (3,544) (3,349) ------- ------- ------- (8,120) (9,149) (1,245) ------- ------- ------- $106,981 96,979 112,254 ======= ======= ======= Certain tax benefits are not reflected in income taxes in the statements of earnings. Such benefits of $6,793 in 1996, $6,532 in 1995 and $9,800 in 1994, relate primarily to stock options. A reconciliation of the statutory United States federal income tax rate to Hasbro's effective income tax rate is as follows: 1996 1995 1994 ---- ---- ---- Statutory income tax rate 35.0% 35.0% 35.0% State and local income taxes, net of federal income tax effect 2.0 2.3 2.4 Amortization of goodwill 1.6 1.9 1.6 International earnings taxed at rates other than the United States statutory rate (1.1) (.3) (.7) Reduction of valuation allowance (1.1) - - Other, net (1.5) (.5) .2 ---- ---- ---- 34.9% 38.4% 38.5% ==== ==== ==== The components of earnings before income taxes are as follows: 1996 1995 1994 ---- ---- ---- United States $208,864 151,094 177,672 International 98,029 101,456 113,897 ------- ------- ------- $306,893 252,550 291,569 ======= ======= ======= The components of deferred income tax expense arise from various temporary differences and relate to items included in the statements of earnings. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 29, 1996 and December 31, 1995 are: 1996 1995 ---- ---- Deferred tax assets: Accounts receivable $ 25,643 28,433 Inventories 10,650 14,671 Net operating loss carryovers 24,266 18,677 Operating expenses 34,039 36,024 Postretirement benefits 12,136 11,834 Other 39,971 39,281 ------- ------- Gross deferred tax assets 146,705 148,920 Valuation allowance (7,724) (15,869) ------- ------- Net deferred tax assets 138,981 133,051 ------- ------- Deferred tax liabilities: Property rights and property, plant and equipment 52,229 59,760 Other 9,563 6,787 ------- ------- Gross deferred tax liabilities 61,792 66,547 ------- ------- Net deferred income taxes $ 77,189 66,504 ======= ======= Hasbro has a valuation allowance for deferred tax assets at December 29, 1996 of $7,724, which is a decrease of $8,145 from the $15,869 at December 31, 1995. Such decrease relates primarily to the current and expected future utilization of certain international tax losses from prior years. The remaining allowance pertains to other international operating loss carryforwards, some of which have no expiration and others that will expire beginning in 1997. If fully realized, future income tax expense will be reduced by $7,724. Based on Hasbro's history of taxable income and the anticipation of sufficient taxable income in years when the temporary differences are expected to become tax deductions, it believes that it will realize the benefit of the deferred tax assets, net of the existing valuation allowance. Of the deferred tax assets, approximately 67% are expected to be realized during the next two fiscal years. Deferred income taxes of $78,031 and $85,849 at the end of 1996 and 1995, respectively, are included as a component of prepaid expenses and other current assets, and $16,123 and $4,007, respectively, are included as a component of other assets. At the same dates, deferred income taxes of $16,017 and $22,198, respectively, are included as a component of deferred liabilities. The cumulative amounts of undistributed earnings of Hasbro's international subsidiaries held for reinvestment amounted to approximately $307,000 at December 29, 1996 and $289,000 at December 31, 1995. (9) Capital Stock ------------- Preference Share Purchase Rights -------------------------------- Hasbro maintains a Preference Share Purchase Right plan (the Rights Plan). Under the terms of the Rights Plan, each share of common stock is accompanied by a Preference Share Purchase Right. Each Right is only exercisable under certain circumstances and, until exercisable, the Rights are not transferable apart from Hasbro's common stock. When exercisable, each Right will entitle its holder to purchase until June 30, 1999, in certain merger or other business combination or recapitalization transactions, at the Right's then current exercise price, a number of the acquiring company's or Hasbro's, as the case may be, common shares having a market value at that time of twice the Right's exercise price. Under certain circumstances, the rightholder may, at the option of the Board of Directors of Hasbro (the Board), receive shares of Hasbro's stock in exchange for Rights. Prior to the acquisition by the person or group of beneficial ownership of a certain percentage of Hasbro's common stock, the Rights are redeemable for $.00444 per Right. The Rights Plan contains certain exceptions with respect to the Hassenfeld family and related entities. Common Stock ------------ On February 19, 1997, the Board declared a three-for-two stock split, payable in the form of a 50% stock dividend, on March 21, 1997 to shareholders of record on March 7, 1997. Appropriate changes, to reflect the split, have been effected in the stock options and other securities exercisable for or convertible into Hasbro's common stock. Except for the balance sheet presentation of the December 31, 1995 outstanding and treasury shares, all share and per share amounts have been adjusted to reflect this split. In August 1990, the Board authorized the purchase of up to 6,750,000 shares of the Company's common stock and in June 1994, the Executive Committee of the Board authorized the purchase of up to an additional 7,500,000 shares. At December 29, 1996, a balance of 5,685,750 shares remained under these authorizations. (10) Employee Stock Options and Warrants ----------------------------------- Hasbro has a Non-Qualified Stock Option Plan, an Incentive Stock Option Plan, a 1992 Stock Incentive Plan, a Stock Incentive Performance Plan and a Stock Option Plan for Non-Employee Directors (collectively, the plans). During 1996, Hasbro adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123) but, as permitted, continues to apply Accounting Principles Board Opinion No. 25 (APB 25) in accounting for the plans. Under APB 25, no compensation cost is recognized. A comparison of the Company's net earnings and earnings per share as reported and pro forma as they would have been had compensation cost been determined consistent with SFAS 123 follows: 1996 1995 ---- ---- Net earnings: As reported $199,912 155,571 Pro forma 196,911 154,802 ======= ======= Earnings per share: As reported $ 1.52 1.18 Pro forma 1.49 1.17 ======= ======= As the provisions of SFAS 123 have not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Hasbro has reserved 14,955,055 shares of its common stock for issuance upon exercise of options granted or to be granted under the plans. These options generally vest in equal annual amounts over three to five years. The plans provide that options be granted at exercise prices not less than market value on the date the option is granted and options are adjusted for such changes as stock splits and stock dividends. No options are exercisable for periods of more than ten years after date of grant. Although certain of the plans permit the granting of awards in the form of stock options, stock appreciation rights, stock awards and cash awards, to date, only stock options have been granted. The changes in outstanding options and warrants for the three years ended December 29, 1996 follow: Weighted Average Shares (in Exercise thousands) Price ------- ------- Outstanding at December 26, 1993 10,684 $16.11 Granted 1,869 19.97 Exercised (2,991) 11.67 Expired or canceled (757) 19.15 ------ Outstanding at December 25, 1994 8,805 18.17 Granted 1,108 22.71 Exercised (475) 11.34 Expired or canceled (561) 20.91 ------ Outstanding at December 31, 1995 8,877 18.93 Granted 6,339 21.75 Exercised (1,236) 14.47 Expired or canceled (345) 22.17 ------ Outstanding at December 29, 1996 13,635 $20.56 ====== ===== The number of shares exercisable and the weighted average exercise price for such shares at the end of 1996, 1995 and 1994 were 6,585,280 at $19.32, 4,727,262 at $16.89 and 3,264,852 at $14.63, respectively. At the end of 1996, by range of exercise prices, the number of shares represented by outstanding options and warrants with their weighted average exercise price and weighted average remaining contractual life, in years, and the number of shares represented by exercisable options and warrants with their weighted average exercise price were: Outstanding Exercisable ------------------------ ------------------ Exercise Price Shares Price Life Shares Price ------------- ---------- ----- ---- ---------- ----- $ 5.06 - 9.83 955,623 $ 7.57 3.1 955,623 $ 7.57 ========== ===== ==== ========== ===== $16.67 - 19.75 2,291,923 $18.39 6.7 1,575,507 $18.30 ========== ===== ==== ========== ===== $20.21 - 28.99 10,387,438 $22.23 6.8 4,054,150 $22.48 ========== ===== ==== ========== ===== The weighted average fair value of options granted in 1996 and 1995 were $6.93 and $6.44, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: risk-free interest rates of 5.51% and 7.19%; expected dividend yields of 1.13% and 1.18%; expected volatility of approximately 21% and lives of 5.9 years for both years. (11) Pension, Postretirement and Postemployment Benefits --------------------------------------------------- Pension Benefits ---------------- Hasbro's net pension and profit sharing cost for 1996, 1995 and 1994 was approximately $15,700, $12,200 and $12,500, respectively. United States Plans ------------------- Substantially all United States employees are covered under at least one of several non-contributory defined benefit plans maintained by the Company. Benefits under the major plans, covering non-union employees, are based primarily on salary and years of service. Benefits under other plans are based primarily on fixed amounts for specified years of service. The net periodic pension cost of these plans included the following components: 1996 1995 1994 ---- ---- ---- Benefits earned during the year $ 8,583 6,304 7,029 Interest cost on projected benefits 9,868 9,492 8,219 Actual return on plan assets (23,227) (31,154) (521) Net amortization and deferral 11,763 21,153 (8,429) ------ ------ ------ $ 6,987 5,795 6,298 ====== ====== ====== The funded status and the amounts recognized in Hasbro's balance sheets relating to these plans are: 1996 1995 ----------------------- ----------------------- Plans With Plans With Plans With Plans With Assets Accumulated Assets Accumulated Exceeding Benefits Exceeding Benefits Accumulated Exceeding Accumulated Exceeding Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- Actuarial present value of: Vested benefits $103,870 6,591 98,149 8,303 Nonvested benefits 3,205 673 3,162 199 ------- ------ ------- ------ Accumulated benefit obligation 107,075 7,264 101,311 8,502 Effect of assumed increase in compensation level 29,542 3,469 27,972 5,997 ------- ------ ------- ------ Projected benefit obligation 136,617 10,733 129,283 14,499 Net assets available for benefits 162,641 - 137,292 919 ------- ------ ------- ------ Plan assets in excess of (less than) projected benefits $ 26,024 (10,733) 8,009 (13,580) ======= ====== ======= ====== Consisting of: Unrecognized net asset $ 1,372 - 1,715 - Unrecognized prior service cost (6,085) (4,474) (815) (4,310) Unrecognized net gain (loss) 32,406 2,818 9,407 (1,984) Accrued pension recognized in the balance sheet (1,669) (9,077) (2,298) (7,286) ------- ------ ------- ------ $ 26,024 (10,733) 8,009 (13,580) ======= ====== ======= ====== The assets of the funded plans are managed by investment advisors and consist primarily of pooled indexed and actively managed bond and stock funds. The projected benefits have been determined using assumed discount rates of 7.75% for 1996, 7.25% for 1995 and 8.5% for 1994 and, for all years, an assumed long-term rate of compensation increase of 5% and an assumed long-term rate of return on plan assets of 9%. Hasbro also has a profit sharing plan covering substantially all of its United States non-union employees. The plan provides for an annual discretionary contribution by the Company which for 1996, 1995 and 1994 was approximately $5,000, $4,800 and $5,100, respectively. International Plans ------------------- Pension coverage for employees of Hasbro's international subsidiaries is provided, to the extent deemed appropriate, through separate defined benefit and defined contribution plans. These plans were neither significant individually nor in the aggregate. Postretirement Benefits ----------------------- Hasbro provides certain postretirement health care and life insurance benefits to eligible United States employees who retire and have either attained age 65 with 5 years of service or age 55 with 10 years of service. The cost of providing these benefits on behalf of employees who retired prior to 1993 is and will continue to be substantially borne by the Company. The cost of providing benefits on behalf of employees who retire after 1992 is shared, with the employee contributing an increasing percentage of the cost, resulting in an employee-paid plan after the year 2002. The plan is not funded. The accumulated benefit obligation relating to this plan at December 29, 1996 and December 31, 1995 consists of: 1996 1995 ---- ---- Retired employees $17,632 17,873 Fully eligible active employees 1,021 952 Other active employees 5,909 5,322 ------ ------ $24,562 24,147 ====== ====== The net periodic postretirement benefit cost included the following components: 1996 1995 1994 ---- ---- ---- Benefits earned during the period $ 289 267 403 Interest cost on projected benefits 1,727 1,822 1,709 ------ ------ ------ $ 2,016 2,089 2,112 ====== ====== ====== For measuring the expected postretirement benefit obligation, an 8.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996 and a rate of 9.2% for 1995 and 1994. The 1996 rate was further assumed to decrease gradually to 5% in 2012. The 1995 and 1994 rates were assumed to decrease to 6% over this same period. All were assumed to remain constant after 2012. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75% in 1996, 7.25% in 1995 and 8.5% in 1994. If the health care cost trend rate were increased one percentage point in each year, the accumulated postretirement benefit obligation at December 31, 1996 would have increased by approximately 10% and the aggregate of the benefits earned during the period and the interest cost would have each increased by approximately 11%. Postemployment Benefits ----------------------- Hasbro has several plans covering certain groups of employees which may provide benefits to such employees following their period of active employment but prior to their retirement. These plans include certain severance plans which provide benefits to employees involuntarily terminated and certain plans which continue the Company's health and life insurance contributions for employees who have left Hasbro's employ under terms of its long-term disability plan. At the beginning of 1994, Hasbro adopted Statement of Financial Accounting Standards No. 112 (SFAS 112). SFAS 112 requires that the cost of certain postemployment benefits be accrued over the employee service period which was a change from the Company's prior practice of recording such benefits when incurred. The effect of initially applying SFAS 112, net of a deferred tax benefit of $2,513, was recorded as the cumulative effect of change in accounting principles. (12) Leases ------ Hasbro occupies certain manufacturing facilities and sales offices and uses certain equipment under various operating lease arrangements. The rent expense under such arrangements, net of sublease income which is not material, for 1996, 1995 and 1994 amounted to $46,092, $43,486 and $39,186, respectively. Minimum rentals, net of minimum sublease income which is not material, under long-term operating leases for the five years subsequent to 1996 and in the aggregate are as follows: 1997 $ 33,749 1998 24,539 1999 20,056 2000 15,619 2001 13,995 Later years 100,452 ------- $208,410 ======= All leases expire prior to 2014. Real estate taxes, insurance and maintenance expenses are generally obligations of the Company. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 1996. In addition, Hasbro leases certain facilities which, as a result of prior restructurings, are no longer in use. Future costs relating to such facilities were included as a component of the restructuring charge and are not included in the table above. (13) Discontinued Development Project and Restructuring Charges ---------------------------------------------------------- During the second quarter of 1995, Hasbro discontinued its efforts, begun in 1992, to develop a mass-market virtual reality game system. These efforts produced such a game system, but at a price judged to be too expensive for the mass-market. The impact of this decision was a charge of $31,100 for the estimated costs associated with such action. Approximately half of the charge resulted from the expensing of software development costs, previously capitalized under the provisions of Statement of Financial Accounting Standards No. 86, related to both the operating system and games for the system. The remaining amount represented provisions for costs associated with discontinuance of this project, including the termination of contractual agreements relating to the development of the system and games, the write-off of certain fixed assets and various other cancellation/termination costs. Substantially all of the liabilities established for this action have been paid. During the third quarter of 1994, Hasbro recorded a restructuring charge of $12,500, primarily related to the reorganization of its Domestic Toy Group and the consolidation of its United States manufacturing operations. Substantially all of the liabilities established for these actions, which included provisions for severance payments, outplacement services and the continuation of certain fringe benefits, primarily medical and dental, have been paid. (14) Financial Instruments --------------------- Hasbro's financial instruments include cash and cash equivalents, accounts receivable, short- and long-term borrowings, accounts payable, accrued liabilities and foreign currency forward exchange contracts. At December 29, 1996, the carrying value of these instruments approximated their fair value based on current market prices and rates. As estimates of these fair values are subjective and involve uncertainties and judgments, they cannot be determined with precision. Any changes in assumptions would affect these estimates. Hasbro enters into certain foreign currency forward exchange contracts to protect itself from adverse currency rate fluctuations on identifiable foreign currency commitments made in the ordinary course of business. These contracts, which relate to future purchases of inventory, are denominated in currencies of major industrial countries and entered into with creditworthy banks for terms of not more than twelve months. The Company does not anticipate any material adverse effect on its results of operations or financial position from these contracts. (See note 15) (15) Commitments and Contingencies ----------------------------- Hasbro had unused open letters of credit of approximately $20,000 and $18,000 at December 29, 1996 and December 31, 1995, respectively. Hasbro had the equivalent of approximately $35,000 and $42,000 of forward exchange contracts outstanding at December 29, 1996 and December 31, 1995, respectively. These contracts have been entered into to hedge firm commitments for the purchase of products, principally from the Far East. Gains and losses deferred under hedge accounting provisions are subsequently included in the measurement of the related foreign currency transaction. The aggregate amount of gains and losses resulting from foreign currency transactions was not material. Hasbro is involved in various claims and legal actions substantially arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's future results of operations or liquidity. (16) Segment Reporting ----------------- Industry and Geographic Information ----------------------------------- Hasbro operates primarily in one industry segment which includes the development, manufacture and marketing of toy products and related items and the licensing of certain related properties. As Hasbro operates internationally, it is exposed to the risk of changes in social, political and economic conditions inherent in such operations. Information about Hasbro's operations in different geographic areas, determined by the location of the subsidiary or unit, for each of the fiscal years in the three-year period ended December 1996 follows. Hasbro's primary operations in areas outside of the United States include Western Europe, Canada, Mexico, Australia and New Zealand and Hong Kong. As the international areas have similar business environments and the Company's operations in those areas are similar, they are presented as one category. 1996 1995 1994 ---- ---- ---- Net revenues: United States $1,642,569 1,550,454 1,530,928 International 1,359,801 1,307,756 1,139,334 --------- --------- --------- $3,002,370 2,858,210 2,670,262 ========= ========= ========= Operating profit: United States $ 201,312 146,841 169,782 International 130,955 126,731 125,895 --------- --------- --------- $ 332,267 273,572 295,677 ========= ========= ========= Identifiable assets: United States $1,793,915 1,782,276 1,612,982 International 907,594 834,112 765,393 --------- --------- --------- $2,701,509 2,616,388 2,378,375 ========= ========= ========= Certain of Hasbro's international units sell products, primarily on a letter of credit basis, directly to United States customers, and certain United States units sell products to international customers, primarily in Latin America. Were such transactions reported by the geographic destination of the sale rather than the geographic location of the unit making the sale, United States revenues would be increased and international revenues decreased by $135,010, $71,998 and $36,666 in 1996, 1995 and 1994, respectively. Other Information ----------------- Hasbro markets its products primarily to customers in the retail sector. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as deemed appropriate, a substantial portion of its customers' ability to discharge amounts owed is dependent upon the retail economic environment. Sales to the Company's two largest customers, Toys R Us, Inc. and Wal- Mart Stores, Inc., amounted to 22% and 13%, respectively, of consolidated net revenues during 1996 and 21% and 12%, respectively, during each of 1995 and 1994. Hasbro purchases certain components and accessories used in its manufacturing process and certain finished products from manufacturers in the Far East. The Company's reliance on external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply for products it sells, should such changes be necessary. However, if Hasbro were prevented from obtaining products from a substantial number of its current Far East suppliers due to political, labor or other factors beyond its control, the Company's operations would be disrupted while alternative sources of product were secured. The imposition of trade sanctions by the United States against a class of products imported by Hasbro from, or the loss of "most favored nation" trading status by the Peoples Republic of China could significantly increase the cost of the Company's products imported into the United States from China. (17) Quarterly Financial Data (Unaudited) ------------------------------------ 1996 ---- Quarter ------------------------------------ First Second Third Fourth Full Year ----- ------ ----- ------ --------- Net revenues $538,685 511,609 845,148 1,106,928 3,002,370 Gross profit $300,914 277,425 472,875 622,259 1,673,473 Earnings before income taxes $ 39,109 9,143 104,934 153,707 306,893 Net earnings $ 24,365 5,986 70,469 99,092 199,912 ======= ======= ======= ========= ========= Per common share Earnings $ .18 .05 .54 .75 1.52 Market price High $ 31 1/4 25 3/4 25 1/2 29 3/8 31 1/4 Low $ 19 1/4 23 1/2 21 1/4 24 5/8 19 1/4 Cash dividends declared $ .07 .07 .07 .07 .27 ======= ======= ======= ========= ========= 1995 ---- Quarter ------------------------------------- First Second Third Fourth Full Year ----- ------ ----- ------ --------- Net revenues $526,503 481,854 826,165 1,023,688 2,858,210 Gross profit $293,931 267,769 465,313 594,000 1,621,013 Earnings (loss) before income taxes $ 35,257 (24,217)(a) 103,370 138,140 252,550 Net earnings (loss) $ 21,683 (14,893) 63,572 85,209 155,571 ======= ======= ======= ========= ========= Per common share Earnings (loss) $ .16 (.11) .48 .64 1.18 Market price High $ 22 1/2 23 1/2 22 1/4 21 3/4 23 1/2 Low $ 18 7/8 20 7/8 19 3/4 19 18 7/8 Cash dividends declared $ .05 .05 .05 .05 .21 ======= ======= ======= ========= ========= 1994 ---- Quarter ------------------------------------ First Second Third Fourth Full Year ----- ------ ----- ------ --------- Net revenues $489,133 444,324 796,222 940,583 2,670,262 Gross profit $280,933 241,146 444,093 542,611 1,508,783 Earnings before income taxes and cumulative ef- fect of change in accounting principles $ 43,443 2,657 122,196(a) 123,273 291,569 Net earnings $ 22,435 1,634 75,151 75,813 175,033 ======= ======= ======= ======= ========= Per common share Earnings before cumulative ef- fect of change in account- ing principles $ .20 .01 .56 .57 1.34 Earnings $ .17 .01 .56 .57 1.31 Market price High $ 24 3/8 24 21 3/8 22 1/4 24 3/8 Low $ 22 1/4 18 3/4 18 3/4 18 1/2 18 1/2 Cash dividends declared $ .05 .05 .05 .05 .19 ======= ======= ======= ======= ========= (a) Includes the effect of nonrecurring charges in 1995 of $31,100 relating to a discontinued development project and in 1994, $12,500 relating to restructuring of operations. (See note 13)

EXHIBIT 22 HASBRO, INC. AND SUBSIDIARIES Subsidiaries of the Registrant (a) Name Under Which Subsidiary State or Other Jurisdiction of Does Business Incorporation or Organization - - --------------------------- ------------------------------ Claster Television, Inc. Maryland Hasbro Far East Services, Ltd. Hong Kong Hasbro Interactive, Inc. Delaware Hasbro International, Inc. Delaware Groupe Hasbro France S.A. France Hasbro Asia-Pacific Marketing Ltd. Hong Kong Hasbro Australia Limited Australia Hasbro Canada, Inc. Canada Hasbro de Mexico S.A. de C.V. Mexico Hasbro Deutschland GmbH Germany Hasbro Far East LTD Hong Kong Hasbro Ireland Limited Ireland Hasbro Italy S.r.l. Italy Hasbro Japan K.K. Japan Hasbro New Zealand Limited New Zealand Hasbro Osterreich Ges.m.b.H Austria Hasbro (Schweiz) AG Switzerland Hasbro U.K. Limited United Kingdom Hasbro Interactive Limited United Kingdom HMS Juquetes S.A. de C.V. Mexico Juguetrenes S.A. de C.V. Mexico K'NEX France S.N.C. France K'NEX G.m.b.H. Germany K'NEX International U.K. United Kingdom MB International B.V. The Netherlands Hasbro B.V. The Netherlands Hasbro Hellas S.A. Greece Hasbro Importacao e Exportacao e de Jogos e Brinquedos Lds Portugal Hasbro Israel Ltd. Israel Hasbro Magyarorszag Kft Hungary Hasbro Poland SpZoo Poland MB Espana, S.A. Spain S.A. Hasbro N.V. Belgium Palmyra Holdings Pte Ltd. Singapore Hasbro Hong Kong Limited Hong Kong Hasbro Singapore Pte Ltd. Singapore Hasbro Toy (Malaysia) Sdn Bhd Malaysia Hasbro International Trading, Inc. Delaware Hasbro Managerial Services, Inc. Rhode Island Larami Limited Delaware (a) Inactive subsidiaries and subsidiaries with minimal operations have been omitted. Such subsidiaries, if taken as a whole, would not constitute a significant subsidiary.

EXHIBIT 24(a) ACCOUNTANTS' CONSENT The Board of Directors Hasbro, Inc.: We consent to incorporation by reference in the Registration Statements Nos. 2-78018, 2-93483, 33-57344 and 33-59583 on Form S-8 and No. 33-41548 on Form S-3 of Hasbro, Inc. of our reports dated February 5, 1997 relating to the consolidated balance sheets of Hasbro, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995 and the related consolidated statements of earnings, shareholders' equity and cash flows and related schedule for each of the fiscal years in the three-year period ended December 29, 1996, which report on the consolidated financial statements is incorporated by reference and which report on the related schedule is included in the Annual Report on Form 10-K of Hasbro, Inc. for the fiscal year ended December 29, 1996. /s/ KPMG Peat Marwick LLP Providence, Rhode Island March 26, 1997

5 YEAR DEC-29-1996 DEC-29-1996 218,971 0 853,749 46,600 273,247 1,486,589 528,717 215,172 2,701,509 830,818 149,382 0 0 66,080 1,585,966 2,701,509 3,002,370 3,002,370 1,328,897 1,328,897 777,561 5,834 31,465 306,893 106,981 199,912 0 0 0 199,912 1.52 0