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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 March 31, 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
- ------------------------------- -------------------
(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 May 1, 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-
March 31, 1998 and December 31, 1997 ....................... 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1998 and 1997 ................. 4
Consolidated Condensed Statements of Cash Flows-
Three months ended March 31, 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 three months ended
March 31, 1998 ............................................ 10
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
<TABLE><CAPTION>
Bulova Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands)
March 31, December 31,
1998 1997
-----------------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents ....................... $ 12,093 $ 9,127
Investments ..................................... 34,930 19,937
Accounts and notes receivable-net ............... 38,926 51,377
Inventories, principally watches and clocks ..... 30,416 35,656
Prepaid expenses ................................ 1,021 2,079
Deferred income taxes ........................... 7,941 8,219
----------------------
Total current assets ........................ 125,327 126,395
----------------------
Property, plant and equipment-net ................. 11,397 11,489
----------------------
Other assets:
Deferred income taxes ........................... 17,101 17,442
Other ........................................... 268 224
----------------------
Total other assets .......................... 17,369 17,666
----------------------
Total assets ................................ $154,093 $155,550
======================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ................................ $ 2,882 $ 3,092
Accrued expenses ................................ 16,231 19,913
Accrued federal and foreign income taxes ........ 959
----------------------
Total current liabilities ................... 20,072 23,005
----------------------
Other liabilities and credits:
Postretirement benefits payable ................. 40,582 40,967
Pension benefits payable ........................ 3,405 3,606
Other ........................................... 5,315 6,029
----------------------
Total other liabilities and credits ......... 49,302 50,602
----------------------
Shareholders' equity .............................. 84,719 81,943
----------------------
Total liabilities and shareholders' equity .. $154,093 $155,550
======================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 3
<TABLE>
<CAPTION>
Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Income
(Amounts in thousands, except per share data)
Three Months Ended
March 31,
1998 1997
---------------------
<S> <C> <C>
Net sales .......................................... $30,926 $28,548
Cost of sales ...................................... 17,448 16,449
---------------------
Gross profit ....................................... 13,478 12,099
Selling, general and administrative expenses ....... 10,449 10,705
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Operating income ................................... 3,029 1,394
Royalty ............................................ 885 1,053
Interest income .................................... 514 317
Interest expense ................................... (54) (7)
Other .............................................. (7) 154
---------------------
Income before income tax expense ................... 4,367 2,911
Income tax expense ................................. (2,010) (1,317)
---------------------
Net income ......................................... $ 2,357 $ 1,594
=====================
Net income per share ............................... $ .51 $ .35
=====================
Weighted average number of shares outstanding ...... 4,599 4,599
=====================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Amounts in thousands)
Three Months Ended
March 31,
1998 1997
----------------------
<S> <C> <C>
Operating Activities:
Net income ....................................... $ 2,357 $ 1,594
Adjustments to reconcile net income to net cash
provided by operating activities ................ 996 1,475
Changes in assets and liabilities-net:
Receivables .................................... 11,865 14,900
Inventories .................................... 5,240 (1,206)
Prepaid expenses ............................... 539 425
Other assets ................................... (44) 363
Accounts payable and accrued expenses .......... (3,892) (3,670)
Accrued federal and foreign income taxes ....... 1,478 (876)
Other liabilities and credits .................. (881) (952)
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17,658 12,053
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Investing Activities:
Purchases of U.S. government securities .......... (104,607) (14,628)
Proceeds from sales of U.S. government securities 90,000 5,000
Purchases of property, plant and equipment ....... (91) (108)
Proceeds from disposal of property, plant and
equipment ....................................... 6 12
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(14,692) (9,724)
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Net change in cash and cash equivalents ............ 2,966 2,329
Cash and cash equivalents, beginning of period ..... 9,127 10,665
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Cash and cash equivalents, end of period ........... $ 12,093 $ 12,994
=====================
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
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 $1,219,000
and $787,000 for the three months ended March 31, 1998 and 1997,
respectively.
See Note 4 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 and $516,000 for the three months ended March 31, 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 Standard ("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 months ended March 31, 1998 and 1997, comprehensive income totaled
$2,776,000 and $1,515,000, respectively. Comprehensive income includes net
income and foreign currency translation gains or losses.
Page 6
6. Shareholders' equity:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------------
(In thousands)
<S> <C> <C>
Common stock ................................. $22,999 $22,999
Additional paid-in capital ................... 23,197 23,197
Retained earnings ............................ 40,151 37,794
Cumulative translation adjustment ............ (1,142) (1,561)
Pension liability adjustment ................. (481) (481)
----------------------
Total ................................... 84,724 81,948
Less treasury stock, at cost ................. 5 5
----------------------
Total shareholders' equity .............. $84,719 $81,943
======================
</TABLE>
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 $374,000 represents the minimum of the
Company's estimated range of equally likely outcomes, the upper limit of
that range is approximately $1,093,000.
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
March 31, 1998 and December 31, 1997 and the results of operations and
changes in cash flows for the three months ended March 31, 1998 and 1997,
respectively.
Results of operations for the first quarter 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 cash flow from operations of $17,658,000 and $12,053,000
for the three months ended March 31, 1998 and 1997, respectively. The increase
in net cash flow is primarily the result of the timing of inventory purchases
and increased sales, as compared to the prior year. The reduction in purchases
during the first quarter of 1998 is due to the Company's continuing effort to
closely monitor inventory purchasing to ensure that appropriate levels are
maintained.
In previous years, the Company has 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 meet through 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 in
amounts aggregating up to $50,000,000. The Credit Agreement has been
periodically extended by the Company and currently expires June 30, 1999. 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 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
entire debt of $19,000,000 under the Credit Agreement was paid in January 1995
and expects to generate sufficient cash flow from operations in 1998 to fund
working capital requirements. The Company's investments consist primarily of
commercial paper. During the first quarter of 1998, the Company purchased
commercial paper for $104,607,000 in cash and received proceeds of $90,000,000.
Cash and cash equivalents, and investments amounted to $47,023,000 at March 31,
1998, as compared to $29,064,000 at December 31, 1997.
The Company has invested in property, plant and equipment in an effort to
improve warehouse operational efficiency. Capital expenditures related to this
project are estimated to be approximately $1,350,000, of which approximately
$91,000 was incurred during the first quarter of 1998, and approximately
$654,000 has been incurred since the inception of the project.
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.
The Company 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. The project is expected to be completed
no later than December 31, 1998, which is prior to any anticipated impact on its
operating systems, and the cost is not expected to be material. 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 entities not affiliated with the Company (vendors,
customers, and business partners) address the issue successfully.
Results of Operations:
Net sales increased $2,378,000, or 8.3%, and income before income taxes
Page 8
increased $1,456,000 for the three months ended March 31, 1998, respectively, as
compared to the prior year.
The increase in net sales is primarily attributable to the continued growth of
the Company's core watch brands of Accutron, Bulova and Caravelle. The Company
has continued a consistent marketing effort focused on brand image which
resulted in a combined sales increase for the core watch brands of $2,638,000,
or 11.1% for the three months ended March 31, 1998 as compared to the prior
year. The increase reflects a combined 10.6% increase in unit volume over the
prior year.
Gross profit as a percentage of sales for the three months ended March 31, 1998
was 43.6% as compared to 42.4% for the three months ended March 31, 1997. This
increase is attributable to a favorable product sales mix and the continued
efforts to improve procurement practices.
Selling, general and administrative expenses as a percentage of net sales for
the three months ended March 31, 1998 was 33.8% as compared to 37.5% for the
prior year. This decrease is the result of higher sales and management's
continued efforts to control discretionary costs, partially offset by higher
advertising costs.
Royalty income has declined $168,000, or 16.0%, for the first quarter of 1998,
as compared to 1997. Royalty income represents payments by a distributor and
licensees principally in Europe, the Far East and South America. The decline in
royalty income reflects the effects of renegotiation of two license agreements
in 1996. Interest income increased $197,000, or 62.1% for the three months ended
March 31, 1998. This increase is the result of the increased level of invested
assets.
The Company imports most of its watch and clock products. Approximately 5% of
the Company's purchases are denominated in Japanese yen. The remaining purchases
are primarily in U.S. dollars from vendors located in 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 gross profit, operating income and
cash flow. Foreign currency fluctuations have not had a material impact on the
results of operations for the quarter ended March 31, 1998 and 1997. Future
foreign currency fluctuations, however, could impact gross profit, income, and
cash flow.
Corporate
Related Parties - Loews has provided administrative services for which the
Company was charged $519,000 and $516,000 for the three months ended March 31,
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.
Page 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits --
(27) Financial Data Schedule for the three months ended March 31, 1998.
(b) Current reports on Form 8-K -- There were no reports on Form 8-K filed for
the three months ended March 31, 1998.
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
------------------
(Registrant)
Dated: May 15, 1998 By: /s/ Paul S. Sayegh
-----------------------
PAUL S. SAYEGH
Chief Operating Officer
(Duly authorized
officer and principal
financial officer)
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,093
<SECURITIES> 34,930
<RECEIVABLES> 42,264
<ALLOWANCES> 3,338
<INVENTORY> 30,416
<CURRENT-ASSETS> 125,327
<PP&E> 20,903
<DEPRECIATION> 9,506
<TOTAL-ASSETS> 154,093
<CURRENT-LIABILITIES> 20,072
<BONDS> 0
<COMMON> 22,999
0
0
<OTHER-SE> 61,720
<TOTAL-LIABILITY-AND-EQUITY> 154,093
<SALES> 30,926
<TOTAL-REVENUES> 1,338
<CGS> 17,448
<TOTAL-COSTS> 17,448
<OTHER-EXPENSES> 10,449
<LOSS-PROVISION> 586
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 4,367
<INCOME-TAX> 2,010
<INCOME-CONTINUING> 2,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,357
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
