-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FWOKDhtTUlRIeBBlT0c4pIh0Wzr9EOWAcZE20Pt9LtOFlOLqpdsUJYTv+3eQGYpM kx/wq5ikeRA7jAmhpCL1WQ== 0000015310-98-000002.txt : 19980330 0000015310-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000015310-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BULOVA CORP CENTRAL INDEX KEY: 0000015310 STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873] IRS NUMBER: 111719409 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00457 FILM NUMBER: 98576591 BUSINESS ADDRESS: STREET 1: ONE BULOVA AVE CITY: WOODSIDE STATE: NY ZIP: 11377-7874 BUSINESS PHONE: 7182043300 MAIL ADDRESS: STREET 1: ONE BULOVA AVE CITY: WOODSIDE STATE: NY ZIP: 11377-7874 FORMER COMPANY: FORMER CONFORMED NAME: BULOVA WATCH CO INC DATE OF NAME CHANGE: 19880811 FORMER COMPANY: FORMER CONFORMED NAME: BULOVA J CO DATE OF NAME CHANGE: 19710627 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to ------------ ------------- Commission File Number 1-457 BULOVA CORPORATION (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, New York 11377-7874 (Address of principal executive offices) (Zip Code) (718) 204-3300 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $5.00 per share (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 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 ------------ ------------ As at February 27, 1998, 4,599,857 shares of Common Stock of the Registrant were outstanding and the aggregate market value of voting stock held by non- affiliates was approximately $2,100,000. ================================================================================ 1 BULOVA CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION For The Year Ended December 31, 1997
Item Page No. No. ---- ----- PART I 1 BUSINESS .......................................................... 3 2 PROPERTIES ........................................................ 4 3 LEGAL PROCEEDINGS ................................................. 4 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 4 PART II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS .............................................. 4 6 SELECTED FINANCIAL DATA ........................................... 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................. 5 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... 9 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 9 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .............................. 23 PART III 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 24 11 EXECUTIVE COMPENSATION ............................................ 25 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .... 26 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 27 PART IV 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K ......................................................... 28
2 PART I Item 1. Business. Bulova Corporation (together with its subsidiaries referred to herein as "Registrant" or the "Company," unless the context otherwise requires) is a New York corporation. Loews Corporation ("Loews") owns approximately 97% of Registrant's outstanding Common Stock. See Item 12 below of this Form 10-K. Registrant is engaged in the distribution and sale of watches, clocks and timepiece parts for consumer use. The principal watch brands are Bulova, Caravelle, Accutron and Sportstime. Clocks are principally sold under the Bulova brand name. The Registrant's market segment breakdown includes a luxury watch line represented by Accutron, a mid-ranged priced watch brand represented by Bulova, and a lower-priced watch line represented by Caravelle. In addition, the Registrant's Sportstime by Bulova brand, with watches using names and logos of various professional and college athletic teams, is sold at various price levels. Bulova's principal markets are the United States and Canada, which accounted for 89% and 11%, respectively, of sales. In most other areas of the world, Registrant has appointed licensees who market watches under Registrant's trademarks in return for a royalty. For additional information concerning Registrant's sales in foreign markets, see Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. Registrant buys complete watches and clocks from foreign suppliers for substantially all of its products. Watch movements, cases and other components are also purchased from foreign suppliers. In the United States, most of Registrant's consumer products are sold through major department stores, jewelry store chains, and premium outlets through Registrant's commission sales force and outside sales representatives. In Canada, Registrant, through a marketing subsidiary, sells directly to retailers. The customer base is comprised of large retailers, small local chains and local independent jewelry shops. In 1997, one customer represented approximately 11% of sales. No other customer represented more than 10% of the Company's sales. The business is intensely competitive. The principal methods of competition are price, styling, product availability, aftersale service, warranty and product performance. In all six categories, Registrant occupies a favorable position of long standing. There are approximately ten major competitors with well established names and positions in the principal markets in which Registrant competes. At least three of these have sales and assets substantially greater than Registrant. In addition, there are an indeterminate number of minor competitors. It is characteristic of Registrant's business and of the watch industry generally that customer receivables from watch sales are carried for relatively long periods. Registrant grants its retailers seasonal credit terms, depending on the product and date of sale. In certain circumstances, Registrant also extends credit to its retailers on an interest-bearing basis. Any backlog of orders is not believed to be significant. The business is seasonal; with the greatest sales coming in the third and fourth quarters in expectation of the holiday selling season. Employees Registrant currently employs approximately 430 persons, approximately 130 of whom are union members, and has experienced satisfactory labor relations. The Company has comprehensive benefit plans for substantially all employees. 3 Item 2. Properties. The Company owns an 80,000 square foot plant in Woodside, New York used for executive and sales offices, watch distribution, service and warehouse purposes. In addition, the Company leases a 71,000 square foot plant in Maspeth, New York, for clock service and warehouse purposes, and a 25,000 square foot plant in Toronto, Canada, for watch and clock sales and service. Item 3. Legal Proceedings. Pending litigation includes various civil actions for damages. On the basis of the facts presently known to it, management does not believe that these actions will have a material adverse effect upon the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. MARKET PRICES The following table sets forth, for the periods indicated, the high and low bid prices for the Company's Common Stock in the over-the-counter market as reported by Carr Securities Corp. These quotations represent prices between dealers and do not include retail mark-up, mark-down or commissions. They do not represent actual transactions.
1997 1996 ------------------------------------------------ High Low High Low - -------------------------------------------------------------------------------- First Quarter ................. 4 3/4 4 3/4 4 1/4 4 1/4 Second Quarter ................ 10 1/2 4 3/4 4 1/4 4 1/4 Third Quarter ................. 14 10 1/2 4 1/4 4 1/4 Fourth Quarter ................ 15 5/8 14 4 3/4 4 1/4
DIVIDEND INFORMATION The Company paid no dividends for the years ended December 31, 1997 and 1996. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS There were approximately 1,500 holders of record of common stock of the Company at February 27, 1998. 4 Item 6. Selected Financial Data.
Year Ended December 31 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- (In thousands, except per share data) Results of Operations: Net sales .................... $123,443 $115,113 $100,449 $ 93,724 $ 93,894 Income from continuing operations .................. 10,016 7,001 2,269 532 1,911 Earnings per share ........... 2.18 1.52 .49 .11 .41 Net income ................... 10,016 7,001 2,632 834 2,514 Earnings per share ........... 2.18 1.52 .57 .18 .54 Financial Position: Total assets ................. 155,550 148,454 134,127 151,035 149,865 Discontinued operations-net .. - - - 20,082 15,445 Long-term debt ............... - - - 200 600 Debt to affiliate ............ - - - 19,000 16,000 Shareholders' equity ......... 81,943 72,381 65,463 62,930 64,101 Dividends per share .......... None None None None None Shares of common stock outstanding.................. 4,599 4,599 4,599 4,599 4,599
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. LIQUIDITY AND CAPITAL RESOURCES Cash Flow The Company generated net cash flow from operations of $13,094,000 for the year ended December 31, 1997, as compared to $9,569,000 and $528,000 for the years ended December 31, 1996 and 1995, respectively. The increase in net cash flow is due primarily to the increased sales and collections from customers, and in 1996, the Benetton settlement noted below. In January 1995, the Company sold its industrial and defense products segment Bulova Technologies, Inc. ("BTI") for $20,810,000 in cash. The Company applied $18,000,000 of the consideration received to the repayment of the entire debt owed to its parent, Loews Corporation ("Loews") under the credit agreement (the "Credit Agreement") described below, and the balance of the consideration was added to working capital. Additionally, the Company assumed BTI's liabilities with respect to postretirement health care benefits for employees of BTI who had retired prior to the consummation of the sale. On August 3, 1995, the Company collected $10,554,000, including $4,200,000 of interest, from Loews related to a tax audit adjustment from the examination of Loews's consolidated federal income tax returns for 1984 through 1990. In the first quarter of 1996, the Company received approximately $3,857,000 in cash from Benetton International, N.V. which represented damages, costs and interest, as a result of an arbitration proceeding regarding an attempted premature termination of a licensing agreement with the Company, which is subject to return under certain circumstances. See Note 9 of the Notes to Consolidated Financial Statements. 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 the Credit Agreement with Loews which provides, under 5 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. 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. Cash and cash equivalents, and investments (primarily U.S. government securities and commercial paper) increased $13,421,000, as compared to 1996, reflecting the improved results from operations discussed below. 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 $563,000 was incurred in the year ended December 31, 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 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 (venders, customers, and business partners) address the issue successfully. RESULTS OF OPERATIONS Net sales increased $8,330,000 and $22,994,000, or 7.2% and 22.9%, as compared to 1996 and 1995, respectively. Income from continuing operations before income taxes increased $3,622,000 and $8,535,000, as compared to 1996 and 1995, respectively. The increase in net sales is primarily due to overall higher unit prices and sales volume of watches. Watch unit prices increased 4.5% and 9.8%, while unit volume increased 6.6% and 21.9%, as compared to 1996 and 1995, respectively. Effective January 1, 1997 and 1996, the Company selectively increased prices, primarily on the Bulova brand. New style introductions, combined with a consistent marketing effort focused on brand image, resulted in significant unit growth of the Accutron, Bulova and Caravelle watch brands. The price increase and unit growth resulted in combined increases of $10,159,000 and $25,991,000, or 11.4% and 35.0%, as compared to 1996 and 1995, respectively. Revenue increases were partially offset by declines in the clock product line. Clock revenues declined $1,674,000 and $1,612,000, or 8.4% and 8.1%, as compared to 1996 and 1995, respectively. Additionally, the Company's watch service revenues declined $977,000, or 49.2%, as compared to 1995. Gross profit as a percentage of net sales for the year ended December 31, 1997 was 46.3%, as compared to 42.0% and 37.1% for the years ended December 31, 1996 and 1995, respectively. This increase is attributable to the price increase discussed above, and continued efforts to improve procurement practices. 6 The Company has adopted amendments, effective July 1, 1996, to its postretirement benefit health care plan which has reduced the related health care costs incurred by the Company. Gross profit and selling, general and administrative expenses include postretirement benefit (credits) costs of $(196,000), $443,000 and $2,152,000 for the years ended 1997, 1996 and 1995, respectively. The cost savings have contributed to the favorable results in gross profit and operating income. See also discussion of selling, general and administrative costs, below. Royalty income has declined $257,000, or 6.7%, as compared to 1996, and increased $409,000, or 12.8%, as compared to 1995. 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 in 1996 of two license agreements. In connection with the renegotiations, the term of the two license agreements were extended to the year 2001. The licensee for Europe and the Far East is based in Hong Kong. While the Company does not believe the current volatility in the Asian economy will have an impact on royalty income for 1998, there can be no assurance that the Asian economy will not impact the ability of the licensee to meet its obligations. Increased interest income reflects the higher level of invested assets. In addition, interest and other revenues were primarily affected by the $4,200,000 of interest income recognized during 1995, related to the tax audit adjustment discussed above, as well as a credit in 1996 of $430,000 due to a revision of the Company's estimated liability related to certain pension costs. Selling, general and administrative expenses as a percentage of net sales for the year ended December 31, 1997 was 38.3%, as compared to 36.8% and 39.0% for the years ended December 31, 1996 and 1995, respectively. The increase in 1997 was the result of the Company's significant increase in brand support advertising, as well as the increase in the Loews administrative services (see "Related Parties," below), partially offset by a reduction in health care costs and bad debt expenses. 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 years ended December 31, 1997, 1996 and 1995. The Company is unable to predict the impact of future foreign currency fluctuations. Asian Economic Crisis - The Company purchases approximately 95% of its products from Asian countries. The Company believes that the economic crisis to date has not negatively impacted its vendors. Further deterioration of economic conditions in Asia could, however, negatively impact the Company, directly affecting cost, gross profit, operating income and cash flow. Corporate Related Parties - Loews has provided administrative services for which the Company paid $2,064,000, $730,000 and $700,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The cost allocated to the Company is estimated to be the incremental cost incurred by Loews in providing these services to the Company. In the fourth quarter of 1996, Loews reevaluated the services and costs which are allocated to the Company. As a result, the Company experienced a significant increase in these costs. See Note 2 of the Notes to Consolidated Financial Statements. Taxes - For the year ended December 31, 1995, income taxes include a charge of $1,772,000 caused by the limitation on the utilization of certain tax attributes in connection with the tax audit adjustment. See Note 3 of the Notes to Consolidated Financial Statements. 7 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company's financial instruments consist primarily of short-term commercial paper and U.S. government treasury bills. As such, the Company does not believe these financial instruments present a significant exposure to market risk. ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes accounting standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and loses) in a full set of general-purpose financial statements. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the statement of financial position. This Statement is effective for fiscal years beginning after December 15, 1997. This Statement will not have a significant impact on the Company. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that an enterprise reports information about operating segments in interim and annual financial statements. It requires that those enterprises report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, and that the enterprise reconcile the total of those amounts to the general-purpose financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the effects of this Statement on its segment disclosures. In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement standardizes disclosure requirements for pension and other postretirement benefits to the extent practicable, requires additional information on changes in benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful to users of financial statements. It also suggests combined formats for presentation of pension and other postretirement benefit disclosures. The Statement supersedes the disclosure requirements of a number of earlier opinions of the FASB and does not address measurement or recognition. It is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the effects of this Statement on its benefit plan disclosures. 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. 8 Item 7A. Quantitative and Qualitative Disclosures about Market Risk. See Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding Quantitative and Qualitative Disclosures about Market Risk. Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------- Assets: - ------------------------------------------------------------------------------- December 31 1997 1996 - ------------------------------------------------------------------------------- Current assets: Cash and cash equivalents (Note 1) $ 9,127,000 $ 10,665,000 Investments (Note 1) 19,937,000 4,978,000 Receivables, less allowance for doubtful accounts and cash discounts of $3,693,000 and $4,062,000 (Note 1) 51,377,000 54,417,000 Inventories (Note 1) 35,656,000 37,130,000 Prepaid expenses (Note 4) 1,560,000 3,174,000 Prepaid income taxes (Note 3) 519,000 Deferred income taxes (Notes 1 and 3) 8,219,000 8,232,000 - ------------------------------------------------------------------------------- Total current assets 126,395,000 118,596,000 - ------------------------------------------------------------------------------- Property, plant and equipment, at cost (Note 1): Land, buildings and improvements 14,090,000 14,090,000 Machinery and equipment 2,631,000 2,523,000 Furniture, fixtures and leasehold improvements 4,091,000 3,703,000 - ------------------------------------------------------------------------------- 20,812,000 20,316,000 Less accumulated depreciation and amortization 9,323,000 8,734,000 - ------------------------------------------------------------------------------- Property, plant and equipment-net 11,489,000 11,582,000 - ------------------------------------------------------------------------------- Other assets: Deferred income taxes (Notes 1 and 3) 17,442,000 17,437,000 Other assets 224,000 839,000 - ------------------------------------------------------------------------------- Total other assets 17,666,000 18,276,000 - ------------------------------------------------------------------------------- Total assets $155,550,000 $148,454,000 =============================================================================== See Notes to Consolidated Financial Statements.
9
- ------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: - ------------------------------------------------------------------------------- December 31 1997 1996 - ------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 3,092,000 $ 3,442,000 Accrued expenses: Salaries, wages and commissions 3,226,000 3,576,000 Postretirement benefits (Note 4) 1,439,000 1,288,000 Advertising (Note 1) 3,292,000 2,128,000 Warranty (Note 1) 1,016,000 1,030,000 Other 10,940,000 9,945,000 Accrued federal and foreign income taxes (Notes 1 and 3) 1,663,000 - ------------------------------------------------------------------------------- Total current liabilities 23,005,000 23,072,000 - ------------------------------------------------------------------------------- Other liabilities and credits: Postretirement benefits payable (Note 4) 40,967,000 42,754,000 Pension benefits payable (Note 4) 3,606,000 4,055,000 Other (Note 9) 6,029,000 6,192,000 - ------------------------------------------------------------------------------- Total other liabilities and credits 50,602,000 53,001,000 - ------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 2, 3, 4, 7 and 9) Shareholders' equity (Note 1): Common stock, $5 par value: Authorized: 7,500,000 shares Issued: 4,600,000 shares 22,999,000 22,999,000 Additional paid-in capital 23,197,000 23,197,000 Retained earnings 37,794,000 27,778,000 Cumulative translation adjustment (1,561,000) (1,251,000) Pension liability adjustment (481,000) (337,000) - ------------------------------------------------------------------------------- 81,948,000 72,386,000 Less 1,000 shares of common stock held in treasury, at cost 5,000 5,000 - ------------------------------------------------------------------------------- Total shareholders' equity 81,943,000 72,381,000 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $155,550,000 $148,454,000 ===============================================================================
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CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Net sales $123,443,000 $115,113,000 $100,449,000 Cost of sales 66,323,000 66,756,000 63,160,000 - ------------------------------------------------------------------------------- Gross profit 57,120,000 48,357,000 37,289,000 Selling, general and administrative expenses 47,246,000 42,341,000 39,149,000 - ------------------------------------------------------------------------------- Operating income (loss) 9,874,000 6,016,000 (1,860,000) Royalty 3,606,000 3,863,000 3,197,000 Interest-net 1,320,000 951,000 4,791,000 Other 491,000 839,000 628,000 - ------------------------------------------------------------------------------- Income from continuing operations before income taxes 15,291,000 11,669,000 6,756,000 Income taxes (Notes 1 and 3) 5,275,000 4,668,000 4,487,000 - ------------------------------------------------------------------------------- Income from continuing operations 10,016,000 7,001,000 2,269,000 Discontinued operations of BTI (net of tax of $195,000) (Note 8) 363,000 - ------------------------------------------------------------------------------- Net income $ 10,016,000 $ 7,001,000 $ 2,632,000 =============================================================================== Earnings per share (Note 1): Income from continuing operations $ 2.18 $ 1.52 $ .49 Discontinued operations of BTI .08 - ------------------------------------------------------------------------------- Net income $ 2.18 $ 1.52 $ .57 =============================================================================== See Notes to Consolidated Financial Statements.
11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Additional Cumulative Pension Common Paid-in Retained Translation Liability Treasury Stock Capital Earnings Adjustment Adjustment Stock - ------------------------------------------------------------------------------------------------- (Amounts in thousands) Balance, Dec. 31, 1994 $22,999 $23,197 $18,145 $(1,406) $ (5) Net income 2,632 Exchange rate changes during the year (net of income taxes of $175) 325 Pension liability adjustment (Note 4) $(424) - ------------------------------------------------------------------------------------------------- Balance, Dec. 31, 1995 22,999 23,197 20,777 (1,081) (424) (5) Net income 7,001 Exchange rate changes during the year (net of income tax benefit of $92) (170) Pension liability adjustment (Note 4) 87 - ------------------------------------------------------------------------------------------------- Balance, Dec. 31, 1996 22,999 23,197 27,778 (1,251) (337) (5) Net income 10,016 Exchange rate changes during the year (net of income tax benefit of $167) (310) Pension liability adjustment (Note 4) (144) - ------------------------------------------------------------------------------------------------- Balance, Dec. 31, 1997 $22,999 $23,197 $37,794 $(1,561) $(481) $ (5) ================================================================================================= See Notes to Consolidated Financial Statements.
12
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Operating Activities: Net income $ 10,016,000 $ 7,001,000 $ 2,632,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of investments (868,000) (339,000) (345,000) Depreciation and amortization 649,000 773,000 667,000 Gain on disposition of assets (15,000) (67,000) (558,000) Provision for losses and cash discounts on accounts receivable 2,126,000 3,194,000 2,174,000 Deferred income taxes 8,000 (1,488,000) 2,567,000 Changes in operating assets and liabilities-net: Receivables 914,000 (6,653,000) (1,878,000) Inventories 1,474,000 1,784,000 (3,164,000) Prepaid expenses 1,614,000 (1,721,000) (1,124,000) Other assets 615,000 (441,000) (133,000) Accounts payable and accrued expenses 1,596,000 3,916,000 1,000 Accrued federal and foreign income taxes (2,182,000) 1,608,000 (463,000) Other-net (2,853,000) 2,002,000 152,000 - ------------------------------------------------------------------------------- 13,094,000 9,569,000 528,000 - ------------------------------------------------------------------------------- Investing Activities: Purchases of short-term investments (53,462,000) (14,639,000) (5,655,000) Proceeds from sales of U.S. government securities 39,371,000 10,000,000 6,000,000 Purchases of property, plant and equipment (563,000) (112,000) (177,000) Proceeds from disposal of property, plant and equipment 22,000 84,000 Proceeds from disposal of BTI 20,810,000 - ------------------------------------------------------------------------------- (14,632,000) (4,667,000) 20,978,000 - ------------------------------------------------------------------------------- Financing Activities: Principal payments on long-term debt (200,000) (400,000) Principal payments on debt to affiliate (19,000,000) - ------------------------------------------------------------------------------- (200,000) (19,400,000) - ------------------------------------------------------------------------------- Net change in cash and and cash equivalents (1,538,000) 4,702,000 2,106,000 Cash and cash equivalents, beginning of year 10,665,000 5,963,000 3,857,000 - ------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 9,127,000 $ 10,665,000 $ 5,963,000 =============================================================================== See Notes to Consolidated Financial Statements.
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies - (a) Business - The Company is engaged in the distribution and sale of watches, clocks and timepieces for consumer use. The principal watch brands are Bulova, Caravelle, Accutron and Sportstime. Clocks are principally sold under the Bulova brand name. Bulova's principal markets are the United States and Canada. Royalties are received from a distributor and licensees principally in Europe, the Far East and South America. Loews Corporation ("Loews") owns approximately 97% of the Company's outstanding voting stock. (b) Principles of Consolidation - The consolidated financial statements include all subsidiaries, which are 100% owned, and all material intercompany accounts and transactions have been eliminated. (c) Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Cash and cash equivalents - The Company classifies as cash equivalents all highly liquid investments with maturities of three months or less. At December 31, 1997 and 1996, cash equivalents were comprised of investments in money- market accounts. (e) Investments - Investments consist of commercial paper and U.S. government securities. These investments are considered available for sale and carried at fair value, which approximates cost. (f) Accounts Receivable and Concentration of Credit Risk - Watches and clocks are sold to retail outlets throughout the United States and Canada. The Company grants its retailers seasonal credit terms. For the years ended December 31, 1997 and 1996, accounts receivable were substantially comprised of balances due from retailers. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. One customer accounted for approximately 11% and 12% of sales for the years ended December 31, 1997 and 1996, respectively. Although the Company's exposure to credit risk associated with non-payment by this customer is affected by conditions or occurrences within the retail industry, trade receivables from this customer were collected within terms; no other customer represented more than 10% of the Company's sales. The carrying amount of receivables approximates fair value. (g) Inventories - Substantially all inventory, consisting primarily of finished watches and clocks, is computed on a first-in, first-out basis and are valued at lower of cost or market. (h) Property, Plant and Equipment - Depreciation is calculated on the straight-line method over the estimated useful lives of the various classes of assets. Leasehold improvements are, if such period is shorter, amortized over the life of the lease. Asset lives range from 2 to 12 years for machinery, equipment, and furniture and fixtures and from 15 to 40 years for buildings and improvements. (i) Income Taxes - The Company is included in Loews consolidated federal tax return. Under the tax allocation agreement, the Company is required to provide a current tax provision calculated on a stand-alone basis. No provision is required for undistributed earnings of subsidiaries, since substantially all of these earnings may be remitted to the Company with little or no tax becoming payable. (j) Earnings Per Share and Shareholders' Equity - Earnings per share has been computed on the basis of the weighted average number of shares outstanding during the periods (4,599,000 for each of the three years ended December 31, 1997). In addition to its common stock, the Company has authorized 500,000 shares of preferred stock. (k) Foreign Currency Adjustment - The effect of changes in exchange rates in translating foreign currency 14 financial statements is accumulated in a separate component of shareholders' equity. (l) Forward Exchange Contracts - In connection with purchases of inventory, from time to time, the Company, enters into forward exchange contracts in order to hedge its exposure to fluctuations in foreign currency exchange rates. These agreements generally involve the exchange of one currency for a second currency at some future date. Counterparties to these agreements are major international financial institutions. As of December 31, 1997, there were no foreign exchange contracts outstanding. (m) Impairment of Long-Lived Assets - The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and certain intangibles, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell. (n) Advertising Costs - Advertising costs for point of sale and media advertising as well as co-op advertising and promotional allowances are expensed as incurred. (o) Warranty Costs - The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year. (p) Reclassifications - Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1997. Note 2. Related Parties - In 1979, the Company entered into a credit agreement with Loews (the "Credit Agreement") which provides for unsecured loans, from time to time, in amounts aggregating up to $50,000,000 with interest at 10% per annum. The Credit Agreement has been periodically extended and currently expires June 30, 1999. There is currently nothing owed by the Company to Loews and the Credit Agreement has not been utilized since the balance was paid in January 1995. Loews has provided administrative services for which the Company paid $2,064,000, $730,000 and $700,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The cost allocated to the Company is estimated to be the incremental cost incurred by Loews in providing these services to the Company. 15 Note 3. Income Taxes - The Company and Loews have a tax allocation agreement with respect to the filing by Loews of consolidated federal income tax returns, which include the Company and its subsidiaries. Under the agreement, the Company will (i) be paid by Loews the amount, if any, by which Loews's consolidated federal income tax is reduced by virtue of the inclusion of the Company and its subsidiaries in the return, or (ii) pay to Loews an amount, if any, equal to federal income tax which would have been payable by the Company if the Company and its subsidiaries had filed a separate consolidated return. Under this agreement, the Company was required to pay Loews approximately $2,580,000 and $5,282,000 and has received approximately $2,109,000 for the years ended December 31, 1997, 1996 and 1995, respectively. This agreement may be canceled by the Company or Loews upon thirty days written notice. Income before income tax expense consisted of the following for continuing operations:
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Income before income taxes: Domestic $14,179,000 $11,350,000 $ 5,933,000 Foreign 1,112,000 319,000 823,000 - ------------------------------------------------------------------------------- Total $15,291,000 $11,669,000 $ 6,756,000 =============================================================================== Income tax expense (benefit): Federal: Current $ 2,580,000 $ 5,282,000 $ 746,000 Deferred 1,857,000 (1,627,000) 2,790,000 State and local: Current 2,849,000 958,000 700,000 Deferred (1,606,000) Foreign: Current (402,000) (22,000) 245,000 Deferred (3,000) 77,000 6,000 - ------------------------------------------------------------------------------- Income tax expense $ 5,275,000 $ 4,668,000 $ 4,487,000 =============================================================================== Deferred tax assets are as follows: December 31 1997 1996 - ------------------------------------------------------------------------------- Employee benefits $22,077,000 $22,735,000 Inventory 5,603,000 5,779,000 Accrued expenses 2,818,000 4,106,000 Accounts receivable 1,520,000 1,482,000 Tax loss carryforward 1,085,000 - ------------------------------------------------------------------------------- 32,018,000 35,187,000 Valuation allowance (6,357,000) (9,518,000) - ------------------------------------------------------------------------------- Deferred tax assets-net $25,661,000 $25,669,000 ===============================================================================
The valuation allowance relates to state and local temporary differences and loss carryforwards. 16 Income taxes differ from that computed at the U.S. statutory rate for the following reasons:
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Income taxes computed at statutory rate $5,352,000 $4,084,000 $2,365,000 Increase (decrease) in taxes resulting from: State and local taxes 808,000 623,000 455,000 Foreign taxes (794,000) (53,000) (43,000) Permanent differences 32,000 31,000 38,000 Tax settlement 1,772,000 Benefit related to prior years' losses (177,000) Other (123,000) (17,000) 77,000 - ------------------------------------------------------------------------------- Income tax expense $5,275,000 $4,668,000 $4,487,000 ===============================================================================
Federal, foreign, state and local income tax payments (refunds) amounted to approximately $7,229,000, $2,910,000 and $(6,022,000) for the years ended December 31, 1997, 1996 and 1995, respectively. Federal income tax returns have been settled through 1990 and the years 1991 through 1994 are currently under examination. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the consolidated balance sheet is believed to be adequate to cover any additional assessments which may be made by federal, state and local tax authorities and should not have a material effect on the financial position and results of operations of the Company. During the second quarter of 1995, the Company reached a tax settlement in connection with the examination of the Loews consolidated federal income tax returns for the 1984 through 1990 tax years. As a result of the settlement, the Company received $4,200,000 of interest and recorded $1,772,000 of tax expense caused by the limitation on the utilization of certain tax attributes. This transaction resulted in pre-tax and after tax income of $4,200,000 and $958,000, respectively. The Company's Canadian tax returns for the years 1984 through 1990 have been settled which resulted in a tax benefit of $794,000 for the year ended December 31, 1997. The years 1990 through 1992 are currently under examination. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the consolidated balance sheet is believed to be adequate to cover any additional assessments which may be made by federal, foreign, state and local tax authorities and should not have a material effect on the financial condition or results of operations of the Company. 17 Note 4. Retirement Plans - Pension Plans - The Company maintains non-contributory pension plans for all of its employees in the United States. Separate retirement plans are maintained by the Company's Canadian subsidiary, which are not material. Pension cost of the U.S. plans includes the following components:
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost-benefits earned $ 655,000 $ 614,000 $ 517,000 Interest cost 1,849,000 1,852,000 1,761,000 Return on assets (2,131,000) (954,000) (3,271,000) Net amortization and deferrals 158,000 (826,000) 1,564,000 Curtailment and special termination benefits expense 168,000 - ------------------------------------------------------------------------------- Net pension cost $ 531,000 $ 854,000 $ 571,000 =============================================================================== The status of the underfunded U.S. plans were as follows: December 31 1997 1996 - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation $25,608,000 $24,109,000 =============================================================================== Accumulated vested benefit obligation $25,055,000 $23,486,000 =============================================================================== Projected benefit obligation $27,932,000 $26,143,000 Plan assets at fair value 22,990,000 22,377,000 - ------------------------------------------------------------------------------- Projected benefit obligation over plan assets 4,942,000 3,766,000 Unrecognized net asset at January 1 1,435,000 1,913,000 Unrecognized net loss (4,661,000) (4,465,000) Unrecognized prior service cost (293,000) (322,000) Additional minimum liability 1,195,000 840,000 - ------------------------------------------------------------------------------- Accrued pension liability - net $ 2,618,000 $ 1,732,000 =============================================================================== The rates used in the actuarial assumptions were: Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate 7.00% 7.50% 7.00% Rate of compensation increase 5.50% 5.75% 5.50% Expected long-term rate of return on assets 7.50% 7.56% 8.75% - --------------------------------------------------------------------------------
18 The Company's funding policy is to make contributions in accordance with applicable governmental requirements. The assets of the plans are invested primarily in interest-bearing obligations. Benefits are determined based on compensation during each year of credited service. Included in prepaid expense is $988,000 and $2,323,000 of contributions in excess of the minimum funding requirement for the year ended December 31, 1997 and 1996, respectively. At December 31, 1997, 1996 and 1995, the Company's minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $1,195,000, $840,000 and $693,000, respectively. This excess is recorded as a reduction to shareholders' equity of $481,000, $337,000 and $424,000, net of tax benefits of $421,000 and $181,000 and $229,000, and intangible assets of $293,000, $322,000 and $40,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Other Postretirement Benefit Plans - The Company maintains postretirement health care plans covering eligible employees and retirees. Union participants generally become eligible upon retirement at age 55 and 10 years of service or upon completion of 20 years of service. Another plan covers salaried employees who are eligible upon retirement at age 55 and 20 years of service or upon retirement at age 60 and 10 years of service. Prior to January 1, 1995, salaried employee participants were eligible upon retirement at age 55 and 10 years of service or upon completion of 20 years of service. The benefits provided by the Company are basically health, and for certain retirees, life insurance type benefits. During 1996, the Company made certain amendments to the plan covering salaried employees which reduced postretirement benefit expense by approximately $2,349,000 and $1,108,000 for the years ended December 31, 1997 and 1996, respectively.
The rates used in the actuarial assumptions were: December 31 1997 1996 - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost 7.50% 7.00% Accumulated postretirement benefit liability 7.00% 7.50% - -------------------------------------------------------------------------------- The following table sets forth the postretirement plan's status: December 31 1997 1996 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $13,872,000 $18,448,000 Fully eligible active plan participants 1,425,000 1,570,000 Other active plan participants 1,018,000 1,072,000 - ------------------------------------------------------------------------------- 16,315,000 21,090,000 Unrecognized prior service cost 6,525,000 5,535,000 Unrecognized net gain 19,566,000 17,417,000 - ------------------------------------------------------------------------------- Accrued postretirement benefit liability $42,406,000 $44,042,000 =============================================================================== 19 Postretirement benefit cost includes the following components: Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- Service costs $ 103,000 $ 206,000 $ 438,000 Interest costs 1,510,000 1,821,000 2,657,000 Net amortization and deferral (1,809,000) (1,498,000) (943,000) Curtailment gain (86,000) - ------------------------------------------------------------------------------- Net periodic postretirement (benefit) cost $ (196,000) $ 443,000 $2,152,000 ===============================================================================
For measurement purposes, a trend rate of 8.3% pre-65 and 7.3% post-65, for covered costs was used. These trend rates are expected to decrease gradually to 5.0% at rates from 0.3% to 0.5% per annum. An increase of one percentage point in assumed health care cost trend rates would increase the accumulated postretirement benefit obligation by approximately $990,000 and the net periodic postretirement benefit cost by approximately $147,000. Note 5. Quarterly Financial Data (Unaudited) -
1997 Quarters Ended Dec. 31 Sept. 30 June 30 March 31 - -------------------------------------------------------------------------------- Net sales $35,235,000 $33,049,000 $26,611,000 $28,548,000 Cost of sales 16,692,000 17,840,000 15,342,000 16,449,000 Net income 4,108,000 3,094,000 1,220,000 1,594,000 Earnings per share .89 .67 .26 .35 1996 Quarters Ended Dec. 31 Sept. 30(1) June 30 March 31 - -------------------------------------------------------------------------------- Net sales $35,121,000 $32,980,000 $22,666,000 $24,346,000 Cost of sales 18,920,000 18,888,000 13,903,000 15,045,000 Net income 1,747,000 3,883,000 670,000 701,000 Earnings per share .38 .84 .15 .15 - --------------------------------------------------------------------------------
(1) Cost of sales and net income includes credits related to the amendment of the Company's postretirement health care plan of $1,194,000 and $776,000, respectively. In addition, net income includes a credit related to an adjustment to certain pension costs of $280,000. The Company's net sales are traditionally greater during the winter holiday season. Consequently, the Company's net sales have historically been higher during the second half of the year. 20 Note 6. Geographic Information -
Year Ended December 31, 1997 United States Canada Total - ------------------------------------------------------------------------------ (In thousands) Sales $112,519 $13,013 $125,532 Intercompany sales (2,089) (2,089) - ------------------------------------------------------------------------------ Total net sales $110,430 $13,013 $123,443 ============================================================================== Operating income $ 8,588 $ 1,286 $ 9,874 Royalties 3,606 3,606 Interest - net 1,482 (162) 1,320 Other 503 (12) 491 - ------------------------------------------------------------------------------ Income from continuing operations before tax $ 14,179 $ 1,112 $ 15,291 ============================================================================== Identifiable assets $144,115 $11,435 $155,550 ============================================================================== Year Ended December 31, 1996 - ------------------------------------------------------------------------------ Sales $104,802 $11,688 $116,490 Intercompany sales (1,377) (1,377) - ------------------------------------------------------------------------------ Total net sales $103,425 $11,688 $115,113 ============================================================================== Operating income $ 5,318 $ 698 $ 6,016 Royalties 3,863 3,863 Interest - net 1,390 (439) 951 Other 779 60 839 - ------------------------------------------------------------------------------ Income from continuing operations before tax $ 11,350 $ 319 $ 11,669 ============================================================================== Identifiable assets $137,149 $11,305 $148,454 ============================================================================== Year Ended December 31, 1995 - ------------------------------------------------------------------------------ Sales $ 90,199 $12,914 $103,113 Intercompany sales (2,664) (2,664) - ------------------------------------------------------------------------------ Total net sales $ 87,535 $12,914 $100,449 ============================================================================== Operating (loss) income $ (2,484) $ 624 $ (1,860) Royalties 3,197 3,197 Interest - net 5,206 (415) 4,791 Other 554 74 628 - ------------------------------------------------------------------------------ Income from continuing operations before tax $ 6,473 $ 283 $ 6,756 ============================================================================== Identifiable assets $120,643 $13,484 $134,127 ==============================================================================
21 Note 7. Leases - The Company leases certain of its warehouse and office facilities. The future minimum lease payments under operating leases for the five years ending December 31, 2002 is $482,000, $497,000, $500,000, $500,000 and $184,000. Note 8. Discontinued Operations - On January 17, 1995, Bulova Technologies, Inc. ("BTI"), the Company's industrial and defense manufacturing business, was sold for $20,810,000 in cash. The sale resulted in a pre-tax and after tax gain of approximately $558,000 and $363,000, respectively. The operating results for the year ended December 31, 1995 were not material. The Company applied $18,000,000 of the consideration received to the repayment of the entire debt to affiliate. Note 9. Contingencies and Litigation - (a) Environmental Matters - During 1991 the Company settled a lawsuit commenced by the owner of property formerly owned by the Company which sought damages under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, for alleged environmental contamination at the property. Under the settlement agreement the Company assumed responsibility for the clean-up of the property and agreed to pay to the owner $50,000 per year until the clean-up is completed. In 1994, the Company accrued an additional $484,000 based upon revised cost estimates. As of December 31, 1997, the remaining estimated liability of $75,000 represents the minimum level of clean-up expense required. During 1994 the Company became aware of an environmental contaminate which was discovered in the ground water of a former defense manufacturing facility. The Company accrued $250,000 to provide for the estimated clean-up costs to be required. Additional testing and further evaluation is required before a definitive cost of ultimate clean-up can be determined. However, the Company believes there will be no additional provisions required. During the third quarter of 1995, the Company provided for a liability of $150,000 in relation to an environmental condition at a former Jackson Heights, N.Y. watch manufacturing facility which the Company agreed to remediate in October 1995. During the second quarter of 1997 testing was completed and a work plan for remediation has been submitted to New York State for approval. As of December 31, 1997 the remaining estimated liability of $95,000 represents the minimum level of clean-up expense required. During the fourth quarter of 1995, the Company became aware of an environmental condition at its Woodside, N.Y. facility. Based upon the information available, the Company provided $100,000 during the fourth quarter of 1995 for the estimated clean-up expense required. During the third quarter of 1997, the Company provided test results to New York State. Further evaluation is required before a definitive cost of ultimate clean-up can be determined. Therefore the liability accrued may require revisions. At December 31, 1997, the remaining environmental liability recognized in the Company's financial statements of $520,000 represents the minimum of the Company's estimated range in equally likely outcomes; the upper limit of that range is approximately $1,239,000. (b) Arbitral Award - 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 22 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. * * * * It is not possible to predict the outcome of pending litigation; however, on the basis of the facts presently known to it, management does not believe the actions pending will have a material adverse effect on the financial condition or results of operations of the Company. Should additional facts arise in the future indicating a probable adverse determination of any such actions, such ultimate determination might have a material adverse effect upon the Company's results of operations or financial condition. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 23 PART III Item 10. Directors and Executive Officers of the Registrant. (a)Directors.
Principal Occupations Director of During Past Five Years the Company Name Age and Other Directorships Since - -------------------------------------------------------------------------------- Andrew H. Tisch ..... 48 Chairman of the Board of the Company and 1979 Chairman of the Management Committee of Loews since 1995. Prior thereto he had been Chairman of the Board and Chief Executive Officer of Lorillard, Inc., a wholly owned subsidiary of Loews. Mr. Tisch is also a director of Loews and Zale Corporation. Herbert C. Hofmann .. 55 President and Chief Executive Officer 1979 of the Company. Mr. Hofmann is also a director of Diamond Offshore Drilling, Inc. (50.3% owned subsidiary of Loews) and also serves as Senior Vice President of Loews. Harry B. Henshel .... 79 Vice Chairman of the Board of the Company. 1958 Laurence A. Tisch ... 75 Co-Chairman of the Board and Co-Chief 1979 Executive Officer of Loews. Mr. Tisch is also Chief Executive Officer and director of CNA Financial Corporation ("CNA")(84% owned subsidiary of Loews). Mr. Tisch also serves as a director of Automatic Data Processing, Inc. Preston R. Tisch .... 71 Co-Chairman of the Board and Co-Chief 1988 Executive Officer of Loews. Mr. Tisch is also a director of CNA, Hasbro, Inc. and Rite Aid Corporation. Messrs. Laurence A. Tisch and Preston R. Tisch are brothers and Mr. Andrew H. Tisch is the son of Mr. Laurence A. Tisch. There are no other family relationships among any of the Company's directors. Each director serves until the annual meeting of shareholders next succeeding his election and until his successor shall have been duly elected and qualified. (b)Executive Officers.
First Became Name Position and Offices Held Age an Officer - -------------------------------------------------------------------------------- Herbert C. Hofmann ..... President and Chief Executive 55 1985 Officer Warren J. Neitzel ...... General Counsel and Corporate 47 1993 Secretary John T. O'Reilly ....... Controller 37 1996 Paul S. Sayegh ......... Chief Operating Officer 54 1979
There are no family relationships among the above. Officers are elected and hold office until their successors are elected and qualified, and are subject to removal by the Board of Directors. All officers of the Company, 24 except Mr. O'Reilly, have been engaged actively and continuously in the business of the Company and its subsidiaries for more than the past five years. Mr. O'Reilly served as Assistant Controller for approximately two years prior to his appointment as Controller. Prior thereto he served, since 1990, as Treasurer of CLAS International, a hotel reservation service affiliated with Loews. Item 11. Executive Compensation. (a)General. The following table sets forth information for the years indicated regarding the compensation of the chief executive officer and each of the other three most highly compensated executive officers of the Company whose compensation exceeded $100,000 as of December 31, 1997, for services in all capacities to the Company. Summary Compensation Table
Name and Principal Position Year Salary - -------------------------------------------------------------------------------- Herbert C. Hofmann 1997 $ - President and Chief Executive Officer (a) 1996 - 1995 - Paul S. Sayegh 1997 245,000 Chief Operating Officer 1996 245,000 1995 223,000 Warren J. Neitzel 1997 140,000 General Counsel and Corporate Secretary 1996 130,000 1995 130,000 John T. O'Reilly 1997 103,000 Controller - ------------ (a)Mr. Hofmann is compensated by Loews. Included in the charges to the Company under a Service Agreement, as discussed in Item 13 of this Form 10-K, was $200,000 for Mr. Hofmann's services in each of the years ended December 31, 1997, 1996 and 1995.
Information with respect to certain non-cash compensation made available to the Company's executive officers in 1997, has not been included because the incremental costs thereof to the Company was below the Securities and Exchange Commission's required disclosure threshold. (b)Compensation Pursuant to Plans. The Company provides a non-contributory retirement plan (the "Plan") for all employees, except for those covered by Loews's benefit plans, which Plan provides pensions upon retirement at one and one-half per cent of the employee's annual compensation during each year of credited service after December 31, 1976, plus one and one-half per cent of annual compensation for the year 1976 multiplied by the number of years of credited service rendered prior to January 1, 1977. Compensation under the Plan includes all compensation as an employee included in the table above. Pension benefits are not subject to reduction for Social Security benefits or other amounts. The following table shows estimated annual benefits payable upon retirement under the Plan for various amounts of average compensation and years of credited service, based upon retirement in 1996 and a straight life annuity form of pension. Other forms of pension payments are also available under 25 the Plan. Pension benefits may be limited by the Internal Revenue Code.
Estimated Annual Pension for Representative Remuneration Years of Credited Service ------------ ------------------------------------------------- 15 20 25 30 35 -- -- -- -- -- $ 50,000 ................. $ 11,250 $ 15,000 $ 18,750 $ 22,500 $ 26,250 100,000 ................. 22,500 30,000 37,500 45,000 52,500 150,000 ................. 33,750 45,000 56,250 67,500 78,750 200,000 ................. 45,000 60,000 75,000 90,000 105,000 250,000 ................. 56,250 75,000 93,750 112,500 131,250 The years of credited service and the estimated annual retirement benefit payable at normal retirement age for the following officers are as follows: Estimated Annual Name Years Retirement Benefit ---- ----- ------------------ Herbert C. Hofmann* Warren J. Neitzel 17 $54,807 Paul S. Sayegh* John T. O'Reilly* *Not covered under the Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) Security Ownership of Certain Beneficial Owners. The only person known to the Registrant to be the beneficial owner of more than 5% of any class of Registrant's voting securities is Loews, which owns beneficially 4,459,859 shares of the outstanding Common Stock of Registrant as of February 27, 1998 constituting approximately 97% of the total shares of Common Stock outstanding. Loews's principal executive offices are located at 667 Madison Avenue, New York, New York 10021-8087. For information with respect to the principal holders of the outstanding voting securities of Loews, see Item 12 (b) below. (b)Security Ownership of Management. The following table sets forth certain information, as of February 27, 1998, with respect to the shares of Registrant's Common Stock and shares of Loews Common Stock beneficially owned by each of the directors of the Company and executive officers named above and by all directors and executive officers of the Company as a group: 26
Shares of Name of Individual Shares of Loews or Number of Common Stock Percent of Common Percent of Persons in Group (1) Class Stock (1) Class - -------------------------------------------------------------------------------- Harry B. Henshel........... 100 * Herbert C. Hofmann......... 400 * Warren J. Neitzel.......... John T. O'Reilly........... Paul S. Sayegh............. Andrew H. Tisch............ 2,000(2) * Laurence A. Tisch.......... 17,749,348 15.4% Preston R. Tisch........... 17,749,348 15.4% All directors and executive officers as a group (8 listed above).......... 100 * 35,501,096 30.9% *Represents less than 1% of the outstanding shares of stock. (1) Except as otherwise indicated, the persons listed as beneficial owners of shares of stock have sole voting and investment power with respect to such shares. (2) In addition, 380 shares of Loews Common Stock are owned by Mr. Tisch's son, as to which Mr. Tisch disclaims any beneficial interest and 20,000 shares of Loews Common Stock are held by a charitable foundation as to which Mr. Tisch has shared voting and investment power.
Item 13. Certain Relationships and Related Transactions. The Company and Loews have entered into a credit agreement (the "Credit Agreement") providing, under terms and conditions set forth therein, for unsecured loans by Loews, from time to time, in amounts aggregating up to $50,000,000, bearing interest at the rate of 10% per annum currently expiring on June 30, 1999. There has not been any borrowings under the Credit Agreement since January 17, 1995. The Company and Loews have entered into a tax allocation agreement with respect to the filing by Loews of consolidated federal income tax returns which include the Company and its subsidiaries. Under this agreement, the Company will (i) be paid by Loews the amount, if any, by which Loews's consolidated federal income tax is reduced by virtue of the inclusion of the Company and its subsidiaries in Loews's consolidated federal income tax return or (ii) pay to Loews an amount, if any, equal to the federal income tax which would have been payable by the Company if the Company and its subsidiaries had filed a separate consolidated return. This agreement may be canceled by the Company or Loews upon thirty days written notice. Pursuant to this agreement, the Company made estimated payments to Loews for the year ended December 31, 1997 amounting to $3,147,000, of which $519,000 will be applied to the year end December 31, 1997, as a prepaid tax. The Company and Loews have entered into a services agreement pursuant to which Loews provides to the Company various administrative services, including among other things, data processing, purchasing, accounts payable, printing services, tax return preparation and cash management services. In addition, the Company provides Loews with warehousing services. Pursuant to this agreement, each party reimburses the other in an amount not to exceed the allocated cost of the services provided. The Company paid Loews $2,064,000 for services provided during 1997. In addition, the Company has reimbursed to Loews approximately $509,000 in salaries and related employee benefits for 1997 for employees of Loews on loan to the Company. The Company participates in blanket insurance policies, primarily relating to property and casualty and general liability insurance, maintained by Loews which cover properties and facilities of Loews and certain 27 of its subsidiaries, including the Company. The Company reimbursed to Loews approximately $231,000 for premiums paid with respect to 1997. Certain of the Company's employee health and life insurance benefits are provided by an insurance subsidiary of CNA. Premiums and fees for such insurance amounted to approximately $331,000 for 1997. PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) 1. The consolidated financial statements appear above under Item 8. The following additional financial data should be read in conjunction with those financial statements. Schedules not included with these additional financial data have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes to consolidated financial statements.
Page Number ------ 2. Financial statement schedules: Independent Auditors' Report......................................... 31 Bulova Corporation and Subsidiaries: Schedule II-Valuation and Qualifying Accounts...................... 32 3.Exhibits: Exhibit Description Number ------------ --------- (3) Articles of Incorporation and By-Laws Restated Certificate of Incorporation, dated May 25, 1964, and filed on August 4, 1964 as Exhibit 3(a) to Amendment No. 2 to Registrant's Registration Statement on Form S-1 (Reg. No. 2-22576), incorporated herein by reference. Copies of amendments thereto, dated July 26, 1966, April 22, 1969 and July 2, 1969, incorporated herein by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1980. Copy of Certificate of Change thereto, dated November 25, 1985, incorporated herein by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1985. Copy of Certificate of Change thereto, dated July 14, 1987, incorporated herein by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987. Copy of Certificate of Amendment thereto, dated June 16, 1988, incorporated herein by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1988............................ 3(a) By-laws currently in effect and incorporated herein by reference to Exhibit 3(b) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1984.............................................. 3(b) (10) Material Contracts Merger Agreement entered into on January 17, 1995, by Bulova Technologies, Inc., a New York corporation ("BTI"), BTI Acquisition Corporation, a Delaware corporation, and Bulova Corporation, a New York corporation, the form of which was filed as part of Exhibit (2) to Registrant's Report on Form 8-K dated January 17, 1995, and incorporated herein by reference..................................... 10(a) 28 Exhibit Description Number ------------ --------- Credit Agreement between Loews Corporation and Registrant dated as of September 19, 1979, the form of which was filed as part of Exhibit (2) of Item 9(a) of Registrant's Report on Form 10-Q for the quarter ended September 30, 1979, and incorporated herein by reference....... 10(b) Federal Income Tax Allocation Agreement between Loews Corporation and Registrant dated as of March 12, 1980 and effective April 1, 1979, incorporated herein by reference to Exhibit 10(b) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987...... 10(c) Corporate Services Agreement between Loews Corporation and Registrant dated as of January 1, 1987, incorporated herein by reference to Exhibit 10(c) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1987.............................................. 10(d) (21) Subsidiaries of the Registrant List of subsidiaries of Registrant................................... 21* (27) Financial Data Schedule.............................................. 27* *Filed herewith (b) Reports on Form 8-K: There were no reports on Form 8-K for the three months ended December 31, 1997. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: March 27, 1998 By /s/ Paul S. Sayegh --------------------------------------- (Paul S. Sayegh, Chief Operating Officer and Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: March 27, 1998 By /s/ Herbert C. Hofmann -------------------------------------- (Herbert C. Hofmann, President, Chief Executive Officer and Director) Dated: March 27, 1998 By /s/ Paul S. Sayegh --------------------------------------- (Paul S. Sayegh, Chief Operating Officer and Principal Financial Officer) Dated: March 27, 1998 By /s/ John T. O'Reilly --------------------------------------- (John T. O'Reilly, Controller and Principal Accounting Officer) By --------------------------------------- (Harry B. Henshel, Director) Dated: March 27, 1998 By /s/ Andrew H. Tisch --------------------------------------- (Andrew H. Tisch, Director) Dated: March 27, 1998 By /s/ Laurence A. Tisch --------------------------------------- (Laurence A. Tisch, Director) Dated: March 27, 1998 By /s/ Preston R. Tisch --------------------------------------- (Preston R. Tisch, Director) 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Bulova Corporation: We have audited the accompanying consolidated balance sheets of Bulova Corporation and its subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at Item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bulova Corporation and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP New York, New York February 18, 1998 31 Schedule II BULOVA CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions Balance at charged to Balance at beginning cost and end Description of Period expenses Deductions of Period ----------- ---------- ---------- ---------- ---------- Year Ended December 31, 1997 Allowance for doubtful accounts.................... $3,514,000 $1,116,000 $1,406,000(a) $3,224,000 Allowance for cash discounts 548,000 1,010,000 1,089,000 469,000 ------------------------------------------------- $4,062,000 $2,126,000 $2,495,000 $3,693,000 ================================================= Allowance for loss on investment in unconsolidated subsidiary ................. $ 529,000 $ 529,000 ========== ========== Year Ended December 31, 1996 Allowance for doubtful accounts.................... $2,712,000 $2,073,000 $1,271,000(a) $3,514,000 Allowance for cash discounts 434,000 1,121,000 1,007,000 548,000 ------------------------------------------------- $3,146,000 $3,194,000 $2,278,000 $4,062,000 ================================================= Allowance for loss on investment in unconsolidated subsidiary.................. $ 529,000 $ 529,000 ========== ========== Year Ended December 31, 1995 Allowance for doubtful accounts.................... $3,022,000 $ 872,000 $1,182,000(a) $2,712,000 Allowance for cash discounts. 455,000 1,302,000 1,323,000 434,000 ------------------------------------------------- $3,477,000 $2,174,000 $2,505,000 $3,146,000 ================================================= Allowance for loss on investment in unconsolidated subsidiary.................. $ 529,000 $ 529,000 ========== ========== - ----------- (a) Includes doubtful accounts written off net of recoveries.
32 EX-21 2
Exhibit 21 BULOVA CORPORATION Subsidiaries of the Registrant December 31, 1997 Organized under Name of Subsidiary the Laws of Business Names ------------------ --------------- -------------- Bulova Watch Company Limited Canada Bulova The names of certain subsidiaries which, if considered as a single subsidiary, would not constitute a "significant subsidiary" as defined in Regulation S-X have been omitted.
EX-27 3 FINANCIAL DATA SCHEDULE FOR DECEMBER 31, 1997 FORM 10-K
5 1,000 12-MOS DEC-31-1997 DEC-31-1997 9,127 19,937 55,070 3,693 35,656 126,395 20,812 9,323 155,550 23,005 0 0 0 22,999 58,944 155,550 123,443 128,860 66,323 66,323 0 1,116 48 15,291 5,275 10,016 0 0 0 10,016 2.18 0
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