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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 June 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
- ------------------------------- -------------------
(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 August 3, 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-
June 30, 1998 and December 31, 1997 ....................... 3
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 1998 and 1997 ......... 4
Consolidated Condensed Statements of Cash Flows-
Six months ended June 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 six months ended
June 30, 1998 ............................................. 11
Page 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
<TABLE><CAPTION>
Bulova Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands)
June 30, December 31,
1998 1997
-----------------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents ....................... $ 7,150 $ 9,127
Investments ..................................... 34,168 19,937
Accounts and notes receivable-net ............... 40,522 51,377
Inventories, principally watches and clocks ..... 32,838 35,656
Prepaid expenses ................................ 1,497 2,079
Prepaid federal income tax ...................... 615
Deferred income taxes ........................... 8,209 8,219
----------------------
Total current assets ........................ 124,999 126,395
----------------------
Property, plant and equipment-net ................. 11,375 11,489
----------------------
Other assets:
Deferred income taxes ........................... 16,870 17,442
Other ........................................... 274 224
----------------------
Total other assets .......................... 17,144 17,666
----------------------
Total assets ................................ $153,518 $155,550
======================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ................................ $ 1,372 $ 3,092
Accrued expenses ................................ 17,134 19,913
----------------------
Total current liabilities ................... 18,506 23,005
----------------------
Other liabilities and credits:
Postretirement benefits payable ................. 40,197 40,967
Pension benefits payable ........................ 3,204 3,606
Other ........................................... 5,366 6,029
----------------------
Total other liabilities and credits ......... 48,767 50,602
----------------------
Shareholders' equity .............................. 86,245 81,943
----------------------
Total liabilities and shareholders' equity .. $153,518 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
--------------------------------------
<S> <C> <C> <C> <C>
Net sales .......................... $26,815 $26,611 $57,741 $55,159
Cost of sales ...................... 14,528 15,342 31,976 31,791
--------------------------------------
Gross profit ....................... 12,287 11,269 25,765 23,368
Selling, general and administrative
expenses .......................... 10,362 10,368 20,811 21,073
--------------------------------------
Operating income ................... 1,925 901 4,954 2,295
Royalty ............................ 908 813 1,793 1,866
Interest income .................... 613 293 1,127 610
Interest expense ................... (1) (4) (55) (11)
Other .............................. 169 145 162 299
--------------------------------------
Income before income tax expense ... 3,614 2,148 7,981 5,059
Income tax expense ................. 1,695 928 3,705 2,245
--------------------------------------
Net income ......................... $ 1,919 $ 1,220 $ 4,276 $ 2,814
======================================
Net income per share ............... $ .42 $ .26 $ .93 $ .61
======================================
Weighted average number of shares
outstanding ....................... 4,599 4,599 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)
Six Months Ended
June 30,
1998 1997
----------------------
<S> <C> <C>
Operating Activities:
Net income ....................................... $ 4,276 $ 2,814
Adjustments to reconcile net income to net cash
provided by operating activities ................ 1,351 1,742
Changes in assets and liabilities-net:
Receivables .................................... 9,567 13,511
Inventories .................................... 2,818 (1,100)
Other assets ................................... (50) 408
Accounts payable and accrued expenses .......... (4,499) (3,047)
Accrued federal and foreign income taxes ....... (96) (1,898)
Other liabilities and credits .................. (1,746) (856)
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11,621 11,574
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Investing Activities:
Purchases of short-term investments .............. (218,332) (14,628)
Proceeds from sales of short-term investments .... 204,974 5,000
Purchases of property, plant and equipment ....... (246) (411)
Proceeds from disposal of property, plant and
equipment ....................................... 6 14
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(13,598) (10,025)
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Net change in cash and cash equivalents ............ (1,977) 1,549
Cash and cash equivalents, beginning of period ..... 9,127 10,665
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Cash and cash equivalents, end of period ........... $ 7,150 $ 12,214
=====================
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 $1,375,000,
$786,000, $2,594,000 and $1,573,000 for the three and six months ended June
30, 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, $516,000, $1,038,000 and $1,032,000 for the three and
six months ended June 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 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 and six months ended June 30, 1998 and 1997, comprehensive income
totaled $1,526,000, $1,256,000, $4,302,000 and $2,771,000, respectively.
Comprehensive income includes net income and foreign currency translation
gains or losses.
Page 6
6. Shareholders' equity:
<TABLE>
<CAPTION>
June 30, 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 .......................... 42,070 37,794
Cumulative translation adjustment .......... (1,535) (1,561)
Pension liability adjustment ............... (481) (481)
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Total ................................. 86,250 81,948
Less treasury stock, at cost ............... 5 5
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Total shareholders' equity ............ $86,245 $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 $342,000 represents the minimum of the
Company's estimated range of equally likely outcomes, the upper limit of
that range is approximately $684,000.
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
June 30, 1998 and December 31, 1997 and the results of operations for the
three and six months ended June 30, 1998 and 1997 and changes in cash flows
for the six months ended June 30, 1998 and 1997, respectively.
Results of operations for the second quarter and first six 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 $11,621,000 and
$11,574,000 for the six months ended June 30, 1998 and 1997, respectively. The
increase in net cash flow is primarily the result of the timing of inventory
purchases and increased sales partially offset by lower collection of accounts
receivable, as compared to the prior year.
In previous years, the Company has relied on Loews, which owns approximately 97%
of the Company's outstanding 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 to generate sufficient cash flow
from operations to fund working capital requirements through 1998.
The Company's investments consist primarily of commercial paper. Cash and cash
equivalents, and investments amounted to approximately $41,318,000 at June 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. Capital expenditures related to this
project are estimated to be approximately $1,350,000, of which approximately
$155,000 and $246,000 was incurred during the three and six months ended June
30,1998, respectively, and approximately $809,000 has been incurred since the
inception of the project which commenced in the first quarter of 1997.
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
by 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 by approximately $204,000, or 0.8%, and $2,582,000 or 4.7%,
for the three and six months ended June 30, 1998, respectively, as compared to
Page 8
the corresponding periods of the prior year. Income before income taxes
increased by approximately $1,466,000 and $2,922,000 for the three and six
months ended June 30, 1998, respectively, as compared to the prior year.
The increase in net sales is primarily attributable to the continued growth of
the Company's Bulova and Caravelle watch brands. The combined sales increase
for the Bulova and Caravelle watch brands was $823,000, or 4.1%, and $3,882,000,
or 9.2% for the three and six months ended June 30, 1998 as compared to the
prior year. These increases were partially offset by a combined sales decline in
other watch and clock product lines of $600,000 and $1,249,000 for the three and
six months ended June 30, 1998, respectively, as compared to the prior year.
Gross profit as a percentage of sales increased to 45.8% and 44.6% for the three
and six months ended June 30, 1998, respectively, as compared to 42.3% and 42.4%
for the prior year. 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 and six months ended June 30, 1998 were 38.6% and 36.0%, respectively,
as compared to 39.0% and 38.2%, respectively, for the prior year. This decrease
is the result of higher sales and management's continued efforts to control
discretionary costs.
Royalty income increased by approximately $95,000 or 11.7% and decreased by
approximately $73,000 or 3.9% for the three and six months ended June 30, 1998,
respectively. 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 six months ended June 30, 1998 reflects the effects of
renegotiation of two license agreements in 1996.
Interest income increased by approximately $320,000 and $517,000 for the three
and six months ended June 30, 1998, respectively, as compared to the prior year.
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
results of operations for the three and six months ended June 30, 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, $516,000, $1,038,000 and $1,032,000 for the three
and six months ended June 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.
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
Page 9
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.
--------------------------------
(a) Exhibits --
(27) Financial Data Schedule for the six months ended June 30, 1998.
(b) Current reports on Form 8-K -- There were no reports on Form 8-K filed for
the three months ended June 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: August 14, 1998 By: /s/ Paul S. Sayegh
-----------------------
PAUL S. SAYEGH
Chief Operating Officer
(Duly authorized
officer and principal
financial officer)
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,150
<SECURITIES> 34,168
<RECEIVABLES> 44,011
<ALLOWANCES> 3,489
<INVENTORY> 32,838
<CURRENT-ASSETS> 124,999
<PP&E> 21,034
<DEPRECIATION> 9,659
<TOTAL-ASSETS> 153,518
<CURRENT-LIABILITIES> 18,506
<BONDS> 0
<COMMON> 22,999
0
0
<OTHER-SE> 63,246
<TOTAL-LIABILITY-AND-EQUITY> 153,518
<SALES> 57,741
<TOTAL-REVENUES> 60,823
<CGS> 31,976
<TOTAL-COSTS> 31,976
<OTHER-EXPENSES> 19,523
<LOSS-PROVISION> 1,288
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 7,981
<INCOME-TAX> 3,705
<INCOME-CONTINUING> 4,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,276
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
