This excerpt taken from the HAS 10-K filed Mar 9, 2005.
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 the products based on its own core brands, the Company also offers internally developed products tied to licensed movie and television based 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 four 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, PLAYSKOOL and TONKA, which the Company views as presenting potential to be successful over the long term. The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time. 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 2004, innovative products such as VIDEONOW COLOR were significant contributors to revenue for the Company. The Company believes its strategy of focusing on the development of its core brands and continuing to identify innovative new products will help to 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 arrangements to license movie and television entertainment-based properties when the Company believes it is
economically beneficial. Theatrical entertainment-based licenses in 2004 included DREAMWORKS' SHREK II, DISNEY'S THE INCREDIBLES, and LUCASFILM'S STAR WARS. Although gross profits of 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 right based assets acquired from the licensor of such properties.
In recent years, the Company has also focused on reducing its fixed costs and increasing its operating margins. In 2004, the Company reassessed the development process in its U.S. Toys segment, moving a greater amount of product development outside of the U.S., resulting in a streamlining of its U.S. Toy workforce. In 2003, the Company ceased manufacturing in its Valencia, Spain facility and announced the closure of the remaining retail stores operated under the Wizards of the Coast and Gamekeeper names. The Company will continue to review its operations in order to determine areas where greater efficiency can be achieved.
The Company's recent strategy also focused on the reduction of long-term debt. The goal of management has been 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 $55,658 and $367,545 in principal amount of long-term debt during 2004 and 2003, respectively. The 2003 repurchases included amounts related to a tender offer, pursuant to which the Company repurchased $167,257 of aggregate principal amount of the 8.50% notes due 2006 previously issued by the Company. At December 26, 2004, the Company's debt-to-capitalization ratio was approximately 28%, which compared to approximately 34% at December 28, 2003. Due to the seasonal nature of the business, the Company's debt-to-capitalization ratio normally peaks at the end of the third quarter, when its working capital requirements are greatest. The September 26, 2004 ratio was approximately 30%. 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 and to maintain this target ratio, as market conditions and the Company's committed revolving credit agreement and other sources of financing allow.
Consolidation in the toy and game industry and associated retail uncertainty continued in 2004, and included the pending reorganization of the Company's second largest customer, Toys 'R Us. As a result, the Company's remaining customer base continued to become more concentrated. The Company's top five customers accounted for approximately 50% of full year net revenues in 2004, with Wal-Mart Stores, Inc., Toys 'R Us, Inc. and Target Corporation, its three largest customers, accounting for 46%. 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, including potential efficiencies related to SKU reductions. However, 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, increased customer concentration may decrease the prices the Company is able to obtain for some of its products. The Company believes that its strategy of seeking to produce sought after products, which provide value to both consumers and the Company's customers, will help protect the Company from any negative impact resulting from an environment of increasing retail consolidation.