Back to GetFilings.com



 

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 26, 2004

Commission file number 1-6682


HASBRO, INC.

(Exact Name of Registrant, As Specified in its Charter)


      Rhode Island     

               05-0155090            

(State of Incorporation)

(I.R.S. Employer Identification No.)


1027 Newport Avenue, Pawtucket, Rhode Island 02862

(Address of Principal Executive Offices, Including Zip Code)

 

               (401) 431-8697               

(Registrant's Phone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by

Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months

(or for such shorter period that the registrant was required to file such reports) and

(2) has been subject to such filing requirements for the past 90 days.

 

Yes X or No    

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X or No

 


The number of shares of Common Stock, par value $.50 per share, outstanding as of October 22, 2004 was 177,016,516.

 

 

PART I. FINANCIAL INFORMATION

ITEM 1: Financial Statements

HASBRO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

(Thousands of Dollars Except Share Data)

(Unaudited)

 

Sept. 26,

 

Sept. 28,

 

Dec. 28,

Assets

 

2004

 

2003

 

2003

 

---------

 

---------

 

---------

Current assets

           

  Cash and cash equivalents

$

305,089

 

155,357

 

520,747 

  Accounts receivable, less allowance

           

    for doubtful accounts of $40,500,

           

    $54,200 and $39,200

 

697,430

 

879,669

 

607,556 

  Inventories:

           

    Finished products

 

295,447

 

266,713

 

155,180 

    Work in process

 

14,153

 

7,762

 

5,144 

    Raw materials

 

7,520

 

14,936

 

8,655 

 

--------------

 

--------------

 

--------------

      Total inventories

 

317,120

 

289,411

 

168,979 

             

  Deferred income taxes

 

110,437

 

114,021

 

119,664 

  Prepaid expenses

 

147,985

 

108,683

 

92,317 

 

--------------

 

--------------

 

--------------

       Total current assets

 

1,578,061

 

1,547,141

 

1,509,263 

             

Property, plant and equipment, net

 

195,208

 

206,756

 

199,854 

 

--------------

 

--------------

 

--------------

             

Other assets

           

  Goodwill

 

473,271

 

462,088

 

463,680 

  Other intangibles, less accumulated amortization

           

    of $482,500, $412,200 and $435,000

 

664,452

 

734,232

 

710,639 

  Other

 

211,246

 

298,277

 

279,940 

 

--------------

 

--------------

 

--------------

       Total other assets

 

1,348,969

 

1,494,597

 

1,454,259 

 

--------------

 

--------------

 

--------------

             

       Total assets

$

3,122,238

 

3,248,494

 

3,163,376 

 

========

 

========

 

========

(continued)

 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

 

(Thousands of Dollars Except Share Data)

(Unaudited)

Sept. 26,

Sept. 28,

Dec. 28,

Liabilities and Shareholders' Equity

2004

2003

2003

---------

---------

---------

Current liabilities

             

  Short-term borrowings

$

16,356

 

104,576

 

23,354 

 

  Current installments of long-term debt

 

1,356

 

1,219

 

1,333 

 

  Accounts payable

 

188,831

 

169,352

 

158,969 

 

  Accrued liabilities

 

635,465

 

698,559

 

746,399 

 

 

--------------

 

--------------

 

--------------

 
 

Total current liabilities

 

842,008

 

973,706

 

930,055 

 
               

Long-term debt, excluding current installments

 

632,411

 

856,934

 

686,871 

 

Deferred liabilities

 

146,169

 

146,463

 

141,210 

 

 

--------------

 

--------------

 

--------------

 
 

Total liabilities

 

1,620,588

 

1,977,103

 

1,758,136 

 

 

--------------

 

--------------

 

--------------

 

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

 

104,847

 

104,847

 

104,847

 

  Additional paid-in capital

 

383,849

 

409,787

 

397,878

 

  Deferred compensation

 

(248

)

(771

)

(679

)

  Retained earnings

 

1,649,930

 

1,496,388

 

1,567,693

 

  Accumulated other comprehensive earnings

 

20,785

 

(5,917

)

30,484

 

  Treasury stock, at cost; 32,720,445 shares at

             
 

September 26, 2004, 35,702,707 at September

             
 

28, 2003 and 34,195,301 at December 28, 2003

 

(657,513

)

(732,943

)

(694,983

)

 

--------------

 

--------------

 

--------------

 
 

Total shareholders' equity

 

1,501,650

 

1,271,391

 

1,405,240

 

 

--------------

 

--------------

 

--------------

 
               

Total liabilities and shareholders' equity

$

3,122,238

 

3,248,494

 

3,163,376

 

 

========

 

========

 

========

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

 

(Thousands of Dollars Except Per Share Data)

(Unaudited)

     

Quarter Ended

Nine Months Ended

--------------------

-------------------------

Sept. 26,
2004
- --------

Sept. 28,
2003
- --------

Sept. 26,
2004
- ---------

Sept. 28,
2003
- ---------

Net revenues

$

947,312

 

971,071

 

1,937,992

 

2,014,308

 

Cost of sales

 

423,458

 

419,869

 

817,531

 

822,913

 

 

------------

 

------------

 

-------------

 

-------------

 

Gross profit

 

523,854

 

551,202

 

1,120,461

 

1,191,395

 

 

------------

 

------------

 

-------------

 

-------------

 

Expenses

                 
 

Amortization

 

16,888

 

19,319

 

47,881

 

53,907

 
 

Royalties

 

65,087

 

82,535

 

131,747

 

169,005

 
 

Research and product development

 

39,257

 

38,811

 

108,636

 

102,416

 
 

Advertising

 

129,403

 

105,039

 

243,751

 

225,903

 
 

Selling, distribution and administration

 

151,179

 

168,505

 

429,005

 

458,824

 
   

------------

 

-------------

 

-------------

 

--------------

 
 

Total expenses

 

401,814

 

414,209

 

961,020

 

1,010,055

 

 

------------

 

-------------

 

-------------

 

--------------

 

Operating profit

 

122,040

 

136,993

 

159,441

 

181,340

 

 

------------

 

-------------

 

-------------

 

--------------

 

Nonoperating (income) expense

                 
 

Interest expense

 

8,257

 

12,570

 

24,488

 

39,566

 
 

Other (income) expense, net

 

(5,513

)

6,299

 

(15,606

)

6,381

 
   

------------

 

-------------

 

-------------

 

--------------

 
 

Total nonoperating (income) expense

 

2,744

 

18,869

 

8,882

 

45,947

 

 

------------

 

-------------

 

-------------

 

--------------

 

Earnings before income taxes and

                 
 

cumulative effect of accounting change

 

119,296

 

118,124

 

150,559

 

135,393

 

Income taxes

 

30,609

 

32,309

 

36,501

 

36,972

 

 

------------

 

-------------

 

-------------

 

--------------

 

Earnings before cumulative effect

                 
 

of accounting change

 

88,687

 

85,815

 

114,058

 

98,421

 

Cumulative effect of accounting change,

                 
 

net of tax

 

-

 

(17,351

)

-

 

(17,351

)

 

------------

 

-------------

 

-------------

 

--------------

 

Net earnings

$

88,687

 

68,464

 

114,058

 

81,070

 
   

=======

 

=======

 

=======

 

========

 
                   



(continued)


HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations (continued)

(Thousands of Dollars Except Per Share Data)

(Unaudited)

     

Quarter Ended

Nine Months Ended

--------------------

-------------------------

Sept. 26,
2004
- ---------

Sept. 28,
2003
- ---------

Sept. 26,
2004
- ---------

Sept. 28,
2003
- ---------

Per common share

               
 

Earnings before cumulative

               
 

  effect of accounting change

                 
 

    Basic

$

.50

 

.49

 

.65

 

.57

 
     

=======

 

=======

 

=======

 

========

 
 

    Diluted

$

.45

 

.48

 

.54

 

.55

 

=======

 

=======

 

=======

 

========

 
 

Cumulative effect of accounting

                 
 

  change, net of tax

                 
 

    Basic and diluted

$

-

 

(.10

)

-

 

(.10

)

     

=======

 

=======

 

=======

 

========

 
                     
 

Net earnings

                 
 

    Basic

$

.50

 

.39

 

.65

 

.47

 

=======

 

=======

 

=======

 

========

 
 

    Diluted

$

.45

 

.38

 

.54

 

.45

 

=======

 

=======

 

=======

 

========

 
                     
 

Cash dividends declared

$

.06

 

.03

 

.18

 

.09

 

=======

 

=======

 

=======

 

========

 



See accompanying condensed notes to consolidated financial statements.

 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine Months Ended September 26, 2004 and September 28, 2003

(Thousands of Dollars)

(Unaudited)

 

2004

 

2003

 

Cash flows from operating activities

 

-------

 

-------

 
 

Net earnings

$

114,058

 

81,070

 
 

Adjustments to reconcile net earnings to net cash

         
 

utilized by operating activities:

         
 

Cumulative effect of accounting change, net of tax

 

-

 

17,351

 

Depreciation and amortization of plant and equipment

 

55,138

 

55,627

 

Other amortization

 

47,881

 

53,907

 
 

Loss on early extinguishment of debt

 

1,072

 

-

 
 

Change in fair value of liabilities potentially settleable

         
 

   in common stock

 

(15,370

)

1,540

 

Deferred income taxes

 

22,969

 

21,187

 
 

Compensation earned under restricted stock programs

 

164

 

79

 
 

Change in operating assets and liabilities (other

         
 

than cash and cash equivalents):

         
 

Increase in accounts receivable

 

(78,432

)

(309,382

)

 

Increase in inventories

 

(146,373

)

(91,298

)

 

Increase in prepaid expenses and other current assets

 

(6,298

)

(19,772

)

 

Decrease in accounts payable and accrued liabilities

 

(79,728

)

(1,282

)

 

Other

 

(8,820

)

15,546

 

 

------------

 

------------

 
 

Net cash utilized by operating activities

 

(93,739

)

(175,427

)

 

------------

 

------------

 

Cash flows from investing activities

         
 

Additions to property, plant and equipment

 

(55,265

)

(42,872

)

 

Investments and acquisitions, net of cash acquired

 

(9,824

)

-

 
 

Other

 

5,138

 

(3,029

)

 

------------

 

------------

 
 

Net cash utilized by investing activities

 

(59,951

)

(45,901

)

 

------------

 

------------

 

Cash flows from financing activities

         
 

Repurchases of and repayments of borrowings with original

         
 

maturities of more than three months

 

(50,385

)

(200,288

)

 

Net (repayments) proceeds of other short-term borrowings

 

(6,803

)

82,765

 
 

Purchase of common stock and other equity securities

 

-

 

(3,378

)

 

Stock option transactions

 

21,249

 

13,792

 
 

Dividends paid

 

(26,467

)

(15,607

)

 

------------

 

------------

 
 

Net cash utilized by financing activities

 

(62,406

)

(122,716

)

 

------------

 

------------

 

Effect of exchange rate changes on cash

 

438

 

4,029

 

 

------------

 

------------

 
 

Decrease in cash and cash equivalents

 

(215,658

)

(340,015

)

Cash and cash equivalents at beginning of year

 

520,747

 

495,372

 

 

------------

 

------------

 
 

Cash and cash equivalents at end of period

$

305,089

 

155,357

 

 

=======

 

=======

 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

Nine Months Ended September 26, 2004 and September 28, 2003

 

(Thousands of Dollars)

(Unaudited)

         
         
   

2004

 

2003

 

 

-------

 

-------

 

Supplemental information

       

  Cash paid during the period for:

       

    Interest

$ 29,255

 

50,534

 

    Income taxes

$ 30,623

 

18,847

 
 

See accompanying condensed notes to consolidated financial statements.







HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Earnings

 

(Thousands of Dollars)

(Unaudited)

     
     
 

Quarter Ended

Nine Months Ended

 

------------------

------------------

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

Net earnings

$

88,687

 

68,464

 

114,058

 

81,070

 

Other comprehensive earnings (loss)

 

3,839

 

4,311

 

(9,699

)

40,897

 
   

----------

 

----------

 

----------

 

----------

 

Total comprehensive earnings

$

92,526

 

72,775

 

104,359

 

121,967

 

 

======

 

======

 

======

 

======

 
 

See accompanying condensed notes to consolidated financial statements.

 

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)


(1)   In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 26, 2004 and September 28, 2003, and the results of its operations and cash flows for the periods then ended in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

The quarterly and year to date periods ended September 26, 2004 and September 28, 2003 are 13-week and 39-week periods, respectively.

The results of operations for the nine months ended September 26, 2004 are not necessarily indicative of results to be expected for the full year.

These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The Company filed audited financial statements for the year ended December 28, 2003 in its annual report on Form 10-K, which includes all such information and disclosures, and, accordingly, should be read in conjunction with the financial information included herein.

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements for the fiscal year ended December 28, 2003.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(2)   Earnings per share data for the fiscal quarters and nine months ended September 26, 2004 and September 28, 2003 were computed as follows:

   

2004

2003

   

-----------------

-----------------

Quarter
- ----------

Basic

Diluted

Basic

Diluted

 

-------

-------

-------

-------

Earnings before cumulative

       

  effect of accounting change

$ 88,687 

88,687 

85,815  

85,815

Effect of dilutive securities:

         

   Change in fair value of liabilities

         

      potentially settleable in common stock

 

-

(5,150)

-

1,540

   

------------

------------ 

------------

------------

Adjusted earnings before cumulative

         

  effect of accounting change

 

$ 88,687 

83,537 

85,815  

87,355

 

=======

======= 

=======

=======

           

Average shares outstanding

 

176,885

176,885 

173,833  

173,833

Effect of dilutive securities:

         
 

Liabilities potentially settleable in

       
 

  common stock

-

5,918 

-

5,873

 

Options and warrants

-

1,730 

-

2,289

 

------------

------------ 

------------

------------

Equivalent shares

 

176,885

184,533 

173,833  

181,995

 

=======

======= 

=======

=======

           

Earnings per share before cumulative

       

  effect of accounting change

$       .50 

.45 

.49  

.48  

   

=======

=======

=======

=======


HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

   

2004

2003

   

-----------------

-----------------

Nine Months
- -----------------

Basic

Diluted

Basic

Diluted

 

-------

-------

-------

-------

Earnings before cumulative

       

  effect of accounting change

$ 114,058

114,058 

98,421 

98,421

Effect of dilutive securities:

         

   Change in fair value of liabilities

         

      potentially settleable in common stock

 

-

(15,370)

-

-

   

------------

------------ 

------------

------------

Adjusted earnings before cumulative

         

  effect of accounting change

 

$ 114,058

98,688 

98,421 

98,421

 

=======

======= 

=======

=======

           

Average shares outstanding

 

176,348

176,348 

173,359 

173,359

Effect of dilutive securities:

         
 

Liabilities potentially settleable in

       
 

  common stock

-

5,548 

-

-

 

Options and warrants

-

2,488 

-

5,210

 

------------

------------ 

------------

------------

Equivalent shares

 

176,348

184,384 

173,359 

178,569

 

=======

======= 

=======

=======

           

Earnings per share before cumulative

       

  effect of accounting change

$   .65 

.54 

.57 

.55  

   

=======

=======

=======

=======


Certain warrants containing a put feature that may be settled in cash or common stock are required to be accounted for as a liability at fair value. The Company is required to assess if these warrants, which are classified as a liability, have a more dilutive impact on earnings per share when treated as an equity contract. For the third quarter and nine months ended September 26, 2004, and the quarter ended September 28, 2003, the warrants had a more dilutive impact on earnings per share assuming they were treated as an equity contract. Accordingly, the numerator includes an adjustment to earnings for the (income) expense included therein related to the fair market value adjustment and the denominator includes an adjustment for the shares issuable as of September 26, 2004 and the quarter ended September 28, 2003.

Options and warrants to acquire shares totaling 10,292 at September 26, 2004 and 6,171 at September 28, 2003, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. The Company also has convertible debt under which potentially issuable shares were not included as the contingency features were not met. If the contingent conversion features are met, the impact of conversion of the debentures would result in an additional 11,574 shares being included in the calculation of diluted earnings per share, to the extent those shares would be dilutive. See Note 7.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(3) Hasbro uses the intrinsic-value method of accounting for stock options granted to employees. As required by the Company's existing stock plans, stock options are granted at, or above, the fair market value of the Company's stock, and, accordingly, no compensation expense is recognized for these grants in the consolidated statements of operations. The Company records compensation expense related to other stock-based awards, such as restricted stock grants, over the period the award vests, typically three years. Had compensation expense been recorded under the fair value method as set forth in the provisions of Statement of Financial Accounting Standards No. 123 for stock options awarded, the impact on the Company's net earnings and net earnings per share for the fiscal quarters and nine months ended September 26, 2004 and September 28, 2003 would have been:


 

Quarter Ended

Nine Months Ended

 

------------------

------------------

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

Reported net earnings

$

88,687

 

68,464

 

114,058

 

81,070

 

  Add:

                 
 

Stock-based employee compensation expense included in reported net earnings, net of related tax effects

 




(4




)




63







118

 




63




  Deduct:

                 
 

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 




(3,683




)




(3,372




)




(10,223




)




(9,667




)

   

----------

 

----------

 

----------

 

----------

 

Pro forma net earnings

$

85,000

 

65,155

 

103,953

 

71,466

 

 

======

 

======

 

======

 

======

 

Reported net earnings per share

                 
 

Basic

$

.50

 

.39

 

.65

 

.47

 
   

======

 

======

 

======

 

======

 
 

Diluted

$

.45

 

.38

 

.54

 

.45

 
   

======

 

======

 

======

 

======

 
                   

Pro forma net earnings per share

                 
 

Basic

$

.48

 

.38

 

.59

 

.41

 
     

======

 

======

 

======

 

======

 
 

Diluted

$

.43

 

.37

 

.48

 

.40

 
   

======

 

======

 

======

 

======

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(4)   Other comprehensive earnings (loss) for the quarters and nine months ended September 26, 2004 and September 28, 2003 consist of the following:

   

Quarter Ended

 

Nine Months Ended

 
   

Sept. 26,

 

Sept. 28,

 

Sept. 26,

 

Sept. 28,

 
   

2004

 

2003

 

2004

 

2003

 
   

---------

 

---------

 

---------

 

---------

 

Foreign currency translation adjustments

$

5,632

 

3,413

 

(3,941

)

38,213

 

Changes in value of available-for-sale    securities, net of tax

 

(2,473

)

(1,367

)

(9,859

)

4,769

 

Losses on cash flow hedging    activities, net of tax

 

(933

)

(377

)

(1,067

)

(7,634

)

Reclassifications to earnings, net of tax

 

1,613

 

2,642

 

5,168

 

5,549

 
   

----------

 

----------

 

----------

 

----------

 
 

$

3,839

 

4,311

 

(9,699

)

40,897

 
   

======

 

======

 

======

 

======

 

Reclassification adjustments from other comprehensive earnings to net earnings of $1,613 and $5,168 for the quarter and nine months ended September 26, 2004, and $2,642 and $5,549 for the quarter and nine months ended September 28, 2003 represent net losses on cash flow hedging derivatives for which the related transaction has impacted earnings and was reflected in cost of sales. The losses on cash flow hedging derivatives for the quarter and nine months ended September 26, 2004 include losses on cash flows reclassified to earnings as the result of hedge ineffectiveness of $13 and $157 for the respective periods. The losses on cash flow hedging derivatives for the quarter and nine months ended September 28, 2003 include losses on cash flows reclassified to earnings as the result of hedge ineffectiveness of $402 and $401 for the respective periods. The Company expects the remaining deferred losses on derivative hedging instruments at September 26, 2004 of $5,673 in accumulated other comprehensive earnings to be reclassified to earnings within the next twelve months.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(5) The components of the net periodic cost of the Company's defined benefit pension and other postretirement plans for the quarters and nine months ended September 26, 2004 and September 28, 2003 are as follows:

 

Quarter ended

 

------------------

 

Pension

 

Postretirement

 

------------------

 

------------------

 

Sept. 26, 2004

 

Sept. 28, 2003

 

Sept. 26, 2004

Sept. 28, 2003

 

-------

 

-------

 

-------

-------

Service cost

$ 2,154

 

2,066

 

151

132

Interest cost

3,655

 

3,507

 

571

572

Expected return on assets

(3,619

)

(3,088

)

-

-

Net amortization and deferrals

672

 

765

 

134

162

 

--------

 

--------

 

--------

--------

Net periodic benefit cost

$ 2,862

 

3,250

 

856

866

 

=====

 

=====

 

=====

=====

 

Nine Months Ended

 

------------------

 

Pension

 

Postretirement

 

------------------

 

------------------

 

Sept. 26, 2004

 

Sept. 28, 2003

 

Sept. 26, 2004

Sept. 28, 2003

 

-------

 

-------

 

-------

-------

Service cost

$ 6,474

 

6,198

 

453

396

Interest cost

10,973

 

10,521

 

1,713

1,714

Expected return on assets

(10,867

)

(9,264

)

-

-

Net amortization and deferrals

2,062

 

2,295

 

402

486

 

--------

 

--------

 

--------

--------

Net periodic benefit cost

$  8,642

 

9,750

 

2,568

2,596

 

=====

 

=====

 

=====

=====

In April 2004, the Company made a cash contribution to its pension plans of approximately $12,400. The Company does not expect to make any further contributions in 2004.

On December 8, 2003, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which expanded Medicare to include coverage for prescription drugs. The Company sponsors retiree medical programs for certain of its locations and the Company expects that this legislation will eventually reduce the Company's costs for some of these programs. In May 2004, the FASB issued FASB Staff Position FAS 106-2 (FSP 106-2), which is applicable to the Company in the third quarter of 2004. The Company has determined that the enactment of the Act was not a significant event under FSP 106-2 and, accordingly, the effects of the Act will be incorporated into the next measurement of plan assets and obligations on September 30, 2004 and reflected in the Company's December 26, 2004 statement of financial position.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

(6)   Hasbro is a worldwide leader in children's and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys ranging from traditional to high-tech. The Company's main reportable segments are U.S. Toys, Games, and International. The Company has one other segment, Operations, which meets the quantitative thresholds for reportable segments.

In the United States, the U.S. Toys segment includes the design, marketing and selling of boys' action figures, vehicles and playsets, girls' toys, preschool toys and infant products, creative play products, electronic interactive products, children's consumer electronics, electronic learning aids, and toy-related specialty products. The Games segment includes the development, manufacturing, marketing and selling of traditional board games and puzzles, handheld electronic games, and trading card and role-playing games. Within the International segment, the Company develops, manufactures, markets and sells both toy and certain game products in non-U.S. markets. The Operations segment sources finished product for the majority of the Company's segments. The Company also has other segments that primarily license out certain toy and game properties and a retail segment, which operated retail stores in 2003. The Company announced the closure of these stores in December 2003. These other segments do not meet th e quantitative thresholds for reportable segments and have been combined for reporting purposes.

Segment performance is measured at the operating profit level. Included in Corporate and eliminations are general corporate expenses, the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. Certain shared costs are allocated to segments based upon foreign exchange rates fixed at the beginning of the year, with adjustment to actual foreign exchange rates included in corporate and eliminations.


The accounting policies of the segments are the same as those referenced in Note 1.

Results shown for the quarter and nine months are not necessarily representative of those which may be expected for the full year 2004, nor were those of the comparable 2003 periods representative of those actually experienced for the full year 2003. Similarly, such results are not necessarily representative of those which would be achieved were each segment an unaffiliated business enterprise.

HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)

Information by segment and a reconciliation to reported amounts for the quarter and nine months ended September 26, 2004 and September 28, 2003 are as follows.

 

Quarter ended

------------------

September 26, 2004

September 28, 2003

-----------------

-----------------

   

External

Affiliate

External

Affiliate

Net revenues

 

-----------

----------

-----------

---------

       U.S. Toys

$

369,703

958

 

377,251

2,733

 

       Games

 

236,501

9,514

 

250,201

9,146

 

       International

 

331,554

173

 

328,110

37,208

 

       Operations (a)

 

1,100

352,902

 

774

298,473

 

       Other segments

 

8,454

-

 

14,735

-

 

       Corporate and eliminations

 

-

(363,547

)

-

(347,560

)

 

------------

------------

 

------------

------------

 

$

947,312

-

 

971,071

-

 

 

=======

=======

 

=======

=======

 

 

Nine Months ended
- -------------------------

September 26, 2004
- -----------------

September 28, 2003
- -----------------


Net revenues

External
- -----------

Affiliate
- ----------

External
- -----------

Affiliate
- ----------

       U.S. Toys

$

689,254

2,506

 

739,114

5,166

 

       Games

 

525,701

23,094

 

511,024

23,253

 

       International

 

691,480

878

 

707,342

85,809

 

       Operations (a)

 

2,095

632,927

 

1,478

565,167

 

       Other segments

 

29,462

-

 

55,350

-

 

       Corporate and eliminations

 

-

(659,405

)

-

(679,395

)

 

------------

------------

 

------------

------------

 

$

1,937,992

-

 

2,014,308

-

 

 

=======

=======

 

=======

=======

 



HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)


 

Quarter ended

Nine Months ended



Operating profit (loss)

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

Sept. 26,
2004
- -------

Sept. 28,
2003
- -------

       U.S. Toys

$

20,848

 

45,835

 

14,892

 

64,107

 

       Games

 

46,418

 

58,310

 

94,713

 

101,682

 

       International

 

48,766

 

38,537

 

41,490

 

27,769

 

       Operations (a)

 

10,611

 

10,274

 

11,987

 

9,118

 

       Other segments

 

1,616

 

(1,736

)

5,101

 

(2,048

)

       Corporate and eliminations

 

(6,219

)

(14,227

)

(8,742

)

(19,288

)

 

-----------

 

------------

 

------------

 

------------

 

$

122,040

 

136,993

 

159,441

 

181,340

 

 

======

 

=======

 

======

 

=======

 

 



Total assets

Sept. 26,
2004
- -------------

Sept. 28,
2003
- -------------

       U.S. Toys

$

969,238

 

1,029,257

 

       Games

 

1,573,472

 

1,403,462

 

       International (b)

 

1,429,562

 

1,354,999

 

       Operations

 

545,773

 

611,593

 

       Other segments

 

171,217

 

92,951

 

       Corporate and eliminations

 

(1,567,024

)

(1,243,768

)

 

--------------

 

--------------

 
 

$

3,122,238

 

3,248,494

 

 

========

 

========

 

(a) The Operations segment derives substantially all of its revenues and operating results from intersegment activities.


(b) Included in the International assets at September 26, 2004 is an increase to goodwill of $9,390 related to the Company's acquisition of the remaining unowned interest in its Latin America operations in the first quarter of 2004.


HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements (continued)

(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)


The following table presents consolidated net revenues by class of principal products for the quarters and nine-month periods ended September 26, 2004 and September 28, 2003.

Quarter ended

Nine Months ended

Sept. 26,
2004
- ---------

Sept. 28,
2003
- ---------

Sept. 26,
2004
- ---------

Sept. 28,
2003
- ---------

Boys' toys

$

184,700

294,900

440,300

673,000

Games and puzzles

 

358,100

357,900

777,400

730,100

Preschool toys

 

87,800

67,100

172,600

137,800

Creative play

 

54,300

67,800

116,100

130,500

Electronic toys

 

178,900

103,200

244,100

163,700

Girls' toys

 

53,800

35,100

103,200

59,900

Other

 

29,712

45,071

84,292

119,308

 

------------

------------

--------------

--------------

Net revenues

$

947,312

971,071

1,937,992

2,014,308

 

=======

=======

========

========

(7) In April 2003, the Financial Accounting Standards Board ("FASB") announced that it would mandate the fair value method of accounting for all stock-based awards. The FASB issued an Exposure Draft of a proposed statement on March 31, 2004, which is subject to a comment period. If enacted, the change in accounting is not expected to be effective for the Company until sometime during fiscal 2005. Until a final statement is issued, the Company cannot estimate the effect that this change in accounting would have on its consolidated statement of operations.

At its meeting on September 30, 2004, the Emerging Issues Task Force (EITF) reached a final consensus that the dilutive effect of contingent convertible debt instruments must be included in dilutive earnings per share regardless of whether the triggering contingency has been satisfied. This consensus, EITF Issue 04-8, requires application on a retroactive basis and restatement of prior period earnings per share. The final consensus, subject to approval by the FASB, is expected to be effective for periods ending after December 15, 2004. Had this consensus been in effect at September 26, 2004 and September 28, 2003, diluted earnings per share before cumulative effect of accounting change would have been $0.43 and $0.46 for the respective quarters and $0.52 and $0.53 for the respective nine months then ended.

 

ITEM 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations

(Thousands of Dollars Except Per Share Data)


EXECUTIVE SUMMARY
- ----------------------------------
The Company earns revenue and generates cash through the sale of a variety of toy and game products both within the United States and in international markets. Most of the Company's products are either internally developed or licensed from outside inventors. In addition to products based on its own brands and products licensed from outside vendors, the Company also offers internally developed products tied to licensed entertainment properties.

The Company's principal business strategies focus on:

Management views the Company's principal product opportunities as falling into three general categories: core brands, innovative new products and licensed entertainment-based products. Although the Company intends to continue to offer products based on licensed entertainment properties, in the past three years the Company has actively sought to reduce its reliance on products based on theatrical properties and to achieve more consistent performance by focusing greater resources on the development and growth of its core brands and on developing innovative products.

The Company's core brands represent Company-owned or Company-controlled brands, such as G.I. JOE, TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAY-DOH, PLAYSKOOL and TONKA, which the Company views as presenting potential to be successful over the long-term. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. However, the volatility of consumer preferences and the high level of competition in the toy and game industry make it difficult to maintain the long-term success of existing product lines and to consistently introduce successful new products.

In addition to its focus on core brands, the Company's strategy also involves trying to meet ever-changing consumer preferences by identifying and offering innovative products based on market opportunities. In 2003, innovative products such as BEYBLADE, FURREAL FRIENDS, and VIDEONOW contributed significantly to the Company's success. In the third quarter of 2004, the Company introduced several new innovative products including VIDEONOW COLOR, LAZER TAG, and TV MISSION: PAINTBALL. The Company believes its strategy of focusing on the development of its core brands and continuing to identify opportunistic new products will prevent the Company from being dependent on the success of any one product line.

While the Company's strategy focuses on growing its core brands and the development of innovative, new products, the Company continues to evaluate and enter into strategic arrangements to license entertainment-based properties when the Company believes it is economically beneficial.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


The Company is offering products based on DREAMWORKS' SHREK II, which was released in May 2004. Other major movie-based properties in 2004 will include products based on DISNEY/PIXARS' THE INCREDIBLES and LUCASFILM'S STAR WARS. Although gross profits from theatrical entertainment-based products are generally higher, this increased gross margin is offset by royalty expenses incurred on these sales, as well as amortization expense of property rights paid to the licensor of such properties.

In recent years, the Company has also focused on reducing its fixed costs and increasing its operating margins through a number of business efficiency initiatives. Two major initiatives in late 2003 were the cessation of manufacturing at the Company's Valencia, Spain facility and the announced closure of the remaining retail stores operated under the Wizards of the Coast and Game Keeper names, both of which occurred in the fourth quarter of 2003. The Company continues to review its operations in order to determine areas where greater efficiency can be achieved.

The Company's strategy for the near-term also focuses on the reduction of long-term debt. The goal of management is to reduce the Company's debt-to-capitalization ratio, defined as total debt, both short-term and long-term, as a percentage of total equity plus total debt, to 25-30%. The Company has repurchased or repaid approximately $215,900 in principal amount of long-term debt during the twelve months ended September 26, 2004. At September 26, 2004, the Company's debt-to-capitalization ratio was approximately 30%, which compared to approximately 43% at September 28, 2003. It is the Company's intent to continue to assess the desirability of using available cash from operations to reduce its outstanding long-term debt to maintain this target ratio, as market conditions and the Company's committed revolving credit agreement and other sources of financing allow.
2003 was a year of ongoing consolidation in the toy and game industry, with further store closings and the bankruptcy of two notable toy and game retailers. This consolidation, and associated retail uncertainty, has continued in the first nine months of 2004. As a result, the Company's customer base continues to become more concentrated. While the consolidation of customers may provide certain benefits to the Company, such as potentially more efficient product distribution and other decreased costs of sales and distribution, this consolidation also creates additional risks to the Company's business associated with a major customer having financial difficulties or reducing its business with the Company. In addition, customer concentration may decrease the prices the Company is able to obtain for some of its products. The Company believes that its strategy of offering strong brands and innovative products, which provide value to both consumers and the Company's customers, will help protect the Company from an y negative impact resulting from an environment of increasing retail consolidation.

RESULTS OF OPERATIONS
- -----------------------------------------

Net earnings for the quarter and nine months ended September 26, 2004 were $88,687 and $114,058, respectively, compared with net earnings of $68,464 and $81,070 for the respective periods of 2003. Basic earnings per share for the quarter and nine months ended September 26, 2004 were $0.50 and $0.65 compared with basic earnings per share of $0.39 and $0.47 for the respective periods in 2003. Diluted earnings per share for the quarter and nine months ended September 26, 2004 were $0.45 and $0.54, respectively, compared with diluted earnings per share of $0.38 and $0.45 for the respective periods in 2003.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

In accordance with U.S. generally accepted accounting principles, diluted earnings per share for the quarter and year to date periods in 2004 have been adjusted to exclude the favorable impact of the fair value adjustment of certain warrants totaling $5,150 and $15,370, respectively, and includes the dilutive impact of shares issuable under this agreement. A similar adjustment was made to the diluted earnings per share for the 2003 third quarter in the amount of $1,540.


Net earnings and basic and diluted earnings per share for the quarter and nine months ended September 28, 2003, include a cumulative effect of an accounting change of $(17,351) or $(0.10) per share relating to the adoption of Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity", ("SFAS 150").


Consolidated net revenues for the quarter ended September 26, 2004 decreased 2% to $947,312 compared with $971,071 for the quarter ended September 28, 2003. For the nine months ended September 26, 2004, consolidated net revenues were $1,937,992 compared to $2,014,308 for the nine months ended September 28, 2003, a decrease of 4%. Operating profit for the quarter ended September 26, 2004 was $122,040 compared to $136,993 in the third quarter of 2003. Operating profit for the 2004 nine-month period was $159,441 compared to an operating profit of $181,340 for the nine-month period of 2003. Most of the Company's revenues and operating earnings are derived from its three principal segments: U.S. Toys, Games and International.

U.S. TOYS
U.S. Toys segment net revenues for the quarter ended September 26, 2004 decreased 2% to $369,703 from $377,251 for the quarter ended September 28, 2003. Net revenues for the nine months ended September 26, 2004 decreased 7% to $689,254 from $739,114 for the nine months ended September 28, 2003. The decrease for both the quarter and nine-month period was primarily due to lower sales of BEYBLADE, and to a lesser extent, decreased sales of TRANSFORMERS, GI JOE, PLAYSKOOL, and ZOIDS products. These decreases were partially offset by increased sales of VIDEONOW products, increased shipments of MY LITTLE PONY products, which were reintroduced in the third quarter of 2003, and revenues from the new product launch of BOOBAH.

The U.S. Toys segment operating profit decreased to $20,848 for the quarter ended September 26, 2004 from $45,835 for the quarter ended September 28, 2003. Operating profit for the nine months ended September 26, 2004, decreased to $14,892 from $64,107 for the nine months ended September 28, 2003. This decrease in operating profit for both the quarter and nine month period primarily related to decreased gross profit as a result of the lower net revenues as well as a change in product mix, including the decline in sales of BEYBLADE products which carry a higher gross margin and increased sales of VIDEONOW hardware, which carry a lower gross margin. To a lesser extent, the decrease relates to an increase in advertising expense, which is consistent with the Company's strategy to continue to focus on product promotions as a means to increase and sustain awareness of its core brands, as well as to introduce new products.

The decrease in operating profit was partially offset by decreased royalties, driven by lower sales of BEYBLADE products, as well as lower selling, distribution, and administration expenses as a result of the Company's cost reduction initiatives. Operating profit in the 2003 nine-month period was negatively impacted by a charge of approximately $7,000 related to exiting certain unprofitable product lines.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


GAMES
Games segment net revenues decreased by 5% to $236,501 for the quarter ended September 26, 2004 from $250,201 for the quarter ended September 28, 2003. Net revenues for the nine months ended September 26, 2004 increased 3% to $525,701 from $511,024 for the nine months ended September 28, 2003. For the quarter, the decrease primarily related to decreased revenues from trading card games, including MAGIC: THE GATHERING products. These decreases were partially offset by increased sales of TRIVIAL PURSUIT products, including the new product release of TRIVIAL PURSUIT - THE 1990'S, as well as TRIVIAL PURSUIT POP CULTURE DVD game, which was introduced in the fourth quarter of 2003. For the nine month period ended September 26, 2004, the increase primarily related to the introduction of DUEL MASTERS trading card games in the first quarter of 2004. This increase was partially offset by decreased revenues from other trading card games, including MAGIC: THE GATHERING. Sales of MAGIC: THE GATHERING have decreased in 2004 due to the fact that there are three releases in 2004 compared to four releases in 2003. Net revenues in the 2004 quarter and nine month periods were also positively impacted by increased sales in the electronic and pre-school categories.

Games segment operating profit decreased to $46,418 for the quarter ended September 26, 2004 from $58,310 for the quarter ended September 28, 2003. Operating profit for the nine months ended September 26, 2004 decreased to $94,713 from $101,682 for the nine months ended September 28, 2003. For the nine-month period, decreased operating profit related to increased advertising expense as a result of the Company's ongoing initiative to raise awareness of its core brands, as well as increased product development expense. Those increased expenses were partially offset by the increased revenues. For the quarter, decreased operating profit primarily related to the decrease in revenues.

INTERNATIONAL
International segment net revenues increased by 1% to $331,554 for the quarter ended September 26, 2004 from $328,110 for the quarter ended September 28, 2003. Net revenues for the nine months ended September 26, 2004 decreased 2% to $691,480 from $707,342 for the nine months ended September 28, 2003. For the quarter and nine months ended September 26, 2004, International segment net revenues were positively impacted by currency translation of approximately $17,400 and $46,200, respectively, as the result of the weaker U.S. dollar. Excluding the favorable impact of foreign exchange, International net revenues decreased 4% and 9% in local currency for the quarter and nine months ended September 26, 2004, respectively. The decrease in local currency revenue for the quarter and nine-month period was primarily the result of decreased sales of BEYBLADE products, partially offset by increased revenues from MY LITTLE PONY products, which were introduced in the third quarter of 2003, and higher sales of FURREAL FRIENDS, DUEL MASTERS, and VIDEONOW products. To a lesser extent, 2004 third quarter and nine month revenues were also positively impacted by increased sales of PLAYSKOOL products and TRIVIAL PURSUIT products including TRIVIAL PURSUIT 20TH ANNIVERSARY EDITION.

The International segment operating profit for the quarter ended September 26, 2004 increased to $48,766 from $38,537 for the quarter ended September 28, 2003. Operating profit for the nine months ended September 26, 2004 increased to $41,490 from $27,769 for the nine months ended September 28, 2003. Although revenues were positively impacted by the weaker U.S. dollar, as noted above, operating expenses were also impacted, with a resulting net unfavorable translation impact to International operating profit of approximately $1,100 for the nine months ended September 26, 2004, and a net favorable translation impact to operating profit of approximately $1,900 for the third quarter.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


Absent the impact of foreign exchange rates, the improvement in operating profit was primarily due to lower royalty expenses. For the quarter, operating profits were positively impacted by an increase in gross profit as a result of increased revenues and the Company's cost reduction initiatives, including the cessation of manufacturing at the Company's Valencia, Spain facility.

GROSS PROFIT
- -----------------------
The Company's gross profit margin decreased to 55.3% for the quarter ended September 26, 2004 from 56.8% for the quarter ended September 28, 2003 while gross margin for the nine months ended September 26, 2004 decreased to 57.8% from 59.1% in the comparable period of 2003. The decrease was due to changes in product mix, primarily decreased sales of BEYBLADE products, which carry a higher gross margin. There were significant shipments of VIDEONOW hardware during the third quarter of 2004, which carries a relatively low gross margin compared to the software. The Company expects to ship significant quantities of VIDEONOW software in the fourth quarter of 2004, which carries a relatively high gross margin. However, the Company expects full year gross margin to be consistent with the prior year. The Company aggressively monitors its levels of inventory, attempting to avoid unnecessary expenditures of cash and potential charges related to obsolescence. The Company's failure to accurately predict and respond to co nsumer demand could result in overproduction of less popular items, which could result in higher obsolescence costs, causing a reduction in gross profit. Rising commodity prices could also have a negative impact on the Company's gross profit margin in the fourth quarter of 2004.

EXPENSES
- -----------------
For the quarter and nine-month period, amortization expense decreased in dollars but remained relatively consistent as a percentage of net revenues. Amortization expense of $16,888, or 1.8% of net revenues in the third quarter of 2004, compared with $19,319, or 2.0% of net revenues in the third quarter of 2003. For the nine months ended September 26, 2004, amortization expense was $47,881, or 2.5% of net revenues compared with $53,907, or 2.7% of net revenues for the nine months ended September 28, 2003. A portion of amortization expense relates to licensing rights and is based on expected sales of products related to those licensing rights. The decrease in amortization expense in 2004 primarily relates to decreased sales of these licensed products in the first nine months of 2004.

Royalty expense for the quarter ended September 26, 2004 decreased to $65,087, or 6.9% of net revenues from $82,535, or 8.5% of net revenues in the third quarter of 2003. Royalty expense for the nine months ended September 26, 2004 decreased to $131,747, or 6.8% of net revenues from $169,005, or 8.4% of net revenues for the nine months ended September 28, 2003. This decrease is primarily due to the lower sales of BEYBLADE products.

Research and product development expenses for the quarter ended September 26, 2004 increased in dollars but remained relatively consistent as a percentage of net revenues. Research and product development expense of $39,257, or 4.1% of net revenues in the third quarter of 2004, compared with $38,811 or 4.0% of net revenues for the quarter ended September 28, 2003. These expenses increased to $108,636 or 5.6% of net revenues for the nine months ended September 26, 2004 from $102,416 or 5.1% of net revenues for the nine months ended September 28, 2003.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

Investment in research and product development costs is an important component to the Company's strategy to grow core brands and to create new and innovative toy and game products. The Company expects full year research and product development expenses to increase slightly as a percentage of revenue in 2004 compared to 2003 levels.

For the quarter ended September 26, 2004, advertising expense increased to $129,403 or 13.7% of net revenues from $105,039, or 10.8% of net revenues for the quarter in 2003. For the nine months ended September 26, 2004, advertising expense increased to $243,751, or 12.6% of net revenues from $225,903, or 11.2% of net revenues for the nine months ended September 28, 2003. The increase is consistent with the Company's strategy to continue to focus on advertising as a means to increase and sustain awareness of its core brands, as well as to introduce new products. In the third quarter of 2004, the Company introduced several new innovative products including VIDEONOW COLOR and LAZER TAG. The Company expects advertising expense in 2004 to continue to be higher in dollars and as a percentage of net revenues than 2003 levels, as it continues to follow its strategy of focusing on core brands and offering new, innovative products.

For the quarter ended September 26, 2004, the Company's selling, distribution and administration expenses decreased to $151,179, or 16.0% of net revenues from $168,505, or 17.4% of net revenues in 2003. For the nine months ended September 26, 2004, these expenses decreased to $429,005, or 22.1% of net revenues from $458,824, or 22.8% of net revenues in 2003. The decreases reflect lower expenses resulting from the Company's cost reduction initiatives, which were partially offset by higher international expenses in translated U.S. dollars as the result of the weaker U.S. dollar.

NONOPERATING (INCOME) EXPENSE
- -------------------------------------------------------
Interest expense for the third quarter of 2004 was $8,257 compared with $12,570 in the third quarter of 2003. For the nine months ended September 26, 2004, interest expense decreased to $24,488 from $39,566 in 2003. For the quarter and nine months ended September 26, 2004, approximately 74% and 71%, respectively, of the decrease in interest expense is attributable to lower levels of short-term and long-term debt in 2004 than in the comparable 2003 periods. This mainly reflects the Company's strategy to reduce its long-term debt. The Company has repurchased and repaid approximately $215,900 in principal amount of long-term debt during the twelve months ended September 26, 2004. The remaining 26% and 29% decreases in interest expense from the quarter and nine months ended September 26, 2004, respectively, are due to lower effective interest rates, primarily the result of interest rate swap agreements that reduce the amount of the Company's debt subject to fixed interest rates.

Other income, net, of $5,513 for the third quarter of 2004 compares to other expense, net of $6,299 for the quarter ended September 28, 2003. For the nine-month periods, other income, net was $15,606 in 2004 compared to other expense, net of $6,381 in 2003. Other income for the third quarter and nine months ended September 26, 2004 includes non-cash income of $5,150 and $15,370, respectively, compared to a charge to earnings of $1,540 for both periods in 2003, related to the change in the fair value of certain warrants required to be classified as a liability. These warrants are required to be adjusted to their fair value each quarter through earnings. The fair value of these warrants is primarily affected by the Company's stock price, but is also affected by the Company's stock price volatility and dividends, as well as risk-free interest rates.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

Assuming the Company's stock volatility and dividend payments, as well as risk-free interest rates remain constant, the fair value of the warrants would increase and the Company would recognize a charge to earnings as the price of the Company's stock increases. If the price of the Company's stock decreases and the Company's stock volatility, dividend payments, and the risk-free interest rates remain constant, the fair value of the warrants will decrease and the Company will recognize income. Based on a hypothetical increase in the Company's stock price to $20.00 per share at September 26, 2004 from its actual price of $18.22 a share on that date, the Company would have recognized non-cash income of approximately $10,200 rather than actual non-cash income recorded of $15,370 for the 2004 nine-month period, to reflect the change in the fair value of the warrants from their fair value of $138,650 at December 28, 2003.


INCOME TAXES
- -----------------------
Income tax expense as a percentage of pretax earnings in the third quarter of 2004 was 25.7%, and for the nine months was 24.2%, compared to 27.4% and 27.3% in the comparable periods of 2003. Absent the effect of the adjustment of certain warrants to their fair value, which has no tax effect, the 2004 effective tax rates for the third quarter and nine months would have been 26.8% and 27.0%, respectively, compared to 27.0% for the comparable periods in 2003. The decrease in the 2004 third quarter rate, from the 28% used for the first two quarters of 2004, is primarily due to a shift of expected operating profits to jurisdictions with lower tax rates. The income tax rate for the full year 2003 was 28.3% and, excluding the effect of the adjustment of the above warrants to their fair value, would have been 26.8%.

CUMULATIVE EFFECT OF ACCOUNTING CHANGES
- --------------------------------------------------------------------------
On June 30, 2003, the first day of the third quarter of fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity", ("SFAS 150"). SFAS 150 required the Company to reclassify certain warrants recorded as equity to a liability, and adjust the warrants to their fair value through earnings as of that date. On the date of adoption, the Company reclassified $107,669 from equity, where the warrants had previously been recorded, to current liabilities. A cumulative effect of accounting change of $17,351 was recorded to adjust the amount of this liability to its fair value on the adoption date. There is no tax benefit associated with this charge.

OTHER INFORMATION
- ---------------------------------
Typically, due to the seasonal nature of its business, the Company expects the second half of the year and within that half, the fourth quarter, to be more significant to its overall business for the full year. The Company expects that this concentration will continue, particularly as more of its business shifts to larger customers with order patterns concentrated in the second half of the year. The concentration of sales in the second half of the year and, specifically, the fourth quarter increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. The trend of larger retailers has been to maintain lower inventories throughout the year and purchase a greater percentage of product within or close to the fourth quarter holiday consumer selling season, which includes Christmas.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


Quick response inventory management practices now being used result in more orders being placed for immediate delivery and fewer orders being placed well in advance of shipment. Consequently, unshipped orders on any date in a given year are not necessarily indicative of future sales. In addition, it is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. At September 26, 2004 and September 28, 2003, the Company's unshipped orders were approximately $491,000 and $542,000, respectively.

Hasbro uses the intrinsic-value method of accounting for stock options granted to employees. As required by the Company's existing stock plans, stock options are granted at, or above, the fair market value of the Company's stock, and, accordingly, no compensation expense is recognized for these grants in the consolidated statement of operations. The Company records compensation expense related to other stock-based awards, such as restricted stock grants, over the period the award vests, typically three years. In March 2004, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft of a proposed statement, subject to a comment period, which would mandate the fair value method of accounting for all stock-based awards. If enacted, the change in accounting is not expected to be effective for the Company until sometime during fiscal 2005. Until the statement is finalized, the Company cannot estimate the effect that this change in accounting would have on its consolidated statement of operations .


At its meeting on September 30, 2004, the Emerging Issues Task Force (EITF) reached a final consensus that the dilutive effect of contingent convertible debt instruments must be included in dilutive earnings per share regardless of whether the triggering contingency has been satisfied. This consensus, EITF Issue 04-8, requires application on a retroactive basis and restatement of prior period earnings per share. The final consensus, subject to approval by the FASB, is expected to be effective for periods ending after December 15, 2004. Had this consensus been in effect at September 26, 2004 and September 28, 2003, diluted earnings per share would have been $0.43 and $0.46 for the respective quarters and $0.52 and $0.53 for the respective nine months then ended.

The American Jobs Creation Act of 2004 (the "Act") was signed into law on October 22, 2004. The Company is studying the various provisions of the Act, including an incentive to reinvest international earnings into the United States. The Act contains many potentially inter-related provisions that impact Hasbro worldwide. The Company is in the process of evaluating these provisions to determine their potential impact.

LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------
Hasbro has historically generated a significant amount of cash from normal operations. The Company funds its operations and liquidity needs primarily through cash flows from operations, as well as utilizing, when needed, borrowings under its credit facilities. The seasonality of the Company's business results in the interim cash flow statements not being representative of that which may be expected for the full year. Historically, the majority of the Company's cash collections occur late in the fourth quarter and early in the first quarter of the subsequent year. As receivables are collected, the proceeds are used to repay outstanding short-term debt. During 2004, the Company expects to continue to fund its working capital needs primarily through operations and, when needed, through its revolving credit facility and receivables securitization program.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


In December 2003, the Company entered into a three-year receivables securitization program whereby undivided interests in up to $250,000 of eligible domestic trade accounts receivable may be sold, on a revolving basis, to bank conduits. In accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", receivable interests securitized are accounted for as a sale and removed from the consolidated balance sheet. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through the securitization program and committed lines of credit, are adequate to meet its needs for the remainder of 2004 and 2005.

However, unforeseen circumstances in the toy or game industry, such as softness in the retail environment or unanticipated changes in consumer preferences could result in a significant decline in revenues and operating results of the Company, which could result in the Company being in non-compliance with its financial covenants and unable to use funding from its receivables securitization program. Non-compliance with its financial covenants could result in the Company being unable to utilize borrowings under its revolving credit facility, other bank lines and the securitization program, a circumstance most likely to occur when operating shortfalls would most require supplementary borrowings to enable the Company to continue to fund its operations. In addition, a significant deterioration in the business of a major U.S. customer could result in a decrease in eligible accounts receivable, which would prevent the Company from being able to fully utilize its receivables securitization program. The Company has been and expects to be in compliance with its borrowing and securitization financial covenants during 2004.

Because of this seasonality in cash flow, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories as well. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, again due to the seasonality of its business, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior year-end.

Cash flows utilized by operating activities were $93,739 for the nine months ended September 26, 2004 compared to $175,427 for the nine months ended September 28, 2003. The decrease in cash flow utilized by operating activities is primarily the result of the utilization of the accounts receivable securitization facility. Accounts receivable were $697,430 at September 26, 2004 compared to $879,669 at September 28, 2003. The decrease in accounts receivable was principally due to the Company's securitization program, as well as increased collections and lower revenues, partly offset by increases resulting from higher translation of international balances due to the currency impact of the weaker U.S. dollar.

Prepaid expenses were $147,985 at September 26, 2004 compared to $108,683 at September 28, 2003. The increase resulted from higher prepaid advertising and prepaid royalties. Prepaid advertising increased as a result of increased advertising to be placed in the fourth quarter of 2004 to promote the Company's new products. Prepaid royalties increased as a result of a reclassification of royalty advances from long-term assets in anticipation of the release of the next STAR WARS film in the second quarter of 2005.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


Inventories increased to $317,120 at September 26, 2004 from $289,411 at September 28, 2003, reflecting a shift in the mix of the Company's retail customers. In 2004, more of the Company's business has shifted to larger non toy and game specific retailers who concentrate more of their toy and game purchases in the fourth quarter.

Accounts payable and accrued expenses decreased to $824,296 at September 26, 2004 from $867,911 at September 28, 2003. This decrease is due to decreased accrued royalties reflecting the lower level of royalty expense, as well as decreased bonus and management incentive accruals.

Collectively, property, plant and equipment and other assets decreased $157,176 from the comparable period in the prior year. The decrease is partially due to amortization of intangibles. In addition, the decrease is also due to the reclassification of royalty advances to prepaid expenses in anticipation of the release of the next STAR WARS film, as mentioned above. These decreases were partially offset by an increase in goodwill of $9,390 relating to the Company's purchase of the remaining unowned interest in its Latin America operations in the first quarter of 2004. The Company paid cash of $9,824 relating to this transaction, which is included in cash utilized by investing activities. Long-term deferred tax assets also decreased partially as a result of utilization of loss carryforwards.

During the nine months ended September 26, 2004, the Company repurchased an aggregate of $48,613 in principal amount of long-term debt, comprised of $17,605 in principal amount of 6.60% Debentures due 2028, $10,908 in principal amount of 6.15% Notes due 2008, and $20,100 in principal amount of 5.60% Notes due 2005. Net borrowings (short-term borrowings, current installments of long-term debt, and long-term debt, less cash and cash equivalents) decreased to $345,034 at September 26, 2004 from $807,372 at September 28, 2003. This reflects an increase in cash of $149,732 as the result of improved earnings and utilization of the accounts receivable securitization facility, as mentioned above. The decrease in net borrowings was also the result of the repurchase and repayment of approximately $215,900 in principal amount of long-term debt during the last twelve months, and a reduction in short-term borrowings. It is the Company's intent to continue to assess the desirability of using available cash from opera tions and other sources of financing to reduce its outstanding long-term debt, as market conditions and the Company's committed revolving credit agreement allow.

The Company currently has an unsecured revolving credit facility of $350,000, maturing in March 2007. The credit facility reduces by $50,000 effective March 31, 2005, and by a further $50,000 effective November 30, 2005. If the Company fails to maintain certain financial ratios or if the credit rating of the Company drops below BB at Fitch Ratings or Standard & Poor's, or Ba3 at Moody's, borrowings under the amended and restated facility would be secured by substantially all domestic inventory as well as certain intangible assets. At September 26, 2004, the Company was rated BBB- by Fitch Ratings and Standard & Poor's, and Baa3 by Moody's. The Company is not required to maintain compensating balances under the agreement. The agreement contains certain restrictive covenants setting forth minimum cash flow and coverage requirements, and a number of other limitations, including restrictions with respect to capital expenditures, investments, acquisitions, share repurchases and dividend payments. The Co mpany was in compliance with all restrictive covenants as of and for the nine months ended September 26, 2004. The Company had approximately $2,000 in borrowings outstanding under its committed revolving credit facility at September 26, 2004.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


The Company also has other uncommitted lines from various banks, of which approximately $14,400 was outstanding at September 26, 2004. Amounts available and unused under the committed line at September 26, 2004 were approximately $339,800. The Company believes that funds provided by operations and amounts available for borrowing from time to time under these lines of credit are adequate to meet its operating needs in the remainder of 2004 and 2005.

In December 2003, the Company entered into a three-year receivables securitization program. Under this program, the Company sells on an ongoing basis, substantially all of its U.S. trade accounts receivable to a bankruptcy remote special purpose entity, Hasbro Receivables Funding, LLC ("HRF"). HRF is consolidated with the Company for financial reporting purposes. The securitization program then allows HRF to sell, on a revolving basis, an undivided interest of up to $250,000 in the eligible receivables it holds to certain bank conduits. The program provides the Company with a cost-effective source of liquidity. Based on the amount of eligible accounts receivable as of September 26, 2004, the Company had availability under this program to sell approximately $128,300, all of which was utilized.

The Company had letters of credit of approximately $25,600 and purchase commitments of $180,600 outstanding at September 26, 2004. Other contractual obligations and commercial commitments, as detailed in the Company's annual report on Form 10-K for the year ended December 28, 2003, did not materially change outside of payments made in the normal course of business and the repurchase of $48,613 in principal amount of long-term debt outstanding.

The Company currently has $250,000 outstanding in principal amount of contingent convertible debentures due 2021. If the closing price of the Company's stock exceeds $23.76 for at least 20 trading days, within the 30 consecutive trading day period ending on the last trading day of the calendar quarter, the holders have the right to convert the notes to shares of the Company's common stock at the initial conversion price of $21.60 in the next calendar quarter. This contingent conversion feature was not met in the first nine months of 2004. The Company believes that cash from operations, the securitization facility, and if necessary the committed line of credit, will allow the Company to meet these and its other obligations. It is the Company's current strategy to reduce its long-term debt through repurchases when it is considered economically beneficial and permitted under the Company's amended and restated revolving credit agreement.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
- ------------------------------------------------------------------------------------------------
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include sales allowances, inventory valuation, recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments and pensions.


HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is added to royalty revenue and reflected as net revenues in the consolidated statements of operations. The Company routinely commits to promotional sales allowance programs with customers. These allowances primarily relate to fixed programs, which the customer earns based on purchases of Company products during the year. Discounts are recorded as a reduction of related revenue at the time of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as the returns allowance, are based on market data, historical trends and information from customers and are therefore subject to estimation.

Inventory is valued at the lower of cost or market. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling price and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in the Company underproducing popular items or overproducing less popular items. Management estimates are monitored on a quarterly basis and a further adjustment to reduce inventory to its net realizable value is recorded, as an increase to cost of sales, when deemed necessary under the lower of cost or market standard.

Goodwill and other intangible assets deemed to have indefinite lives are tested for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The impairment test begins by allocating goodwill and intangible assets to applicable reporting units. Goodwill is then tested using a two step process that begins with an estimation of the fair value of the reporting unit using an income approach, which looks to the present value of expected future cash flows.

The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value, which is also calculated using an income approach. The Company's annual impairment test will be performed in the fourth quarter of 2004. At September 26, 2004, the Company has goodwill and intangible assets with indefinite lives of $549,009 recorded on the balance sheet.

Intangible assets, other than those with indefinite lives, are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability of the value of these intangible assets is measured by a comparison of the assets' carrying value to the estimated future undiscounted cash flows expected to be generated by the asset. If such assets were considered to be impaired, the impairment would be measured by the amount by which the carrying value of the asset exceeds its fair value based on estimated future discounted cash flows. The estimation of future cash flows requires significant judgments and estimates with respect to future revenues related to the respective asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in a change in this assessment and result in an impairment charge. The estimation of discounted cash flows a lso requires the selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted cash flows and could increase or decrease the related impairment charge.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


Intangible assets covered under this policy were $588,714 at September 26, 2004. During the first nine months of 2004, there were no impairment charges related to these intangible assets.

The recoverability of royalty advances and contractual obligations with respect to minimum guaranteed royalties is assessed by comparing the remaining minimum guaranty to the estimated future sales forecasts and related cash flow projections to be derived from the related product. If sales forecasts and related cash flows from the particular product do not support the recoverability of the remaining minimum guaranty or, if the Company decides to discontinue a product line with royalty advances or commitments, a charge to royalty expense to write-off the remaining minimum guaranty is required. The preparation of revenue forecasts and related cash flows for these products requires judgments and estimates. Actual revenues and related cash flows or changes in the assessment of anticipated revenues and cash flows related to these products could result in a change to the assessment of recoverability of remaining minimum guaranteed royalties. At September 26, 2004, the Company had $186,888 of prepaid royaltie s, $89,896 of which are included in prepaid expenses and other current assets and $96,992 which are included in other assets.

The Company, 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 using estimates for expected return on assets, expected compensation increases, and applicable discount rates. These estimates are established for the upcoming year at the Company's measurement date of September 30. The Company estimates expected return on assets using a weighted average rate based on historical market data for the investment classes of assets held by the plan, the allocation of plan assets among those investment classes, and the current economic environment. Based on this information, the Company's estimate of expected return on plan assets in 2004 and 2003 was 8.75%. A decrease in the estimate used for expected return on plan assets would increase pension expense, while an increase in this estimate would decrease pension expense. A decrease of 1% in the estimate of expecte d return on plan assets would increase pension expense by approximately $1,600. Expected compensation increases are estimated using a combination of historical compensation increases with expected compensation increases in the Company's long-term business forecasts. Based on this analysis, the Company's estimate of expected long-term compensation increases was 4.0% in 2004 and 2003. Increases in estimated compensation increases would increase pension expense while decreases would decrease pension expense. Discount rates are selected based upon rates of return on high quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefits. The Company considers Moody's long-term Aa Corporate Bond yield at the measurement date as an appropriate guide in setting this rate. At September 30, 2003, the Company's measurement date for its pension assets and liabilities, the Moody's long-term Corporate Bond yield was 5.9%, and the Company selected a dis count rate of 6%. A decrease in the discount rate would result in greater pension expense, while an increase in the discount rate would decrease pension expense. A decrease of 1% in the Company's discount rate would increase pension expense and the projected benefit obligation by approximately $3,700 and $33,000, respectively. In accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", actual results that differ from the actuarial assumptions are accumulated and, if in excess of a certain corridor, amortized over future periods and, therefore generally affect recognized expense and the recorded obligation in future periods. Assets in the plan are valued on the basis of their fair market value on the measurement date.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


FINANCIAL RISK MANAGEMENT
- ----------------------------------------------
The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as the result of sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while marketing those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound, Canadian dollar and Mexican peso and, to a lesser extent, currencies in Latin American and Asia Pacific countries.

To manage this exposure, the Company has hedged a portion of its estimated foreign currency transactions using forward foreign exchange contracts, and purchased foreign currency options.

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 on-going risk on the net exposure should 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. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts. The Company does not speculate in, and, other than set forth above, the Company does not hedge foreign currency exposures. The Company reflects all derivatives at their fair value as an asset or liability on the balance sheet.

The Company is a party to interest rate swap agreements in order to adjust the amount of total debt that is subject to fixed interest rates. At September 26, 2004, these swaps had notional amounts of $150,000. These agreements are designated and effective as hedges of the change in the fair value of the associated debt. Changes in fair value of these contracts are wholly offset in earnings by changes in the fair value of long-term debt. At September 26, 2004, these contracts had a fair value of $6,293, which is recorded in other assets, with a corresponding fair value adjustment to increase long-term debt.


FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------------------------------------
This Quarterly Report on Form 10-Q contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, concerning management's expectations, goals, objectives, and similar matters. These statements may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "look forward," "may," "planned," "potential," "should," "will," and "would" or any variations of words with similar meanings. These forward-looking statements are inherently subject to known and unknown risks and uncertainties.

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)


The Company's actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to:

HASBRO, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)

(Thousands of Dollars Except Per Share Data)

The Company undertakes no obligation to revise the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect events or circumstances occurring after the date of the filing of this report.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk


The information required by this item is included in Part I Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference.


Item 4. Controls and Procedures.

The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 26, 2004. Based on the eva luation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There were no changes in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarter ended September 26, 2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None.


Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

   

On December 6, 1999, the Board of Directors authorized a common share repurchase program for up to $500 million in common stock. No repurchases were made under this program during the third quarter of 2004. At September 26, 2004, $204.5 million remained under this authorization.


No share repurchases were made by the Company during the third quarter of 2004.


Item 3. Defaults Upon Senior Securities.


None.

Item 4. Submission of Matters to a Vote of Security Holders.


None.

 

Item 5. Other Information


None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

 
 

3.1

Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     
 

3.2

Amendment to Articles of Incorporation, dated June 28, 2000. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     
 

3.3

Amendment to Articles of Incorporation, dated May 19, 2003. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

     
 

3.4

Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

     
 

3.5

Certificate of Designations of Series C Junior Participating Preference Stock of Hasbro, Inc. dated June 29, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     
 

3.6

Certificate of Vote(s) authorizing a decrease of class or series of any class of shares. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No 1-6682.)

     
 

4.1

Indenture, dated as of July 17, 1998, by and between the Company and Citibank, N.A. as Trustee. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 14, 1998, File No. 1-6682.)

     
 

4.2

Indenture, dated as of March 15, 2000, by and between the Company and the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4(b)(i) to the Company's Annual Report on Form 10-K for the year ended December 26, 1999, File No. 1-6682.)

     
 

4.3

Indenture, dated as of November 30, 2001, by and between the Company and The Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 333-83250, filed February 22, 2002.)

     
 

4.4

Third Amended and Restated Revolving Credit Agreement dated as of November 14, 2003 by and among the Company, the Banks thereto, and Fleet National Bank, as Agent for the Banks. (Incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended December 28, 2003, File No. 1-6682.)

Item 6. Exhibits and Reports on Form 8-K. (continued)

(a) Exhibits. (continued)

     
 

4.5

Rights Agreement, dated as of June 16, 1999, between the Company and Fleet National Bank (the Rights Agent). (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated as of June 16, 1999.)

 

4.6

First Amendment to Rights Agreement, dated as of December 4, 2000, between the Company and the Rights Agent. (Incorporated by reference to Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-6682.)

     
 

10.1

Form of Fair Market Value Stock Option Agreement under the 2003 Stock Incentive Performance Plan

     
 

10.2

Form of Premium-Priced Stock Option Agreement under the 2003 Stock Incentive Performance Plan

     

11.1

Computation of Earnings Per Common Share - Nine Months

Ended September 26, 2004 and September 28, 2003.

 

11.2

Computation of Earnings Per Common Share - Quarters

 

Ended September 26, 2004 and September 28, 2003.

 
 

12

Computation of Ratio of Earnings to Fixed Charges -

 

Nine Months and Quarter Ended September 26, 2004.

     
 

31.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

     
 

31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

     
 

32.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

     
 

32.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

   
 

(b)  Reports on Form 8-K

 

A Current Report on Form 8-K, dated July 16, 2004, was filed to announce the Company's results for the second quarter ended June 27, 2004. Consolidated statements of earnings (without notes) for the quarters ended June 27, 2004 and June 29, 2003, consolidated balance sheets as of said dates, major segment results, and reconciliations of EBITDA tables for the said periods were also filed.

 

 

 

 

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HASBRO, INC.
- ---------------------
   (Registrant)

 
 
 

Date: October 29, 2004

By:  /s/ David D. R. Hargreaves

------------------------------------------

 

David D. R. Hargreaves

Senior Vice President and

 

Chief Financial Officer

(Duly Authorized Officer and

 Principal Financial Officer)

 



HASBRO, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q
For the Period Ended September 26, 2004

Exhibit Index

Exhibit

 

No.

Exhibits

-------

-----------

   

3.1

Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     

3.2

Amendment to Articles of Incorporation, dated June 28, 2000. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     

3.3

Amendment to Articles of Incorporation, dated May 19, 2003. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

   

3.4

Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

     

3.5

Certificate of Designations of Series C Junior Participating Preference Stock of Hasbro, Inc. dated June 29, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

     

3.6

Certificate of Vote(s) authorizing a decrease of class or series of any class of shares. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No 1-6682.)

     

4.1

Indenture, dated as of July 17, 1998, by and between the Company and Citibank, N.A. as Trustee. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 14, 1998, File No. 1-6682.)

     

4.2

Indenture, dated as of March 15, 2000, by and between the Company and the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4(b)(i) to the Company's Annual Report on Form 10-K for the year ended December 26, 1999, File No. 1-6682.)

     

4.3

Indenture, dated as of November 30, 2001, by and between the Company and The Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File No. 333-83250, filed February 22, 2002.)

4.4

Third Amended and Restated Revolving Credit Agreement dated as of November 14, 2003 by and among the Company, the Banks thereto, and Fleet National Bank, as Agent for the Banks. (Incorporated by reference to Exhibit 4(d) to the Company's Annual Report on Form 10-K for the year ended December 28, 2003, File No. 1-6682.)

     

4.5

Rights Agreement, dated as of June 16, 1999, between the Company and Fleet National Bank (the Rights Agent). (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated as of June 16, 1999.)

   

4.6

First Amendment to Rights Agreement, dated as of December 4, 2000, between the Company and the Rights Agent. (Incorporated by reference to Exhibit 4(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 1-6682.)

   

10.1

Form of Fair Market Value Stock Option Agreement under the 2003 Stock Incentive Performance Plan

   

10.2

Form of Premium-Priced Stock Option Agreement under the 2003 Stock Incentive Performance Plan

   

11.1

Computation of Earnings Per Common Share - Nine Months

Ended September 26, 2004 and September 28, 2003.

 

11.2

Computation of Earnings Per Common Share - Quarter

 

Ended September 26, 2004 and September 28, 2003.

 

12

Computation of Ratio of Earnings to Fixed Charges -

 

Nine Months and Quarter Ended September 26, 2004.

   

31.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

   

31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

   

32.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

   

32.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.