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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, 1999
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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
----------------------------------------------------
(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 6, 1999
- --------------------------- -------------------------------
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, 1999 and December 31, 1998 ....................... 3
Consolidated Condensed Statements of Income -
Three and six months ended June 30, 1999 and 1998 ......... 4
Consolidated Condensed Statements of Cash Flows-
Six months ended June 30, 1999 and 1998 ................... 5
Notes to Consolidated Condensed Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .......................... 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ....................... 12
Exhibit 27--Financial Data Schedule for the six months ended
June 30, 1999
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,
1999 1998
-----------------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents ....................... $ 7,689 $ 5,720
Investments ..................................... 26,920 19,964
Accounts and notes receivable-net ............... 43,447 56,213
Inventories, principally watches and clocks ..... 42,061 38,937
Prepaid expenses ................................ 1,537 1,502
Prepaid federal income tax ...................... 989 1,057
Deferred income taxes ........................... 9,293 9,416
----------------------
Total current assets ........................ 131,936 132,809
----------------------
Property, plant and equipment-net ................. 15,500 15,207
----------------------
Other assets:
Deferred income taxes ........................... 15,886 16,220
Other ........................................... 211 216
----------------------
Total other assets .......................... 16,097 16,436
----------------------
Total assets ................................ $163,533 $164,452
======================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ................................ $ 2,532 $ 3,579
Accrued expenses ................................ 18,634 21,529
----------------------
Total current liabilities ................... 21,166 25,108
----------------------
Other liabilities and credits:
Postretirement benefits payable ................. 38,559 39,495
Pension benefits payable ........................ 3,188 3,590
Other ........................................... 4,530 4,428
----------------------
Total other liabilities and credits ......... 46,277 47,513
----------------------
Shareholders' equity .............................. 96,090 91,831
----------------------
Total liabilities and shareholders' equity .. $163,533 $164,452
======================
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,
1999 1998 1999 1998
--------------------------------------
<S> <C> <C> <C> <C>
Net sales .......................... $29,404 $26,815 $58,281 $57,741
Cost of sales ...................... 14,872 14,528 30,053 31,976
--------------------------------------
Gross profit ....................... 14,532 12,287 28,228 25,765
Selling, general and administrative
expenses .......................... 12,031 10,362 22,777 20,811
--------------------------------------
Operating income ................... 2,501 1,925 5,451 4,954
Royalty ............................ 952 908 1,891 1,793
Interest income .................... 475 613 880 1,127
Interest expense ................... (1) (3) (55)
Other .............................. (35) 169 (87) 162
--------------------------------------
Income before income tax expense ... 3,893 3,614 8,132 7,981
Income tax expense ................. 1,576 1,695 3,492 3,705
--------------------------------------
Net income ......................... $ 2,317 $ 1,919 $ 4,640 $ 4,276
======================================
Net income per share ............... $ .50 $ .42 $ 1.01 $ .93
======================================
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,
1999 1998
----------------------
<S> <C> <C>
Operating Activities:
Net income ....................................... $ 4,640 $ 4,276
Adjustments to reconcile net income to net cash
provided by operating activities ................ 1,856 1,351
Changes in assets and liabilities-net:
Receivables .................................... 11,416 9,567
Inventories .................................... (3,124) 2,818
Other assets ................................... 5 (50)
Accounts payable and accrued expenses .......... (3,942) (4,499)
Accrued federal and foreign income taxes ....... 68 (96)
Other liabilities and credits .................. (1,652) (1,746)
----------------------
9,267 11,621
----------------------
Investing Activities:
Purchases of short-term investments .............. (19,635) (218,332)
Proceeds from sales of short-term investments .... 13,000 204,974
Purchases of property, plant and equipment ....... (663) (246)
Proceeds from disposal of property, plant and
equipment ....................................... 6
----------------------
(7,298) (13,598)
----------------------
Net change in cash and cash equivalents ............ 1,969 (1,977)
Cash and cash equivalents, beginning of period ..... 5,720 9,127
----------------------
Cash and cash equivalents, end of period ........... $ 7,689 $ 7,150
======================
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, 1998 filed with the Securities and
Exchange Commission on March 30, 1999.
There have been no changes in significant accounting policies since December
31, 1998. In addition, certain amounts applicable to prior periods have been
reclassified to conform to classifications followed in 1999.
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. In addition, Benetton has commenced a second
arbitration proceeding, asserting claims against the Company and the Company
has asserted counter claims against Benetton in relation to the license
agreement.
3. Under the tax allocation agreement between the Company and its parent, Loews
Corporation ("Loews"), the Company has paid Loews approximately $1,080,000,
$1,375,000, $2,392,000 and $2,594,000 for the three and six months ended
June 30, 1999 and 1998, 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, 1998.
4. Loews provides administrative and managerial services for which the Company
was charged $664,000, $519,000, $1,329,000 and $1,038,000 for the three and
six months ended June 30, 1999 and 1998, 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.
5. For the three and six months ended June 30, 1999 and 1998, comprehensive
income totaled $2,512,000, $1,526,000, $4,259,000 and $4,302,000,
respectively. Comprehensive income includes all changes to shareholders'
equity, except those resulting from investments by owners and distributions
to owners. Comprehensive income includes net income, foreign currency
translation gains or losses, and pension liability adjustments.
6. The Company is responsible for the clean-up of certain environmental
conditions at its Woodside, N.Y. facility as well as certain former
manufacturing facilities. The remaining environmental liability recognized
in the Company's financial statements of $168,000 represents the minimum of
the Company's estimated range of equally likely outcomes, the upper limit of
that range is approximately $500,000.
See Note 8 of the Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 1998.
Page 6
7. Shareholders' equity:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------------
(In thousands)
<S> <C> <C>
Common stock ............................... $22,999 $22,999
Additional paid-in capital ................. 23,197 23,197
Retained earnings .......................... 53,354 48,714
Accumulated other comprehensive loss ....... (3,455) (3,074)
----------------------
Total ................................. 96,095 91,836
Less treasury stock, at cost ............... 5 5
----------------------
Total shareholders' equity ............ $96,090 $91,831
======================
</TABLE>
8. Geographic Information:
The Company operates predominantly in a single industry segment, that being
the distribution and sale of watches and clocks under the brand names of
Bulova, Caravelle and Accutron. Substantially all of the Company's sales are
in the United States and Canada. The Company evaluates performance based on
operating earnings of the respective geographic area and the geographic
distribution of the Company's operating results are summarized in the
following tables:
<TABLE>
<CAPTION>
United
Three Months Ended June 30, 1999 States Canada Total
------------------------------
(In thousands)
<S> <C> <C> <C>
Sales ................................. $27,107 $2,982 $30,089
Intercompany sales .................... (685) (685)
------------------------------
Total net sales ....................... $26,422 $2,982 $29,404
==============================
Operating income ...................... $ 2,236 $ 265 $ 2,501
Royalties ............................. 952 952
Interest-net .......................... 459 16 475
Other ................................. (35) (35)
------------------------------
Income before tax ..................... $ 3,612 $ 281 $ 3,893
==============================
Three Months Ended June 30, 1998
Sales ................................. $24,449 $ 2,790 $27,239
Intercompany sales .................... (424) (424)
------------------------------
Total net sales ....................... $24,025 $ 2,790 $26,815
==============================
Operating income ...................... $ 1,578 $ 347 $ 1,925
Royalties ............................. 908 908
Interest-net .......................... 590 22 612
Other ................................. 72 97 169
------------------------------
Income before tax ..................... $ 3,148 $ 466 $ 3,614
==============================
Page 7
United
Six Months Ended June 30, 1999 States Canada Total
------------------------------
(In thousands)
<S> <C> <C> <C>
Sales ................................. $53,279 $6,004 $59,283
Intercompany sales .................... (1,002) (1,002)
------------------------------
Total net sales ....................... $52,277 $6,004 $58,281
==============================
Operating income ...................... $ 4,669 $ 782 $ 5,451
Royalties ............................. 1,891 1,891
Interest-net .......................... 844 33 877
Other ................................. (92) 5 (87)
------------------------------
Income before tax ..................... $ 7,312 $ 820 $ 8,132
==============================
Six Months Ended June 30, 1998
Sales ................................. $53,212 $ 5,671 $58,883
Intercompany sales .................... (1,142) (1,142)
------------------------------
Total net sales ....................... $52,070 $ 5,671 $57,741
==============================
Operating income ...................... $ 4,329 $ 625 $ 4,954
Royalties ............................. 1,793 1,793
Interest-net .......................... 1,044 28 1,072
Other ................................. 141 21 162
------------------------------
Income before tax ..................... $ 7,307 $ 674 $ 7,981
==============================
9. 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, 1999 and December 31, 1998 and the results of operations for the
three and six months ended June 30, 1999 and 1998 and changes in cash flows
for the six months ended June 30, 1999 and 1998, 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 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Liquidity and Capital Resources:
The Company generated net cash flow from operations of $9,267,000 and
$11,621,000 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in net cash flow compared to the corresponding period of the prior year
is primarily the result of an increase in inventory purchases necessary to meet
the Company's sales forecast, partially offset by a higher collection of
accounts receivables compared to the corresponding period of the prior year.
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,
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, 1998.
The Company has not required any working capital advances from Loews since
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 U.S. Treasury notes and
commercial paper. Cash and cash equivalents, and investments amounted to
approximately $34,609,000 at June 30, 1999, as compared to approximately
$25,684,000 at December 31, 1998.
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 $2,000,000, of which approximately
$55,000 was incurred during the second quarter of 1999, and approximately
$1,232,000 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. Additionally, during the fourth quarter of 1998, the Company
purchased a building for its clock warehousing and distribution requirements to
replace a leased facility. The cost of the building was approximately $4,000,000
and was funded through the Company's available working capital. Renovation costs
incurred during the first half of 1999 were approximately $490,000. These costs
were funded through the Company's working capital.
Year 2000 Issue
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions may cause computer systems to malfunction when
processing information involving dates beginning in 1999. Such malfunctions
could lead to business delays and disruptions. The Company renovated or replaced
many of its legacy systems and upgraded its systems to accommodate business for
the Year 2000 and beyond. In addition, the Company is checking embedded systems
in computer hardware and other infrastructure such as heating and ventilating
systems, and security systems.
The Company's total cost to replace and upgrade its systems to accommodate Year
2000 processing amounted to approximately $350,000. However, prior to 1997, the
Company did not specifically separate technology charges for the Year 2000 from
other information technology charges.
Page 9
In addition, while some hardware charges are included in the budget figures, the
Company's hardware costs are typically included as part of ongoing technology
updates and not specifically as part of the Year 2000 project. All funds spent
and to be spent will be financed from current operating funds.
As of June 30, 1999, the Company has certified internally virtually all of its
internal applications and systems as being ready for the year 2000. However, due
to the interdependent nature of computer systems, there may be an adverse impact
on the Company if vendors, customers, and other business partners fail to
successfully address the Year 2000 issue. The Company's contingency plans have
been 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 risk with the Company's vendors, customers,
and other business partners.
RESULTS OF OPERATIONS:
Net sales increased $2,589,000, and $540,000, or 9.7% and 0.9%, for the three
and six months ended June 30, 1999, respectively, as compared to the
corresponding periods of the prior year. Income before taxes increased by
approximately $279,000 and $151,000, for the three and six months ended June 30,
1999, respectively, as compared to the prior year. The increase in net sales is
primarily attributable to a unit volume increase of 15.8% and 7.0%, partially
offset by a decrease in the average unit selling price of 5.3% and 5.6% for the
three and six months ended June 30, 1999, respectively, as compared to the
corresponding periods of the prior year. The average unit selling price decrease
was caused by a change in the product sales mix of the Company's core brands.
Gross profit as a percentage of sales increased to 49.4% and 48.4% for the three
and six months ended June 30, 1999, respectively, as compared to 45.8% and 44.6%
for the prior year. This increase is attributable to a favorable product sales
mix and the continued efforts to maintain operational efficiency and improve
procurement practices.
Selling, general and administrative expenses as a percentage of net sales for
the three and six months ended June 30, 1999 was 40.9% and 39.1%, respectively,
as compared to 38.6% and 36.0%, respectively, for the prior year. This increase
is the result of an increased level of brand support, an increase in commission
expense related to an increase in net sales as discussed above, as well as an
increase in parent company charges of 27.9% and 28.0% for the three and six
months ended June 30, 1999 as compared to the corresponding periods of the prior
year.
Royalty income has increased by approximately $44,000, or 4.8%, and increased by
approximately $98,000, or 5.5%, for the three and six months ended June 30,
1999, as compared to the corresponding period of the prior year. Royalty income
represents payments by a distributor and licensees principally in Europe, the
Far East and South America. The income represents an annual increase in
association with the South American distributor agreement. The Europe and Far
East license agreements expire on December 31, 2001 and the South American
distributor agreement expires on December 31, 2000. The Company cannot predict
the outcome of future negotiations. This could negatively impact revenues, gross
profit, results of operations and cash flows. Interest income decreased $138,000
and $247,000 for the three and six months ended June 30, 1999, respectively, as
compared to the prior year. This decrease is the result of a lower level of
invested assets compared to the corresponding period of the prior year.
Page 10
Foreign Currency
The Company imports most of its watch and clock products. During the first half
of 1999 approximately 10% of the Company's purchases were denominated in
Japanese yen. The remaining purchases were 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 six months ended June 30,
1999 and 1998. Future foreign currency fluctuations, however, could impact gross
profit, income, and cash flow.
Forward-Looking Statements
When included in this 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.
Page 11
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, 1999.
(b) Current reports on Form 8-K -- There were no reports on Form 8-K filed for
the three months ended June 30, 1999.
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: August 16, 1999 By: /s/ Paul S. Sayegh
-----------------------
PAUL S. SAYEGH
Chief Operating Officer
(Duly authorized
officer and principal
financial officer)
Page 12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,689
<SECURITIES> 26,920
<RECEIVABLES> 46,855
<ALLOWANCES> 3,408
<INVENTORY> 42,061
<CURRENT-ASSETS> 131,936
<PP&E> 25,614
<DEPRECIATION> 10,114
<TOTAL-ASSETS> 163,533
<CURRENT-LIABILITIES> 21,166
<BONDS> 0
<COMMON> 22,999
0
0
<OTHER-SE> 73,091
<TOTAL-LIABILITY-AND-EQUITY> 163,533
<SALES> 58,281
<TOTAL-REVENUES> 58,281
<CGS> 30,053
<TOTAL-COSTS> 30,053
<OTHER-EXPENSES> 21,427
<LOSS-PROVISION> 1,350
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 8,132
<INCOME-TAX> 3,492
<INCOME-CONTINUING> 4,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,640
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
</TABLE>
