Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 10-K Document 41 189K
2: EX-4 Exhibit 4 (C) 147± 609K
3: EX-4 Exhibit 4 (D) 162± 671K
4: EX-4 Exhibit 4 (F) 2± 12K
5: EX-10 Exhibit 10 (D) 2± 11K
6: EX-10 Exhibit 10 (Gg) 11± 50K
7: EX-10 Exhibit 10 (Hh) 7± 33K
8: EX-10 Exhibit 10 (Vv) 4± 21K
9: EX-10 Exhibit 10 (Ww) 7± 37K
10: EX-11 Statement re: Computation of Earnings Per Share 1 7K
11: EX-12 Statement re: Computation of Ratios 1 7K
12: EX-13 Annual or Quarterly Report to Security Holders 44± 190K
13: EX-21 Subsidiaries of the Registrant 1 9K
14: EX-23 Consent of Experts or Counsel 1 9K
EX-13 — Annual or Quarterly Report to Security Holders
Exhibit Table of Contents
EXHIBIT 13
HASBRO, INC. AND SUBSIDIARIES
Selected Information Contained in
Annual Report to Shareholders
for the Year Ended December 31, 2000
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's common stock, par value $.50 per share (the "Common Stock"), is
traded on the New York and London Stock Exchanges. Prior to June 23, 1999,
the Common Stock was 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 New York Stock Exchange and the American Stock
Exchange, as applicable, and the cash dividends declared per share of Common
Stock for the periods listed.
Sales Prices
---------------- Cash Dividends
Period High Low Declared
------ ---- --- --------------
1999
1st Quarter $30 1/8 21 13/16 $.06
2nd Quarter 37 27 .06
3rd Quarter 28 5/8 21 15/16 .06
4th Quarter 24 1/4 16 7/8 .06
2000
1st Quarter $19 1/8 13 3/4 $.06
2nd Quarter 18 9/16 15 .06
3rd Quarter 17 13/16 10 3/16 .06
4th Quarter 12 15/16 8 3/8 .03
The approximate number of holders of record of the Company's Common Stock as
of February 28, 2001 was 8,650.
Dividends
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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 short-term and long-term
debt. Under the most restrictive agreement, dividend payments are restricted
to the greater of $.03 per share quarterly or 25% of prior fiscal year
consolidated net income.
SELECTED FINANCIAL DATA
-----------------------
(Thousands of Dollars and Shares Except per share Data and Ratios)
Fiscal Year
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of
Earnings Data:
Net revenues $3,787,215 4,232,263 3,304,454 3,188,559 3,002,370
Net earnings (loss)$ (144,631) 188,953 206,365 134,986 199,912
Per Common Share
Data:
Earnings (loss)
Basic $ (.82) .97 1.04 .70 1.02
Diluted $ (.82) .93 1.00 .68 .98
Cash dividends
declared $ .21 .24 .21 .21 .18
Balance Sheet Data:
Total assets $3,828,459 4,463,348 3,793,845 2,899,717 2,701,509
Long-term debt $1,167,838 420,654 407,180 - 149,382
Ratio of Earnings to
Fixed Charges(1) (.67) 4.10 6.70 5.66 7.51
Weighted Average
Number of Common
Shares:
Basic 176,437 194,917 197,927 193,089 195,061
Diluted 176,437 202,103 205,420 206,353 209,283
(1) For purposes of calculating the ratio of earnings to fixed charges,
fixed charges include interest, amortization of debt expense and
one-third of rentals; earnings available for fixed charges represent
earnings before fixed charges and income taxes. Earnings for 2000
were insufficient to cover fixed charges by $225,986.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
-------
A percentage analysis of results of operations follows:
2000 1999 1998
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of sales 44.2 40.1 41.3
----- ----- -----
Gross profit 55.8 59.9 58.7
Amortization 4.2 4.1 2.2
Royalties, research and development 16.8 16.8 12.9
Advertising 12.0 10.8 13.3
Selling, distribution and administration 22.7 19.0 19.8
Restructuring charge and acquired in-process
research and development 1.7 1.5 .6
Loss on sale of business units 1.2 - -
Interest expense 3.0 1.6 1.1
Other (income) expense, net .2 (.4) (.4)
----- ----- -----
Earnings (loss) before income taxes (6.0) 6.5 9.2
Income taxes (2.2) 2.0 2.9
----- ----- -----
Net earnings (loss) (3.8)% 4.5% 6.3%
===== ===== =====
(Thousands of Dollars Except Share Data)
Results of Operations
---------------------
Net earnings (loss) for the three fiscal years ended December 31, 2000 were
$(144,631), $188,953 and $206,365, respectively. Diluted earnings (loss) per
share was $(.82) in 2000, $.93 in 1999 and $1.00 in 1998. Net revenues and
operating profit, excluding charges relating to the Company's consolidation
programs, decreased from 1999 levels in the U.S. Toy and International
segments. In U.S. Toys, the decline in revenues resulted from a decline in
sales of product related to STAR WARS: EPISODE 1: THE PHANTOM MENACE, POKEMON
toys and TELETUBBIES preschool products, offset in part by the United States
introduction of ACTION MAN. Coupled with the decline in revenues, lower
gross profit margins on product sold in 2000, and early 2000 higher
administrative overhead and expenditures for items such as advertising
resulted in an operating loss. In the International segment, the decline in
sales of STAR WARS product was largely offset by shipments of POKEMON toy and
non-trading card game related products. The decline in revenues was due
primarily to the unfavorable impact of currency. Higher product costs on
items sold in 2000 contributed to the decline in operating profit. The
Company's Other segments had an operating loss in 2000 compared to operating
profit in 1999 due to reduced revenues from sales of seasonal outdoor play
products, combined with decreased shipments of KOOSH and candy products. In
the Company's Games segment, revenues increased while operating profits,
before consolidation program charges and loss on sale of business units,
decreased. The increased revenues are due in large part to the full year
inclusion of trading cards games from Wizards of the Coast, Inc. (Wizards),
acquired in the fourth quarter of 1999, while decreased operating profits
result from a significant decline in sales of FURBY and related lost profit.
Included in the results of the Games segment are revenues and operating
profits derived from sales of interactive software games, and costs
associated with development of an online interactive game initiative,
Games.com. In December 2000, the Company announced it had entered into an
agreement with Infogrames Entertainment S.A. (Infogrames) to sell the
business units which make up Hasbro Interactive as well as Games.com. This
sale closed in January 2001. Net revenues from the business units held for
sale, including revenues from affiliated companies, for the three fiscal
years ended December 31, 2000 were $194,300, $237,200 and $197,000,
respectively. Operating losses of the business units to be sold, including
consolidation program charges and discontinued development charge, were
$(104,200) in 2000, $(124,300) in 1999 and $(2,100) in 1998.
Net revenues for 2000 were $3,787,215 compared to $4,232,263 and $3,304,454
for 1999 and 1998, respectively. This 11% decrease in net revenues from 1999
levels includes an approximate $129,800 worldwide unfavorable impact of
foreign currency translation rates. Decreased revenues of 47% in the U.S. Toy
segment resulted primarily from decreased sales of product relating to STAR
WARS: EPISODE 1: THE PHANTOM MENACE. It is expected that revenues and
related expenses of entertainment based products are higher in the year of a
theatrical release. STAR WARS: EPISODE 1: THE PHANTOM MENACE was released
theatrically in the United States in May 1999, and throughout international
markets thereafter. In the International segment, net revenues decreased 12%
from 1999 levels, 10% of which is due to the unfavorable impact of currency
noted above, and the remainder to a combination of reduced sales of STAR
WARS, FURBY and ACTION MAN products, offset in part by increased sales of
POKEMON toy related products. Reduced revenues of these segments over the
prior year were offset in part by increased revenues of the Games segment,
which experienced an 11% growth in revenues over the prior year. This
increase was driven primarily by trading card game revenues from Wizards,
which was acquired in the fourth quarter of 1999. While the most significant
contribution from trading card games came from sales of POKEMON card games,
other staple products from Wizards, including MAGIC: THE GATHERING, accounted
for 30% of the increase attributable to trading card games. Partly
offsetting this increase was an approximate 86% decrease in sales of FURBY
and FURBY related product, and a 22% decrease in revenues from interactive
software games.
In comparing 1999 to 1998, the Games segment led revenue growth during the
year, accounting for approximately 71% of the increase, followed by U.S. Toys
and International, contributing 18% and 13% of revenue growth, respectively.
Increased Games segment revenue was primarily driven by FURBY, which
accounted for 24% of segment revenue in 1999 compared to 7% in 1998. Revenues
from Wizards, acquired in the fourth quarter of 1999, accounted for 14% of
Games segment revenues. Increased activity in hand-held electronic games
utilizing Company and licensed brands, interactive CD-ROM games and
traditional board games such as MONOPOLY and TRIVIAL PURSUIT also contributed
to Games segment growth. U.S. Toy segment revenues were boosted by sales of
STAR WARS product associated with the theatrical release of STAR WARS:
EPISODE 1: THE PHANTOM MENACE. Revenues from this line accounted for 36% of
segment revenues in 1999 compared to 13% in 1998. This, as well as the
popular POKEMON line, traditional toy offerings such as EASY BAKE and LITE
BRITE and the full year inclusion of the MICRO MACHINES line acquired with
Galoob Toys, Inc. (Galoob) in the fourth quarter of 1998, also contributed to
revenue growth over 1998 by the U.S. Toy segment. The International segment
contribution to revenue growth was primarily driven by sales of STAR WARS,
POKEMON, TELETUBBIES and FURBY and hand-held electronic products in certain
markets, all partly offset by decreased volume in traditional board games and
puzzles as well as the negative impact of foreign currency translation. The
results of Other segments negatively affected revenue by approximately 3%,
primarily due to decreased revenues of KOOSH and candy product.
The Company's gross profit margin decreased to 55.8% in 2000 from 59.9% in
1999 and 58.7% in 1998. The decrease in margin primarily reflects product
mix, with lower revenues generated from FURBY and entertainment based
properties, such as STAR WARS related products, which carry higher gross
margins. Partially offsetting this decrease is the higher gross margin
associated with trading card games from Wizards. Moderating this higher
anticipated gross margin in 2000 was the impact of obsolescence costs
associated with overproduction of certain trading card games, primarily
POKEMON related. The increase in margin in 1999 from 1998 principally
reflects the increased revenues in the Games segment, where many product
lines carry a higher gross margin.
Amortization expense of $157,763 includes amortization of both property
rights and cost in excess of net assets acquired. This compares with $173,533
in 1999 and $72,208 in 1998. Impairment charges of $25,046 were recognized
in 2000 resulting from discontinued product line offerings arising from the
Company's decision to focus on developing its core brands. In 1999, as part
of its consolidation program, the Company recognized $38,449 in impairment
charges arising from decisions to discontinue or significantly reduce product
line offerings. The remaining increases in all years were attributable to the
acquisitions made during the period.
Expenditures for royalties, research and development decreased 11% to
$635,366 from $711,790 in 1999, which had increased from $424,673 in 1998.
Included in these amounts are expenditures for research and development of
$208,485 in 2000, $254,599 in 1999 and $184,962 in 1998. As percentages of
net revenues, research and development was 5.5% in 2000, down from 6.0% in
1999 and 5.6% in 1998. In 1999, contractual development commitments
recognized for discontinued product lines in connection with the 1999
consolidation program amounted to $10,992. The decrease in 2000 reflects
reduced spending on development of interactive software game titles, the
primary reason for the increase in 1999 over 1998, and reduced product
development in the U.S. Toy group as the Company focuses its efforts on
developing its core brands. 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. Excluding charges
of $42,270 in 2000 and $15,300 in 1999 relating to royalty commitments on
discontinued product lines and product lines with significantly reduced
expectations recognized in connection with the Company's consolidation
programs, royalty expenditures decreased by approximately $57,000 and .2% as
a percent of net revenues from 1999. Excluding consolidation program charges,
the increase in 1999 over 1998 reflects the increased percentage of 1999
revenues obtained from licensed product carrying higher royalty rates,
primarily STAR WARS.
Advertising expense increased to 12.0% of net revenues, compared to 10.8% of
net revenues in 1999 and the 1998 level of 13.3%. Included in 2000 expense is
$3,155 related to contractual commitments on discontinued product lines
arising from the Company's 2000 consolidation program. This charge, combined
with expenditures committed to early in the year, contributed to the
increased percentage of lower 2000 net revenue. The percentage decrease in
1999 from 1998 levels primarily reflects the mix of more entertainment based
properties, such as STAR WARS and POKEMON, marketed throughout our segments,
which tend to carry a lower advertising to revenue ratio. Increased 1999
revenues in the Games segment from FURBY and trading card games also
contributed to the decrease from 1998, as these lines do not carry as great
of an advertising spend ratio as other products.
Selling, distribution and administration costs increased in both dollars and
as a percentage of net revenues in 2000 from 1999 levels. The increase
results from marketing, selling and administrative costs in the Games segment
associated with Wizards. Costs associated with tournament sponsorship and
retail operations of Wizards result in higher selling, distribution and
administrative costs than historically found in the Games segment. The
increase in the Games segment was offset in part by lower administrative
costs in the remainder of the Games segment and in the US Toy segment
relating to a significant decrease or elimination of performance based bonus
accruals existing in 1999. Comparing 1999 to 1998, selling, distribution and
administration costs increased in dollars but decreased as a percentage of
net revenues to $799,919, or 19.0% of revenues, from $655,938, or 19.9% in
1998. Of the increase in dollars, approximately 25% of the increase reflects
the Games segment's 1999 acquisition of Wizards and approximately 31% of the
increase reflects higher performance based bonus accruals. The remainder of
the increase in dollars primarily reflects costs associated with the higher
level of activity in 1999. The decreased percentage reflects higher 1999
revenues as well as the Company's commitment to control these costs, and the
benefit received from the 1997 global integration and profit enhancement
program.
The Company recognized $63,951 of restructuring expense in 2000. This amount
reflects charges under the 2000 restructuring plan of $70,079 and adjustments
to the 1999 plan of $(6,128). The pretax impact of consolidation program
charges and adjustments for the fiscal year ended December 31, 2000 was
$146,142.
On October 12, 2000, the Company announced a plan approved by its Board of
Directors (Board) to consolidate its U.S. Toy group in Rhode Island,
significantly reduce overhead through reductions in product development,
sales and marketing, and administrative functions across the Company and to
increase its focus on development of the Company's core brands. The impact
of this plan was recorded in the fourth quarter as follows:
Restructuring charge $ 70,079
--------
Other operating expenses:
Cost of sales 6,625
Amortization 25,046
Royalties, research and development 42,270
Advertising 3,155
Selling, distribution and administration 5,095
--------
82,191
--------
Total 2000 consolidation program cost $ 152,270
========
The significant components of the 2000 plan include the closing of offices in
Cincinnati, Ohio, the Napa, California office and warehouse and a small
office in San Francisco, California, thereby essentially consolidating the
U.S. Toy group in Rhode Island. These actions were substantially completed at
December 31, 2000. Additionally, the plan includes the reduction of
overhead, particularly in marketing and sales, product development and
administration. This includes a curtailment of expansion of the retail
business of Wizards, the further consolidation of certain international
operating offices into regional centers and consolidation and streamlining of
the Company's marketing activities. The Company is also increasing its focus
on developing and marketing its core brands and reducing its reliance on
licenses. This focus has resulted in product lines which will be discontinued
or for which the Company has significantly reduced expectations.
Together, the components of this plan anticipate the redundancy of
approximately 850 employees, including 125 in manufacturing and sourcing
activities and 725 worldwide in research and product development, marketing,
sales and administration. Employee redundancies by area are as follows:
Opening Balance at
Balance Activity December 31, 2000
------- ------- -------
Manufacturing activities 125 (98) 27
Research, product development, sales
marketing and administration 725 (403) 322
------- ------- -------
850 (501) 349
======= ======= =======
Total charges under the 2000 plan represent cash charges of $89,400,
comprised of approximately $31,800 for severance benefits which will be
disbursed over the employee's entitlement period, $5,100 in related charges
paid in 2000 to relocate certain U.S. Toy group employees to Rhode Island,
$21,400 for lease costs to be expended over the contractual lease term of the
closed facilities and approximately $31,100 of contractual commitments on
exited product lines and certain other licensed product lines with reduced
expectations due to the Company's enhanced focus on its core brands. The
product lines being exited were not, either individually or in the aggregate,
material to the Company's revenues or operating results. Total non-cash
charges were $62,900 of which charges of $16,900 were for fixed asset write-
offs relating primarily to Corporate and the U.S. Toy segment. The remaining
approximate $46,000 relates to asset write-offs and a write-down of assets
impaired due to the Company's enhanced focus on its core brands. This
includes impairment of intangible assets arising from the decision to
discontinue product line offerings. Non-cash charges relating to asset write-
offs have been credited to the respective line items on the balance sheet.
The components of the plan included in the restructuring charge in the
statement of operations are severance costs of $31,800, lease costs of
$21,400 and fixed asset write-offs of $16,900. Included in accrued
liabilities at December 31, 2000 is $53,200 relating to amounts due to
terminated employees over their severance entitlement period and costs
associated with lease costs. The Company anticipates pretax savings under the
restructuring plan of $49,000 in 2001 and $53,000 in 2002. The restructuring
plan is expected to be completed in fiscal 2001. Third party actions and the
impact of competition could delay or increase the cost of implementation of
the Company's consolidation program or alter the Company's actions and reduce
actual results.
In December 1999, the Company commenced a program to consolidate
manufacturing and sourcing activities and product lines, as well as
streamline and further regionalize marketing, sales and research and
development activities worldwide. Costs associated with this program in 1999
amounted to $141,575, and were recorded $64,232 in restructuring, $8,740 in
cost of sales, $38,449 in amortization, $26,292 in royalties, research and
development and $3,862 in advertising. Adjustments to the 1999 restructuring
plan of $(6,128) were recorded in 2000.
The significant components of the 1999 restructuring plan included the
closing of factories in Mexico and in the United Kingdom, reducing capacity
at the remaining three factories, shifting production to third party
manufacturers in the Far East and further consolidation and regionalization
of the International marketing and sales structure. Actions under the plan
commenced in December 1999 and were completed in fiscal 2000. There were no
material changes to the plan, however adjustments were recognized in 2000
reflecting the reversal of excess restructuring accruals due to lower than
previously estimated costs to achieve the overall objectives of the plan,
primarily in the consolidation and regionalization of the International
marketing and sales structure. The 1999 restructuring charge of $64,232
represented approximately $38,700 of cash charges for severance benefits for
termination of approximately 2,200 employees, which will be disbursed over
the employee's entitlement period, $14,300 of cash charges for lease and
facility closing costs to be expended over the contractual lease terms and
closing process and non-cash charges of $11,200 for fixed asset write-offs,
arising primarily in the manufacturing area. Of the cash amount,
approximately $4,700 was paid prior to December 26, 1999 for severance
benefits relating to approximately 200 employees terminated prior to that
date. Non-cash charges relating to fixed asset write-offs were credited to
the respective line items on the balance sheet. Details of
activity in the restructuring plan for fiscal 2000 follow:
Balance at Balance at
Dec. 26, Dec. 31,
1999 Adjustments Activity 2000
------- ----------- -------- ------
Severance $ 34,000 (4,800) (25,200) 4,000
Lease and facility
closing costs 14,300 (1,300) (9,100) 3,900
------- ------- ------- ------
$ 48,300 (6,100) (34,300) 7,900
======= ======= ======= ======
Employee redundancies by area:
Manufacturing and sourcing
activities 1,700 - (1,700) -
Research, product development, sales
marketing and administration 300 (40) (260) -
------- ------- ------- ------
2,000 (40) (1,960) -
======= ======= ======= ======
The remaining severance liability represents cash charges for severance
benefits for employees made redundant which will be disbursed over the
employee's entitlement period. The balance in lease and facility closing
costs will be expended over the contractual lease term. The Company
generated pre-tax savings of approximately $15,900 from this plan in 2000.
The components of the 1999 program included in other operating expenses
represented costs associated with exiting certain product lines and
reevaluating other product lines which resulted in reduced expectations. The
product lines being exited were not, either individually or in the aggregate,
material to the Company's revenues or operating results. Approximately
$12,000 represents cash charges that will be incurred on contractual royalty,
product development and advertising commitments associated with the
discontinued product lines. Non-cash charges of approximately $65,000 relate
to asset write-offs and write-downs of underutilized assets. This includes
impairment of intangible assets arising from the decision to discontinue or
significantly reduce product line offerings. The resulting sum of
undiscounted future cash flows of these assets was not sufficient to cover
the carrying amount of the assets, and as such, they were written down to
their fair market value. Items relating to property rights and licenses,
goodwill, inventory, prepaid and other current assets have been credited to
the respective asset in the balance sheet.
As noted above, in December 2000, the Company entered into an agreement to
sell certain business units comprising Hasbro Interactive, as well as its
internet portal, Games.com, to Infogrames for Infogrames securities and cash.
The sale of the business units closed in January 2001. Net assets of the
business units to be sold have been written down to estimated fair value as
of December 31, 2000, resulting in the recognition of a pretax loss of
$43,965. In addition, the Company entered into an agreement with Infogrames,
whereby Infogrames will develop interactive games based on the Company's
properties. The Company will receive annual royalties including a minimum
guarantee from Infogrames based on sales generated from the licensing
agreement.
During the third quarter of 1998, the Company incurred a one-time charge to
write-off the $20,000 appraised value of acquired in-process research and
development of MicroProse, Inc., which was acquired for a total purchase
price of approximately $70,000 on September 14, 1998.
Interest expense was $114,421 in 2000, compared to $69,340 in 1999 and
$36,111 during 1998. The increase largely reflects the costs associated with
funding the Company's recent acquisitions and the Company's stock repurchase
program. Under the terms of the Company's amended and restated credit
facility agreements, coupled with the increased amount of long-term debt of
the Company, Hasbro expects interest expense to increase in 2001.
Other expense of $7,288 in 2000 compares with income of $15,616 in 1999 and
$14,707 in 1998. Expense in 2000 relates primarily to the write down of
investments held for sale which have experienced a non-temporary decline in
value, coupled with a higher level of transactional losses resulting from an
unfavorable movement in foreign currency.
Income tax benefit on the pre-tax loss was 36.0% in 2000. This compares with
income tax expense of 31.0% in 1999 and 32.0% in 1998. This year's higher
rate reflects the tax benefit of operating losses in jurisdictions with
higher statutory tax rates.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents were $127,115 at December 31, 2000 compared to
$280,159 and $177,748 at December 26, 1999 and December 27, 1998,
respectively.
Hasbro generated approximately $163,000 of net cash from its operating
activities in 2000, compared with approximately $392,000 in 1999 and $127,000
in 1998. The 58% decrease in cash provided by operating activities from 1999
is due primarily to the approximate $145,000 net loss incurred in 2000.
Coupled with cash utilized to reduce accounts payable and accrued
liabilities, the decrease was partially offset by a 37% decrease in accounts
receivable. The decrease in accounts receivable results from a 27% decrease
in revenues for the fourth quarter of 2000 and a greater proportion of cash
collected on sales during the year. Inventories decreased as a result of
both lower production in anticipation of reduced shipments in the first
quarter of 2001 and the write-down of excess inventory, particularly trading
card games, in the fourth quarter. Conversely, prepaid expenses and other
current assets increased in large part as a result of inclusion of assets
held for sale in regards to the Company's sale of Hasbro Interactive and
Games.com to Infogrames.
Hasbro generated approximately $392,000 of net cash from its operating
activities in 1999, compared with approximately $127,000 in 1998. The
significant change between the 1999 and 1998 amounts results from a
combination of factors. Included in the 1999 amount was $38,361 utilized by
changes in operating assets and liabilities, compared with $267,231 utilized
in 1998. Full year accounts receivable for 1999 increased at a rate
significantly below that of the increase in fourth quarter revenues.
Reflecting the acquisition of Wizards made during the fourth quarter and
growth in inventory levels in the International segment for 2000 product
introduction, 1999 inventories increased over prior year levels. Prepaid and
other current assets also increased from the prior year, in part due to the
acquisition of Wizards and the increased spending on product development.
Reflecting amounts payable in 2000 for the Wizards acquisition, the remaining
unpaid amounts from the 1999 consolidation program and increased bonus
accruals in high performing segments, accounts payable and accrued
liabilities increased by 35% over prior year levels. Royalty advances made in
connection with the STAR WARS license that apply to future years have been
included in long-term assets. During 1998, $267,231 was utilized by changes
in operating assets and liabilities. With the $170,723 increase in fourth
quarter revenues from the comparable period of 1997, most of which, under
Hasbro's normal trading terms, became due after the end of the Company's
fiscal year, accounts receivable increased. Inventories also increased, in
part reflecting acquisitions made during the year, as did prepaid expenses
and other current assets, largely reflecting higher advance royalty payments.
Partially offsetting these utilizations of funds was a small increase in
accounts payable and other accrued liabilities.
Cash flows from investing activities were a net utilization of $180,710,
$429,092 and $792,700 in 2000, 1999 and 1998, respectively. During 2000, the
Company expended approximately $125,000 on additions to its property, plant
and equipment while during 1999 and 1998 it expended approximately $107,000
and $142,000, respectively. Of these amounts, 33% in 2000, 53% in 1999 and
38% in 1998 were for purchases of tools, dies and molds related to the
Company's products. Under the terms of the Company's amended and restated
credit facilities, the Company is restricted in the amount it can expend on
additions to property, plant and equipment. The 1998 additions also include
the expenditures associated with the consolidation of its Spanish
manufacturing and marketing operations into one facility. During the three
years, depreciation and amortization of plant and equipment was $106,458,
$103,791 and $96,991, respectively.
During 2000, the Company made several small acquisitions for approximately
$58,000 in total, net of cash acquired, none of which were considered
individually significant. An additional post closing adjustment payment made
and contingent payments accrued in 2000 with relation to the September 1999
acquisition of Wizards totaled approximately $79,800, bringing the total
acquisition cost to date to $492,574. On September 30, 1999, the Company
acquired the outstanding shares of Wizards, for an initial purchase price of
$325,000, subject to additional payments based upon the closing balance sheet
and future payments contingent upon achieving certain operating objectives.
The Company also made other smaller acquisitions and investments in 1999,
none of which were significant. Hasbro made three major acquisitions during
1998, having an aggregate purchase price of $669,737. On April 1, 1998, it
acquired substantially all of the business and operating assets of Tiger
Electronics, Inc. and certain affiliates. On September 14, 1998, it acquired
the outstanding shares of MicroProse Inc. through a cash tender offer of
$6.00 for each outstanding share. On October 30, 1998, it acquired the
outstanding shares of Galoob through a cash tender offer of $12.00 for each
outstanding share. Other investing activities in 2000 largely reflects a
reduction in intangible and other long-term assets of Hasbro Interactive and
Games.com, which were sold to Infogrames. Under the terms of the Company's
amended and restated credit facilities, the Company is restricted in the
amount it can expend on future acquisitions.
The Company commits to inventory production, advertising and marketing
expenditures prior to the peak third and fourth quarter retail selling
season. In addition, accounts receivable, which increase with customer
purchases, are also closer to this selling season and are generally not due
for payment until the fourth quarter or early in the first quarter of the
subsequent year. This timing difference between expenses paid and revenues
collected makes it necessary for the Company to borrow significant amounts
during the year. During 2000, the Company borrowed through the issuance of
commercial paper and against short-term lines of credit to fund its seasonal
working capital requirements in excess of funds available from operations and
the issuance of long-term debt. In February 2001, the Company entered into
amended and restated secured revolving and line of credit facility agreements
with its existing lenders. These committed lines include long-term and
short-term secured credit agreements of $325,000 each. The facilities are
secured by substantially all domestic accounts receivable and inventory, as
well as certain investments and intangible assets of the Company. The
Company is not required to maintain compensating balances under the
agreements. The agreements contain certain restrictive covenants setting
forth minimum cash flow and coverage requirements, and a number of other
limitations, including with respect to capital expenditures, investments,
acquisitions, share repurchases and dividend payments. During 2001, the
Company expects to fund its seasonal working capital needs through operations
and these lines of credit and believes that the funds available to it are
adequate to meet its needs. Amounts available for borrowing under the
committed revolving and line of credit facilities are $325,000 (long-term)
and $325,000 (short-term) and vary by quarter, with availability at its
lowest point of $300,000 in the first quarter of 2001. Of this amount
available, $213,000 is unused at March 4, 2001. Amounts available and unused
under uncommitted lines at March 4, 2001 were $143,000.
During 2000, net financing activities utilized approximately $128,000 of
funds of the Company, primarily as a result of the completion on March 27 of
a "Modified Dutch Auction" tender offer, pursuant to which the Company
accepted for payment 18,085,578 shares of common stock, representing
approximately 9.5% of outstanding shares, at a purchase price of $17.25 per
share. The aggregate purchase, including fees and expenses associated with
the tender offer, was approximately $313,000. Offsetting this utilization
was net borrowing activities in 2000 which included the issuance of $550,000
of 7.95% notes due March 15, 2003 and $200,000 of 8.50% notes due March 15,
2006. During 1999, net financing activities provided approximately $145,000
of funds to the Company, primarily through the use of short-term borrowings.
Net financing activities during 1998 provided approximately $490,000,
principally through the issuance of $100,000 of 5.60% notes due November 1,
2005, $150,000 of 6.15% notes due July 15, 2008 and $150,000 of 6.6%
debentures due July 15, 2028.
On December 9, 1997, the Board cancelled all prior share repurchase
authorizations and authorized the purchase of up to an additional $500,000 of
the Company's common stock. On December 6, 1999, the Board authorized an
additional common stock repurchase program up to $500,000. As a result of the
"Modified Dutch Auction" tender offer, the repurchase authorization of 1997
has been completed while $204,500 remains under the 1999 authorization. The
shares acquired under these programs are being used for corporate purposes
including issuance upon the exercise of stock options and warrants. Under
terms of the current bank agreements, the Company is limited in its
repurchase of its shares in the future to $5,000 per year. During 1999, the
Company also invested approximately $240,000 to repurchase its common stock
in the open market. This compares with approximately $180,000 repurchased in
the open market in 1998.
At December 31, 2000, under the most restrictive bank credit agreement
covenant, dividend payments are restricted to the greater of $.03 per share
quarterly or 25% of prior fiscal year consolidated net income.
Financial Risk Management
-------------------------
The Company is exposed to market risks attributable to fluctuations in
foreign currency exchange rates primarily as a result of sourcing products in
four currencies while marketing those products in more than thirty
currencies. Results of operations will be affected primarily by changes in
the value of the U.S. dollar, Hong Kong dollar, British pound, Euro, Canadian
dollar and Mexican peso versus other currencies, principally in Europe and
the United States.
To manage this exposure, as of December 31, 2000, the Company has hedged a
portion of its estimated fiscal 2001 foreign currency transactions using a
combination of forward foreign exchange contracts and purchased foreign
currency options. The Company estimates that a hypothetical immediate 10%
unfavorable movement in the currencies involved could result in an
approximate $13.7 million decrease in the fair value of these instruments.
The Company is also exposed to foreign currency risk with respect to its net
cash and cash equivalents or short-term borrowing positions in other than the
U.S. dollar. The Company believes, however, that the risk on this net
exposure would not be material to its financial condition. In addition, the
Company's revenues and costs have been and will likely continue to be
affected by changes in foreign currency rates. The Company does not speculate
in and other than set forth above, the Company does not hedge foreign
currencies.
At December 31, 2000, the Company had fixed rate long-term debt of
$1,167,838. Interest rate changes affect the fair value of this fixed rate
debt but do not impact earnings or cash flows. The Company estimates that a
hypothetical one percentage point decrease or increase in interest rates
would increase or decrease the fair value of this debt by approximately
$31,000 or $29,000, respectively.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 was
amended during 1999, requiring the Company to adopt SFAS 133 effective
January 1, 2001. SFAS 133 will require that the Company record all
derivatives, such as foreign exchange contracts, in the balance sheet at fair
value. Changes in derivative fair values will either be recognized in
earnings as an offset to the changes in the fair value of the related hedged
assets, liabilities and firm commitments or, for forecasted transactions,
deferred and recorded as a component of other shareholders' equity until the
hedged transactions occur and are recognized in earnings. The ineffective
portion of a hedging derivative's change in fair value will be immediately
recognized in earnings.
The one-time effect of adopting SFAS 133 on the Company's assets,
liabilities, other comprehensive income and net income will be less than
$1,000 for the fiscal quarter ending April 1, 2001.
The Economy and Inflation
-------------------------
The Company continued to experience difficult economic environments in some
parts of the world during 2000. 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 2000 was not
significant and the Company will continue its policy of monitoring costs and
adjusting prices accordingly.
Euro Conversion
---------------
Certain member countries of the European Union established fixed conversion
rates between their existing currencies and the European Economic Monetary
Union common currency, or Euro. While the Euro was introduced on January 1,
1999, member countries will continue to use their existing currencies through
January 1, 2002, with the transition period for full conversion to the Euro
ending June 30, 2002. Transition to the Euro creates certain issues for the
Company with respect to upgrading information technology systems for 2002
full use requirements, reassessing currency risk, product pricing, amending
business and financial contracts as well as processing tax and accounting
records. The Company has and will continue to address these transition issues
and does not expect the Euro to have a material effect on the results of
operations or financial condition of the Company.
Other Information
-----------------
The Company's revenue pattern continues to show the second half of the year
more significant to its overall business. The trend of retailers over the
past few years has been to make a higher percentage of their purchases within
or close to the fourth quarter holiday consumer selling season, which
includes Christmas.
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.
In May 2000, the Emerging Issues Task Force reached a consensus on issue No.
00-14, Accounting for Coupons, Rebates, and Discounts (Issue 00-14). Issue
00-14 requires that all expenses relating to sales incentives such as
coupons, rebates and discounts be reported as a reduction of sales. Issue
00-14 will be effective for the Company not later than the second quarter of
2001. The Company currently estimates the impact of adopting Issue 00-14 on
net revenues and selling, distribution and administration expense would not
have a material effect on the Company's financial condition.
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 31, 2000 and December 26, 1999
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the fiscal years in the three-year period ended
December 31, 2000. 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 auditing standards
generally accepted in the United States of America. 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 31, 2000 and December 26, 1999
and the results of their operations and their cash flows for each of the
fiscal years in the three-year period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Providence, Rhode Island
February 7, 2001
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and December 26, 1999
(Thousands of Dollars Except Share Data)
Assets 2000 1999
------ ---- ----
Current assets
Cash and cash equivalents $ 127,115 280,159
Accounts receivable, less allowance for
doubtful accounts of $55,000 in 2000
and $65,000 in 1999 685,975 1,084,118
Inventories 335,493 408,571
Prepaid expenses and other current assets 431,630 358,804
--------- ---------
Total current assets 1,580,213 2,131,652
Property, plant and equipment, net 296,729 318,825
--------- ---------
Other assets
Cost in excess of acquired net assets, less
accumulated amortization of $225,770 in 2000
and $193,947 in 1999 803,189 806,092
Other intangibles, less accumulated amortization
of $347,149 in 2000 and $300,632 in 1999 902,893 949,789
Other 245,435 256,990
--------- ---------
Total other assets 1,951,517 2,012,871
--------- ---------
Total assets $3,828,459 4,463,348
========= =========
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
December 31, 2000 and December 26, 1999
(Thousands of Dollars Except Share Data)
Liabilities and Shareholders' Equity 2000 1999
------------------------------------ ---- ----
Current liabilities
Short-term borrowings $ 228,085 714,669
Accounts payable 191,749 284,772
Accrued liabilities 789,128 983,280
Income taxes 30,850 88,606
--------- ---------
Total current liabilities 1,239,812 2,071,327
Long-term debt 1,167,838 420,654
Deferred liabilities 93,403 92,392
--------- ---------
Total liabilities 2,501,053 2,584,373
--------- ---------
Shareholders' equity
Preference stock of $2.50 par value.
Authorized 5,000,000 shares; none issued - -
Common stock of $.50 par value. Authorized
600,000,000 shares; issued 209,694,630 shares
in 2000 and 1999 104,847 104,847
Additional paid-in capital 464,084 468,329
Deferred compensation (6,889) -
Retained earnings 1,583,394 1,764,110
Accumulated other comprehensive earnings (44,718) (32,982)
Treasury stock, at cost, 37,253,164 shares in
2000 and 16,710,620 shares in 1999 (773,312) (425,329)
--------- ---------
Total shareholders' equity 1,327,406 1,878,975
--------- ---------
Total liabilities and shareholders' equity $3,828,459 4,463,348
========= =========
See accompanying notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended in December
(Thousands of Dollars Except Share Data)
2000 1999 1998
---- ---- ----
Net revenues $3,787,215 4,232,263 3,304,454
Cost of sales 1,673,973 1,698,242 1,366,061
--------- --------- ---------
Gross profit 2,113,242 2,534,021 1,938,393
--------- --------- ---------
Expenses
Amortization 157,763 173,533 72,208
Royalties, research and development 635,366 711,790 424,673
Advertising 452,978 456,978 440,692
Selling, distribution and administration 863,496 799,919 655,938
Restructuring charge 63,951 64,232 -
Loss on sale of business units 43,965 - -
Acquired in-process research and
development - - 20,000
--------- --------- ---------
Total expenses 2,217,519 2,206,452 1,613,511
--------- --------- ---------
Operating profit (loss) (104,277) 327,569 324,882
--------- --------- ---------
Nonoperating (income) expense
Interest expense 114,421 69,340 36,111
Other (income) expense, net 7,288 (15,616) (14,707)
--------- --------- ---------
Total nonoperating expense 121,709 53,724 21,404
--------- --------- ---------
Earnings (loss) before income taxes (225,986) 273,845 303,478
Income taxes (81,355) 84,892 97,113
--------- --------- ---------
Net earnings (loss) $ (144,631) 188,953 206,365
========= ========= =========
Per common share
Net earnings (loss)
Basic $ (.82) .97 1.04
========= ========= =========
Diluted $ (.82) .93 1.00
========= ========= =========
Cash dividends declared $ .21 .24 .21
========= ========= =========
See accompanying notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended in December
(Thousands of Dollars)
2000 1999 1998
---- ---- ----
Cash flows from operating activities
Net earnings (loss) $(144,631) 188,953 206,365
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization of plant
and equipment 106,458 103,791 96,991
Other amortization 157,763 173,533 72,208
Deferred income taxes (67,690) (38,675) 1,679
Compensation earned under restricted
stock programs 2,754 - -
Loss on sale of business units 43,965 - -
Acquired in-process research and
development - - 20,000
Change in operating assets and liabilities
(other than cash and cash equivalents):
Decrease (increase) in accounts
receivable 395,682 (11,248) (126,842)
Decrease (increase) in inventories 69,657 (44,212) (44,606)
Increase in prepaid expenses
and other current assets (84,006) (26,527) (113,451)
(Decrease) increase in accounts payable
and other current liabilities (292,313) 193,626 17,668
Long-term advances and other (25,083) (147,729) (3,425)
------- ------- -------
Net cash provided by operating
activities 162,556 391,512 126,587
------- ------- -------
Cash flows from investing activities
Additions to property, plant and
equipment (125,055) (107,468) (141,950)
Investments and acquisitions, net of
cash acquired (138,518) (352,417) (667,736)
Other 82,863 30,793 16,986
------- ------- -------
Net cash utilized by investing
activities (180,710) (429,092) (792,700)
------- ------- -------
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Fiscal Years Ended in December
(Thousands of Dollars)
2000 1999 1998
---- ---- ----
Cash flows from financing activities
Proceeds from borrowings with original
maturities of more than three months 912,979 460,333 407,377
Repayments of borrowings with original
maturities of more than three months (291,779) (308,128) (24,925)
Net (repayments) proceeds of other
short-term borrowings (341,522) 226,103 271,895
Purchase of common stock (367,548) (237,532) (178,917)
Stock option and warrant transactions 2,523 50,358 58,493
Dividends paid (42,494) (45,526) (42,277)
------- ------- -------
Net cash (utilized) provided by
financing activities (127,841) 145,608 491,646
------- ------- -------
Effect of exchange rate changes on cash (7,049) (5,617) (9,570)
------- ------- -------
(Decrease) increase in cash
and cash equivalents (153,044) 102,411 (184,037)
Cash and cash equivalents at beginning
of year 280,159 177,748 361,785
------- ------- -------
Cash and cash equivalents at end
of year $127,115 280,159 177,748
======= ======= =======
Supplemental information
Cash paid during the year for
Interest $ 91,180 64,861 25,135
======= ======= =======
Income taxes $ 95,975 108,342 128,436
======= ======= =======
See accompanying notes to consolidated financial statements.
[Enlarge/Download Table]
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Thousands of Dollars)
Accumulated
Additional Other Total
Common Paid-in Deferred Retained Comprehensive Treasury Shareholders'
Stock Capital Compensation Earnings Earnings Stock Equity
--------- --------- --------- --------- --------- --------- ---------
Balance, December 28, 1997 $ 104,849 454,498 - 1,457,495 (3,903) (174,822) 1,838,117
Net earnings - - - 206,365 - - 206,365
Other comprehensive earnings - - - - (5,722) - (5,722)
Comprehensive earnings 200,643
Purchase of treasury stock - - - - - (178,917) (178,917)
Stock option and warrant
transactions - 66,818 - - - 60,195 127,013
Dividends declared - - - (42,061) - - (42,061)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 27, 1998 104,849 521,316 - 1,621,799 (9,625) (293,544) 1,944,795
Net earnings - - - 188,953 - - 188,953
Other comprehensive earnings - - - - (23,357) - (23,357)
Comprehensive earnings 165,596
Purchase of treasury stock - - - - - (237,532) (237,532)
Stock option and warrant
transactions - (52,892) - - - 105,747 52,855
Dividends declared - - - (46,642) - - (46,642)
Other (2) (95) - - - - (97)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 26, 1999 104,847 468,329 - 1,764,110 (32,982) (425,329) 1,878,975
Net loss - - - (144,631) - - (144,631)
Other comprehensive earnings - - - - (11,736) - (11,736)
Comprehensive earnings (156,367)
Purchase of treasury stock - - - - - (367,548) (367,548)
Stock option and warrant
transactions - (1,708) - - - 7,406 5,698
Restricted stock activity (2,537) (6,889) - - 12,159 2,733
Dividends declared - - - (36,085) - - (36,085)
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2000 $ 104,847 464,084 (6,889) 1,583,394 (44,718) (773,312) 1,327,406
========= ========= ========= ========= ========= ========= =========
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 years end on the last Sunday in December. The fiscal
year ended December 31, 2000 is a fifty-three week period while the
fiscal years ended December 26, 1999 and December 27, 1998 were fifty-two
week periods.
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
-----------------
The Company reviews long-lived assets (property, plant and equipment,
cost in excess of acquired net assets and other intangibles) 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. If such assets were
considered to be impaired, the impairment to be recognized would be
measured by the amount by which the carrying value of the assets exceed
their fair value. Fair value is determined based on discounted cash flows
or appraised values, depending on the nature of the asset. Assets to be
disposed of are carried at the lower of the carrying amount or their fair
value less disposal costs.
Cost in Excess of Net Assets Acquired and Other Intangibles
-----------------------------------------------------------
Approximately 43% 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.
Approximately 24% results from the Company's 1998 acquisitions of Tiger
Electronics, Inc. and Galoob Toys, Inc. An additional approximate 21%
results from the Company's 1999 acquisition of Wizards of the Coast, Inc.
Goodwill is being amortized on the straight-line basis over lives ranging
from ten to forty years.
Substantially all of the other intangibles consist of the cost of
acquired product rights. In establishing the value of such rights, the
Company considers, but does not individually value, existing trademarks,
copyrights, patents, license agreements and other product-related rights.
Approximately 61% of these other intangibles relate to rights acquired in
the acquisitions noted above. These rights, which were valued at their
acquisition date based on the anticipated future cash flows from the
underlying product lines, are being amortized over three to twenty-five
years using the straight-line method. An additional approximate 11% of
these other intangibles relate to rights acquired from a major motion
picture studio and are being amortized over the contract life, in
proportion to projected sales of the licensed products during the same
period.
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.
Revenue Recognition
-------------------
Revenue from product sales is recognized upon the passing of title to the
customer, generally at the time of shipment. Provisions for discounts,
rebates and returns are made when the related revenues are recognized.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 101 (SAB 101), Revenue Recognition in Financial Statements, in
December 1999. The SAB summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition
in financial statements. SAB 101 was adopted by the Company in the fourth
quarter and had no significant impact on the consolidated financial
statements.
Research and Development
------------------------
Research and product development costs for 2000, 1999 and 1998 were
$208,485, $254,599 and $184,962, 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.
Shipping and Handling
---------------------
Hasbro expenses costs related to the shipment and handling of goods to
customers as incurred. For 2000, 1999, and 1998, these costs were
$177,200, $169,068 and $155,521 and are included in selling, distribution
and administration expenses.
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.
Comprehensive Income
--------------------
Comprehensive income is comprised primarily of gains and losses on the
translation of foreign currency financial statements and also includes
unrealized gains and losses on certain investment securities, net of tax.
The related tax benefit of other comprehensive income items was $720,
$3,187 and $1,684 for the years 2000, 1999 and 1998, respectively.
Reclassification adjustments in 2000, net of related income taxes of
$2,695, were $4,398.
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 as well as
translation gains and losses resulting from the use of the U.S. dollar as
the functional currency in highly inflationary economies. Other gains and
losses resulting from translation of financial statements are the
principal component of other comprehensive earnings.
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.
Risk Management Contracts
-------------------------
Hasbro does not enter into derivative financial instruments for
speculative purposes. The Company enters into foreign currency forward
and option contracts to mitigate its exposure to foreign currency
exchange rate fluctuations. This exposure relates to future purchases of
inventory not denominated in the functional currency of the unit
purchasing the inventory as well as other cross-border currency
requirements. Premiums on option contracts are amortized over their term
and if such contract is terminated before its maturity, the unamortized
premium is expensed and included in other expense, net. The carrying
value of options is included in prepaid expenses and other current
assets. Gains and losses on forward and option contracts meeting hedge
accounting requirements are deferred and recognized as adjustments to the
carrying value of the related transactions. In the event hedge accounting
requirements are not met, gains and losses on such instruments are
included currently in the statements of operations.
Earnings Per Common Share
-------------------------
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding for the year. Diluted
earnings per share is similar except that the weighted average number of
shares outstanding is increased by shares issuable upon exercise of stock
options and warrants for which market price exceeds exercise price, less
shares which could have been purchased by the Company with the related
proceeds. As a result of the Company's net loss during 2000, the basic
and diluted shares are the same because increasing diluted shares by 526
related to employee stock options would have an antidilutive effect.
A reconciliation of earnings per share for the three fiscal years ended
December 31, 2000 is as follows:
2000 1999 1998
--------------- --------------- ---------------
Basic Diluted Basic Diluted Basic Diluted
------- ------- ------- ------- ------- -------
Net earnings (loss) $(144,631) (144,631) 188,953 188,953 206,365 206,365
======= ======= ======= ======= ======= =======
Average shares
outstanding 176,437 176,437 194,917 194,917 197,927 197,927
Options and warrants - - - 7,186 - 7,493
------- ------- ------- ------- ------- -------
Equivalent shares 176,437 176,437 194,917 202,103 197,927 205,420
======= ======= ======= ======= ======= =======
Earnings (loss)
per share $ (.82) (.82) .97 .93 1.04 1.00
======= ======= ======= ======= ======= =======
(2) Acquisitions and Disposals
--------------------------
In December 2000, the Company entered into an agreement to sell certain
business units comprising Hasbro Interactive, as well as its internet
portal, Games.com, to Infogrames Entertainment SA (Infogrames) for
Infogrames securities and cash. The sale of the business units closed in
January 2001. Net assets of the business units to be sold have been
written down to estimated fair value as of December 31, 2000, resulting
in the recognition of a pretax loss of $43,965. The net assets of the
business units held for sale are presented in the balance sheet at
December 31,2000 as a component of prepaid expenses and other current
assets. In the three fiscal years ended December 31, 2000, net revenues
of the business units sold were $194,300, $237,200 and $197,000,
respectively. Operating losses of the business units to be sold,
including consolidation program charges and discontinued development
charge, were $(104,200) in 2000, $(124,300) in 1999 and $(2,100) in 1998.
On September 30, 1999, Hasbro acquired Wizards of the Coast, Inc.
(Wizards) for an initial purchase price of $325,000 subject to additional
payments based upon the closing balance sheet and future payments
contingent upon achieving certain operating objectives. The total
acquisition cost to date amounts to $492,574, which includes $76,495 of
contingent payment in accrued liabilities at year end with respect to
2000, and has been accounted for using the purchase method. The Company
also made several smaller acquisitions in 2000, none of which were
material.
On a pro forma basis, reflecting the acquisition of Wizards as if it had
taken place at the beginning of each period and after giving effect to
adjustments recording the acquisition, unaudited net revenues, net
earnings and basic and diluted earnings per share for the year ended
December 26, 1999 would have been $4,630,368, $270,386, $1.39 and $1.34,
respectively, and for the year ended December 27, 1998 would have been
$3,459,343, $177,704, $.90 and $.87, respectively. These pro forma
results are not indicative of either future performance or actual results
which would have occurred had the acquisition taken place at the
beginning of the respective periods.
(3) Inventories
-----------
2000 1999
---- ----
Finished products $285,884 348,058
Work in process 19,071 13,470
Raw materials 30,538 47,043
------- -------
$335,493 408,571
======= =======
(4) Property, Plant and Equipment
-----------------------------
2000 1999
---- ----
Land and improvements $ 12,146 16,323
Buildings and improvements 206,518 199,713
Machinery and equipment 297,410 355,958
------- -------
516,074 571,994
Less accumulated depreciation 253,533 298,766
------- -------
262,541 273,228
Tools, dies and molds, net of
amortization 34,188 45,597
------- -------
$296,729 318,825
======= =======
Expenditures for maintenance and repairs which do not materially extend
the life of the assets are charged to operations.
(5) Short-Term Borrowings
---------------------
At December 31, 2000, Hasbro has available secured committed and
unsecured uncommitted lines of credit from various banks approximating
$704,000 and $419,000, respectively. Substantially all of the short-term
borrowings outstanding at the end of 2000 and 1999 represent borrowings
made under, or supported by, these lines of credit and the weighted
average interest rates of the outstanding borrowings were 10.0% and 6.4%,
respectively. During 2000, 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. Certain
domestic accounts receivable and inventory of the Company secured the
committed lines at December 31, 2000. In February 2001, the Company
entered into amended and restated secured revolving and line of credit
facility agreements with its existing lenders. These committed lines
include $325,000 and $325,000 available under long-term and short-term
secured credit agreements, respectively. The facilities are secured by
substantially all domestic accounts receivable and inventory, as well as
certain investments and intangible assets of the Company. The Company is
not required to maintain compensating balances, however, it is required
to pay a fee of 3/8% per annum of the unused amount of the facility
available for borrowing. The agreements contain certain restrictive
covenants setting forth minimum cash flow and coverage requirements, and
a number of other limitations, including with respect to capital
expenditures, investments, acquisitions, share repurchases and dividend
payments.
(6) Accrued Liabilities
-------------------
2000 1999
---- ----
Royalties $149,020 178,211
Advertising 86,480 140,129
Payroll and management incentives 71,840 114,852
Other 481,788 550,088
------- -------
$789,128 983,280
======= =======
(7) Long-Term Debt
--------------
2000 1999
---- ----
7.95% Notes Due 2003 $ 550,000 -
5.60% Notes Due 2005 100,000 100,000
8.50% Notes Due 2006 200,000 -
6.15% Notes Due 2008 150,000 150,000
6.60% Debentures Due 2028 150,000 150,000
Other 17,838 20,654
------- -------
$1,167,838 420,654
========= =======
Current installments of $1,793 in 2000 and $4,142 in 1999 are aggregated
with short-term borrowings. The maturities of long-term debt in 2002 and
in the succeeding three years are $2,400, $550,900, $1,000 and $101,000.
(8) Income Taxes
------------
Income taxes attributable to earnings (loss) before income taxes are:
2000 1999 1998
---- ---- ----
Current
United States $(41,343) 77,512 40,256
State and local (443) 5,566 5,226
International 28,121 40,489 49,952
------- ------- -------
(13,665) 123,567 95,434
------- ------- -------
Deferred
United States (59,775) (40,131) (6,458)
State and local (5,124) (3,440) (554)
International (2,791) 4,896 8,691
------- ------- -------
(67,690) (38,675) 1,679
------- ------- -------
$(81,355) 84,892 97,113
======= ======= =======
Certain tax benefits are not reflected in income taxes in the statements
of operations. Such benefits of $248 in 2000, $16,735 in 1999 and
$14,377 in 1998, 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:
2000 1999 1998
---- ---- ----
Statutory income tax rate (35.0)% 35.0% 35.0%
State and local income taxes, net (1.6) .5 1.0
Goodwill amortization 4.6 3.3 1.8
Tax on international earnings (3.1) (7.9) (5.4)
Other, net (.9) .1 (.4)
---- ---- ----
(36.0)% 31.0% 32.0%
==== ==== ====
The components of earnings (loss) before income taxes, determined by tax
jurisdiction, are as follows:
2000 1999 1998
---- ---- ----
United States $(318,859) 79,519 123,969
International 92,873 194,326 179,509
------- ------- -------
$(225,986) 273,845 303,478
======= ======= =======
The components of deferred income tax expense arise from various
temporary differences and relate to items included in the statements of
operations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000
and December 26, 1999 are:
2000 1999
Deferred tax assets: ---- ----
Accounts receivable $ 33,227 36,696
Inventories 22,839 26,205
Net operating loss carryovers 29,885 28,930
Operating expenses 50,713 39,512
Postretirement benefits 12,032 12,243
Other 147,023 99,143
------- -------
Gross deferred tax assets 295,719 242,729
Valuation allowance (11,124) (15,146)
------- -------
Net deferred tax assets 284,595 227,583
------- -------
Deferred tax liabilities 118,870 100,820
------- -------
Net deferred income taxes $165,725 126,763
======= =======
Hasbro has a valuation allowance for deferred tax assets at December 31,
2000 of $11,124, which is a decrease of $4,022 from the $15,146 at
December 26, 1999. The allowance pertains to United States and
international operating loss carryforwards, some of which have no
expiration and others that would expire beginning in 2003. If fully
realized, $7,103 will reduce goodwill and the balance will reduce future
income tax expense. Deferred tax liabilities relate primarily to property
rights.
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.
Deferred income taxes of $155,291 and $115,646 at the end of 2000 and
1999, respectively, are included as a component of prepaid expenses and
other current assets, and $14,693 and $19,592, respectively, are included
as a component of other assets. At the same dates, deferred income taxes
of $806 and $1,236, respectively, are included as a component of accrued
liabilities, and $3,453 and $7,239, respectively, are included as a
component of deferred liabilities.
The cumulative amount of undistributed earnings of Hasbro's international
subsidiaries held for reinvestment is approximately $408,000 at December
31, 2000. In the event that all international undistributed earnings were
remitted to the United States, the amount of incremental taxes would be
approximately $60,000.
(9) Capital Stock
-------------
Preference Share Purchase Rights
--------------------------------
Hasbro maintains a Preference Share Purchase Rights 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, 2009, 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 Company may substitute
cash, other assets, equity securities or debt securities for the common
stock. At the option of the Board of Directors of Hasbro (the Board),
the rightholder may, under certain circumstances, 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 $.01 per Right. The Rights Plan contains certain
exceptions with respect to the Hassenfeld family and related entities.
Common Stock
------------
On December 6, 1999, the Board authorized a common share repurchase
program up to $500,000. At December 31, 2000, $204,500 remained under
this authorization.
On February 19, 1999, the Board declared a three-for-two stock split,
payable in the form of a 50% stock dividend, on March 15, 1999 to
shareholders of record on March 1, 1999. All earnings per common share
amounts, references to common stock and shareholders' equity amounts are
reflective of the stock split.
(10) Stock Options, Restricted Stock and Warrants
--------------------------
Hasbro has various stock plans for employees as well as a plan for non-
employee members of the Board (collectively, the plans) and has reserved
30,316,339 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. Certain of the plans
permit the granting of awards in the form of stock options, stock
appreciation rights, stock awards and cash awards.
During 2000, the Company issued restricted stock and granted deferred
restricted stock units to certain key employees. At December 31, 2000,
these awards, net of forfeitures, aggregated the equivalent of 634,076
shares. These shares or units are nontransferable and subject to
forfeiture for periods prescribed by the Company. Upon granting of these
awards, unearned compensation equivalent to the market value at the date
of grant is charged to shareholders' equity and subsequently amortized
over the periods during which the restrictions lapse, generally 3 years.
Deferred compensation relating to the grants, net of forfeitures,
amounted to $9,622. Amortization of deferred, unearned compensation
relating to the restricted stock and deferred restricted stock units of
$2,733 was recorded in fiscal 2000. During 2000, the Company also made
awards under a Long Term Incentive Program (LTIP) under the Company's
omnibus employee stock plans. Conditional upon the Company reaching
certain volume, earnings per share and stock price benchmarks within a
three year performance cycle, restricted shares would be awarded which
would vest over the two years following that cycle. Unearned
compensation equivalent to the market value of the target number of
shares that would be awarded if these conditions were met was recorded at
the date of the LTIP award and is being amortized over a five-year
period. Adjustments are made to compensation expense for changes in
market value and achievement of financial goals. For the year ended
December 31, 2000, conditional requirements of the LTIP award had not
been met and accordingly no compensation expense has been recognized.
As permitted by Statement of Financial Accounting Standards No. 123 (SFAS
123), Hasbro continues to apply Accounting Principles Board Opinion No.
25 (APB 25) in accounting for the plans under which no compensation cost
is recognized. Had compensation expense been recorded under the
provisions of SFAS 123, the impact on the Company's net earnings (loss)
and earnings (loss) per share would have been:
2000 1999 1998
---- ---- ----
Reported net earnings (loss) $(144,631) 188,953 206,365
Pro forma compensation expense,
net of tax (21,981) (18,335) (10,339)
------- ------- -------
Pro forma net earnings (loss) $(166,612) 170,618 196,026
======= ======= =======
Pro forma earnings (loss) per share
Basic $ (.94) .88 .99
Diluted $ (.94) .84 .95
======= ======= =======
The weighted average fair value of options granted in 2000, 1999 and 1998
were $6.43, $12.13 and $8.66, 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 2000, 1999 and 1998, respectively: risk-free interest rates of
6.77%, 5.60% and 5.70%; expected dividend yields of 1.58%, 0.78% and
0.85% and expected volatility of approximately 41%, 34% and 26%, and
expected lives of approximately 6 years.
Additionally, the Company has reserved 18,962,500 shares of its common
stock for issuance upon exercise of outstanding warrants. During 2000,
in connection with the acquisition of certain rights, the Company issued
warrants to purchase 500,000 shares at an exercise price of $15.00 and a
fair value at date of grant of $6.00. In addition, the Company granted
warrants to purchase 1,000,000 and 700,000 shares at exercise prices of
$15.70 and $18.84 respectively, relating to future rights.
Information with respect to options and warrants, in thousands of shares,
for the three years ended December 31, 2000 is as follows:
2000 1999 1998
---- ---- ----
Number of shares:
Outstanding at beginning of year 33,776 36,361 31,424
Granted 9,029 7,168 8,639
Exercised (475) (8,313) (3,468)
Expired or canceled (1,872) (1,440) (234)
------ ------ ------
Outstanding at end of year 40,458 33,776 36,361
====== ====== ======
Exercisable at end of year 27,656 23,456 11,673
====== ====== ======
Weighted average exercise price:
Granted $ 15.59 31.32 23.86
Exercised $ 7.81 14.51 13.34
Expired or canceled $ 22.40 27.43 18.75
Outstanding at end of year $ 20.27 21.46 18.17
Exercisable at end of year $ 20.11 19.09 14.43
====== ====== ======
Information, in thousands of shares, with respect to the 40,458 options
and warrants outstanding and the 27,656 exercisable at December 31, 2000,
is as follows:
Weighted
Average Weighted
Remaining Average
Range of Contractual Exercise
Exercise Prices Shares Life Price
--------------- ------- ---------- -------
Outstanding
$11.10-$14.06 2,823 2.7 years $13.13
$14.14-$16.81 10,466 7.0 years $15.44
$17.34-$23.27 13,989 7.8 years $18.90
$23.33-$36.27 13,180 8.6 years $27.09
====== =====
Exercisable
$11.10-$14.06 2,630 $13.26
$14.14-$16.81 3,257 $15.76
$17.34-$23.27 12,453 $18.82
$23.33-$36.27 9,316 $25.30
====== =====
(11) Pension, Postretirement and Postemployment Benefits
---------------------------------------------------
Pension and Postretirement Benefits
-----------------------------------
Hasbro's net pension, 401(k) matching contribution and profit sharing
cost for 2000, 1999 and 1998 was approximately $13,700, $14,200 and
$14,500, respectively.
United States Plans
-------------------
Substantially all United States employees are covered under at least one
of several non-contributory defined benefit pension plans maintained by
the Company. Benefits under the two major plans, principally covering
non-union employees, are based primarily on salary and years of service.
One of these plans is funded. Benefits under the remaining plans are
based primarily on fixed amounts for specified years of service. One of
these plans is also funded. At December 31, 2000, the two funded plans
have plan assets of $236,296 and accumulated benefit obligations of
$145,589. The unfunded plans have accumulated benefit obligations of
$17,747.
Hasbro also provides certain postretirement health care and life
insurance benefits to eligible 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.
Pension Postretirement
--------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
Change in projected benefit
---------------------------
obligation
----------
Projected benefit obligation
at beginning of year $ 188,318 207,063 24,683 28,428
Service cost 8,032 9,356 241 227
Interest cost 13,656 13,670 1,792 1,775
Plan amendments 955 (2,298) - -
Actuarial gain (18,660) (32,438) (1,155) (3,263)
Benefits paid (7,652) (6,305) (2,238) (2,484)
Expenses paid (371) (730) - -
Other (1,735) - (384) -
------- ------- ------- -------
Projected benefit obligation
at end of year $ 182,543 188,318 22,939 24,683
======= ======= ======= =======
Change in plan assets
---------------------
Fair value of plan assets at
beginning of year $ 242,889 219,410 - -
Actual return on plan assets 919 30,061 - -
Employer contribution 511 453 - -
Benefits paid (7,652) (6,305) - -
Expenses paid (371) (730) - -
------- ------- ------- -------
Fair value of plan assets at
end of year $ 236,296 242,889 - -
======= ======= ======= =======
Funded status $ 53,752 54,571 (22,939) (24,683)
Unrecognized net gain (73,588) (80,496) (1,424) (406)
Unrecognized prior service cost 5,191 5,836 (384) -
------- ------- ------- -------
Accrued benefit cost $(14,645) (20,089) (24,747) (25,089)
======= ======= ======= =======
The assets of the funded plans are managed by investment advisors and
consist primarily of pooled indexed and actively managed stock and bond
funds. For measuring the expected pension accumulated benefit obligation,
assumed discount rates of 8.00%, 7.75% and 6.75% were used for 2000, 1999
and 1998, respectively; assumed long-term rates of compensation increase
of 4.50% in 2000, 1999 and 1998, and an assumed long-term rate of return
on plan assets of 9.00% in all years.
For measuring the expected postretirement benefit obligation, a 7.00%,
7.25% and 7.50% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2000, 1999 and 1998, respectively.
The rates for all years were further assumed to decrease gradually to
4.50% in 2012. All were assumed to remain constant after 2012. The
discount rates used in the pension calculation were also used for the
postretirement calculation.
2000 1999 1998
---- ---- ----
Components of net periodic cost
-------------------------------
Pension
-------
Service cost $ 8,032 9,356 9,362
Interest cost 13,656 13,670 12,798
Expected return on assets (21,368) (19,484) (17,465)
Net amortization and deferrals (4,498) (786) (448)
------- ------- -------
Net periodic benefit cost (benefit) $(4,178) 2,756 4,247
======= ======= =======
Postretirement
--------------
Service cost $ 241 227 224
Interest cost 1,792 1,775 1,893
Net amortization and deferrals (136) 27 57
------- ------- -------
Net periodic benefit cost $ 1,897 2,029 2,174
======= ======= =======
If the health care cost trend rate were increased one percentage point in
each year, the accumulated postretirement benefit obligation at December
31, 2000 and the aggregate of the benefits earned during the period and
the interest cost would have each increased by approximately 10%.
Hasbro has a retirement savings plan to which eligible employees may make
contributions of up to 18% of their salary, as allowed under Section
401(k) of the Internal Revenue Code. In 2000, the plan was amended to
increase Hasbro's matching percentage of employee contributions, in lieu
of discretionary contributions to the profit sharing component of the
plan. The Company contributed approximately $11,200, $6,500 and $6,600
to the plan in 2000, 1999 and 1998, 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.
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.
(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 2000, 1999 and 1998 amounted to $57,470, $56,072 and
$50,932, respectively.
Minimum rentals, net of minimum sublease income which is not material,
under long-term operating leases for the five years subsequent to 2000
and in the aggregate are as follows:
2001 $ 32,443
2002 23,982
2003 19,561
2004 16,181
2005 13,121
Later years 51,243
-------
$156,531
=======
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 2000.
In addition, Hasbro leases certain facilities which, as a result of
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) Consolidation Program and Restructuring Charge
----------------------------------------------
The Company recognized $63,951 of restructuring expense in 2000. This
amount reflects charges under the 2000 restructuring plan of $70,079 and
adjustments to the 1999 plan of $(6,128). The pretax impact of all
consolidation program charges and adjustments to the statement of
operations for the fiscal year ended December 31, 2000 was $146,142.
On October 12, 2000, the Company announced a plan approved by its Board
of Directors to consolidate its U.S. Toy group into Rhode Island,
significantly reduce overhead through reductions in product development,
sales and marketing, and administrative functions across the Company and
to increase its focus on development of the Company's core brands. The
impact of this plan was recorded in the fourth quarter as follows:
Restructuring charge $ 70,079
--------
Other operating expenses:
Cost of sales 6,625
Amortization 25,046
Royalties, research and development 42,270
Advertising 3,155
Selling, distribution and administration 5,095
--------
82,191
--------
Total 2000 consolidation program cost $ 152,270
========
The significant components of the 2000 plan include the closing of
offices in Cincinnati, Ohio, the Napa, California office and warehouse
and a small office in San Francisco, California, thereby essentially
consolidating the U.S. Toy group in Rhode Island. These actions were
substantially completed at December 31, 2000. Additionally, the plan
includes the reduction of overhead, particularly in marketing and sales,
product development and administration. This includes a curtailment of
expansion of the retail business of Wizards, the further consolidation of
certain international operating offices into regional centers and
consolidation and streamlining of the Company's marketing activities. The
Company is also increasing its focus on developing and marketing its core
brands, reducing its reliance on licenses. This focus has resulted in
product lines which will be discontinued or for which the Company has
significantly reduced expectations.
Together, the components of this plan anticipate the redundancy of
approximately 850 employees, including 125 in manufacturing and sourcing
activities and 725 worldwide in research and product development,
marketing, sales and administration. Employee redundancies by area are as
follows:
Opening Balance at
Balance Activity December 31, 2000
-------- -------- -----------------
Manufacturing activities 125 (98) 27
Research, product development, sales
marketing and administration 725 (403) 322
------- ------- -------
850 (501) 349
======= ======= =======
Total charges under the 2000 plan represent cash charges of $89,400,
comprised of approximately $31,800 for severance benefits which will be
disbursed over the employee's entitlement period, $5,100 in related
charges paid in 2000 to relocate certain U.S. Toy group employees to
Rhode Island, $21,400 for lease costs to be expended over the contractual
lease term of the closed facilities and approximately $31,100 of
contractual commitments on exited product lines and certain other
licensed product lines with reduced expectations due to the Company's
enhanced focus on its core brands. The product lines being exited were
not, either individually or in the aggregate, material to the Company's
revenues or operating results. Total non-cash charges were $62,900. Non-
cash charges of $16,900 for fixed asset write-offs relate primarily to
Corporate and the U.S. Toy segment. The remaining approximate $46,000
relates to asset write-offs and a write-down of assets impaired due to
the Company's enhanced focus on its core brands. This includes impairment
of intangible assets arising from the decision to discontinue product
line offerings. Non-cash charges relating to asset write-offs have been
credited to the respective line items on the balance sheet. The
components of the plan included in the restructuring charge in the
statement of operations are severance costs of $31,800, lease costs of
$21,400 and fixed asset write-offs of $16,900. Included in accrued
liabilities at December 31, 2000 is $53,200 relating to amounts due to
terminated employees over their severance entitlement period and costs
associated with lease and closing costs. The restructuring plan is
expected to be completed in fiscal 2001.
On December 7, 1999, the Company announced a program to consolidate
manufacturing and sourcing activities and product lines, as well as
streamline and further regionalize marketing, sales and research and
development activities worldwide. Costs associated with the 1999
consolidation program, recorded in the fourth quarter of 1999, amounted
to $141,575, of which $64,232 was recorded as a restructuring charge and
$77,343 in various other operating expense categories. Adjustments to the
restructuring plan of $(6,128) were recorded in 2000.
The significant components of the plan included the closing of factories
in Mexico and in the United Kingdom, reducing capacity at the remaining
three factories, shifting production to third party manufacturers in the
Far East and further consolidation and regionalization of the
International marketing and sales structure. Actions under the plan
commenced in December 1999 and were completed in fiscal 2000. There were
no material changes to the plan, however, adjustments were recognized in
2000 reflecting the reversal of excess restructuring accruals due to
lower than previously estimated costs to achieve the overall objectives
of the plan, primarily in the consolidation and regionalization of the
International marketing and sales structure. The 1999 restructuring
charge of $64,232 represented approximately $38,700 of cash charges for
severance benefits for termination of approximately 2,200 employees,
which will be disbursed over the employee's entitlement period, $14,300
of cash charges for lease and facility closing costs to be expended over
the contractual lease terms and closing process and non-cash charges of
$11,200 for fixed asset write-offs, arising primarily in the
manufacturing area. Of the cash amount, approximately $4,700 was paid
prior to December 26, 1999 for severance benefits relating to
approximately 200 employees terminated prior to that date. Non-cash
charges relating to fixed asset write-offs were credited to the
respective line items on the balance sheet. Details of activity in the
restructuring plan for fiscal 2000 follow:
Balance at Balance at
Dec. 26, Dec. 31,
1999 Adjustments Activity 2000
------- ----------- -------- ------
Severance $ 34,000 (4,800) (25,200) 4,000
Lease and facility
closing costs 14,300 (1,300) (9,100) 3,900
------- ------- ------- ------
$ 48,300 (6,100) (34,300) 7,900
======= ======= ======= ======
Employee redundancies by area:
Manufacturing and sourcing
activities 1,700 - (1,700) -
Research, product development, sales
marketing and administration 300 (40) (260) -
------- ------- ------- ------
2,000 (40) (1,960) -
======= ======= ======= ======
The remaining severance liability represents cash charges for severance
benefits for employees made redundant which will be disbursed over the
employee's entitlement period. The balance in lease and facility closing
costs will be expended over the contractual lease term.
The components of the consolidation program included in other operating
expenses in 1999 represent costs associated with exiting certain product
lines and reevaluating other product lines resulting in reduced
expectations. The product lines being exited were not, either
individually or in the aggregate, material to the Company's revenues or
operating results. Approximately $12,000 represented cash charges to be
incurred on contractual royalty, product development and advertising
commitments associated with the discontinued product lines. Non-cash
charges of approximately $65,000 related to asset write-offs and write-
downs of underutilized assets. This includes impairment of intangible
assets arising from the decision to discontinue or significantly reduce
product line offerings. The resulting sum of undiscounted future cash
flows of these assets was not sufficient to cover the carrying amount of
the assets, and as such, they were written down to their fair market
value. Items relating to property rights and licenses, goodwill,
inventory, prepaid and other current assets were credited to the
respective asset in the balance sheet.
(14) Financial Instruments
---------------------
Hasbro's financial instruments include cash and cash equivalents,
accounts receivable, short- and long-term borrowings, accounts payable
and accrued liabilities. At December 31, 2000, the carrying cost of these
instruments approximated their fair value. Its financial instruments also
include foreign currency forwards and options. At December 31, 2000, the
carrying value of these instruments approximated their fair value based
on quoted or publicly available market information.
Hasbro uses foreign currency forwards and options, generally purchased
for terms of not more than twelve months, to protect itself from adverse
currency rate fluctuations on firmly committed and anticipated foreign
currency transactions. These over-the-counter contracts, which hedge
future purchases of inventory and other cross-border currency
requirements, are primarily denominated in United States and Hong Kong
dollars and Irish punts and entered into with counterparties who are
major financial institutions with which Hasbro also has other financial
relationships. The Company believes any risk related to default by a
counterparty to be remote.
The Company had the equivalent of approximately $166,500 and $85,000 of
foreign currency forwards outstanding, and approximately $89,500 and
$132,000 of foreign currency options outstanding at December 31, 2000 and
December 26, 1999, respectively. Gains and losses deferred under hedge
accounting provisions are subsequently included in the measurement of the
related foreign currency transaction. Gains and losses on contracts not
meeting hedge accounting provisions are included currently in earnings.
The aggregate amount of gains and losses resulting from all foreign
currency transactions was not material.
(15) Commitments and Contingencies
-----------------------------
Hasbro had unused open letters of credit of approximately $40,000 and
$15,000 at December 31, 2000 and December 26, 1999, respectively.
The Company routinely enters into license agreements with inventors,
designers and others for the use of intellectual properties in its
products. Certain of these agreements contain provisions for the payment
of guaranteed or minimum royalty amounts. Under terms of currently
existing agreements, in certain circumstances the Company may become
liable for remaining guaranteed minimum royalties of up to $741,000
between 2001 and 2008. Of this amount, approximately $238,000 has been
paid. Approximately $58,000 is included in the $66,509 of prepaid
royalties which are a component of prepaid expenses and other current
assets in the balance sheet. Included in other assets is $180,000
representing the long-term portion of amounts paid. Of the remaining
unpaid minimum guaranties, Hasbro may be required to pay amounts as
follows:
2001 $ 44,000
2002 193,000
2003 89,000
2004 56,000
2005 121,000
-------
$ 503,000
=======
Such payments are related to royalties which are expected to be incurred
on anticipated revenues in the years 2001 through 2008.
Hasbro 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 to the
financial condition of the Company.
(16) Segment Reporting
-----------------
Segment and Geographic Information
----------------------------------
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.
The Company's reportable segments are U.S. Toys, Games, International and
Global Operations.
In the United States, the U.S. Toy segment includes the design, marketing
and selling of boys action figures, vehicles and playsets, girls toys,
preschool toys and infant products and creative play products. The Games
segment includes the development, marketing and selling of traditional
board games and puzzles, handheld electronic games, electronic
interactive products, children's consumer electronics, electronic
learning aids, trading card and role-playing games and interactive
software games based on the Company's owned and licensed brands. Within
the International segment, the Company develops, markets and sells both
toy and certain 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.
Segment performance is measured at the operating profit level, prior to
certain charges. In 2000, segment profitability was measured prior to
$146,142 and $43,965 in charges incurred in connection with the
consolidation programs and loss on sale of business units, respectively.
In 1999, segment profitability was measured prior to $141,575 in charges
incurred in connection with the 1999 consolidation program. For 1998,
operating profits are reflected prior to the $20,000 charge incurred to
write-off acquired in-process research and development arising on the
MicroProse acquisition. Included in Corporate and eliminations are
general corporate expenses, the elimination of intersegment transactions
and assets not identified with a specific segment. Intersegment sales and
transfers are reflected in management reports at amounts approximating
cost.
As a result of the complexity of the Company's organizational changes, it
is unable to segregate assets and related expenses between the U.S. Toys
and Games segments for 1999 and prior and these balances are reported as
one. Assets are segregated in 2000 and are separately reported for that
period. The total of U.S. Toys and Games assets in 2000 is presented for
comparative purposes only, and is not used by management in assessing
segment performance in 2000. Certain asset related expense items,
including depreciation and amortization of intangibles, have been
allocated to segments in 1999 and 1998 based upon estimates in order to
arrive at segment operating profit. In December of 2000, the Company
announced that it entered into an agreement to dispose of certain
business units included in its Games segment (see note 2). During 1999,
the Company's Games segment acquired Wizards of the Coast, Inc.
The accounting policies of the segments are the same as those described
in note (1) to the consolidated financial statements.
Information by segment and a reconciliation to reported amounts are as
follows:
[Enlarge/Download Table]
Revenues
from Operating Depreciation
External Affiliate Profit and Capital Total
Customers Revenues (Loss) Amortization Additions Assets
--------- --------- --------- --------- --------- ---------
2000
----
U.S. Toys $ 558,915 5,130 (112,338) 24,240 923 273,381
Games 1,898,177 83,164 146,009 90,196 45,463 2,099,809
--------- --------- --------- --------- --------- ---------
U.S. Toys and Games 2,457,092 88,294 33,671 114,436 46,386 2,373,190
International 1,085,839 - 61,458 35,073 19,447 1,244,479
Global Operations (b) 24,885 825,594 (1,329) 56,542 42,989 504,105
Other segments 219,399 17,898 (18,749) 21,328 2,467 276,203
Corporate and eliminations - (931,786) 10,779 11,796 13,766 (569,518)
--------- --------- --------- --------- --------- ---------
Segment total 3,787,215 - 85,830 239,175 125,055 3,828,459
Consolidation program (c) - - (146,142) 25,046 - -
Loss on sale of business units (d) - - (43,965) - - -
--------- --------- --------- --------- --------- ---------
Consolidated Total $3,787,215 - (104,277) 264,221 125,055 3,828,459
========= ========= ========= ========= ========= =========
1999
----
U.S. Toys (a) $1,056,700 - 91,588
Games (a) 1,703,216 81,948 259,314
--------- --------- --------- --------- --------- ---------
U.S. Toys and Games (a) 2,759,916 81,948 350,902 109,250 12,077 3,588,994
International 1,227,949 6,403 140,567 34,150 9,539 1,285,342
Global Operations (b) 24,923 1,030,028 (1,878) 61,175 67,644 572,454
Other segments 219,475 18,988 5,777 22,517 4,301 269,435
Corporate and eliminations - (1,137,367) (26,224) 11,783 13,907 (1,252,877)
--------- --------- --------- --------- --------- ---------
Segment total 4,232,263 - 469,144 238,875 107,468 4,463,348
Consolidation program (c) - - (141,575) 38,449 - -
--------- --------- --------- --------- --------- ---------
Consolidated Total $4,232,263 - 327,569 277,324 107,468 4,463,348
========= ========= ========= ========= ========= =========
[Enlarge/Download Table]
Revenues
from Operating Depreciation
External Affiliate Profit and Capital Total
Customers Revenues (Loss) Amortization Additions Assets
--------- --------- --------- --------- --------- ---------
1998
----
U.S. Toys (a) $ 894,279 61 55,103
Games (a) 1,043,623 1,019 143,216
--------- --------- --------- --------- --------- ---------
U.S. Toys and Games (a) 1,937,902 1,080 198,319 54,543 12,739 2,390,147
International 1,106,565 (174) 130,232 23,905 34,480 840,246
Global Operations (b) 6,453 935,683 (6,560) 62,397 71,585 415,872
Other segments 253,534 8,992 35,565 19,106 4,925 354,717
Corporate and eliminations - (945,581) (12,674) 9,248 18,221 (207,137)
--------- --------- --------- --------- --------- ---------
Segment total 3,304,454 - 344,882 169,199 141,950 3,793,845
Acquired in-process research
and development - - (20,000) - - -
--------- --------- --------- --------- --------- ---------
Consolidated Total $3,304,454 - 324,882 169,199 141,950 3,793,845
========= ========= ========= ========= ========= =========
(a) As a result of the complexity of the Company's organizational changes, it was unable to segregate
assets and related expenses between the U.S. Toys and Games segments prior to fiscal 2000. 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.
(b) The Global Operations segment derives substantially all of its revenues, and thus its operating
results, from intersegment activities.
(c) The impact of the consolidation programs to operating profit by segment was $45,437 to U. S. Toys,
$5,937 to Games, $29,301 to International, $401 to Global Operations and $65,066 to Corporate and Other
segments for 2000. In 1999, the impact to operating profit by segment was $16,150 to U.S. Toys, $35,732
to Games, $23,044 to International, $44,324 to Global Operations and $22,325 to Other.
(d) The loss on sale of business units relates to the sale of the Games segment's business units
comprising Hasbro Interactive and Games.com (see note 2).
The following table presents consolidated net revenues by classes of
principal products for the years ended in December:
2000 1999 1998
---- ---- ----
Boys toys $ 719,900 1,232,300 891,600
Games and puzzles 2,146,800 1,936,100 1,268,700
Interactive software games 179,600 229,400 192,300
Preschool toys 202,000 273,600 341,600
Other 538,915 560,863 610,254
------- --------- ---------
Net revenues $3,787,215 4,232,263 3,304,454
========= ========= =========
Information as to Hasbro's operations in different geographical areas is
presented below on the basis the Company uses to manage its business.
Net revenues and the related pretax earnings are categorized based on
location of the customer, while long-lived assets (property, plant and
equipment, cost in excess of acquired net assets and other intangibles)
are categorized based on their location:
2000 1999 1998
---- ---- ----
Net revenues
United States $2,251,023 2,818,837 2,113,057
International 1,536,192 1,413,426 1,191,397
--------- --------- ---------
$3,787,215 4,232,263 3,304,454
========= ========= =========
Pretax earnings (loss)
United States $ (242,758) 158,834 194,050
International 16,772 115,011 109,428
--------- --------- ---------
$ (225,986) 273,845 303,478
========= ========= =========
Long-lived assets
United States $1,803,688 1,880,029 1,694,967
International 199,123 194,677 177,569
--------- --------- ---------
$2,002,811 2,074,706 1,872,536
========= ========= =========
Principal international markets include Western Europe, Canada, Mexico,
Australia, New Zealand and Hong Kong.
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 overall retail economic environment.
Sales to the Company's two largest customers, Wal-Mart Stores, Inc. and
Toys `R Us, Inc., amounted to 14% and 13%, respectively, of consolidated
net revenues during 2000, 16% each during 1999 and 18% and 17%,
respectively, during 1998.
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 the Company 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 or the
European Union against a class of products imported by Hasbro from, or
the loss of "normal trade relations" status by, the People's Republic of
China could significantly increase the cost of the Company's products
imported into the United States or Europe.
(17) Quarterly Financial Data (Unaudited)
------------------------------------
2000
----
Quarter
-----------------------------------
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
Net revenues $773,481 778,373 1,072,617 1,162,744 3,787,215
Gross profit $473,180 480,330 613,082 546,650 2,113,242
Earnings (loss) before
income taxes $ 21,923 9,421 20,046 (277,376)(a)(225,986)
Net earnings (loss) $ 15,127 6,500 13,832 (180,090) (144,631)
======= ======= ======= ========= =========
Per common share
Earnings (loss)
Basic $ .08 .04 .08 (1.05) (.82)
Diluted $ .08 .04 .08 (1.05) (.82)
Market price
High $ 19 1/8 18 9/16 17 13/16 12 15/16 19 1/8
Low $ 13 3/4 15 10 3/16 8 3/8 8 3/8
Cash dividends
declared $ .06 .06 .06 .03 .21
======= ======= ======= ========= =========
1999
----
Quarter
-----------------------------------
First Second Third Fourth Full Year
----- ------ ----- ------ ---------
Net revenues $668,398 874,574 1,098,179 1,591,112 4,232,263
Gross profit $411,881 529,548 654,166 938,426 2,534,021
Earnings before
income taxes $ 19,993 46,796 123,434 83,622(a) 273,845
Net earnings $ 13,795 32,289 85,170 57,699 188,953
======= ======= ======= ========= =========
Per common share
Earnings
Basic $ .07 .17 .44 .30 .97
Diluted $ .07 .16 .43 .29 .93
Market price
High $ 30 1/8 37 28 5/8 24 1/4 37
Low $ 21 13/16 27 21 15/16 16 7/8 16 7/8
Cash dividends
declared $ .06 .06 .06 .06 .24
======= ======= ======= ========= =========
(a) In 2000 and 1999, includes $63,951 and $64,232, respectively,
relating to restructuring of operations.
Dates Referenced Herein and Documents Incorporated by Reference
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