Hasbro 2007 Annual Report Download - page 21

Part of our strategy for remaining relevant to older children is to offer innovative children’s toy and game
electronic products. The margins on many of these products are lower than more traditional toys and
games and such products may have a shorter lifespan than more traditional toys and games. As a result,
increasing sales of children’s toy and game electronic products may lower our overall operating margins
and produce more volatility in our business.
As children have grown “older younger” and have become interested in more and more sophisticated and
adult products, such as videogames and consumer electronics, at younger and younger ages, we have needed
to work even harder to keep our products relevant for these consumers. One initiative we have been pursuing
to capture the interest of older children is to offer innovative children’s electronic toys and games. Examples
of such products in the last few years include VIDEONOW, CHATNOW, ZOOMBOX, our I-branded products
such as I-DOG and I-CAT, and our FURREAL FRIENDS line of products, including BUTTERSCOTCH.
These products, if successful, can be an effective way for us to connect with consumers and increase sales.
However, children’s electronics, in addition to the risks associated with our other family entertainment
products, also face certain additional risks.
Our costs for designing, developing and producing electronic products tend to be higher than for many of
our other more traditional products, such as board games and action figures. The ability to recoup these higher
costs through sufficient sales quantities and to reflect higher costs in higher prices is constrained by heavy
competition in consumer electronics. As a consequence, our margins on the sales of electronic products tend
to be lower than for more traditional products and we can face increased risk of not achieving sales sufficient
to recover our costs. In addition, the pace of change in product offerings and consumer tastes in the electronics
area is potentially even greater than for our other products. This pace of change means that the window in
which a product can achieve and maintain consumer interest may be even shorter.
As a manufacturer of consumer products and a large multinational corporation, we are subject to various
government regulations and may be subject to additional regulations in the future, violation of which
could subject us to sanctions or otherwise harm our business. In addition, we could be the subject of
future product liability suits or product recalls, which could harm our business.
As a manufacturer of consumer products, we are subject to significant government regulations, including,
in the United States, under The Consumer Products Safety Act, The Federal Hazardous Substances Act, and
The Flammable Fabrics Act, as well as under product safety and consumer protection statutes in our
international markets. In addition, certain of our products are subject to regulation by the Food and Drug
Administration or similar international authorities. While we take all the steps we believe are necessary to
comply with these acts, there can be no assurance that we will be in compliance in the future. Failure to
comply could result in sanctions which could have a negative impact on our business, financial condition and
results of operations. We may also be subject to involuntary product recalls or may voluntarily conduct a
product recall. While costs associated with product recalls have generally not been material to our business,
the costs associated with future product recalls individually and in the aggregate in any given fiscal year, could
be significant. In addition, any product recall, regardless of direct costs of the recall, may harm consumer
perceptions of our products and have a negative impact on our future sales and results of operations.
Governments and regulatory agencies in the markets where we manufacture and sell products may enact
additional regulations relating to product safety and consumer protection in the future, and may also increase
the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or
more of our customers might require changes in our products, such as the non-use of certain materials, in the
future. Complying with any such additional regulations or requirements could impose increased costs on our
business. Similarly, increased penalties for non-compliance could subject us to greater expense in the event
any of our products were found to not comply with such regulations. Such increased costs or penalties could
harm our business.
In addition to government regulation, products that have been or may be developed by us may expose us
to potential liability from personal injury or property damage claims by the users of such products. There can
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