SEC Filing | Hasbro, Inc.

SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 26, 1999 Commission file number 1-6682 HASBRO, INC. -------------------- (Name of Registrant) Rhode Island O5-0155090 - - ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 1027 Newport Avenue, Pawtucket, Rhode Island 02861 --------------------------------------------------- (Principal Executive Offices) (401) 431-8697 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X or No --- --- The number of shares of Common Stock, par value $.50 per share, outstanding as of November 5, 1999 was 193,764,320.

HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Thousands of Dollars Except Share Data) (Unaudited) Sep. 26, Sep. 27, Dec. 27, Assets 1999 1998 1998 --------- --------- --------- Current assets Cash and cash equivalents $ 108,627 176,486 177,748 Accounts receivable, less allowance for doubtful accounts of $64,900, $56,900 and $64,400 1,167,660 1,030,751 958,826 Inventories: Finished products 366,811 328,757 283,160 Work in process 17,839 16,627 12,698 Raw materials 54,012 38,425 38,943 --------- --------- --------- Total inventories 438,662 383,809 334,801 Deferred income taxes 108,930 92,748 100,332 Prepaid expenses 443,344 243,513 218,279 --------- --------- --------- Total current assets 2,267,223 1,927,307 1,789,986 Property, plant and equipment, net 303,667 287,872 330,355 --------- --------- --------- Other assets Cost in excess of acquired net assets, less accumulated amortization of $179,094 $144,503 and $152,008 687,848 643,136 704,282 Other intangibles, less accumulated amortization of $232,597, $187,554 and $192,268 800,514 716,123 837,899 Other 134,017 101,866 131,323 --------- --------- --------- Total other assets 1,622,379 1,461,125 1,673,504 --------- --------- --------- Total assets $4,193,269 3,676,304 3,793,845 ========= ========= =========

HASBRO, INC. AND SUBSIDIARIES Consolidated Balance Sheets, continued (Thousands of Dollars Except Share Data) (Unaudited) Sep. 26, Sep. 27, Dec. 27, Liabilities and Shareholders' Equity 1999 1998 1998 --------- --------- --------- Current liabilities Short-term borrowings $ 889,405 507,596 372,249 Trade payables 140,845 152,350 209,119 Accrued liabilities 733,114 788,902 729,605 Income taxes 75,745 88,654 55,327 --------- --------- --------- Total current liabilities 1,839,109 1,537,502 1,366,300 Long-term debt, excluding current installments 407,584 300,000 407,180 Deferred liabilities 82,451 80,010 75,570 --------- --------- --------- Total liabilities 2,329,144 1,917,512 1,849,050 --------- --------- --------- Shareholders' equity Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued - - - Common stock of $.50 par value. Authorized 300,000,000 shares; issued 209,694,630, 209,698,516 and 209,698,516 104,847 104,849 104,849 Additional paid-in capital 467,064 453,586 521,316 Retained earnings 1,717,972 1,500,478 1,621,799 Accumulated other comprehensive income (27,470) (5,216) (9,625) Treasury stock, at cost; 15,299,432, 13,664,769 and 13,523,983 shares (398,288) (294,905) (293,544) --------- --------- --------- Total shareholders' equity 1,864,125 1,758,792 1,944,795 --------- --------- --------- Total liabilities and shareholders' equity $4,193,269 3,676,304 3,793,845 ========= ========= ========= See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Thousands of Dollars Except Share Data) (Unaudited) Quarter Ended Nine Months Ended ------------------ -------------------- Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 -------- -------- --------- --------- Net Revenues $ 1,098,179 945,498 2,641,151 2,000,375 Cost of Sales 444,013 402,369 1,045,556 853,776 -------- -------- --------- --------- Gross Profit 654,166 543,129 1,595,595 1,146,599 -------- -------- --------- --------- Expenses Amortization 31,130 19,275 88,974 49,298 Royalties, Research and Development 170,778 113,755 462,496 263,220 Advertising 117,567 128,053 299,925 257,023 Selling, Distribution and Administration 193,582 162,705 515,231 439,433 Acquired Research and Development - 20,000 - 20,000 -------- -------- --------- --------- Total Expenses 513,057 443,788 1,366,626 1,028,974 -------- -------- --------- --------- Operating Profit 141,109 99,341 228,969 117,625 -------- -------- --------- --------- Nonoperating (income) expense Interest Expense 19,190 11,308 44,788 20,036 Other (Income) Expense, Net (1,515) (1,568) (6,042) (12,082) -------- -------- --------- --------- Total nonoperating (income) expense 17,675 9,740 38,746 7,954 -------- -------- --------- --------- Earnings Before Income Taxes 123,434 89,601 190,223 109,671 Income Taxes 38,264 28,271 58,969 35,095 -------- -------- --------- --------- Net Earnings $ 85,170 61,330 131,254 74,576 ======== ======== ========= ========= Per Common Share Net Earnings Basic $ .44 .31 .67 .38 ======== ======== ========= ========= Diluted $ .43 .30 .64 .36 ======== ======== ========= ========= Cash Dividends Declared $ .06 .05 .18 .15 ======== ======== ========= ========= See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 26, 1999 and September 27, 1998 (Thousands of Dollars) (Unaudited) 1999 1998 ------- ------- Cash flows from operating activities Net earnings $ 131,254 74,576 Adjustments to reconcile net earnings to net cash utilized by operating activities: Depreciation and amortization of plant and equipment 76,511 69,458 Other amortization 88,974 49,298 Deferred income taxes (5,974) (8,141) Acquired research and development - 20,000 Change in operating assets and liabilities (other than cash and cash equivalents): Increase in accounts receivable (218,729) (241,956) Increase in inventories (109,874) (113,951) Increase in prepaid expenses (227,326) (130,678) (Decrease) increase in trade payables and accrued liabilities (39,419) 59,184 Other (1,081) (1,613) ------- ------- Net cash utilized by operating activities (305,664) (223,823) ------- ------- Cash flows from investing activities Additions to property, plant and equipment (66,897) (87,543) Purchase of product rights and licenses (13,800) - Investments and acquisitions, net of cash acquired (22,791) (389,441) Other 2,527 6,033 ------- ------- Net cash utilized by investing activities (100,961) (470,951) ------- ------- Cash flows from financing activities Proceeds from borrowings with original maturities of more than three months 445,861 300,850 Repayments of borrowings with original maturities of more than three months (90,760) (25,775) Net proceeds of other short-term borrowings 178,062 378,363 Purchase of common stock (207,170) (172,574) Stock option transactions 48,172 51,579 Dividends paid (33,879) (31,817) ------- ------- Net cash provided by financing activities 340,286 500,626 ------- ------- Effect of exchange rate changes on cash (2,782) 8,849 ------- ------- Decrease in cash and cash equivalents (69,121) (185,299) Cash and cash equivalents at beginning of year 177,748 361,785 ------- ------- Cash and cash equivalents at end of period $108,627 176,486 ======= =======

HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Nine Months Ended September 26, 1999 and September 27, 1998 (Thousands of Dollars) (Unaudited) 1999 1998 ------- ------- Supplemental information Cash paid during the period for: Interest $ 40,952 14,931 Income taxes $ 37,639 41,980 See accompanying condensed notes to consolidated financial statements. HASBRO, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Earnings (Thousands of Dollars) (Unaudited) Quarter Ended Nine Months Ended ------------------ ------------------ Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 -------- -------- -------- -------- Net earnings $ 85,170 61,330 131,254 74,576 Other comprehensive earnings (loss) (1,461) 14,860 (17,845) (1,313) -------- -------- -------- -------- Total comprehensive earnings $ 83,709 76,190 113,409 73,263 ======== ======== ======== ======== See accompanying condensed notes to consolidated financial statements.

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (Thousands of Dollars and Shares Except Per share Data) (Unaudited) (1) In the opinion of management and subject to year-end audit, the accompanying unaudited interim financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 26, 1999 and September 27, 1998, and the results of operations and cash flows for the periods then ended. The results of operations for the nine months ended September 26, 1999 are not necessarily indicative of results to be expected for the full year. (2) All share and per share amounts have been adjusted to reflect the three- for-two stock split paid March 15, 1999. (3) The Company's other comprehensive earnings (loss) primarily results from foreign currency translation adjustments. (4) Hasbro is a worldwide marketer and distributor of children's and family entertainment products, principally engaged in the design, manufacture and marketing of games and toys ranging from traditional to high-tech. During the second quarter of 1999, the Company redefined its focus and method of managing its business into two major areas, Toys and Games. Following this organizational adjustment, within its two key areas, under the provisions of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company's reportable segments are U.S. Toys, Games, International and Global Operations. In the United States, the U.S. Toy segment includes the design, marketing and selling of boys action figures, vehicles and playsets, girls toys, preschool toys and infant products and creative play products. The Games segment includes the development, marketing and selling of traditional board games and puzzles, handheld electronic games, electronic plush, electronic learning aids and interactive software games based on the Company's owned and licensed brands. Within the International segment, the Company develops, markets and sells both toy and game products in non-U.S. markets. Global Operations manufactures and sources product for the majority of the Company's segments. The Company also has other segments which license certain toy properties and which develop and market non-traditional toy and game based product realizing more than half of their revenues and the majority of their operating profit in the first half of the year, which is contra-seasonal to the rest of the Company's business. These other segments do not meet the quantitative thresholds for reportable segments and have been combined for reporting purposes.

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) Segment performance is measured at the operating profit level. Included in Corporate and eliminations are general corporate expenses, the elimination of intersegment transactions and assets not identified with a specific segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. The accounting policies of the segments are the same as those described in note 1 to the Company's consolidated financial statements for the year ended December 27, 1998. Amounts shown for the nine months of 1999 are not necessarily representative of those which may be expected for the full year 1999 nor were those of the nine months of 1998 representative of those actually experienced for the full year 1998. Similarly, such results are not necessarily those which would be achieved were each segment an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts for the three and nine months ended September 26, 1999 and September 27, 1998 are as follows. Three Months ------------ 1999 1998 ---- ---- Net revenues External Affiliate External Affiliate -------- --------- -------- --------- U.S. Toys $ 309,670 - 272,377 - Games 394,887 50,410 328,058 2,688 International 359,740 655 293,675 396 Global Operations (a) 8,591 293,612 1,884 288,072 Other segments 25,291 5,314 49,504 3,575 Corporate and eliminations - (349,991) - (294,731) --------- --------- --------- --------- $1,098,179 - 945,498 - ========= ========= ========= =========

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) Nine Months ----------- 1999 1998 ---- ---- Net revenues External Affiliate External Affiliate -------- --------- -------- --------- U.S. Toys $ 839,194 - 603,389 61 Games 906,615 51,766 589,275 1,739 International 709,715 3,625 616,842 1,986 Global Operations (a) 17,216 752,206 2,757 662,040 Other segments 168,411 13,661 188,112 11,384 Corporate and eliminations - (821,258) - (677,210) --------- --------- --------- --------- $2,641,151 - 2,000,375 - ========= ========= ========= ========= Quarter ended Nine Months ended Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Operating profit U.S. Toys $ 35,278 30,446 84,313 32,695 Games (c) 56,592 34,688 95,224 51,597 International 58,817 38,341 33,854 15,306 Global Operations (a) (2,090) (811) (5,714) (11,033) Other segments (8,572) 2,544 22,455 29,564 Corporate and eliminations 1,084 (5,867) (1,163) (504) ------- ------- ------- ------- $141,109 99,341 228,969 117,625 ======= ======= ======= ======= Depreciation U.S. Toys and Games (b) $ 4,263 3,621 11,054 7,628 International 1,263 2,374 5,821 6,998 Global Operations 19,837 17,141 48,583 45,648 Other segments 597 322 2,771 2,013 Corporate and eliminations 2,114 2,143 8,282 7,171 ------- ------- ------- ------- $ 28,074 25,601 76,511 69,458 ======= ======= ======= ======= Amortization of intangibles U.S. Toys and Games (b) $ 21,295 10,798 57,293 25,925 International 6,039 3,731 18,083 11,218 Global Operations 916 - 1,931 - Other segments 2,880 4,746 11,667 12,155 ------- ------- ------- ------- $ 31,130 19,275 88,974 49,298 ======= ======= ======= =======

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) Quarter ended Nine Months ended Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Capital additions U.S. Toys and Games (b) $ 2,694 2,071 7,874 4,961 International 2,676 3,262 4,705 18,495 Global Operations 19,591 27,743 47,850 46,999 Other segments 48 654 2,222 2,163 Corporate and eliminations 758 5,844 4,246 14,925 ------- ------- ------- ------- $ 25,767 39,574 66,897 87,543 ======= ======= ======= ======= Sep. 26, 1999 Sep. 27, 1998 ------------- ------------- Total assets U.S. Toys and Games (b) $2,702,800 2,124,073 International 1,181,310 889,297 Global Operations 543,274 394,383 Other segments 289,524 331,646 Corporate and eliminations (523,639) (63,095) --------- --------- $4,193,269 3,676,304 ========= ========= (a) The Global Operations segment derives substantially all of its revenues and thus its operating results from intersegment activities. (b) As a result of the complexity of the Company's organizational changes, it currently is unable to segregate assets and related expenses between the U.S. Toys and Games segments, and thus they are currently reported as one. It is anticipated that such items will be segregated in the future and will then be separately reported. Certain asset related expense items including depreciation and amortization of intangibles have been allocated to segments based upon estimates in order to arrive at segment operating profit. (c) Included in the third quarter and nine months ended September 27, 1998 is a charge to write-off the $20,000 appraised value of acquired in-process research and development of MicroProse, Inc., which was acquired on September 14, 1998.

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) The following table presents consolidated net revenues by classes of principal products for the quarter and nine months ended September 26, 1999 and September 27, 1998. Quarter ended Nine Months ended Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Boys toys $ 364,200 246,100 937,200 575,900 Games and puzzles 494,400 410,600 1,033,500 755,700 Interactive software games 34,000 23,500 111,700 58,200 Preschool toys 76,200 118,600 161,700 200,700 Other 129,379 146,698 397,051 409,875 ------- ------- --------- --------- Net revenues $1,098,179 945,498 2,641,151 2,000,375 ======= ======= ========= =========

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) (5) Earnings per share data for the fiscal quarters and nine months ended September 26, 1999 and September 27, 1998 were computed as follows: 1999 1998 ----------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Quarter - - ------- Net earnings $ 85,170 85,170 61,330 61,330 ======= ======= ======= ======= Average shares outstanding (in thousands) 194,612 194,612 197,053 197,053 Effect of dilutive securities; Options and warrants - 5,732 - 7,509 ------- ------- ------- ------- Equivalent Shares 194,612 200,344 197,053 204,562 ======= ======= ======= ======= Earnings per share $ .44 .43 .31 .30 ======= ======= ======= ======= Nine Months - - ----------- Net earnings $131,254 131,254 74,576 74,576 ======= ======= ======= ======= Average shares outstanding (in thousands) 195,280 195,280 198,519 198,519 Effect of dilutive securities; Options and warrants - 8,726 - 7,887 ------- ------- ------- ------- Equivalent Shares 195,280 204,006 198,519 206,406 ======= ======= ======= ======= Earnings per share $ .67 .64 .38 .36 ======= ======= ======= =======

HASBRO, INC. AND SUBSIDIARIES Condensed Notes to Consolidated Financial Statements (continued) (Thousands of Dollars) (Unaudited) (6) The Company made three major acquisitions during 1998, having an aggregate purchase price of $669,737. On April 1, 1998, the Company acquired substantially all of the business and operating assets of Tiger Electronics, Inc. and certain affiliates (Tiger). On September 14, 1998, the Company acquired MicroProse, Inc. (MicroProse) through a cash tender offer of $6.00 for each outstanding share of MicroProse. Upon completion of a short-form merger, MicroProse became a wholly-owned subsidiary of the Company and each untendered share was converted into the right to receive $6.00 in cash. On October 30, 1998, the Company acquired Galoob Toys, Inc. (Galoob) through a cash tender offer of $12.00 for each outstanding share of Galoob. Upon completion of a short-form merger, Galoob became a wholly-owned subsidiary of the Company and each untendered Galoob share was converted into the right to receive $12.00 in cash. These three acquisitions were accounted for using the purchase method, and accordingly, the net assets acquired have been recorded at their estimated fair value and the results of their operations included from the dates of acquisition. Based on estimates of fair market value, $90,494 has been allocated to net tangible assets, $306,710 to product rights, $252,827 to goodwill and $20,000 to acquired in-process research and development. The appraised fair value of this acquired in-process research and development (interactive game software projects under development at the date of acquisition) was determined using the discounted cash flow approach, considered the percentage of completion at the date of acquisition and was expensed at acquisition. On a pro forma basis, reflecting these three acquisitions as if they had taken place at the beginning of the period, after giving effect to adjustments recording the acquisitions and excluding the charge for in-process research and development, unaudited net revenues, net earnings and basic and diluted earnings per share for the nine months ended September 28, 1998 would have been $2,211,900, $43,300, $.22 and $.21, respectively. These pro forma results are not indicative of either future performance or actual results which would have occurred had the acquisitions taken place at the beginning of the period.

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) NET EARNINGS AND SEGMENT RESULTS - - -------------------------------- Net earnings for the 1999 third quarter and nine months increased to $85,170 and $131,254, respectively, from 1998 levels of $61,330 and $74,576. Diluted earnings per share for the third quarter was $.43 in 1999 and $.30 in 1998. For the nine months ended September 1999, diluted earnings per share was $.64 and $.36 for the same period in 1998. Net revenues and operating profits of the U.S. Toy, Games and International segments increased in both the third quarter and nine months of 1999 over comparable 1998 levels. Impacting the Games segment operating profit in the third quarter and nine months of 1998 was a one-time pre-tax charge of $20,000 to write off the appraised value of acquired in-process research and development of MicroProse, Inc. (MicroProse), which was acquired on September 14, 1998. Operating profit of the Games segment was favorably impacted compared to the prior year periods, absent the effect of the above mentioned one-time charge, by 48% and 92% in the quarter and nine months, respectively, by increased revenues of interactive plush and handheld electronic game products of Tiger Electronics, Inc. (Tiger), which was acquired on April 1, 1998. The overall increase in operating profit of the Games segment was partially offset in the quarter and nine months by a decrease in operating profit compared to the prior year periods, absent the effect of the above mentioned one-time charge, of 56% and 45%, respectively, due to the unfavorable impact of increased costs incurred for the realized and anticipated expansion of the Company's offering of interactive game products. A more detailed discussion of items impacting consolidated net earnings and segment results follows. NET REVENUES - - ------------ Net revenues for the third quarter of 1999 increased approximately 16% to $1,098,179 from $945,498 in the third quarter of 1998. This revenue increase reflects the impact of increased shipments of STAR WARS product across all segments, FURBY and computer based games, and sales of POKEMON products across all segments, all partially offset by decreased shipments of U.S. Toys' Preschool products. Revenues were also adversely impacted by $13,800 from the stronger U.S. dollar. For the nine months, revenues were $2,641,151 and $2,000,375 in 1999 and 1998, respectively. In addition to the third quarter factors above, the 1999 nine month amounts reflect the impact of Tiger, the U.S. release of STAR WARS: EPISODE I: THE PHANTOM MENACE in May 1999 and a negative impact of approximately $21,500 from the strengthened U.S. dollar. GROSS PROFIT - - ------------ The Company's gross profit margins for the quarter and nine months of 1999 were 59.6% and 60.4%, respectively, compared to 1998 amounts of 57.4% and 57.3%. The improvement primarily reflects higher revenues generated from

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) entertainment based properties and interactive game products, which carry higher gross margins. Secondarily, the removal of excess capacity in our Operations segment resulting from the closure of seven manufacturing facilities throughout 1998 has had a positive impact on gross profit margins. EXPENSES - - -------- Amortization expense in both periods of 1999 was greater than in the comparable periods of 1998, reflecting the Company's 1998 acquisitions (see note 6). Royalties, research and development expenses for the quarter and year to date increased in both amount and as a percentage of net revenues from comparable 1998 levels. The royalty component, which accounts for 67% of the combined increase, reflects increased volumes across all segments of STAR WARS and POKEMON product which began shipping in the fourth quarter of 1998, as well as Tiger game products. Revenues derived from entertainment based properties, such as STAR WARS and POKEMON, and resultant royalties, while continuous over the life of a contract, are generally higher in amount in the year a theatrical release takes place. It is anticipated that operating profit will also generally be higher in these years. The degree to which revenues, royalties and operating profits fluctuate is dependent not only on theatrical release dates, but video release dates as well. The Company believes the trend of increased royalty expense is likely to continue in line with the expected higher percentage of the Company's product arising from licensed product. Research and development, at $62,022 for the 1999 third quarter increased in both dollars and as a percentage of net revenues from the 1998 amount of $43,165. For the nine months ended September 1999, research and development expenses increased in dollars to $156,110 from the 1998 amount of $117,544 while remaining constant as a percentage of net revenues. The increases primarily reflect the Company's continuing effort to expand interactive game titles and its 1998 acquisitions. Advertising expense in the third quarter of 1999 decreased in dollars to $117,567 from the 1998 amount of $128,053. For the nine months ended September 1999, advertising expense increased in dollars to $299,925 from $257,023 in the comparable period of 1998. In both the quarter and nine months, advertising decreased as a percentage of net revenues from 1998 amounts. The decrease in dollars in the third quarter and percent of net revenues in both periods reflects the mix of more entertainment based product shipped in 1999 than in the comparable period of 1998. Entertainment based product is not as extensively advertised as the Company's non-entertainment based products. The increase in dollars on a 1999 year to date basis reflects the inclusion of Tiger.

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) Selling, distribution and administration expenses, which, with the exception of distribution costs, are largely fixed, increased in amount during each of the third quarter and nine months of 1999 from comparable 1998 levels. They increased marginally as a percentage of net revenues in the quarter while decreasing as a percentage of net revenues for the nine months. The increase in amount is due primarily to the effect of increased volumes on distribution costs, as well as the inclusion of Tiger and its increased volumes for the full nine months of 1999. The decrease in percentage in the nine month period reflects the increase in 1999 revenue. During the third quarter of 1998, the Company incurred a one-time charge to write-off the $20,000 appraised value of acquired in-process research and development of MicroProse, which was acquired by the Games segment for approximately $70,000 on September 14, 1998 (see note 6). NONOPERATING (INCOME) EXPENSE - - ----------------------------- Interest expense during the third quarter and nine months of 1999 was $19,190 and $44,788, respectively, compared with $11,308 and $20,036 in 1998. The increase reflects costs associated with debt issued to fund the Company's 1998 acquisitions, the continuation of the Company's share repurchase program and the higher level of business activities in 1999. While consistent with 1998 for the third quarter, the decrease in other nonoperating income, net, for the nine months of 1999 predominately reflects lower earnings from short-term investments than in 1998. INCOME TAXES - - ------------ Income tax expense for the quarter and nine months of 1999 was 31.0% of pre- tax income compared with 31.6% for the quarter and 32.0% for the nine months of 1998. The lower percentage versus the nine months of 1998 resulted primarily from the downward trend of the tax on international earnings due to the reorganization of the Company's global business. OTHER INFORMATION - - ----------------- During the past several years the Company has experienced a shift in its revenue pattern wherein the second half of the year has grown in significance to its overall business and, within that half, the fourth quarter has become more prominent. Although the first half of 1999 may represent a greater proportion of full year revenues than the first half of 1998, principally because of the May 19, 1999 theatrical release of STAR WARS: EPISODE 1: THE PHANTOM MENACE, the Company expects that this trend generally will continue. This concentration increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. The trend of retailers over the past few years has been to purchase product within or close to the fourth quarter holiday consumer selling season, which includes Christmas. Quick response inventory management practices now being used result in fewer orders being placed in advance of shipment and more orders, when placed, for immediate delivery. As a result, unshipped orders on any date in a given year are not necessarily indicative of sales for the entire year. In addition, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. At October 24, 1999 and October 25, 1998 the Company's unshipped orders were approximately $860,000 and $580,000, respectively. Late in the fourth quarter of 1997, the Company announced a global integration and profit enhancement program which anticipated the redundancy of approximately 2,500 employees, principally in manufacturing, and provided for actions in three principal areas: a continued consolidation of the Company's manufacturing operations; the streamlining of marketing and sales, while exiting from certain underperforming markets and product lines; and the further leveraging of overheads. The program has been completed. The Company initially estimated its pretax cost savings from this initiative to be $40,000 in 1998 and $350,000 over the period 1998 through 2002. Because of the unanticipated shortfall in sales to Toys 'R Us during 1998 and changes in product mix, factory utilization rates were not as high as initially anticipated, which resulted in below target savings in 1998. The Company estimates that it realized pretax savings of approximately $30,000 for the full year 1998 and approximately $20,000 for the third quarter and $50,000 for the nine months of 1999. The positive cash flow impact from this program has and will occur largely in the form of reduced outflows for payment of costs associated with the manufacture and sourcing of products. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- The seasonality of the Company's business coupled with certain customer incentives, mainly in the form of extended payment terms, result in the interim cash flow statements not being representative of that which may be expected for the full year. Historically, the majority of the Company's cash collections occur late in the fourth quarter and early in the first quarter of the subsequent year. As receivables are collected, cash flow from operations becomes positive and is used to repay a significant portion of the short-term borrowings.

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) As a result, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories as well. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, again due to the seasonality of its business and the extended payment terms offered, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior year-end. Receivables were $1,167,660 at the end of September 1999 compared to $1,030,751 at the end of September 1998. The increase reflects higher nine month revenues and the impact of 1998 acquisitions, offset by the increased impact of the Company's letter of credit business and entertainment based toy and game business, both of which have shorter payment terms. Inventories increased to $438,662, or 14.3%, from $383,809 in September 1998, reflecting the Company's 1998 acquisitions and build up for increased 1999 activity. Other current assets increased to $552,274 at September 1999 from $336,261 at September 1998. Of this increase, 70% reflects advance royalties under the STAR WARS license agreement and 13% reflects the impact of the MicroProse acquisition. Trade payables and accrued liabilities both decreased from the comparable 1998 levels, due primarily to the 1998 impact of unpaid balances relating to the Tiger acquisition. Included in trade payables at September 1999 is $3,749 of current installments of long-term debt of subsidiaries within the International segment. The 1999 impact of these changes are reflected in the $305,664 of net cash utilized by operating activities for the nine months. Property, plant and equipment and other assets, as a group, increased from their September 1998 levels, reflecting the Company's August 13, 1999 acquisition of Europress, a veteran software publisher in the United Kingdom, the 1998 fourth quarter acquisition of Galoob as well as several acquisitions of product rights, licenses and investments during the most recent twelve months. This increase in non-current assets was partially offset by twelve additional months of depreciation and amortization expense. Net cash utilized by these investing activities for the nine months ended September 26, 1999 was $100,961. Net borrowings (short and long-term borrowings less cash and cash equivalents) increased to $1,188,362 at September 26, 1999 from $631,110 at September 27, 1998. This reflects the use of approximately $516,000 of cash in the prior twelve months for investments and acquisitions and the Company's continued repurchase of its common stock, both of which are traditionally funded through a combination of cash provided by operating activities and short and long-term borrowings. During the second quarter of 1999, the Company accelerated a portion of its planned 1999 share buyback through the purchase of 3.1 million

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) shares of its common stock (obtained through the exercise of a warrant) from DreamWorks LLC, at market price. The increase in net borrowings is also impacted by the advance royalty payments made in the fourth quarter of 1998 and second quarter of 1999 under the STAR WARS license agreement, discussed above. In November 1998, the Company issued $100,000 of 5.60% notes due November 1, 2005. At September 26, 1999, the Company had committed unsecured lines of credit totaling approximately $730,000 available to it. It also had available uncommitted lines approximating $660,000. The Company believes that these amounts are adequate for its needs. Of these available lines, approximately $930,000 was in use at September 26, 1999. Net cash provided by financing activities for the nine months of 1999 was $340,286. YEAR 2000 - - --------- The Company has developed plans that address its possible exposure from the impact of the Year 2000. A global cross-functional team of employees is managing this project. The team meets regularly and makes periodic reports on its progress to a management steering committee, the Audit Committee of the Board of Directors and the Board of Directors. The Company has completed the awareness and assessment phases of this project through the inventorying and assessment of its critical financial, operational (including imbedded and non-information technology) and information systems. The remediation phase is substantially complete. Modifications or replacements of remaining non-critical, non-compliant systems are in progress. A planned global 'enterprise' system has become operational at several of the Company's major units, replacing a number of older non-compliant systems. The Company is now in the validation and implementation phases and believes that 100% of its mission critical systems are currently Year 2000 compliant. The Company believes that 100% of all systems will be compliant or operating under contingency plans, discussed below, by mid-December 1999. Excluding costs related to the enterprise system, the Company's out of pocket costs associated with becoming Year 2000 compliant are estimated to approximate $3,000. These costs are being expensed as incurred and approximately $2,000 of this amount has been spent to date. The Company has completed its review of the Year 2000 readiness of its customers, vendors and service providers. This review process included both obtaining confirmation from these business partners of their readiness as well as reviews of such readiness at key vendors by independent third party consultants. The Company will continue to monitor its customers, vendors and service providers for Year 2000 compliance and progress made on any necessary remediation plans. Nothing has come to the attention of the Company that would lead it to believe that its material customers, vendors and service providers will not be Year 2000 ready.

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) (Thousands of dollars) The Company's risk management program includes disaster recovery contingency plans that have been expanded to include Year 2000 issues. This includes a review of customer Year 2000 readiness and discontinuing credit or shortening payment terms accordingly, identification and selection of alternative Year 2000 ready suppliers and service providers and specific contingency plans for non-compliant systems where implementation of the global enterprise system may be delayed beyond the end of 1999, specifically legacy system updates and manual workarounds. In addition, the Company may carry a modest temporary increase in its inventory of certain items going into 2000 to guard against any disruption in supply. Year 2000 readiness has been a senior management priority of the Company for some time and the Company believes that it is taking such reasonable and prudent steps as are necessary to mitigate its risks related to Year 2000. However, the effect, if any, on the Company's results of operations from Year 2000 if it, its customers, vendors or service providers are not fully Year 2000 compliant cannot be reasonably estimated. Notwithstanding the above, the most likely impact on the Company would be a reduced level of activity in the early part of the first quarter of the year 2000, a time at which, as a result of the seasonality of the Company's business, its activities in sales, manufacturing and sourcing are at a low point. Certain statements contained in this discussion contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are inherently subject to known and unknown risks and uncertainties. The Company's actual actions or results may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to, delays in, or increases in the anticipated cost of, the implementation of planned actions as a result of unanticipated technical malfunctions or difficulties which would arise during the validation process or otherwise; the inherent risk that assurances, warranties, and specifications provided by third parties with respect to the Company's systems, or such third party's Year 2000 readiness, may prove to be inaccurate, despite the Company's review process; the continued availability of qualified persons to carry out the remaining anticipated phases; the risk that governments may not be Year 2000 ready, which could affect the commercial sector in trade, finance and other areas, notwithstanding private sector Year 2000 readiness; whether, despite a comprehensive review, the Company has successfully identified all Year 2000 issues and risks; and the risk that proposed actions and contingency plans of the Company and third parties with respect to Year 2000 issues may conflict or themselves give rise to additional issues.

HASBRO, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RECENT INFORMATION - - ------------------ On September 30, 1999, the Company completed its previously announced acquisition of Wizards of the Coast, Inc., a privately held publisher of hobby games and fantasy and science fiction literature, for approximately $325,000, subject to post closing adjustment and certain contingent payment rights. To fund this transaction, the Company issued commercial paper supported by a short-term $350,000 credit agreement. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The effective date of this statement has been delayed to fiscal years beginning after June 15, 2000, requiring the Company to adopt the standard not later than the beginning of fiscal 2001. SFAS 133 will require that the Company record all derivatives, such as foreign exchange contracts, on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as an offset to the changes in the fair value of the related hedged assets, liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other shareholders' equity until the hedged transactions occur and are recognized in earnings. Any portion of a hedging derivative's change in fair value, which does not offset the change in fair value of the underlying exposure, will be immediately recognized in earnings. The Company does not believe adoption of SFAS 133 will have a material impact on either its financial condition or results of operations.

PART II. Other Information Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 11.1 Computation of Earnings Per Common Share - Nine Months Ended September 26, 1999 and September 27, 1998. 11.2 Computation of Earnings Per Common Share - Quarter Ended September 26, 1999 and September 27, 1998. 12 Computation of Ratio of Earnings to Fixed Charges - Nine Months and Quarter Ended September 26, 1999. 27 Article 5 Financial Data Schedule - Third Quarter 1999 (b) Reports on Form 8-K A Current Report on Form 8-K, dated October 14, 1999, was filed by the Company and included the Press Release, dated October 14, 1999, announcing the Company's results for the current quarter. Consolidated Statements of Earnings (without notes) for the quarters and nine months ended September 26, 1999 and September 27, 1998 and Consolidated Condensed Balance Sheets (without notes) as of said dates were also filed.

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HASBRO, INC. ------------ (Registrant) Date: November 10, 1999 By: /s/ Alfred J. Verrecchia ------------------------ Alfred J. Verrecchia Executive Vice President, Global Operations and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

HASBRO, INC. AND SUBSIDIARIES Quarterly Report on Form 10-Q For the Period Ended September 26, 1999 Exhibit Index Exhibit No. Exhibits - - ------- -------- 11.1 Computation of Earnings Per Common Share - Nine Months Ended September 26, 1999 and September 27, 1998 11.2 Computation of Earnings Per Common Share - Quarter Ended September 26, 1999 and September 27, 1998 12 Computation of Ratio of Earnings to Fixed Charges - Nine Months and Quarter Ended September 26, 1999 27 Article 5 Financial Data Schedule - Third Quarter 1999

EXHIBIT 11.1 HASBRO, INC. AND SUBSIDIARIES Computation of Earnings Per Common Share Nine Months Ended September 26, 1999 and September 27, 1998 (Thousands of Dollars and Shares Except Per Share Data) 1999 1998 ----------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Net earnings $131,254 131,254 74,576 74,576 ======= ======= ======= ======= Weighted average number of shares outstanding: Outstanding at beginning of period 196,175 196,175 200,162 200,162 Exercise of stock options and warrants: Actual 2,641 2,641 1,858 1,858 Assumed - 8,726 - 7,887 Purchase of common stock (3,536) (3,536) (3,501) (3,501) ------- ------- ------- ------- Total 195,280 204,006 198,519 206,406 ======= ======= ======= ======= Per common share: Net earnings $ .67 .64 .38 .36 ======= ======= ======= =======

EXHIBIT 11.2 HASBRO, INC. AND SUBSIDIARIES Computation of Earnings Per Common Share Quarter Ended September 26, 1999 and September 27, 1998 (Thousands of Dollars and Shares Except Per Share Data) 1999 1998 ----------------- ----------------- Basic Diluted Basic Diluted ------- ------- ------- ------- Net earnings $ 85,170 85,170 61,330 61,330 ======= ======= ======= ======= Weighted average number of shares outstanding: Outstanding at beginning of period 194,834 194,834 198,018 198,018 Exercise of stock options and warrants: Actual 131 131 497 497 Assumed - 5,732 - 7,509 Purchase of common stock (353) (353) (1,462) (1,462) ------- ------- ------- ------- Total 194,612 200,344 197,053 204,562 ======= ======= ======= ======= Per common share: Net earnings $ .44 .43 .31 .30 ======= ======= ======= =======

EXHIBIT 12 HASBRO, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges Nine Months and Quarter Ended September 26, 1999 (Thousands of Dollars) Nine Months Quarter ------- ------- Earnings available for fixed charges: Net earnings $131,254 85,170 Add: Fixed charges 58,054 24,020 Income taxes 58,969 38,264 ------- ------- Total $248,277 147,454 ======= ======= Fixed Charges: Interest on long-term debt $ 18,716 6,067 Other interest charges 26,072 13,123 Amortization of debt expense 324 108 Rental expense representative of interest factor 12,942 4,722 ------- ------- Total $ 58,054 24,020 ======= ======= Ratio of earnings to fixed charges 4.28 6.14 ======= =======

5 1000 9-MOS DEC-26-1999 SEP-26-1999 108,627 0 1,232,560 64,900 438,662 2,267,223 590,003 286,336 4,193,269 1,839,109 407,584 0 0 104,847 1,759,278 4,193,269 2,641,151 2,641,151 1,045,556 1,045,556 851,395 2,923 44,788 190,223 58,969 131,254 0 0 0 131,254 .67 .64