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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-457
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BULOVA CORPORATION
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(Exact name of registrant as specified in its charter)
New York 11-1719409
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
ONE BULOVA AVENUE, WOODSIDE, N.Y. 11377-7874
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(Address of principal executive offices) (Zip Code)
(718) 204-3300
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
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 No
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Class Outstanding at November 2, 1998
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Common stock, $5 par value 4,599,249 shares
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Page 1
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets-
September 30, 1998 and December 31, 1997 .................. 3
Consolidated Condensed Statements of Income -
Three and nine months ended September 30, 1998 and 1997 ... 4
Consolidated Condensed Statements of Cash Flows-
Nine months ended September 30, 1998 and 1997 ............. 5
Notes to Consolidated Condensed Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ...................... 10
Exhibit 27--Financial Data Schedule for the nine months ended
September 30, 1998 ......................................... 12
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Bulova Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands)
September 30, December 31,
1998 1997
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Assets
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Current assets:
Cash and cash equivalents ....................... $ 7,174 $ 9,127
Short-term investments .......................... 24,583 19,937
Accounts and notes receivable-net ............... 50,150 51,377
Inventories, principally watches and clocks ..... 38,175 35,656
Prepaid expenses ................................ 796 2,079
Deferred income taxes ........................... 8,712 8,219
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Total current assets ........................ 129,590 126,395
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Property, plant and equipment-net ................. 11,309 11,489
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Other assets:
Deferred income taxes ........................... 16,457 17,442
Other ........................................... 248 224
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Total other assets .......................... 16,705 17,666
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Total assets ................................ $157,604 $155,550
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Liabilities and Shareholders' Equity
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Current liabilities:
Accounts payable ................................ $ 2,743 $ 3,092
Accrued expenses ................................ 18,589 19,913
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Total current liabilities ................... 21,332 23,005
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Other liabilities and credits:
Postretirement benefits payable ................. 39,163 40,967
Pension benefits payable ........................ 3,004 3,606
Other ........................................... 5,043 6,029
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Total other liabilities and credits ......... 47,210 50,602
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Shareholders' equity .............................. 89,062 81,943
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Total liabilities and shareholders' equity .. $157,604 $155,550
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See accompanying Notes to Consolidated Condensed Financial Statements.
Page 3
Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Income
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
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Net sales .......................... $ 33,920 $33,049 $ 91,661 $88,208
Cost of sales ...................... 16,853 17,840 48,829 49,631
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Gross profit ....................... 17,067 15,209 42,832 38,577
Selling, general and administrative
expenses .......................... 12,934 11,491 33,745 32,564
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Operating income ................... 4,133 3,718 9,087 6,013
Royalty income...................... 899 856 2,692 2,722
Interest income .................... 452 427 1,579 1,048
Interest expense ................... (16) (4) (71) (15)
Other .............................. 118 93 280 381
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Income before income tax expense ... 5,586 5,090 13,567 10,149
Income tax expense ................. 2,345 1,996 6,050 4,241
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Net income ......................... $ 3,241 $ 3,094 $ 7,517 $ 5,908
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Net income per share ............... $ .70 $ .67 $ 1.63 $ 1.28
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Weighted average number of shares
outstanding ....................... 4,599 4,599 4,599 4,599
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See accompanying Notes to Consolidated Condensed Financial Statements.
Page 4
Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Amounts in thousands)
Nine Months Ended
September 30,
1998 1997
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Operating Activities:
Net income ....................................... $ 7,517 $ 5,908
Adjustments to reconcile net income to net cash
provided by operating activities ................ 1,945 2,784
Changes in assets and liabilities-net:
Receivables .................................... (955) 2,265
Inventories .................................... (2,519) 866
Other assets ................................... 740 1,374
Accounts payable and accrued expenses .......... (1,999) (2,987)
Accrued federal and foreign income taxes ....... 845 (1,992)
Other liabilities and credits .................. (3,790) (1,475)
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1,784 6,743
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Investing Activities:
Purchases of short-term investments .............. (218,332) (33,661)
Proceeds from sales of short-term investments .... 214,952 20,000
Purchases of property, plant and equipment ....... (363) (478)
Proceeds from disposal of property, plant and
equipment ....................................... 6 17
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(3,737) (14,122)
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Net change in cash and cash equivalents ............ (1,953) (7,379)
Cash and cash equivalents, beginning of period ..... 9,127 10,665
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Cash and cash equivalents, end of period ........... $ 7,174 $ 3,286
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See accompanying Notes to Consolidated Condensed Financial Statements.
Page 5
Bulova Corporation and Subsidiaries
Notes to Consolidated Condensed Financial Statements
1. See Notes to Consolidated Financial Statements in the Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 27, 1998.
There have been no changes in significant accounting policies since December
31, 1997. In addition, certain amounts applicable to prior periods have been
reclassified to conform to classifications followed in 1998.
2. In 1991, the Company and a third party commenced an arbitration proceeding
before the Netherlands Arbitration Institute contesting the attempt of
Benetton International N.V. ("Benetton") to prematurely terminate the
License Agreement for "Benetton by Bulova" timepieces and seeking damages in
relation thereto. (The License Agreement subsequently terminated in 1994).
The arbitral panel determined that Benetton was not entitled to terminate
the License Agreement prior to the expiration of its term and awarded
damages to the Company in relation thereto. Benetton has commenced
proceedings in the Dutch courts seeking to overturn the arbitral award on a
number of grounds and, pending the outcome of those proceedings, to suspend
enforcement of the damage award. The Dutch courts have refused to suspend
enforcement of the damage award and on February 12, 1996, the Company
received approximately $3,857,000 which represented damages, costs and
interest. The funds received are subject to return, with interest, if the
Dutch courts ultimately uphold Benetton's petition to overturn the arbitral
award. As a result, the Company has deferred recognition of the award and
recorded a deferred credit.
3. Under the tax allocation agreement between the Company and its parent, Loews
Corporation ("Loews"), the Company has paid Loews approximately $688,000,
$786,000, $3,282,000 and $2,359,000 for the three and nine months ended
September 30, 1998 and 1997, respectively.
See Note 3 of the Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 1997.
4. Loews provides administrative and managerial services for which the Company
was charged $519,000, $516,000, $1,557,000 and $1,548,000 for the three and
nine months ended September 30, 1998 and 1997, respectively. This expense is
included in selling, general and administrative expenses. The cost allocated
to the Company is estimated to be the incremental cost incurred by Loews in
providing these services to the Company.
See Note 2 of the Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 1997.
5. The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income." Comprehensive income includes all
changes to shareholders' equity, including net income, except those
resulting from investments by owners and distributions to owners. For the
three and nine months ended September 30, 1998 and 1997, comprehensive
income totaled $2,817,000, $3,091,000, $7,119,000 and $5,835,000,
respectively. Comprehensive income includes net income and foreign currency
translation gains or losses.
Page 6
6. Shareholders' equity:
September 30, December 31,
1998 1997
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(In thousands)
Common stock ............................... $ 22,999 $ 22,999
Additional paid-in capital ................. 23,197 23,197
Retained earnings .......................... 45,311 37,794
Cumulative translation adjustment .......... (1,959) (1,561)
Pension liability adjustment ............... (481) (481)
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Total ................................. 89,067 81,948
Less treasury stock, at cost ............... 5 5
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Total shareholders' equity ............ $ 89,062 $ 81,943
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7. The Company is responsible for the clean-up of certain environmental
conditions at its current facility as well as certain former manufacturing
facilities. The remaining environmental liability recognized in the
Company's financial statements of $266,000 represents the minimum of the
Company's estimated range of equally likely outcomes, the upper limit of
that range is approximately $608,000.
See Note 9 of the Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 1997.
8. In the opinion of Management, the accompanying consolidated condensed
financial statements reflect all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 1998 and December 31, 1997 and the results of operations for
the three and nine months ended September 30, 1998 and 1997 and changes in
cash flows for the nine months ended September 30, 1998 and 1997,
respectively.
Results of operations for the third quarter and first nine months of each of
the years is not necessarily indicative of results of operations for that
entire year.
Page 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Liquidity and Capital Resources:
The Company generated net cash flow from operations of $1,784,000 and $6,743,000
for the nine months ended September 30, 1998 and 1997, respectively. The
decrease in net cash flow is primarily the result of timing in and increase of
inventory purchases necessary to meet the Company's sales forecast, as well as
an increase in the level of cash collection for the nine months ended September
30, 1997, which the Company has been able to maintain through the nine months
ended September 30, 1998, resulting in a more consistent accounts receivable
balance compared to the corresponding period of the prior year. Additionally, a
decrease in accounts payable and accrued expenses, resulting from a difference
in the timing of the transaction, compared to the corresponding period of the
prior year also decreased the net cash flow. An increase in net income has
partially offset the cash usages discussed above.
Prior to January 1995, the Company had relied on Loews, which owns approximately
97% of the Company's common stock, to meet working capital needs which the
Company was not able to satisfy with internally generated funds. In 1979, the
Company entered into a credit agreement with Loews (the "Credit Agreement")
which provides, under terms and conditions set forth therein, for unsecured
loans to the Company to be made by Loews from time to time, in principal amounts
aggregating up to $50,000,000. The Credit Agreement has been periodically
extended by the Company and currently expires on June 30, 2000. While Loews has
no obligation to enter into or maintain arrangements for any further borrowing,
it is anticipated that should the Company require working capital advances, they
would be provided by Loews under the Credit Agreement. See Note 2 of the Notes
to Consolidated Financial Statements in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
The Company has not required any working capital advances from Loews since the
then outstanding debt of $19,000,000 in principal amount under the Credit
Agreement was paid in January 1995 and expects that existing cash balances and
cash flow from operations will be sufficient to fund anticipated working capital
requirements.
The Company's investments consist primarily of commercial paper. Cash and cash
equivalents, and short-term investments amounted to approximately $31,757,000 at
September 30, 1998, as compared to approximately $29,064,000 at December 31,
1997.
The Company has invested in property, plant and equipment in an effort to
improve warehouse operational efficiency. In the third quarter of 1998, the
Company increased the scope of the project and revised its estimate of related
capital expenditures from $1,350,00 to $2,000,000. Approximately $117,000 and
$363,000 was incurred during the three and nine months ended September 30, 1998,
and approximately $926,000 has been incurred since the inception of the project,
which commenced in the first quarter of 1997. This project will be funded
through the Company's working capital.
On November 3, 1998 the Company executed an agreement to acquire a warehouse
facility for its clock operation. The acquisition and renovation cost is
expected to be approximately $4,400,000. The purchase is subject to certain
terms and conditions contained in the agreement including a Phase 2
environmental study. The Company expects the closing to be completed by December
31, 1998. The project will be funded through the Company's available working
capital.
Year 2000 Issue
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, time-sensitive
software may incorrectly recognize a date using "00" as the year 1900 rather
than 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Page 8
The Company has completed an assessment of its computer and other non-
information technology systems, and is in the process of modifying and/or
replacing portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. Based on a
revaluation of the status of the project conducted in the third quarter of 1998,
the Company revised the project's completion date. The project is now expected
to be completed by the end of the first quarter of 1999, which is prior to any
anticipated impact on its operating systems. The estimated total cost of the
Year 2000 project is approximately $225,000. The Company believes that the Year
2000 issue will not pose a significant operational problem for its computer
systems. However, if the modifications and conversions of software are not
completed timely, the Year 2000 issue could have a material impact on the
operations of the Company. In addition, due to the interdependent nature of
computer systems, the Company may be adversely impacted depending upon whether
it or other entitites not affiliated with the Company (vendors, customers, and
business partners) address the issue successfully. Contingency plans will be
prepared so that the Company's critical business processes can be expected to
continue to function on January 1, 2000 and beyond. The Company's contingency
plans will be structured to address both remediation of systems and their
components and overall business operating risk. These plans are intended to
mitigate both internal risks as well as potential risks with the Company's
vendors, customers and business partners.
Results of Operations:
Net sales increased by approximately $871,000, or 2.6%, and $3,453,000 or 3.9%,
for the three and nine months ended September 30, 1998, respectively, as
compared to the corresponding periods of the prior year. Income before income
taxes increased by approximately $496,000 and $3,418,000 for the three and nine
months ended September 30, 1998, respectively, as compared to the corresponding
periods of the prior year.
The increase in net sales is primarily attributable to the continued growth of
the Company's Bulova and Caravelle watch brands. These increases were partially
offset by a combined sales decline in the Sportstime licensed product line and
the clock product lines. The Company is evaluating the market position and sales
contribution of its Sportstime licensed product lines.
In the third quarter of 1998, the Company recorded a credit of $227,000 in cost
of sales related to an actuarial revaluation of its post retirement benefit net
periodic expense. Exclusive of this transaction, gross profit as a percentage of
net sales increased to 49.6% and 46.5% for the three and nine months ended
September 30, 1998, respectively, as compared to 46.0% and 43.7% for the
corresponding periods of the prior year. This increase is attributable to a
favorable product sales mix and continued efforts to improve procurement
practices.
In the third quarter of 1998, the Company recorded a credit of $423,000 in
administrative expense related to an actuarial revaluation of its post
retirement benefit net priodic expense. Exclusive of this transaction, selling,
general and administrative expenses as a percentage of net sales for the three
and nine months ended September 30, 1998 were 39.4% and 37.3%, respectively, as
compared to 34.8% and 36.9%, respectively, for the corresponding periods of the
prior year. The increase in selling, general, and administrative expenses for
the three and nine months ended September 30, 1998 is primarily due to an
increased investment in brand support.
Royalty income increased by approximately $43,000 or 5.0% and decreased by
approximately $30,000 or 1.1% for the three and nine months ended September 30,
1998, respectively, as compared to the corresponding periods of the prior year.
Royalty income represents payments by a distributor and licensees principally in
Europe, the Far East and South America. The decline in royalty income for the
nine months ended September 30, 1998 reflects the effects of renegotiation of
two license agreements in 1996.
Interest income increased by approximately $25,000 and $531,000 for the three
and nine months ended September 30, 1998, respectively, as compared to the
corresponding periods of the prior year. This increase is the result of the
increased level of invested assets.
Page 9
The Company imports most of its watch and clock products. Approximately 5.0% of
the Company's purchases are denominated in Japanese yen. The remaining purchases
are primarily denominated in U.S. dollars and acquired from vendors located in
Europe, Hong Kong and other Asian countries. The Hong Kong dollar is pegged to
the U.S. dollar and has not been subject to the fluctuations that have affected
other Asian currencies. In the event that the peg between the two currencies is
removed, currency fluctuations could have a material impact on the cost of those
imported products which ultimately could have a negative impact on the Company's
gross profit, operating income and cash flow. Foreign currency fluctuations have
not had a material impact on the results of operations for the three and nine
months ended September 30, 1998 and 1997. Future foreign currency fluctuations,
however, could impact gross profit, income, and cash flow.
Forward-Looking Statements
When included in the Report, the words "believes," "expects," "intends,"
"anticipates," "estimates" and analogous expressions are intended to identify
forward-looking statements. Such statements inherently are subject to a variety
of risks and uncertainties that could cause actual results to differ materially
from those projected. Such risks and uncertainties include, among others,
general economic and business conditions, changes in financial markets,
significant changes in consumer spending patterns, competition in the Company's
product areas, effects of the Asian economic crisis, changes in foreign currency
valuations in relation to the U.S. dollar, changes in foreign, political, social
and economic conditions, and various other matters, many of which are beyond the
Company's control. These forward-looking statements speak only as of the date
of this report. The Company expressly disclaims any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any
statement is based.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits --
(27) Financial Data Schedule for the nine months ended September 30, 1998.
(b) Current reports on Form 8-K -- There were no reports on Form 8-K filed for
the three months ended September 30, 1998.
Page 10
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.
BULOVA CORPORATION
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(Registrant)
Dated: November 16, 1998 By: /s/ Paul S. Sayegh
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PAUL S. SAYEGH
Chief Operating Officer
(Duly authorized
officer and principal
financial officer)
Page 11