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.
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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
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.
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.
Item 6. Selected Financial Data.
Item 7.
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%.
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.
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.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Bulova Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
Bulova Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED OPERATIONS
See Notes to Consolidated Financial Statements.
Bulova Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
See Notes to Consolidated Financial Statements.
Bulova Corporation and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
See Notes to Consolidated Financial Statements.
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.
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:
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:
Note 6. Inventories:
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:
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.
Deferred tax assets are as follows:
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:
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:
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.
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:
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.
Note 9. Foreign Operations:
Foreign currency items included in the Consolidated Financial Statements are as follows:
Note 10. Quarterly Financial Data (Unaudited):
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.
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.
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.
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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors.
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.
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.
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
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.
(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.
Item 12.
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.
(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:
Item 13.
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
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.
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.