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, 2001

OR

[ ]                                            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)

                                                               OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________       to __________

Commission file number 1-457

BULOVA CORPORATION

(Exact name of registrant as specified in its charter)

New York

11-1719409

(State or other jurisdiction of

(I.R.S. employer

incorporation or organization)

identification no.)

One Bulova Avenue, Woodside, New York 11377-7874

(Address of principal executive offices) (Zip code)

(718) 204-3300

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $5.00 per share

(Title of Class)

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Yes

      X

No

_________

_________

BULOVA CORPORATION

INDEX TO ANNUAL REPORT ON

FORM 10-K FILED WITH THE

SECURITIES AND EXCHANGE COMMISSION

For the Year Ended December 31, 2001

Item

Page

No.   

PART I

 No. 

  1

BUSINESS

3

  2

PROPERTIES

3

  3

LEGAL PROCEEDINGS

4

  4

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

4

PART II

  5

MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED

   STOCKHOLDER MATTERS

4

  6

SELECTED FINANCIAL DATA

4

  7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

   CONDITION AND RESULTS OF OPERATIONS

5

  7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

   RISK

7

  8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

9

  9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

   ACCOUNTING AND FINANCIAL DISCLOSURE

23

PART III

10

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

23

11

EXECUTIVE COMPENSATION

24

12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

   MANAGEMENT

25

13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

26

PART IV

14

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON

   FORM 8-K

26

   Bulova Corporation (together with its subsidiaries referred to herein as "Registrant" or the "Company," unless the context otherwise requires) is a New York corporation. Loews Corporation ("Loews") owns approximately 97% of Registrant's outstanding Common Stock. See Item 12 below of this Form 10-K.

   Registrant is engaged in the distribution and sale of watches, clocks and timepiece parts for consumer use. The principal watch brands are Bulova, Caravelle, Accutron and Wittnauer. In addition the Company sells watches and clocks with brand names from licensed third parties. The principal licensed brand is Harley Davidson. Clocks are primarily sold under the Bulova brand name. The Registrant's product breakdown includes luxury watch lines represented by Accutron and Wittnauer, a mid-ranged priced watch line represented by Bulova, and a lower-priced watch line represented by Caravelle.

   In September 2001, the Company through its subsidiaries, acquired Wittnauer trademarks, related inventory and receivables, including the Wittnauer trademark for timepieces. See Note 3 of the Notes to Consolidated Financial Statements.

   Bulova's principal markets are the United States, Canada and Mexico which accounted for 87%, 9% and 4%, respectively, of sales in 2001. In Europe and the Far East, 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 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

   Registrant buys complete watches and clocks from foreign suppliers for substantially all of its products. Watch movements, cases and other components are also purchased from foreign suppliers. In the United States, most of Registrant's consumer products are sold through major department stores, jewelry store chains, and premium outlets through Registrant's commission sales force and independent sales representatives. In Canada and Mexico, Registrant, through marketing subsidiaries, sells directly to retailers. The customer base is comprised of large retailers, small local chains and local independent jewelry shops. In 2001, 2000 and 1999, one customer represented approximately 16%, 15% and 13%, respectively, of sales. No other customer represented more than 10% of the Company's sales.

   The business is intensely competitive. The principal methods of competition are price, styling, product availability, aftersale service, warranty and product performance. In all six categories, Registrant occupies a favorable position of long standing. There are approximately ten major competitors with well established names and positions in the principal markets in which Registrant competes. At least three of these have sales and assets substantially greater than the Registrant. In addition, there are an indeterminate number of minor competitors.

   It is characteristic of Registrant's business and of the watch industry generally that customer receivables from watch sales are carried for relatively long periods. Registrant grants its retailers seasonal credit terms, depending on the product and date of sale. In certain circumstances, Registrant also extends credit to its retailers on an interest-bearing basis.

   Any backlog of orders is not believed to be significant. The business is seasonal; with the greatest sales coming in the third and fourth quarters in anticipation of the holiday selling season.

   Registrant currently employs approximately 520 persons, approximately 190 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 owns an 80,000 square foot plant in Woodside, New York used for executive and sales offices, watch distribution, service and warehouse purposes and also owns a 91,000 square foot plant in Brooklyn, New York, for clock service and warehouse purposes. In addition, the Company leases an approximately 31,000 square foot plant in Toronto, Canada, for watch and clock sales and service and leases approximately 5,400 square feet of office space in Mexico, Federal District.

 3

Item 3. Legal Proceedings.

  The Company and its subsidiaries are parties to litigation arising in the ordinary course of business. The outcome of this litigation will not, in the opinion of management, materially affect the Company's results of operations, equity or financial position.

Item 4. Submission of Matters to a Vote of Security Holders.

  None.

2001                 

2000                    

High 

Low 

High 

Low   

First Quarter

$16.00 

$13.13  

$21.00 

$17.50  

Second Quarter

17.00 

15.75  

17.50 

15.00  

Third Quarter

30.00 

16.75  

15.00 

13.50  

Fourth Quarter

25.00 

21.00  

13.75 

12.75  

Year Ended December 31

2001

2000

1999

1998

1997

(In thousands, except per share data)

Results of Operations:

  Net sales

$142,819

$149,806

$134,013

$129,157

$123,443

  Net income

10,456

15,436

14,620

10,920

10,016

  Net income per share

2.27

3.36

3.18

2.37

2.18

Financial Position:

  Total assets

194,000

187,785

178,793

164,452

155,550

  Shareholders' equity

131,151

121,532

106,749

91,831

81,943

  Dividends per share

None

None

None

None

None

  Shares of common stock outstanding

4,599

4,599

4,599

4,599

4,599

RESULTS OF OPERATIONS

2001 Compared with 2000

Net sales and income before income taxes decreased $6,987,000 and $9,193,000, or 4.7% and 34.1%, respectively, as compared to 2000. Income before taxes includes $5,495,000 in 2000, relating to the settlement of an arbitration proceeding with Benetton Group SpA ("Benetton").

The decrease in net sales is primarily attributable to the unit volume decrease of the Company's Bulova and Caravelle watch brands of 1.9% and 23.5%, respectively, as well as a decrease in clock unit volume of 11.8%. The unit volume decline for Bulova, Caravelle and clocks resulted in a combined decrease to net sales of $11,447,000 for the year ended December 31, 2001, partially offset by the addition of the Wittnauer watch brand representing $2,649,000 in 2001. The Company believes that the decline in the unit volume reflects the economic downturn and consumer reluctance to make discretionary expenditures.

The Company's overall gross margins are primarily affected by three major factors: sales mix, product pricing strategy and efficient procurement practices. Gross profit as a percentage of net sales was 52.4% for the year ended December 31, 2001, as compared to 51.2% for the prior year. This increase is attributable to a shift from lower gross margin to higher gross margin product.

Selling, general and administrative expenses as a percentage of net sales for 2001 was 42.2%, as compared to 40.1% for the prior year. The primary reason for the increase is the sales decline noted above as well as systems development costs and hardware related to the Company's replatforming of its computer systems.

Royalty income represents payments by licensees in Europe and the Far East. Royalty income, excluding the Benetton settlement recognized in 2000, decreased $124,000 in 2001, as compared to the prior year.

The Company's principal Far East license agreement expired on December 31, 2001 and the Company's principal European license agreement has been extended without a minimum royalty clause, to December 31, 2002. The Company has signed a new distribution agreement for Brazil and has entered into a new license agreement for the territory of Hong Kong, China, Taiwan and Macao. The Company is also in the process of negotiating distribution agreements for the Philippines, Central America, Korea and Singapore and is unable to predict the outcome of these negotiations.

Interest -- net declined by $1,002,000 for 2001 due primarily to lower interest rates.

2000 Compared with 1999

Net sales and income before income taxes increased $15,793,000 and $6,212,000, or 11.8% and 29.9%, respectively, as compared to 1999. Income before income taxes in 2000 includes $5,495,000 relating to the Benetton arbitration proceeding settlement.

The increase in net sales was primarily attributable to the unit volume increase of the Company's Bulova and Accutron watch brands of 23.5% and 19.6%, respectively, partially offset by the decrease in clock unit volume of 6.2%, as compared to 1999. The growth in unit volume resulted in a combined increase to net sales of $16,516,000, as compared to 1999, partially offset by a decrease of $1,512,000 in clock net sales.

Gross profit as a percentage of net sales for the year ended December 31, 2000 was 51.2%, as compared to 50.8% for the year ended December 31, 1999. This increase was a result of the growth of watch sales, favorable sales mix of watches and clocks as compared to the prior year and the Company's product pricing strategy, partially offset by the lower clock sales.

Royalty income represents payments by licensees in Europe and the Far East, as well as proceeds of an arbitration settlement. The increase in royalty income as compared to 1999 is attributable to the settlement of all the arbitration proceedings and litigation with Benetton, as a result of which the Company recognized approximately $5,495,000 of royalty income in April 2000. Royalty income, exclusive of the settlement, decreased approximately $1,030,000 as compared to 1999. This decrease was due to the bankruptcy of the Company's Latin American distributor.

Interest -- net increased $408,000 or 25.8%, as compared to 1999, due primarily to an increase in the effective rate of return on invested assets.

Selling, general and administrative expenses as a percentage of net sales for the year ended December 31, 2000 was 40.1%, as compared to 38.8% for the year ended December 31, 1999. The increase was due to increased spending on brand support and commissions.

Foreign Currency

The Company imports most of its watch and clock products. In 2001, approximately 3% of the Company's purchases were denominated in Japanese yen. The remaining purchases were primarily denominated in U.S. dollars for product acquired from vendors located in Europe, Hong Kong and other Asian countries. The Hong Kong dollar is pegged to the U.S. dollar and has not been subject to the fluctuations that have affected other Asian currencies. In the event that the peg between the two currencies is removed, currency fluctuations could have a material impact on the cost of those imported products which ultimately could have a negative impact on the Company's gross profit, operating income and cash flow. Foreign currency fluctuations have not had a material impact on the results of operations for the years ended December 31, 2001, 2000 and 1999. Future foreign currency fluctuations, however, could impact gross profit, income and cash flow.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

The Company generated net cash from operations of $15,944,000 for the year ended December 31, 2001, as compared to net cash utilized of $15,930,000 for the same period in 2000. The increase in net cash flow is primarily the result of a decrease in inventory purchases and a higher collection of accounts receivables as compared to the prior year, offset by a change in the timing of accounts payable and accrued expenses.

During the third quarter of 2001, the Company purchased the Wittnauer trademarks for timepieces and related inventory and receivables for a purchase price of approximately $11,929,000. The purchase price was funded from the Company's existing working capital balances.

The Company expects that existing cash balances and cash flow from operations will be sufficient to fund anticipated working capital requirements.

Cash and cash equivalents amounted to $18,937,000 at December 31, 2001, as compared to $16,862,000 at December 31, 2000.

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

The Company has exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates. The Company mitigates its exposure to interest rate risk by maintaining investments with short-term maturities. As such, the Company does not believe these financial instruments present a significant exposure to market risk.

ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 applies to the accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of long-lived assets, except for certain obligations of lessees. Adoption of this standard is required for fiscal years beginning after June 15, 2002. Adoption of this standard will not have a material impact on the Company's results of operations, equity or financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 essentially applies one accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. Adoption of this standard is required for fiscal years beginning after December 15, 2001. Adoption of this standard will not have a material impact on the Company's results of operations, equity or financial position.

In 2002, the Company is required to implement the provisions of the FASB's Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer." EITF Issue No. 00-14 addresses the recognition, measurement, and income statement characterization of sales incentives, including rebates, coupons and free products or services, offered voluntarily by a vendor without charge to the customer that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. EITF Issue No. 00-25 addresses whether consideration from a vendor to a reseller of the vendor's products is (i) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (ii) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. Adoption of this standard will not have a material impact on the Company's results of operations, equity or financial position.

FORWARD-LOOKING STATEMENTS

When included in this Report, the words "believes," "expects," "intends," "anticipates," "estimates" and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in financial markets, significant changes in consumer spending patterns, competition in the Company's product areas, changes in foreign currency valuations in relation to the U.S. dollar, changes in foreign, political, social and economic conditions and various other matters, many of which are beyond the Company's control. These forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in t he Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

See Management's Discussion and Analysis of Financial Condition and Results of Operations for information regarding Quantitative and Qualitative Disclosures about Market Risk.

 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 (the "Corporation") as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the index at Item 14(a) 2. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Deloitte & Touche LLP

New York, New York

February 14, 2002

CONSOLIDATED BALANCE SHEETS

Assets:

December 31

2001   

2000 

(Amounts in thousands of dollars)

Current assets:

  Cash and cash equivalents (Note 1)

$            18,937

$             16,862

  Receivables, less allowance for doubtful accounts and cash discounts of

     $4,635 and $5,017 (Note 1)

77,008

70,686

  Inventories (Note 1)

48,914

56,072

  Prepaid expenses (Note 5)

2,607

2,969

  Prepaid federal income tax (Notes 1 and 4)

630

  Deferred income taxes (Notes 1 and 4)

11,809

10,712

Total current assets

159,275

157,931

Property, plant and equipment, at cost (Note 1):

  Land, buildings and improvements

19,782

19,127

  Machinery and equipment

3,973

3,108

  Furniture, fixtures and leasehold improvements

4,945

4,501

28,700

26,736

  Less accumulated depreciation and amortization

12,055

11,111

Property, plant and equipment-net

16,645

15,625

Other assets:

  Deferred income taxes (Notes 1 and 4)

12,904

14,057

  Trademarks (Note 3)

4,983

  Other assets

193

172

Total other assets

18,080

14,229

Total assets

$          194,000

$           187,785

=========================================================================================

CONSOLIDATED BALANCE SHEETS

Liabilities and Shareholders' Equity:

December 31

2001   

                  2000

(Amounts in thousands of dollars)

Current liabilities:

  Accounts payable

$              8,391 

$           8,158 

  Accrued expenses:

     Salaries, wages and commissions

2,903 

3,339 

     Pension (Note 5)

33 

     Postretirement benefits (Note 5)

1,064 

1,031 

     Advertising and promotions (Note 1)

3,788 

5,131 

     Warranty (Note 1)

998 

1,019 

     Federal income taxes (Notes 1 and 4)

1,140 

     Other

11,504 

12,462 

Total current liabilities

29,788 

31,173 

Other liabilities and credits:

  Postretirement benefits payable (Note 5)

31,041 

33,716 

  Pension benefits payable (Note 5)

2,020 

1,364 

Total other liabilities and credits

33,061 

35,080 

Commitments and contingent liabilities (Notes 2, 4, 5 and 8)

Shareholders' equity (Note 1):

  Common stock, $5 par value:

     Authorized: 7,500,000 shares

     Issued: 4,600,000 shares

22,999 

22,999 

  Additional paid-in capital

23,197 

23,197 

  Retained earnings

89,226 

78,770 

  Accumulated other comprehensive loss

(4,266)

(3,429)

131,156 

121,537 

  Less 1,000 shares of common stock held in treasury, at cost

5 

5 

Total shareholders' equity

131,151 

121,532 

Total liabilities and shareholders' equity

$          194,000 

$          187,785 

=========================================================================================

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31 

2001 

2000 

1999 

(Amounts in thousands, except per share data)

Net sales

$           142,819 

$           149,806 

$          134,013 

Cost of sales

68,024 

73,060 

65,930 

Gross profit

74,795 

76,746 

68,083 

Selling, general and administrative expenses

60,265 

60,071 

51,939 

Operating income

14,530 

16,675 

16,144 

Royalty income (Note 8)

2,420 

8,039 

3,574 

Interest -- net

990 

1,992 

1,584 

Other income (expense)

(153)

274 

(534)

Income before income taxes

17,787 

26,980 

20,768 

Income taxes (Notes 1 and 4)

7,331 

11,544 

6,148 

Net income

$             10,456 

$             15,436 

$            14,620 

=========================================================================================

Net income per share (Note 1)

$                 2.27 

$                 3.36 

$                3.18 

=========================================================================================

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Accumulated

Additional

Other

Comprehensive

Common

Paid-in

Retained

Comprehensive

Treasury

Income

Stock

Capital

Earnings

(Loss) Income

Stock

(Amounts in thousands)

Balance, January 1, 1999

$      22,999 

$      23,197 

$       48,714

$             (3,074)

$               (5)

Comprehensive income:

    Net income

$             14,620 

14,620

______________

    Other comprehensive

       income, net of taxes:

        Exchange rate changes

          during the year (net of

          income tax benefit of $95)

(176)

(176)

        Pension liability adjustment,

          net (Note 5)

474 

474 

______________

    Other comprehensive income

298 

______________

Comprehensive income

$             14,918 

=============

Balance, December 31, 1999

22,999

23,197

63,334

(2,776)

(5)

Comprehensive income:

    Net income

$            15,436 

15,436

______________

    Other comprehensive

      loss, net of tax benefit:

       Exchange rate changes

          during the year (net of

          income tax benefit of $293)

(544)

(544)

       Pension liability adjustment,

          net (Note 5)

(109)

(109)

______________

    Other comprehensive loss

(653)

______________

Comprehensive income

$             14,783 

=============

Balance, December 31, 2000

22,999

23,197

78,770

(3,429)

(5)

Comprehensive income:

    Net income

$             10,456 

10,456

______________

    Other comprehensive

      loss, net of tax benefit:

       Exchange rate changes

          during the year (net of

          income tax benefit of $226)

(419)

(419)

       Pension liability adjustment,

          net (Note 5)

(418)

(418)

______________

    Other comprehensive loss

(837)

______________

Comprehensive income

$ 9,619

=============

Balance, December 31, 2001

$       22,999

$       23,197

$       89,226

$             (4,266)

$               (5)

=============================================================

Year Ended December 31

2001  

2000  

1999 

(Amounts in thousands)

Operating Activities:

Net income

$             10,456

$             15,436

$            14,620

Adjustments to reconcile net income to net cash

   provided by (used in) operating activities:

     Amortization of investments

8 

(521)

     Depreciation and amortization

920 

855 

741 

     Gain on disposition of assets

(3)

     Provision for losses and cash discounts on accounts

        receivable

1,095 

2,804 

2,597 

     Deferred income taxes

56 

3,501 

(2,634)

Changes in operating assets and liabilities-net:

     Receivables

(3,977)

(10,119)

(9,755)

     Inventories

10,383 

(19,285)

2,150 

     Prepaid expenses

643 

(2,056)

589 

     Other assets

(21)

3 

41 

     Accounts payable and accrued expenses

(2,525)

3,206 

2,859 

     Accrued federal and foreign income taxes

1,770 

(1,681)

2,108 

     Other-net

(2,856)

(8,599)

(4,189)

15,944 

(15,930)

8,606 

Investing Activities:

Acquisition of Wittnauer brand

(11,929)

Purchases of short-term investments

(9,444)

(24,579)

Proceeds from sales of short-term investments

21,500 

33,000 

Purchases of property, plant and equipment

(1,944)

(1,296)

(720)

Proceeds from disposal of property, plant and equipment

4 

5 

(13,869)

10,765 

7,701 

Net change in cash and cash equivalents

2,075 

(5,165)

16,307 

Cash and cash equivalents, beginning of year

16,862 

22,027 

5,720 

Cash and cash equivalents, end of year

$            18,937 

$           16,862 

$           22,027 

=========================================================================================

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 1. Summary of Significant Accounting Policies -

(a) Business -- The Company is engaged in the distribution and sale of watches and clocks for consumer use. The principal watch brands are Bulova, Caravelle, Accutron and Wittnauer. Clocks are principally sold under the Bulova brand name. Bulova's principal markets are the United States and Canada. Royalties are received from licensees principally in Europe and the Far East. Loews Corporation ("Loews") owns approximately 97% of the Company's outstanding voting stock.

(b) Principles of Consolidation -- The consolidated financial statements include all subsidiaries, which are 100% owned, and all material intercompany accounts and transactions have been eliminated.

(c) Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(d) Cash and Cash Equivalents -- The Company classifies as cash equivalents all highly liquid investments with original maturities of three months or less. At December 31, 2001 and 2000, cash equivalents were comprised of investments in money-market accounts.

(e) Accounts Receivable and Concentration of Credit Risk -- Watches and clocks are sold to retail outlets throughout the United States, Canada and Mexico. The Company grants its retailers seasonal credit terms. For the years ended December 31, 2001 and 2000 accounts receivable were substantially comprised of balances due from retailers. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. One U.S. based customer accounted for approximately 16%, 15% and 13% of sales for the years ended December 31, 2001, 2000 and 1999, respectively. Although the Company's exposure to credit risk associated with non-payment by this customer is affected by conditions or occurrences within the retail industry, trade receivables from this customer were collected within terms; no other customer represented more than 10% of the Company's sales. The carrying amount of receivables approximates fair value.

(f) Inventories -- Substantially all inventory, consisting primarily of finished watches and clocks is valued at the lower of cost or market. Cost is determined on a first-in, first-out basis.

(g) 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.

(h) Income Taxes -- The Company is included in Loews consolidated federal tax return. Under the tax allocation agreement between the Company and Loews, the Company is required to provide a current tax provision calculated on a stand-alone basis. The Company provides for deferred income taxes under the liability method, whereby deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. 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.

(i) Advertising Costs -- Advertising costs for point of sale and media advertising as well as co-op advertising and promotional allowances are expensed as incurred.

(j) Warranty Costs -- The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year.

(k) Reclassifications -- Certain amounts applicable to prior periods have been reclassified to conform to the 2001 presentation.

14

(l) Earnings Per Share and Shareholders' Equity -- Earnings per share has been computed on the basis of the weighted average number of shares outstanding during the periods (4,599,000 for each of the three years ended December 31, 2001). There are no potentially dilutive securities outstanding.

In addition to its common stock, the Company has authorized 500,000 shares of preferred stock with no par value.

(m) Foreign Currency Adjustment -- The effect of changes in exchange rates in translating foreign currency financial statements is accumulated as a separate component of other comprehensive income in the statement of shareholders' equity.

(n) Forward Exchange Contracts -- In connection with purchases of inventory, from time to time, the Company enters into forward exchange contracts in order to hedge its exposure to fluctuations in foreign currency exchange rates. These agreements generally involve the exchange of one currency for a second currency at some future date. Counterparties to these agreements are major international financial institutions. During the years ended December 31, 2001 and 2000, no foreign exchange contracts were entered into.

(o) Impairment of Long-Lived Assets -- The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and certain intangibles, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of by the Company are recorded at the lower of carrying amount or fair value less cost to sell.

(p) Accounting Pronouncements -- In 2002, the Company is required to implement the provisions of the FASB's Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer." EITF Issue No. 00-14 addresses the recognition, measurement, and income statement characterization of sales incentives, including rebates, coupons and free products or services, offered voluntarily by a vendor without charge to the customer that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. EITF Issue No. 00-25 addresses whether consideration from a vendor to a reseller of the vendor's products is (i) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (ii) a cost incurred by the vendor for assets or ser vices received from the reseller and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. Adoption of this standard will not have a material impact on the Company's results of operations, equity or financial position.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires companies to use the purchase method of accounting for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method of accounting. The Company has adopted this standard for the acquisition of the Wittnauer brand.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. The Company has adopted this standard for the acquisition of the Wittnauer brand.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 applies to the accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of long-lived assets, except for certain obligations of lessees. Adoption of this standard is required for fiscal years beginning after June 15, 2002 and will not have a material impact on the Company's results of operations, equity or financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 essentially applies one accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. Adoption of this standard is required for fiscal years beginning after December 15, 2001 and will not have a material impact on the Company's results of operations, equity or financial position.

Note 2. Related Parties -

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, tax return preparation, insurance and cash management services. In addition, the Company provides Loews with warehousing services. Pursuant to this agreement, each party reimburses the other in an amount not to exceed the allocated costs of the services provided. The Company paid Loews $3,000, $3,009 and $2,659 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the Company has reimbursed to Loews approximately $538, $540 and $518 in salaries and related employee benefits for the years ended December 31, 2001, 2000, and 1999, respectively, for employees of Loews on loan to the Company.

In 2000, the Company started a business process re-engineering project to update its operational and financial data processing systems including new hardware and software and the relocation of its data processing activities from the Loews mainframe environment to a stand-alone client server network. Certain costs were paid by Loews and the Company paid its direct costs and costs allocated to it. Reflected in the financial statements are those costs incurred and paid directly by the Company and those costs allocated to it by Loews. Total direct and allocated costs paid by the Company during the years ended December 31, 2001 and 2000 were approximately $1,600 and $900, respectively. Of these costs, approximately $990 were capitalized.

The Company participates in blanket insurance policies, primarily relating to property and casualty and general liability insurance, which cover properties and facilities of Loews and certain of its subsidiaries, including the Company. The Company reimbursed to Loews approximately $254, $222 and $242, for premiums paid during the years ended December 31, 2001, 2000 and 1999, respectively.

Certain of the Company's employee health and life insurance benefits are provided by an insurance subsidiary of CNA Financial Corporation, an 89% owned subsidiary of Loews. Premiums and fees for such insurance amounted to approximately $165, $153 and $198 during the years ended December 31, 2001, 2000 and 1999, respectively.

Note 3. Acquisition of Wittnauer Brand -

On September 5, 2001, the Company through its subsidiaries, acquired the Wittnauer trademarks, related inventory and receivables, including the Wittnauer trademark for timepieces, for a purchase price, including related payments, aggregating approximately $11,929. The acquisition of the Wittnauer brand has been accounted for under the purchase method in accordance with SFAS No. 141, "Business Combinations." Net sales in 2001 of the Wittnauer brand were not material in relation to the Consolidated Statements of Income of the Company. Pro forma data had the acquisition occurred on January 1, 2001 or January 1, 2000 was not available. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," no amortization has been recorded, since the life of the trademarks is believed to be indefinite. For tax purposes, the trademarks will be amortized over 15 years. The purchase price was funded from the Company's existing working capital balances. The following table summarizes the estimated fair values of the assets acquired at the date of acquisition.

Current assets:

  Accounts receivable

$           3,440 

  Inventories

3,225 

  Prepaid expenses

281 

     Total current assets

6,946 

Trademarks

4,983 

     Total assets acquired

$         11,929 

=========================================================================================

Note 4. Income Taxes -

As previously noted, the Company and Loews have a tax allocation agreement with respect to the filing by Loews of consolidated federal income tax returns, which include the Company and its subsidiaries. Under the agreement, the Company will (i) be paid by Loews the amount, if any, by which Loews's consolidated federal income tax is reduced by virtue of the inclusion of the Company and its subsidiaries in the return, or (ii) pay to Loews an amount, if any, equal to federal income tax which would have been payable by the Company if the Company and its subsidiaries had filed a separate consolidated return. Under this agreement, the Company was required to pay Loews approximately $4,318, $5,034 and $6,278 for the years ended December 31, 2001, 2000 and 1999, respectively. This agreement may be cancelled by the Company or Loews upon thirty days written notice. No valuation allowance is deemed necessary in these financial statements as in the opinion of management, it is more likely than not that such deferred tax assets will be realized.

Income before income taxes and income tax expense (benefit) consisted of the following:

Year Ended December 31

2001    

2000    

1999 

Income before income taxes:

  Domestic

$            15,056

$            24,379

$           19,082 

  Foreign

2,731

2,601

1,686 

Total

$            17,787

$            26,980

$           20,768 

=========================================================================================

Year Ended December 31

2001    

2000    

1999 

Income tax expense (benefit):

  Federal:

    Current

$              4,318 

$               5,034 

$             6,278 

    Deferred

277 

2,553 

2,926 

  State and local:

    Current

1,545 

1,920 

1,898 

    Deferred

61 

964 

(5,670)

  Foreign:

    Current

1,073 

1,440 

956 

    Deferred

57 

(367)

(240)

Income tax expense

$              7,331 

$             11,544 

$             6,148 

=========================================================================================

Deferred tax assets (liabilities) are as follows:

December 31

2001    

2000 

Employee benefits

$             13,871 

$           15,524 

Inventory

8,611 

5,394 

Accrued expenses

374 

1,940 

Accounts receivable

1,857 

1,911 

Deferred tax assets -- net

$             24,713 

$           24,769 

=========================================================================================

Income taxes differ from that computed at the U.S. statutory rate for the following reasons:

Year Ended December 31

2001

2000 

1999 

Income taxes computed at statutory rate

35.0%

35.0%

35.0% 

Increase (decrease) in taxes resulting from:

  State and local taxes

5.5

6.9

7.0 

  Foreign taxes

1.0

.9

.6 

  Valuation allowance and settlement of prior year tax

(13.0

 )

Other

(.3

)

Effective income tax rate

41.2%

42.8%

29.6%  

========================================================================================

Federal, foreign, state and local income tax payments amounted to approximately $4,337, $8,599 and $4,225 for the years ended December 31, 2001, 2000 and 1999, respectively.

Federal income tax returns of Loews have been examined through 1997 and settled through 1994. The years 1998 through 2000 are currently under examination. The Company's Canadian tax returns have been examined and settled through 1996 and the years 1997 through 2000 are currently under examination. While tax liabilities for subsequent years are subject to audit and final determination, in the opinion of management the amount accrued in the consolidated balance sheet is believed to be adequate to cover any additional assessments which may be made by federal, foreign, state and local tax authorities and should not have a material effect on the financial condition or results of operations of the Company.

Note 5. Benefit Plans -

Pension Plans - The Company maintains non-contributory pension plans for all of its employees in the United States. Separate retirement plans are maintained by the Company's Canadian subsidiary, which are not material. 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.

At December 31, 2001, 2000 and 1999, the Company's minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $2,020, $1,364 and $1,226, respectively. This excess is recorded as a reduction to shareholders' equity of $1,170, $752 and $643, net of tax benefits of $630, $405 and $346 and intangible assets of $220, $207 and $236 for the years ended December 31, 2001, 2000 and 1999, respectively.

Other Postretirement Benefit Plans - The Company maintains postretirement health care plans covering eligible employees and retirees. Union participants generally become eligible upon retirement at age 55 and 10 years of service or upon completion of 20 years of service. Another plan covers salaried employees who are eligible upon retirement at age 55 and 20 years of service or upon retirement at age 60 and 10 years of service. The benefits provided by the Company are basically health, and for certain retirees, life insurance type benefits.

Pension Benefits

Other Postretirement Benefits

Year Ended December 31

2001 

2000  

1999  

2001 

2000 

1999 

Service costs

$          797 

$         669  

$           808 

$            77

$         118 

$           99 

Interest cost

2,177 

2,154  

2,024 

932 

944 

625 

Expected return on plan assets

(1,983)

(1,814) 

(1,577)

Amortization of unrecognized

   net asset

(478) 

(478)

Amortization of unrecognized

   net loss (gain)

58  

231 

(1,012)

(1,440)

(1,551)

Amortization of unrecognized

   prior service cost

29 

29  

29 

(1,575)

(1,231)

(1,230)

Net periodic benefit costs (income)

$       1,020 

$         618  

$         1,037

$     (1,578)

$     (1,609)

$     (2,057)

=========================================================================================

Changes in benefit obligations are as follows:

Other

Pension Benefits

Postretirement Benefits

2001 

2000 

2001   

2000 

Benefit obligation at January 1

$         30,407 

$        27,811 

$         13,026 

$        12,294 

Service cost

797 

669 

77 

118 

Interest cost

2,177 

2,154 

932 

944 

Plan participants' contributions

334 

268 

Amendments

42 

(338)

(2,592)

Actuarial loss

1,325 

1,557 

1,626 

3,294 

Benefits paid

(1,853)

(1,784)

(1,398)

(1,300)

Benefit obligation at December 31

32,895 

30,407 

14,259 

13,026 

Change in plan assets:

Fair value of plan assets at January 1

26,868 

22,640 

Actual return on plan assets

2,292 

3,450 

Company contributions

2,771 

2,562 

1,064 

1,032 

Plan participants' contributions

334 

268 

Benefits paid

(1,853)

(1,784)

(1,398)

(1,300)

Fair value of plan assets at December 31

30,078 

26,868 

Benefit obligation over plan assets

2,817 

3,539 

14,259 

13,026 

Unrecognized net actuarial (loss) gain

(4,315)

(3,299)

8,603 

11,240 

Unrecognized prior service (cost) gain

(220)

(207)

9,243 

10,481 

Net benefit obligation

$          (1,718)

$              33 

$         32,105 

$        34,747 

=========================================================================================

Amounts recognized in the balance sheet consist of:

Other

Pension Benefits

Postretirement Benefits

December 31

2001 

2000  

2001 

2000  

Accrued benefit liability

$              302 

$             1,397 

$          32,105

$         34,747  

Intangible asset

(220)

(207)

Accumulated other comprehensive loss

(1,800)

(1,157)

Net benefit obligation (prepaid)

$          (1,718)

$                33 

$          32,105

$         34,747  

========================================================================================

Weighted-average assumptions are as follows:

Pension Benefits

Other Postretirement Benefits

Year Ended December 31

2001    

2000   

1999   

2001    

2000    

1999    

Discount rate

7.25   

7.50% 

8.00%

7.25   

7.50%

8.00% 

Expected return on plan assets

7.50   

8.00% 

6.75%

Rate of compensation increase

5.25   

5.50% 

5.50%

Note 6. Quarterly Financial Data (Unaudited) -

2001 Quarters Ended

Dec. 31

Sept. 30

June 30

March 31

Net sales

45,375

34,658

30,746

32,040

Cost of sales

22,470

16,048

14,927

14,579

Net income

4,516

1,575

1,926

2,439

Net income per share

.98

.34

.42

.53

2000 Quarters Ended

Dec. 31

Sept. 30

June 30

March 31

Net sales

$44,212

$40,779

$29,538

$35,277

Cost of sales

20,989

19,469

14,658

17,944

Net income

3,921

3,772

4,988

2,755

Net income per share

.86

.82

1.08

.60

Note 7. Geographic Information -

The Company operates predominantly in a single industry segment, that being the distribution and sale of watches and clocks under the brand names of Bulova, Caravelle, Accutron and Wittnauer. Substantially all of the Company's sales are in the United States, Canada and Mexico. The Company commenced operations in Mexico in November 2000. The Company evaluates performance based on operating earnings of the respective geographic area and the geographic distributions of the Company's identifiable assets and operating results are summarized in the following tables: