10-K 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, 1994 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. [ ] 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 24, 1995, 4,599,249 shares of Common Stock of the Registrant were outstanding and the aggregate market value of voting stock held by non- affiliates was approximately $486,000. ================================================================================ 1 BULOVA CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION For The Year Ended December 31, 1994
Item Page No. PART I No. ---- ------ 1 BUSINESS .......................................................... 3 2 PROPERTIES ........................................................ 3 3 LEGAL PROCEEDINGS ................................................. 3 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 3 PART II 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS .......................................................... 4 6 SELECTED FINANCIAL DATA ........................................... 4 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............................................ 5 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 8 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ............................................. 25 PART III 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ................ 25 11 EXECUTIVE COMPENSATION ............................................ 26 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .... 27 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 28 PART IV 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ... 29
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. 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 Loews, 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 agreement. Registrant is engaged in the distribution and sales 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 economy lower-priced watch line targeted by Caravelle. In addition, the Registrant's Sportstime by Bulova brand is at various price levels with watches using names and logos of various professional and college athletic teams. The principal markets are the United States and Canada. During 1994, approximately 13% of the sales were made outside the United States, substantially all of which were in Canada. 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 11 of the Notes to Consolidated Financial Statements of the accompanying 1994 Annual Report to Shareholders. Registrant primarily buys complete watches and clocks from foreign suppliers. Watch movements, cases and other components are purchased from foreign suppliers. In the United States, most of Registrant's consumer products are sold directly to retail jewelry 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 business is intensely competitive. The principal methods of competition are price, styling, aftersale service, warranty and product performance. In all five 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, in a few instances up to twelve months, 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 fiscal quarters in expectation of the holiday selling season. Employees Registrant currently employs approximately 460 persons, approximately 130 of whom are union members, and has experienced satisfactory labor relations. The Company has comprehensive benefit plans for substantially all employees. Item 2. Properties. The Company leases its primary facilities which include an 80,000 square foot plant in Woodside, New York for executive and sales offices, watch distribution, service and warehouse purposes, 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. 3 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.
1994 1993 ------------------------------------------------ High Low High Low -------------------------------------------------------------------------------- First Quarter ................. 3 1/4 2 3/4 4 4 Second Quarter ................ 3 1/4 2 5/8 4 4 Third Quarter ................. 3 1/4 3 4 4 Fourth Quarter ................ 3 1/4 3 1/4 4 4
DIVIDEND INFORMATION The Company paid no dividends for the years ended December 31, 1994 and 1993. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS There were approximately 1,500 holders of record of common stock of the Company at February 24, 1995. Item 6. Selected Financial Data.
Years Ended December 31, ----------------------------------------------- 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------- (In thousands, except per share data) Results of Operations: Revenues....................... $100,046 $101,303 $ 98,841 $101,001 $104,279 Income (loss) from continuing operations.................... 532 1,911 (1,342) (486) (159) Per share ................... .11 .41 (.29) (.11) (.03) Income (loss) before extraordinary credit and cumulative effect of accounting changes (1)........ 834 2,514 4,793 65 (4,962) Per share.................... .18 .54 1.04 .01 (1.08) Income (loss) before cumulative effect of accounting changes (1) .......................... 834 2,514 4,793 1,947 (4,080) Per share.................... .18 .54 1.04 .42 (.89) Net income (loss).............. 834 2,514 (13,189) 1,947 (4,080) Per share.................... .18 .54 (2.87) .42 (.89) Financial Position: Total assets................... 151,035 149,865 165,489 143,971 140,286 Discontinued operations-net (1) 20,082 15,445 11,245 29,435 25,993 Long-term debt................. 200 600 1,000 1,400 1,800 Debt to affiliate.............. 19,000 16,000 31,000 36,000 32,000 Shareholders' equity........... 62,930 64,101 61,893 76,067 73,847 Dividends per share............ None None None None None (1) See Notes 2, 7 and 8 of the Notes to Consolidated Financial Statements.
4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Liquidity and Capital Resources: Cash Flow 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"), 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 agreement. The sale of BTI will allow the Company to concentrate its resources on its core watch and clock business. Proceeds received from the sale as well as the decrease in interest expense resulting from the repayment of the debt owed to Loews will initially improve cash flow. The Company continues to be adversely affected by competition and oversupply of watch and clock products. The Company has reduced costs to improve gross profit, and continues its effort to closely monitor inventory purchasing to ensure appropriate levels of inventory are maintained. Based on business volume, management believes inventory levels cannot be significantly reduced. Business conditions are expected to remain difficult, therefore, it is likely that pricing will be reduced affecting gross profit, income and cash flow. For a number of 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 has not been able to meet through internally generated funds. 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. The Credit Agreement initially expired in 1980, but the expiration date has been periodically extended by the Company and Loews. The Credit Agreement currently expires June 30, 1996. At December 31, 1994 loans aggregating $19,000,000 were outstanding under the Credit Agreement. The largest amount outstanding under the Credit Agreement during 1994 was $20,000,000. At December 31, 1993 loans aggregating $16,000,000 were outstanding under the Credit Agreement and the largest amount outstanding during 1993 was $31,000,000. The increase in borrowing was primarily due to an increase in inventory purchases during the fourth quarter of 1994. See Note 3 of the Notes to Consolidated Financial Statements. The Company from time to time will require additional borrowings from Loews to meet its working capital needs, including normal inventory purchases. While Loews has no obligation to enter into or maintain arrangements for any further borrowing, the Company anticipates that its additional working capital needs will be provided by Loews under the Credit Agreement. Cash Flow From Operations The Company utilized net cash from operations of approximately $3,931,000 for the year ended December 31, 1994, compared to generated net cash flow of $10,272,000 and $7,858,000 for the years ended December 31, 1993 and 1992, respectively. The reason for the decrease in cash flow is primarily due to the timing of the transactions; year end levels of accounts receivable increased by $3,522,000, or 7.4%, and accounts payable and accrued expenses decreased by $730,000, or 3.7%. Additionally, other liabilities and credits decreased $3,551,000, or 7.4% primarily associated with the recording of a favorable foreign currency adjustment of $1,472,000, partially offset by an inventory decrease of $4,528,000, or 11.2%. 5 Cash Flow From Investing Activities Investing activities include net proceeds from the sale of a former defense manufacturing facility of $4,487,000 and $2,578,000 in 1993 and 1992, respectively. In addition, for the year ended December 31, 1993 the Company received $669,000 in proceeds related to the sale of its Hong Kong office. The Company does not anticipate any material capital expenditures in 1995. Cash Flow From Financing Activities Cash flow from financing activities primarily represents changes in the amounts due to Loews under the Credit Agreement discussed above. Contingencies Material contingencies consist of environmental claims relating to a former Valley Stream, N.Y. defense manufacturing facility for which the Company, in the second quarter of 1994, provided for a liability of $250,000, and a former Sag Harbor, N.Y. watch manufacturing facility, for which the Company provided an additional liability of $484,000 in the third quarter of 1994. The environmental clean-up will directly affect cash flow, and it is expected that to the extent the Company does not have sufficient liquidity, cash needs will be funded through the Credit Agreement with Loews. During the fourth quarter of 1994 and 1992 the Company provided $811,000 and $750,000, respectively, to cover legal and settlement costs related to actions currently pending. In addition, the Company provided for a liability of $709,000 during the year ended December 31, 1992 in relation to its agreement to fund certain retirement benefits. The environmental liability recognized in the Company's financial statements to date of $2,334,000 represents the minimum of the Company's estimated range of equally likely outcomes; the upper limit of that range is approximately $2,834,000. Management does not believe that the foregoing matters will have a material adverse effect on the financial condition or results of operations of the Company. The Company's accrued liabilities for these matters represents a reasonable estimate made by the Company for various legal and environmental matters for which it believes it is probable that a liability exists or a settlement will be negotiated. See Note 13 of the Notes to Consolidated Financial Statements for further discussion. Results of Operations Watch, clock and jewelry revenue decreased by $170,000 and $910,000, or 0.2% and 1.0%, as compared to 1993 and 1992, respectively. Income before accounting changes and discontinued operations decreased by $1,379,000, or 72.2%, and increased by $1,874,000, or 139.6%, as compared to 1993 and 1992, respectively. The primary reason for the decrease in income before accounting changes and discontinued operations is the $2,050,000 after-tax gain from disposal of a former defense manufacturing facility and Hong Kong property which was recognized in 1993. Additionally, the Company provided $477,000 and $527,000 associated with contingencies and litigation in 1994, respectively, offset by a favorable foreign currency adjustment of $1,472,000 associated with the shutdown of the Company's European facilities, which was finalized in November 1994. Revenues decreased, exclusive of asset dispositions, as compared to 1993 by approximately $492,000, or 0.5%, due to a decline in the average unit selling price, partially offset by an increase in unit sales representing approximately $311,000, or 0.3%. Compared to 1992, revenues declined $4,805,000, or 5.0% due to lower unit sales, partially offset by a higher average unit selling price representing approximately $1,206,000, or 1.2%. The decrease, from 1993, in the average unit selling price resulted from decreases at the Company's Canadian operation. 6 Consumer products unit volume increased 0.3% and declined 5.0% as compared to 1993 and 1992, respectively. The sales volume increase compared to 1993 is primarily associated with increased sales in the Bulova and Caravelle watch brands and Bulova clocks. These increases are partially offset by a decrease in direct sales associated with the Benetton Line, the license agreement for which expired in June 1994. Compared to 1992, the Caravelle and Benetton brands decreased 19.0% and 88.0%, respectively, which was partially offset by volume increases in the Bulova brand of 26.0%. Cost of sales as a percentage of sales decreased 2.6% and 1.4% as compared to 1993 and 1992. The primary reason for the decrease is a change in product sales mix and effective procurement practices implemented by the Company. Selling, general and administrative costs as a percentage of sales decreased 0.4% and 2.2% compared to 1993 and 1992. The reduction of selling, general and administrative costs resulted from management's efforts to control discretionary costs in these areas during periods of flat or declining sales. The Company recognized $3,780,000, $3,535,000 and $3,507,000 in royalty income in 1994, 1993 and 1992, respectively, which includes $1,484,000, $2,162,000 and $2,211,000 of royalties under the "Benetton by Bulova" license agreement for years ended 1994, 1993 and 1992, respectively. The license agreement with Benetton expired June 30, 1994. The impact of losing the Benetton Agreement will directly impact the Company's revenues, income and cash flow. The remaining royalty income represents payments by two licensees in Europe and the Far East. The Company imports most of its watch and clock products. Foreign currency fluctuations therefore, can have a material impact on the Company's operations. Approximately 25% of the Company's purchases are denominated in Japanese yen. As a result of hedging practices adopted by the Company, foreign currency fluctuations have not had a material impact on the results of operations for the years ended December 31, 1994, 1993, and 1992. Future foreign currency fluctuations, however, could impact gross profit, income and cash flow. The recent level of inflation has not had a material impact on the results of operations. Corporate Related Parties - Loews has provided administrative services for which the Company paid $1,200,000 for the year ended December 31, 1994, and $1,000,000 for each of the years ended December 31, 1993 and 1992. The cost allocated to the Company is estimated to be the incremental cost incurred by Loews in providing these services to the Company. If the Company incurred these costs on a stand- alone basis, it believes the costs incurred could aggregate between $1,200,000 and $1,500,000. The additional cost would reduce income and cash flow. See Note 3 of the Notes to Consolidated Financial Statements. Taxes - For the year ended December 31, 1993 the Company recorded a tax benefit of $847,000 resulting from the Omnibus Budget Reconciliation Act of 1993, enacted August, 1993, which among other things, increased the corporate tax rate from 34% to 35% effective January 1, 1993. In accordance with SFAS No. 109 net deferred tax assets have been adjusted for the effect of the change in tax rates in the period enacted. See Note 7 of the Notes to Consolidated Financial Statements. Interest Expense and Other Income - Interest expense decreased $841,000 due to a $10,000,000 decline in the average borrowing from affiliate. Other income was higher for the year ended December 31, 1994 primarily due to custom refunds received. Other - In the fourth quarter of 1994 the Company completed the shut-down of its European facilities which resulted in a favorable foreign currency adjustment of $1,472,000. 7 Item 8. Financial Statements and Supplementary Data. Bulova Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- 1994 1993 -------------------------------------------------------------------------------- Assets: Current assets: Cash ........................................... $ 3,857,000 $ 5,639,000 Receivables-net (Notes 1 and 5) ................ 51,254,000 47,732,000 Inventories (Notes 1 and 6) .................... 35,750,000 40,278,000 Prepaid expenses ............................... 329,000 520,000 Deferred income taxes (Notes 1 and 7) .......... 10,004,000 10,616,000 Net assets of discontinued operations (Note 2).. 20,082,000 15,445,000 --------------------------- Total current assets ........................ 121,276,000 120,230,000 --------------------------- Property, plant and equipment, at cost (Notes 1 and 12): Land, buildings and improvements ............... 14,083,000 13,771,000 Machinery and equipment ........................ 2,502,000 3,250,000 Furniture, fixtures and leasehold improvements . 3,513,000 3,608,000 --------------------------- 20,098,000 20,629,000 Less accumulated depreciation and amortization . 7,348,000 7,557,000 --------------------------- 12,750,000 13,072,000 --------------------------- Other assets: Deferred income taxes (Notes 1 and 7) ........... 16,744,000 16,171,000 Other assets .................................... 265,000 392,000 --------------------------- 17,009,000 16,563,000 --------------------------- Total assets ................................ $151,035,000 $149,865,000 ===========================
See Notes to Consolidated Financial Statements. 8
December 31, --------------------------- 1994 1993 -------------------------------------------------------------------------------- Liabilities and Shareholders' Equity: Current liabilities: Current installments of long-term debt (Note 12) $ 400,000 $ 400,000 Accounts payable ............................... 5,569,000 4,938,000 Accrued expenses: Salaries, wages and commissions .............. 2,116,000 2,157,000 Pension (Note 8) ............................. 1,328,000 1,252,000 Postretirement benefits (Note 8) ............. 1,298,000 1,236,000 Advertising .................................. 1,759,000 2,184,000 Warranty ..................................... 1,560,000 1,746,000 Other ........................................ 3,692,000 6,501,000 Accrued federal and foreign income taxes (Notes 1 and 7) ............................... 2,333,000 1,776,000 --------------------------- Total current liabilities .................... 20,055,000 22,190,000 --------------------------- Obligations under capital leases (Note 12) ....... 200,000 600,000 --------------------------- Other liabilities and credits: Postretirement benefits payable (Note 8) ....... 43,183,000 41,059,000 Pension benefits payable (Note 8) .............. 2,581,000 3,007,000 Other .......................................... 3,086,000 2,908,000 --------------------------- 48,850,000 46,974,000 --------------------------- Debt to affiliate: 10% note payable (Notes 1 and 3) ............... 19,000,000 16,000,000 --------------------------- Commitments and contingent liabilities (Notes 2,3, 7, 8, 12 and 13) 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 .............................. 18,145,000 17,311,000 Cumulative translation adjustment .............. (1,406,000) 599,000 --------------------------- 62,935,000 64,106,000 Less 1,000 shares of common stock held in treasury, at cost ............................. 5,000 5,000 --------------------------- Total shareholders' equity ................... 62,930,000 64,101,000 --------------------------- Total liabilities and shareholders' equity.... $151,035,000 $149,865,000 ===========================
9 Bulova Corporation and Subsidiaries STATEMENTS OF CONSOLIDATED OPERATIONS
Years Ended December 31, -------------------------------------- 1994 1993 1992 ------------------------------------------------------------------------------- Revenues: Net sales .......................... $ 93,724,000 $ 93,894,000 $ 94,634,000 Royalties, interest and other (Notes 4 and 10) .................. 6,322,000 7,409,000 4,207,000 -------------------------------------- Total revenues .................. 100,046,000 101,303,000 98,841,000 -------------------------------------- Expenses: Cost of sales ...................... 59,267,000 61,279,000 60,115,000 Selling, general and administrative (Notes 3, 8 and 12) ............... 39,416,000 36,895,000 40,361,000 Interest: Affiliate (Note 3) ............... 467,000 1,357,000 1,485,000 Others ........................... 113,000 64,000 73,000 -------------------------------------- Total expenses .................. 99,263,000 99,595,000 102,034,000 -------------------------------------- Income (loss) from continuing operations before income taxes ...... 783,000 1,708,000 (3,193,000) Income tax (expense) benefit (Notes 1 and 7) .............................. (251,000) 203,000 1,851,000 -------------------------------------- Income (loss) from continuing operations .......................... 532,000 1,911,000 (1,342,000) Discontinued operations of BTI (net of tax of $155,000, $254,000 and $2,857,000) (Note 2) ................ 302,000 603,000 6,135,000 -------------------------------------- Income before cumulative effect of accounting changes .................. 834,000 2,514,000 4,793,000 Cumulative effect of accounting changes: Postretirement benefits other than pensions (net of income tax benefit of $13,173,000)(Note 8)............ (25,567,000) Accounting for income taxes (Note 7) 7,585,000 -------------------------------------- Net income (loss) ............... $ 834,000 $ 2,514,000 $(13,189,000) ====================================== Income (loss) per share (Note 1): Income (loss) from continuing operations ........................ $.11 $.41 $ (.29) Discontinued operations of BTI ..... .07 .13 1.33 -------------------------------------- Income before cumulative effect of accounting changes ................ .18 .54 1.04 Postretirement benefits other than pensions ..................... (5.56) Accounting for income taxes ........ 1.65 -------------------------------------- Net income (loss) ............... $.18 $.54 $(2.87) =======================================
See Notes to Consolidated Financial Statements. 10 Bulova Corporation and Subsidiaries STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Shareholders' Equity Number of -------------------------------------------------------------- Common Additional Cumulative Shares Common Paid-in Retained Translation Treasury Issued (1) Stock Capital Earnings Adjustment Stock ------------------------------------------------------------------------------------------------- Balance, Dec. 31, 1991 4,600,000 $22,999,000 $23,197,000 $ 27,986,000 $ 1,890,000 $(5,000) Net loss ............. (13,189,000) Exchange rate changes during the year (net of income taxes of $507,000) ........... (985,000) ------------------------------------------------------------------------ Balance, Dec. 31, 1992 4,600,000 22,999,000 23,197,000 14,797,000 905,000 (5,000) Net income ........... 2,514,000 Exchange rate changes during the year (net of income taxes of $165,000) ........... (306,000) ------------------------------------------------------------------------ Balance, Dec. 31, 1993 4,600,000 22,999,000 23,197,000 17,311,000 599,000 (5,000) Net income ........... 834,000 Exchange rate changes during the year (net of income taxes of $287,000) ........... (533,000) Foreign currency adjustment .......... (1,472,000) ------------------------------------------------------------------------ Balance, Dec. 31, 1994 4,600,000 $22,999,000 $23,197,000 $ 18,145,000 $(1,406,000) $(5,000) ======================================================================== (1) Includes 1,000 shares of common stock held in treasury.
See Notes to Consolidated Financial Statements. 11 Bulova Corporation and Subsidiaries STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended December 31, --------------------------------------- 1994 1993 1992 -------------------------------------------------------------------------------- Operating activities: Net income (loss) ................... $ 834,000 $ 2,514,000 $(13,189,000) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Cumulative effect of accounting changes .......................... 17,982,000 Depreciation and amortization ..... 608,000 1,127,000 1,076,000 Loss (gain) on disposition of assets ........................... 165,000 (3,446,000) (64,000) Provision for losses and cash discounts on accounts receivable . 2,577,000 3,262,000 3,677,000 Deferred income taxes ............. 39,000 1,995,000 (17,815,000) Changes in operating assets and liabilities-net: Receivables ....................... (6,099,000) (850,000) (3,010,000) Inventories ....................... 4,528,000 9,728,000 (10,981,000) Prepaid expenses .................. 191,000 324,000 26,000 Net assets of discontinued operations ....................... (4,637,000) (4,200,000) 18,190,000 Other assets ...................... 127,000 (22,000) 4,000 Accounts payable and accrued expenses ......................... 730,000 1,060,000 366,000 Accrued federal and foreign income taxes ..................... 557,000 (3,947,000) 1,127,000 Other liabilities and credits ..... (3,551,000) 2,727,000 10,469,000 -------------------------------------- (3,931,000) 10,272,000 7,858,000 -------------------------------------- Investing activities: Purchases of property, plant and equipment .......................... (451,000) (524,000) (2,297,000) Proceeds from disposal of property, plant and equipment ...... 5,203,000 2,581,000 -------------------------------------- (451,000) 4,679,000 284,000 -------------------------------------- Financing activities: Proceeds from debt to affiliate ..... 23,000,000 16,000,000 36,000,000 Principal payments on debt to affiliate .......................... (20,000,000) (31,000,000) (41,000,000) Principal payments on long-term debt ............................... (400,000) (400,000) (400,000) -------------------------------------- 2,600,000 (15,400,000) (5,400,000) -------------------------------------- Net change in cash ................... (1,782,000) (449,000) 2,742,000 Cash, beginning of year .............. 5,639,000 6,088,000 3,346,000 -------------------------------------- Cash, end of year .................... $ 3,857,000 $ 5,639,000 $ 6,088,000 ======================================
See Notes to Consolidated Financial Statements. 12 Bulova Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies: (a) Affiliation: Loews Corporation ("Loews") owns approximately 97% of the Company's outstanding voting stock. (b) Principles of Consolidation: The consolidated financial statements include all of its subsidiaries, which are 100% owned, and all material intercompany accounts and transactions have been eliminated. The equity method of accounting is used for investments in associated companies in which the Company has an interest of 20% to 50%. (c) Accounts Receivable: Watches and clocks are sold to retail outlets throughout the United States and Canada. The Company grants its retailers seasonal credit terms as well as extends credit on an interest-bearing basis. For the years ended December 31, 1994 and 1993, accounts receivable were substantially comprised of balances due from retailers. (d) Inventories: Substantially all inventory is computed on a first-in, first-out basis and are valued at lower of cost or market. (e) 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. (f) Income Taxes: The Company is included in Loews consolidated tax return. Under the tax allocation agreement, the Company is required to provide a current tax provision calculated on a stand-alone basis. The Company's ability to carry forward tax losses or credits to offset future years' income or tax is subject to restrictions of the Internal Revenue Service. 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. (g) Net Income (Loss) Per Share and Shareholders' Equity: Net income (loss) 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, 1994). In addition to its common stock, the Company has authorized 500,000 shares of preferred stock. (h) Foreign Currency Adjustment: The effect of changes in exchange rates in translating foreign currency financial statements is accumulated in a separate component of shareholders' equity. (i) Fair Value of Financial Instruments: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The carrying amount of receivables and long-term debt other than from affiliate, approximates fair value. The Company does not maintain any significant banking relationships apart from Loews. A discount rate therefore, commensurate with the credit, interest rate and prepayment risks involved, which could be used to estimate fair value of the affiliate receivable and payable cannot be practicably determined. Therefore, management is not able to estimate the fair value of the affiliate receivable and payable. (j) Forward Exchange Contracts: In connection with purchases of inventory, the Company has entered 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, 1993, the U.S. dollar equivalent of foreign currency contracts approximated $3,000,000. These agreements matured through June 30, 1994. As of December 31, 1994, there were no foreign currency contracts outstanding. (k) Reclassifications: Certain amounts applicable to prior periods have been reclassified to conform to the classifications followed in 1994. 13 Note 2. Discontinued Operations: On October 4, 1994, the Company executed a letter of intent, subject to certain conditions, to sell its industrial and defense manufacturing business, Bulova Technologies, Inc. ("BTI"). On January 17, 1995, BTI was sold for $20,810,000 in cash. The sale results in a pre-tax and after-tax gain of approximately $558,000 and $363,000, respectively, to be recorded in the first quarter of 1995. The Company applied $18,000,000 of the consideration received to the repayment of the entire debt to affiliate. The operating results of BTI have been reported separately as discontinued operations in the Consolidated Financial Statements. Accordingly, prior year amounts have been restated. Summarized financial information of BTI is as follows:
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Net sales ....................... $ 52,600,000 $ 52,421,000 $ 82,778,000 Cost of sales ................... (45,117,000) (44,359,000) (63,987,000) Selling, general and administrative ................. (5,849,000) (5,920,000) (7,395,000) Interest expense ................ (1,177,000) (1,285,000) (2,404,000) ------------------------------------------- Income before income taxes ...... 457,000 857,000 8,992,000 Income taxes .................... (155,000) (254,000) (2,857,000) ------------------------------------------- Income from discontinued operations .................... $ 302,000 $ 603,000 $ 6,135,000 =========================================== December 31, ------------------------- 1994 1993 ------------------------- Cash ........................................... $ 428,000 $ 241,000 Accounts receivable ............................ 6,699,000 6,942,000 Inventories .................................... 16,246,000 11,831,000 Property, plant and equipment-net .............. 7,834,000 8,395,000 Other assets ................................... 623,000 612,000 ------------------------- Total assets ................................ 31,830,000 28,021,000 ------------------------- Current installment of long-term debt .......... 408,000 616,000 Accounts payable ............................... 3,761,000 3,579,000 Accrued expenses ............................... 3,501,000 3,616,000 Long-term debt ................................. 2,288,000 2,666,000 Other long-term liabilities .................... 1,790,000 2,099,000 ------------------------- Total liabilities ........................... 11,748,000 12,576,000 ------------------------- Net assets of discontinued operations ....... $20,082,000 $15,445,000 =========================
14 During 1994, 1993 and 1992, the Company settled defense contract claims with the U.S. government for approximately $2,370,000, $1,950,000 and $19,500,000, respectively, which amounts are included in net sales in the table above. The net effect of the claims settlement increased earnings for this segment by $2,370,000, $1,950,000 and $17,100,000 for the years ended December 31, 1994, 1993 and 1992, respectively. In 1992, as a direct result of the contract claims settlement and the Company's intention not to pursue additional sales and production of units under this contract, approximately $2,400,000 of parts inventory and equipment related to production of units under this contract were written off. The Company received notice from a customer, in 1992, of its industrial and defense products segment regarding an allegedly defective product delivered prior to 1992. The Company provided a reserve of approximately $1,500,000 in relation to this claim, which was included as a charge to cost of sales for the year ended December 31, 1992. During the second quarter of 1993, this matter was settled and the Company accrued an additional $500,000. As of December 31, 1994, the Company has satisfied all outstanding obligations related to this claim. Note 3. 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 initially expired in 1980, but the expiration date has been periodically extended by the Company and Loews. It currently expires June 30, 1996. In January 1995, the balance was paid in full with the proceeds from the sale of BTI (see Note 2). Loews has provided administrative services for which the Company has paid $1,200,000 for the year ended December 31, 1994 and $1,000,000 for each of the years ended December 31, 1993 and 1992. In 1994, 1993 and 1992, the Company allocated $800,000 of these administrative charges to BTI. The cost allocated to the Company is estimated to be the incremental cost incurred by Loews in providing administrative services to the Company. If the Company incurred these costs on a stand-alone basis, it believes the costs incurred could aggregate between $1,200,000 and $1,500,000. Note 4. Asset Dispositions: The Company consummated the sale of a former defense manufacturing facility in the second quarter of 1993. In the third quarter of 1993 the Company sold its former Hong Kong office. These transactions resulted in pre-tax and after-tax gains of approximately $3,154,000 and $2,050,000, respectively, for the year ended December 31, 1993. Note 5. Accounts Receivable:
December 31, ---------------------------- 1994 1993 ---------------------------- Trade accounts and notes receivable ............ $45,311,000 $40,103,000 Other, including $8,126,000 due from affiliate (Note 7) ...................................... 9,420,000 10,583,000 ---------------------------- 54,731,000 50,686,000 Less allowance for doubtful receivables and cash discounts ................................ 3,477,000 2,954,000 ---------------------------- Receivables-net .............................. $51,254,000 $47,732,000 ============================
Note 6. Inventories:
December 31, ---------------------------- 1994 1993 ---------------------------- Watches and clocks ............................. $32,924,000 $37,630,000 Jewelry ........................................ 430,000 420,000 Precious metals ................................ 450,000 311,000 Other .......................................... 1,946,000 1,917,000 ---------------------------- $35,750,000 $40,278,000 ============================
15 Note 7. 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 federal income tax (benefit) expense to be paid or received by the Company for the years ended December 31, 1994, 1993 and 1992 amounted to $(74,000), $(2,451,000) and $3,287,000, respectively. Pursuant to this agreement, there was $2,039,000 payable to Loews as of December 31, 1994. This agreement may be cancelled by the Company or Loews upon thirty days written notice. In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which, among other things, required a change from the deferred method to the liability method of accounting for income taxes and allows recognition of deferred tax assets based on the likelihood of realization of a tax benefit in future years. The cumulative effect as of January 1, 1992 of adopting this change resulted in the Company recognizing a benefit of $7,585,000, or $1.65 per share, primarily representing deferred tax assets which will be realized in the Loews consolidated tax return. Income before income taxes and income taxes (benefits) consisted of the following for continuing operations:
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Income (loss) before income taxes: Domestic...................... $ 382,000 $ 1,075,000 $(3,771,000) Foreign....................... 401,000 633,000 578,000 ------------------------------------------- Total........................ $ 783,000 $ 1,708,000 $(3,193,000) =========================================== Income tax (expense) benefits: Federal: Current.................... $ 289,000 $ 693,000 $ (724,000) Deferred................... (116,000) (18,000) 2,814,000 State and local-current...... (65,000) (132,000) (231,000) Foreign: Current.................... (310,000) (370,000) (222,000) Deferred................... (49,000) 30,000 214,000 ------------------------------------------- $(251,000) $ 203,000 $ 1,851,000 ===========================================
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, among other things, increased the corporate tax rate from 34% to 35%, effective January 1, 1993. In accordance with SFAS No. 109, net deferred tax assets were adjusted for the effect of the change in tax rates in the period enacted. As a result, the Company recorded a tax benefit in 1993 of $847,000 to increase its deferred tax assets. 16 Deferred tax assets are as follows:
December 31, ---------------------------- 1994 1993 ---------------------------- Employee benefits............................... $24,055,000 $23,128,000 Inventory....................................... 8,161,000 8,837,000 Accrued expenses................................ 2,353,000 2,278,000 Accounts receivable............................. 1,261,000 1,034,000 Tax loss carryforward........................... 902,000 1,374,000 ---------------------------- 36,732,000 36,651,000 Valuation allowance............................. (9,984,000) (9,864,000) ---------------------------- $26,748,000 $26,787,000 ============================
The valuation allowance relates to state and local temporary differences and loss carryforwards. Income taxes differ from that computed at the U.S. statutory rate for the following reasons:
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Income taxes computed at statutory rate.................. $ 274,000 $ 598,000 $ (1,086,000) (Decrease) increase in taxes resulting from: Tax rate change ............... (847,000) State and local taxes, net of federal benefit ........... 42,000 86,000 152,000 Foreign taxes, net of foreign tax credit ................... (38,000) 35,000 9,000 Benefit related to permanent differences .................. (482,000) (13,000) Benefit (expense) related to prior years' losses .......... 292,000 (25,000) (143,000) Other ......................... 163,000 (37,000) (783,000) ------------------------------------------- Income taxes (benefit) ....... $ 251,000 $(203,000) $ (1,851,000) ===========================================
17 Federal, foreign, state and local income tax (refunds) payments amounted to approximately $(2,314,000), $1,814,000 and $(597,000) for the years ended December 31, 1994, 1993 and 1992, respectively. At December 31, 1994 the Company had state and local operating loss carryforwards of approximately $7,697,000 which expire between 1999 and 2002. Loews federal income tax returns have been examined through 1988 and settled through 1983, and the years 1989 and 1990 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. As of December 31, 1994, the Company has recorded an $8,126,000 receivable related to the audited adjustments of the examination of Loews tax returns for 1984 through 1988. Upon final determination of these audits, the receivable from Loews as adjusted will be collected, together with accrued interest. The Company's Canadian tax returns for the years 1984 through 1992 are currently under examination. The Company is contesting significant assessments with respect to these examinations. In the opinion of the Company, the additional tax and interest, if any, resulting from these assessments should not have a material effect on its consolidated financial position or results of operations. Note 8. 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 foreign subsidiary, which are not material. Pension cost of the U.S. plans includes the following components:
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Service cost-benefits earned ......................... $ 740,000 $ 657,000 $ 615,000 Interest cost ................... 1,652,000 1,609,000 1,504,000 Return on assets-actual ......... 424,000 (1,029,000) (829,000) Net amortization and deferrals .. (1,764,000) (489,000) (689,000) ------------------------------------------- Net pension cost ............ $ 1,052,000 $ 748,000 $ 601,000 =========================================== 18 The status of the underfunded U.S. plans were as follows: December 31, ---------------------------- 1994 1993 ---------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation.............. $18,590,000 $20,021,000 ============================ Accumulated vested benefit obligation ...... $18,031,000 $19,100,000 ============================ Projected benefit obligation .................. $20,684,000 $22,883,000 Plan assets at fair value ..................... 14,194,000 13,928,000 ---------------------------- Projected benefit obligation over plan assets . 6,490,000 8,955,000 Unrecognized net asset at January 1 ........... 2,870,000 3,349,000 Unrecognized net loss ......................... (3,165,000) (5,245,000) Unrecognized prior service cost ............... (45,000) (67,000) ---------------------------- Accrued pension cost ........................ $ 6,150,000 $ 6,992,000 ============================ The rates used in the actuarial assumptions were: Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Discount rate .................... 8.75% 7.50% 8.50% Rate of compensation increase .... 6.25% 5.75% 5.50% Expected long-term rate of return on assets ....................... 7.50% 8.50% 9.00%
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. Other Postretirement Benefit Plans: The Company maintains postretirement health care plans covering eligible employees and retirees. 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 certain employees who had accumulated 10 years of service and were age 55 or who had 20 years of service as of October 1, 1987. The benefits provided by the Company are basically health, and for certain retirees, life insurance type benefits. 19 Effective January 1, 1992, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This new standard required accrual of an employer's obligation for postretirement benefits including medical and life-insurance coverage, during the active service period of the employee. The Company elected immediate recognition of the transition obligation of $38,740,000. The cumulative effect of this change, net of income taxes of $13,173,000, was to reduce income by $25,567,000, or $5.56 per share. The rates used in the actuarial assumptions were:
December 31, ---------------------------- 1994 1993 ----------------------------- Net periodic postretirement benefit cost........ 7.50% 8.50% Accumulated postretirement benefit liability.... 8.75% 7.50% The following table sets forth the postretirement plan's status: December 31, ---------------------------- 1994 1993 ---------------------------- Accumulated postretirement benefit obligation: Retirees ..................................... $22,887,000 $27,302,000 Fully eligible active plan participants ...... 4,214,000 6,237,000 Other active plan participants ............... 2,950,000 4,405,000 ---------------------------- 30,051,000 37,944,000 Unrecognized prior service cost .............. 91,000 Unrecognized net gain ........................ 14,339,000 4,351,000 ---------------------------- Accrued postretirement benefit liability .... $44,481,000 $42,295,000 ============================= Postretirement benefit cost includes the following components: Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Service costs .................. $ 562,000 $ 652,000 $ 601,000 Interest costs ................. 2,595,000 3,179,000 3,042,000 ------------------------------------------- Net periodic postretirement benefit cost ................ $3,157,000 $3,831,000 $3,643,000 ===========================================
For measurement purposes, a trend rate of 13.5% pre-65 and 10.5% post-65, for covered costs was used. These trend rates are expected to decrease gradually to 8.25% at 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 $2,378,000 and the net periodic postretirement benefit cost by approximately $340,000. 20 Note 9. Foreign Operations: Foreign currency items included in the Consolidated Financial Statements are as follows:
December 31, ---------------------------- 1994 1993 ---------------------------- Current assets ................................. $11,329,000 $12,044,000 Non-current assets ............................. 233,000 311,000 Current liabilities ............................ 2,420,000 3,403,000 Non-current liabilities ........................ 163,000 Retained earnings .............................. 6,568,000 6,215,000 Investment in foreign subsidiaries, at cost .... 2,574,000 2,574,000 Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Sales ........................... $11,859,000 $13,604,000 $13,909,000 Net income ...................... 401,000 633,000 578,000
Note 10. Quarterly Financial Data (Unaudited):
1994 Quarters Ended 1993 Quarters Ended ----------------------------------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 ----------------------------------------------------------------- (In thousands, except per share data) Total revenues..$30,727 $27,220 $21,012 $21,087 $26,530 $28,714 $22,270 $23,789 Cost of sales... 17,553 16,219 13,037 12,458 16,615 17,364 12,402 14,898 Income (loss) from continuing operations .... 732 81 (469) 188 (3) 1,350 499 65 Per share ...... .16 .02 (.11) .04 .29 .11 .01 Income (loss) from discontinued operations .... 76 (30) 565 (309) 794 209 (477) 77 Per share ...... .02 (.01) .13 (.07) .17 .04 (.10) .02 Net income (loss)......... 808 51 96 (121) 791 1,559 22 142 Per share....... .18 .01 .02 (.03) .17 .33 .01 .03
In the fourth quarter of 1994, the Company increased its estimated legal and settlement costs by $811,000 (see Note 13). In addition, the Company recorded a favorable foreign currency adjustment of $1,472,000 related to the shut-down of its European facilities, included in other income. There were no significant adjustments in the fourth quarter of 1993. 21 Note 11. Business Segment Information: The Company is engaged principally in the sale of watches and clocks. The following table sets forth, for the periods indicated, identifiable assets and certain operating information.
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------------------------------------- Geographic Area Information: Net Sales: Unaffiliated customers: United States .............. $ 81,865,000 $ 80,276,000 $ 80,579,000 Canada ..................... 11,859,000 13,604,000 13,909,000 Europe ..................... 14,000 146,000 ------------------------------------------ $ 93,724,000 $ 93,894,000 $ 94,634,000 ========================================== Inter-area sales to affiliates (a): United States .............. $ 1,901,000 $ 2,658,000 $ 2,505,000 Europe ..................... 738,000 741,000 924,000 ------------------------------------------ $ 2,639,000 $ 3,399,000 $ 3,429,000 ========================================== Income (loss) contribution (b): United States ................ $ 796,000 $ 2,434,000 $ (2,017,000) Canada ....................... 1,126,000 1,102,000 976,000 Europe ....................... (21,000) 20,000 (113,000) ------------------------------------------ $ 1,901,000 $ 3,556,000 $ (1,154,000) ========================================== Identifiable assets: United states ................ $139,473,000 $137,510,000 $152,577,000 Canada ....................... 11,562,000 11,906,000 12,437,000 Europe ....................... 449,000 475,000 ------------------------------------------ $151,035,000 $149,865,000 $165,489,000 ========================================== (a) Inter-area sales to affiliates are reflected at the cost of the manufacturing location plus a margin. The amount of export sales from the United States to unaffiliated customers is not material. (b) Consists of income (loss) from continuing operations before interest expense, corporate expenses and income taxes.
22 Note 12. Leases: The Company leases certain of its warehouse and office facilities. Other leases cover machinery and equipment. Net book value of assets held under capital leases, included in property, plant and equipment, amounted to $4,567,000 and $4,644,000 (net of accumulated amortization of $758,000 and $681,000) for the years ended December 31, 1994 and 1993, respectively. The following is a schedule of future minimum lease payments under capital and operating leases for the five years ending December 31, 1999, together with the present value of net minimum lease payments of capital leases at December 31, 1994: Minimum Rentals ---------------------------- Capital Operating Leases Leases ---------------------------- Years Ending December 31, 1995 ........................................... $ 422,000 $ 440,000 1996 ........................................... 204,000 475,000 1997 ........................................... 382,000 1998 ........................................... 362,000 1999 ........................................... 377,000 --------------------------- Total minimum lease payments ................. 626,000 $2,036,000 ========== Less amount representing interest .............. 26,000 ---------- Present value of net minimum lease payments .... $ 600,000 ========== Note 13. Contingencies and Litigation: (a) 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. Based on the information available at that time, the Company provided $1,000,000 for estimated clean-up costs. During the fourth quarter of 1992 the Company became aware of additional facts and provided an additional $250,000. On September 14, 1994 the Company received revised cost estimates associated with the environmental clean-up, based upon this information, in the third quarter of 1994, the Company accrued an additional $484,000 to provide for the minimum level of clean-up expense to be required. On July 7, 1994 the Company became aware of an environmental contaminate which was discovered in the ground water of its former defense manufacturing facility. Testing and evaluation of this site remains in its preliminary stages. Based upon the information available, during the second quarter of 1994 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. Therefore, the liability accrued by the Company in the second quarter may require revisions in the future. The estimated environmental liability recognized in the Company's financial statements to date of $2,334,000 represents the minimum of the Company's estimated range in equally likely outcomes; the upper limit of that range is approximately $2,834,000. (b) Executive Life - In April 1991 Executive Life Insurance Company ("Executive Life"), the insurance company that issued annuity policies to the Company's retirees was placed in conservatorship under the laws of California, the state in which Executive Life is domiciled. The Company, since April 1991, has been making up any shortfall which resulted from such conservatorship to those retirees who were not receiving their full retirement payment from Executive Life. 23 In July 1993, Executive Life, based in part on an agreement with the National Organization of Life and Health Guaranty Associations ("NOLHGA"), reimbursed the Company approximately $1,380,000 in respect of amounts paid by the Company to its retirees to make up the shortfall prior to the commencement of shortfall payments under an Interim Agreement in April 1992. The Company expects reimbursement for an additional $213,000 in respect of payments made during this period. This amount is included in other receivables. In September 1993 the Superior Court of the State of California approved a revised plan of rehabilitation (the "Revised Plan") for Executive Life. Although approval of the Revised Plan has been appealed, appellate courts have denied requests to stay the implementation of the Revised Plan. Under the Revised Plan, (i) Aurora National Life Assurance Company ("Aurora") has assumed the obligations of Executive Life under annuity policies for those Company retirees who elect to participate in the Revised Plan, but at a reduced rate, which the Company understands is expected to average approximately 78%; and (ii) NOLHGA, on behalf of participating state life and health insurance guaranty associations, has agreed to pay the balance of the original Executive Life annuity obligation with respect to substantially all of the participating retirees. The Company, in the fourth quarter of 1992, agreed to make up any remaining shortfall ("Remaining Shortfall") with respect to any participating retiree who does not receive his or her full entitlement from Aurora and NOLHGA. In December 1993 the Company entered into an agreement with the Department of Labor in which the Department of Labor acknowledged the termination of its investigation concerning the purchase of the Executive Life annuity. In that agreement, the Company agreed, subject to the approval of the Internal Revenue Service, to amend its retirement plan to include payment of any Remaining Shortfall contemplated under the Revised Plan and further agreed that should Aurora or NOLHGA fail to pay any amount required to be paid by them under the Revised Plan, the Company would cause such payment to be made. The Company provided $709,000 in relation to the liability concerning payment of the Remaining Shortfall under the Revised Plan during the year ended December 31, 1992. This liability is subject to adjustment as the Revised Plan is fully implemented. In November 1994 the Company submitted claims, under the Revised Plan, to Aurora for reimbursement of payments made by the Company to Bulova retirees during the period of March 1, 1993 through September 30, 1993. The Company expects reimbursement for an additional $140,000 for payments made during this period. This amount is included in other receivables. (c) The Company has provided $811,000 in the fourth quarter of 1994 and $750,000 during 1992 to cover the estimated legal and or settlement costs related to various lawsuits, disputes with third parties, investigations and pending actions against the Company. The liability represents the estimate made by the Company for which it believes it is probable that a liability exists or a settlement will be negotiated. 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 financial condition. 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 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 -------------------------------------------------------------------------------- Harry B. Henshel .... 76 Chairman of the Board of the Company. 1958 Herbert C. Hofmann .. 52 President and Chief Executive Officer 1979 of the Company. Mr. Hofmann also serves as Senior Vice President of Loews where, among other things, he is responsible for Loews's Management Information Systems and purchasing operations. Andrew H. Tisch ..... 45 Chairman of the Board and Chief Executive 1979 Officer of Lorillard Tobacco Company. Mr. Tisch is also a director of Loews and Gordon Jewelry Corp. Mr. Tisch served as President and Chief Executive Officer of the Company from October 1979 to August 1989. Laurence A. Tisch ... 72 Co-Chairman of the Board and Co-Chief 1979 Executive Officer of Loews. Mr. Tisch is also a director of CNA Financial Corporation ("CNA")(84% owned subsidiary of Loews), Automatic Data Processing, Inc., Petrie Stores Corporation, Chairman of the Board, President and Chief Executive Officer of CBS Inc. ("CBS"). Preston R. Tisch .... 68 Co-Chairman of the Board and Co-Chief 1988 Executive Officer of Loews. Mr. Tisch is also a director of Loews, CNA, CBS, 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 -------------------------------------------------------------------------------- Thomas P. Hickerson .... Vice President and Controller 53 1983 Herbert C. Hofmann ..... President and Chief Executive 52 1985 Officer Warren J. Neitzel....... General Counsel and Corporate 44 1993 Secretary Paul S. Sayegh ......... Chief Operating Officer 51 1979
25 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 have been engaged actively and continuously in the business of the Company and its subsidiaries for more than the past five years. Prior to his appointment as General Counsel and Corporate Secretary, Mr. Neitzel served as Senior Counsel for the Company's former defense subsidiary since 1980. A report under Section 16 of the Securities Exchange Act of 1934, as amended, was not filed in a timely manner by each of Mr. Hickerson, Mr. Neitzel and Mr. Sayegh in relation to their election as officers of the Company. Item 11. Executive Compensation. The following table sets forth information for the years indicated regarding the compensation of the chief executive officer and each of the other four most highly compensated executive officers of the Company as of December 31, 1994, for services in all capacities to the Company. Summary Compensation Table
Name and Principal Position Year Salary Bonus -------------------------------------------------------------------------------- Herbert C. Hofmann 1994 $ - $ - President and Chief Executive Officer (a) 1993 - - 1992 - - Paul S. Sayegh 1994 212,000 - Chief Operating Officer 1993 200,000 - 1992 185,000 - Thomas P. Hickerson 1994 114,000 - Vice President and Controller 1993 110,700 - 1992 114,596 - James S. Waterwash 1994 199,000 - Vice President 1993 193,325 - 1992 185,000 4,679 Warren J. Neitzel 1994 112,000 - General Counsel and Corporate Secretary 1993 104,108 - 1992 100,799 - ------------- (a) Mr. Hofmann is compensated by Loews. Included in the charges to the Company under a Service Agreement, as discussed in Item 13 below, was $200,000 for Mr. Hofmann's services in 1994. Loews did not charge the Company for Mr. Hofmann's services prior to 1994.
Information with respect to certain non-cash compensation made available to the Company's executive officers in 1994 has not been included because the incremental costs thereof to the Company was below the Securities and Exchange Commission's required disclosure threshold. 26 (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 1994 and a straight life annuity form of pension. Other forms of pension payments are also available under 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 75,000................. 16,875 22,500 28,125 33,750 39,375 100,000................. 22,500 30,000 37,500 45,000 52,500 125,000................. 28,125 37,500 46,875 56,250 65,625 150,000................. 33,750 45,000 56,250 67,500 78,750 175,000................. 39,375 52,500 65,625 78,750 91,875 200,000................. 45,000 60,000 75,000 90,000 105,000 225,000................. 50,625 67,500 84,375 101,250 118,125 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 ---- ----- ------------------ Thomas P. Hickerson 20 $39,585 Herbert C. Hofmann* Warren J. Neitzel 14 48,072 Paul S. Sayegh* *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 4,449,859 shares of the outstanding Common Stock of Registrant as of February 24, 1995 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. 27 (b) Security Ownership of Management. The following table sets forth certain information, as of February 28, 1995, 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:
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 * Thomas P. Hickerson... Herbert C. Hofmann.... 400(2) * Warren J. Neitzel..... Paul S. Sayegh........ Andrew H. Tisch....... 1,000(3) * Laurence A. Tisch..... 9,449,956 16.0% Preston R. Tisch...... 9,449,956 16.0% James S. Waterwash.... All directors and executive officers as a group ............. 100 * 18,901,312 32.1% * 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)Does not include 375 shares of Loews Common Stock owned by Mr. Hofmann's children as to which he disclaims any beneficial interest. (3)In addition, 186 shares of Loews Common Stock are owned by Mr. Tisch's son, as to which Mr. Tisch disclaims any beneficial interest and 30,000 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 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, 1996. The largest amount of indebtedness outstanding under the Credit Agreement during 1994 was $20,000,000. As noted above, the Company used a portion of its proceeds from the disposition of BTI to settle the debt owed to Loews in January 1995. Interest on the notes for the year ended December 31, 1994 amounted to $1,422,000 which was paid during the year. 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 cancelled by the Company or Loews upon thirty days written notice. Pursuant to this agreement, $2,039,000 was 28 payable to Loews for the year ended December 31, 1994. In addition, the Company has recorded an $8,126,000 receivable from Loews related to the audited adjustments of the examination of Loews tax returns for 1984 through 1988. Upon final determination of these audits, the receivable from Loews as adjusted will be collected, together with accrued interest. 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. Pursuant to this agreement, each party reimburses the other in an amount not to exceed the allocated cost of the services provided. The Company and Loews paid $1,200,000 and $122,000, respectively, for services provided during 1994. Although the Company cannot practicably estimate the administrative costs which it would incur on a stand-alone basis, it believes that had the agreement with Loews for administrative services not been in place during 1994, the Company could have incurred costs aggregating between $1,200,000 and $1,500,000. In addition, the Company has reimbursed to Loews approximately $734,000 in salaries and related employee benefits for 1994 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 of its subsidiaries, including the Company. The Company reimbursed to Loews approximately $462,000 for premiums paid with respect to 1994. 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 $348,000 for 1994. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. The 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...................................... 32 Bulova Corporation and Subsidiaries: Schedule II-Valuation and Qualifying Accounts................... 33 29 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) (4) Instruments Defining the Rights of Security Holders, Including Indentures Registrant hereby agrees to furnish to the Commission upon request copies of instruments with respect to certain long-term debt which have not been filed as an exhibit to this report, pursuant to Item 601 (b)(4)(iii) of Regulation S-K. (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) 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, 1994. 30 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, 1995 By 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, 1995 By Herbert C. Hofmann -------------------------------- (Herbert C. Hofmann, President, Chief Executive Officer and Director) Dated: March 27, 1995 By Paul S. Sayegh -------------------------------- (Paul S. Sayegh, Chief Operating Officer and Principal Financial Officer) Dated: March 27, 1995 By Thomas P. Hickerson -------------------------------- (Thomas P. Hickerson, Vice President and Controller, Principal Accounting Officer) Dated: March 27, 1995 By Harry B. Henshel -------------------------------- (Harry B. Henshel, Director) Dated: March 27, 1995 By Andrew H. Tisch -------------------------------- (Andrew H. Tisch, Director) Dated: March 27, 1995 By Laurence A. Tisch ------------------------------- (Laurence A. Tisch, Director) Dated: March 27, 1995 By Preston R. Tisch -------------------------------- (Preston R. Tisch, Director) 31 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, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the index at Item 14(a)2. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedules, 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. As discussed in Notes 7 and 8 to the consolidated financial statements, in 1992 the Company changed its methods of accounting for income taxes and postretirement benefits. Deloitte & Touche LLP New York, New York February 15, 1995 32 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 costs and end of Description of Period expenses Deductions Period ----------- ------------------------------------------------- Year Ended December 31, 1994 Allowance for doubtful accounts ..................... $2,563,000 $1,675,000 $1,216,000(a) $3,022,000 Allowance for cash discounts .. 391,000 902,000 838,000 455,000 ---------------------------------------------- $2,954,000 $2,577,000 $2,054,000 $3,477,000 ============================================== Allowance for loss on investment in unconsolidated subsidiary ................... $ 529,000 $ 529,000 ========== ========== Year Ended December 31, 1993 Allowance for doubtful accounts ..................... $2,709,000 $1,946,000 $2,092,000(a) $2,563,000 Allowance for cash discounts .. 358,000 1,316,000 1,283,000 391,000 ---------------------------------------------- $3,067,000 $3,262,000 $3,375,000 $2,954,000 ============================================== Allowance for loss on investment in unconsolidated subsidiary ................... $ 529,000 $ 529,000 ========== ========== Year Ended December 31, 1992 Allowance for doubtful accounts ..................... $2,312,000 $2,692,000 $2,295,000(a) $2,709,000 Allowance for cash discounts .. 285,000 985,000 912,000 358,000 ---------------------------------------------- $2,597,000 $3,677,000 $3,207,000 $3,067,000 ============================================== Allowance for loss on investment in unconsolidated subsidiary ................... $ 529,000 $ 529,000 ========== ========== ------------- (a) Includes doubtful accounts written off net of recoveries.
33
EX-21 2 Exhibit 21 BULOVA CORPORATION Subsidiaries of the Registrant December 31, 1994
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. 34
EX-27 3 FINANCIAL DATA SCHEDULE FOR DECEMBER 31, 1994 FORM 10-K
5 1,000 12-MOS DEC-31-1994 DEC-31-1994 3,857 0 54,731 3,477 35,750 121,276 20,098 7,348 151,035 20,055 200 22,999 0 0 39,931 151,035 93,724 100,046 59,267 59,267 36,839 2,577 580 783 251 532 302 0 0 834 .18 0