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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, 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
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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 7, 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-
March 31, 1999 and December 31, 1998 ....................... 3
Consolidated Condensed Statements of Income -
Three months ended March 31, 1999 and 1998 ................. 4
Consolidated Condensed Statements of Cash Flows-
Three months ended March 31, 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 three months ended
March 31, 1999 ............................................ 13
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,
1999 1998
----------------------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents ....................... $ 10,303 $ 5,720
Investments ..................................... 29,762 19,964
Accounts and notes receivable-net ............... 39,667 56,213
Inventories, principally watches and clocks ..... 39,405 38,937
Prepaid expenses ................................ 1,856 1,502
Prepaid income taxes ............................ 1,057
Deferred income taxes ........................... 9,280 9,416
---------------------
Total current assets ........................ 130,273 $132,809
---------------------
Property, plant and equipment-net ................. 15,539 15,207
---------------------
Other assets:
Deferred income taxes ........................... 16,035 16,220
Other ........................................... 232 216
---------------------
Total other assets .......................... 16,267 16,436
---------------------
Total assets ................................ $162,079 $164,452
=====================
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable ................................ $ 1,938 $ 3,579
Accrued expenses ................................ 19,320 21,529
Accrued federal and foreign income taxes ........ 516
---------------------
Total current liabilities ................... 21,774 25,108
---------------------
Other liabilities and credits:
Postretirement benefits payable ................. 38,859 39,495
Pension benefits payable ........................ 3,389 3,590
Other ........................................... 4,479 4,428
---------------------
Total other liabilities and credits ......... 46,727 47,513
---------------------
Shareholders' equity .............................. 93,578 91,831
---------------------
Total liabilities and shareholders' equity .. $162,079 $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
March 31,
--------------------
1999 1998
--------------------
<S> <C> <C>
Net sales .......................................... $28,877 $30,926
Cost of sales ...................................... 15,181 17,448
--------------------
Gross profit ....................................... 13,696 13,478
Selling, general and administrative expenses ....... 10,746 10,449
--------------------
Operating income ................................... 2,950 3,029
Royalty ............................................ 939 885
Interest income .................................... 405 514
Interest expense ................................... (3) (54)
Other .............................................. (52) (7)
--------------------
Income before income tax expense ................... 4,239 4,367
Income tax expense ................................. 1,916 2,010
--------------------
Net income ......................................... $ 2,323 $ 2,357
====================
Net income per share ............................... $ .51 $ .51
====================
Weighted average number of shares outstanding
(in thousands) ................................... 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,
---------------------
1999 1998
---------------------
<S> <C> <C>
Operating Activities:
Net income ....................................... $ 2,323 $ 2,357
Adjustments to reconcile net income to net cash
provided by operating activities ................ 984 996
Changes in assets and liabilities-net:
Receivables .................................... 15,883 11,865
Inventories .................................... (468) 5,240
Prepaid expenses ............................... (354) 539
Other assets ................................... (16) (44)
Accounts payable and accrued expenses .......... (3,850) (3,892)
Accrued federal and foreign income taxes ....... 1,573 1,478
Other liabilities and credits .................. (1,362) (881)
--------------------
14,713 17,658
--------------------
Investing Activities:
Purchases of U.S. government securities .......... (19,635) (104,607)
Proceeds from sales of U.S. government securities 10,000 90,000
Purchases of property, plant and equipment ....... (495) (91)
Proceeds from disposal of property, plant and
equipment ....................................... 6
--------------------
(10,130) (14,692)
--------------------
Net change in cash and cash equivalents ............ 4,583 2,966
Cash and cash equivalents, beginning of period ..... 5,720 9,127
--------------------
Cash and cash equivalents, end of period ........... $ 10,303 $ 12,093
====================
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
$1,312,000 and $1,219,000 for the three months ended March 31, 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 $665,000 and $519,000 for the three months ended
March 31, 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 months ended March 31, 1999 and 1998, comprehensive income
totaled $1,747,000 and $2,776,000, 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 current facility as well as certain former
manufacturing facilities. The remaining environmental liability
recognized in the Company's financial statements of $213,000 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>
March 31, 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 .......................... 51,037 48,714
Accumulated other comprehensive loss ....... (3,650) (3,074)
----------------------
Total ................................... 93,583 91,836
Less treasury stock, at cost ............... 5 5
----------------------
Total shareholders' equity .............. $93,578 $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 March 31, 1999 States Canada Total
------------------------------
(In thousands)
<S> <C> <C> <C>
Sales ................................. $26,172 $3,022 $29,194
Intercompany sales .................... (317) (317)
------------------------------
Total net sales ....................... $25,855 $3,022 $28,877
==============================
Operating income ...................... $ 2,433 $ 517 $ 2,950
Royalties ............................. 939 939
Interest-net .......................... 385 17 402
Other ................................. (57) 5 (52)
------------------------------
Income before tax ..................... $ 3,700 $ 539 $ 4,239
==============================
Three Months Ended March 31, 1998
Sales ................................. $28,763 $2,881 $31,644
Intercompany sales .................... (718) (718)
------------------------------
Total net sales ....................... $28,045 $2,881 $30,926
==============================
Operating income ...................... $ 2,751 $ 278 $ 3,029
Royalties ............................. 885 885
Interest-net .......................... 454 6 460
Other ................................. 69 (76) (7)
------------------------------
Income before tax ..................... $ 4,159 $ 208 $ 4,367
==============================
</TABLE>
Page 7
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 March 31, 1999 and December 31, 1998 and the results of operations and
changes in cash flows for the three months ended March 31, 1999 and 1998,
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 8
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Liquidity and Capital Resources:
The Company generated net cash flow from operations of $14,713,000 and
$17,658,000 for the three months ended March 31, 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 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 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 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 the
entire 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 U.S. Treasury notes and
commercial paper. Cash and cash equivalents, and investments amounted to
approximately $40,065,000 at March 31, 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
$116,000 was incurred during the first quarter of 1999, and approximately
$1,177,000 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. The Company anticipates it will incur
approximately $650,000 in renovation costs during the first half of 1999.
Renovation costs incurred during the first quarter of 1999 were approximately
$200,000. 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.
Based upon its current assessment, the Company estimates the total cost to
replace and upgrade its systems to accommodate Year 2000 processing is
expected to be approximately $350,000. As of March 31, 1999, approximately
Page 9
$337,000 has been spent. However, prior to 1997, the Company did not
specifically separate technology charges for the Year 2000 from other
information technology charges. 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.
The Company believes that it will be able to resolve the Year 2000 issue
during the first half of 1999. As of March 31, 1999, the Company has certified
internally over 95% 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 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 risk
with the Company's vendors, customers, and other business partners.
RESULTS OF OPERATIONS:
Net sales decreased $2,049,000, or 6.6%, and income before taxes decreased
$128,000, or 2.9%, respectively, for the three months ended March 31, 1999, as
compared to the prior year. The decrease in net sales is primarily
attributable to a unit volume decrease of .5% and a 6.1% decrease in the
average unit selling price. Income before taxes decreased as a result of the
sales decrease noted above, partially offset by an increase in gross profit
percentage discussed below.
Gross profit as a percentage of sales for the three months ended March 31,
1999 was 47.4% as compared to 43.6% for the three months ended March 31, 1998.
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 months ended March 31, 1999 was 37.2% as compared to 33.8% for the
prior year. This increase is the result of an increased level of brand support
advertising, partially offset by a decrease in selling expenses.
Royalty income has increased $54,000, or 6.1%, for the first quarter of 1999,
as compared to 1998. 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 $109,000, or 21.2%, for
the three months ended March 31, 1999. This decrease is the result of a lower
level of invested assets as compared to the corresponding period of the prior
year.
Foreign Currency
The Company imports most of its watch and clock products. Approximately 4% of
the Companys 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 Company's
Page 10
results of operations for the quarters ended March 31, 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 three months ended March 31, 1999.
(b) Current reports on Form 8-K -- There were no reports on Form 8-K filed
for the three months ended March 31, 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: May 14, 1999 By: /s/ Paul S. Sayegh
-----------------------
PAUL S. SAYEGH
Chief Operating Officer
(Duly authorized
officer and principal
financial officer)
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,303
<SECURITIES> 29,762
<RECEIVABLES> 43,448
<ALLOWANCES> 3,781
<INVENTORY> 39,405
<CURRENT-ASSETS> 130,273
<PP&E> 25,696
<DEPRECIATION> 10,157
<TOTAL-ASSETS> 162,079
<CURRENT-LIABILITIES> 21,774
<BONDS> 0
<COMMON> 22,999
0
0
<OTHER-SE> 70,579
<TOTAL-LIABILITY-AND-EQUITY> 162,079
<SALES> 28,877
<TOTAL-REVENUES> 28,877
<CGS> 15,181
<TOTAL-COSTS> 15,181
<OTHER-EXPENSES> 10,083
<LOSS-PROVISION> 663
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 4,239
<INCOME-TAX> 1,916
<INCOME-CONTINUING> 2,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,323
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
