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, 2002

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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

      X

No

_________

_________

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

   Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes

No

         X

_________

_________

   The aggregate market value of voting and non-voting common equity held by non-affiliates as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $3,499,950.

BULOVA CORPORATION

INDEX TO ANNUAL REPORT ON

FORM 10-K FILED WITH THE

SECURITIES AND EXCHANGE COMMISSION

For the Year Ended December 31, 2002

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

8

  8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

10

  9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

   ACCOUNTING AND FINANCIAL DISCLOSURE

26

PART III

10

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

26

11

EXECUTIVE COMPENSATION

27

12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

   MANAGEMENT

28

13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

29

14

CONTROLS AND PROCEDURES

29

PART IV

15

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON

   FORM 8-K

30

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

   The Company is engaged in the distribution and sale of watches, clocks and timepiece parts for consumer use. The principal watch brands are Bulova, Caravelle, Wittnauer and Accutron. In addition, the Company sells watches and clocks with brand names licensed from third parties. The principal licensed brand is Harley Davidson. Clocks are primarily sold under the Bulova brand name. The Company's product breakdown includes luxury watch lines represented by Wittnauer and Accutron, a mid-priced watch line represented by Bulova, and a lower-priced watch line represented by Caravelle. The Company entered the grandfather clock market in the United States and Canada with the purchase in July of 2002 of select assets of a manufacturer and distributor of high quality grandfather clocks.

   Bulova's principal markets are the United States, Canada and Mexico which accounted for 89%, 9% and 2%, respectively, of sales in 2002. Prior to January 1, 2003, the Company's products were also sold overseas by third parties through license agreements with the Company under which the Company received royalty payments. The Company's principal Far East license agreement expired at the end of 2001 and its principal European license agreement expired at the end of 2002. In anticipation of the expiration of the European license agreement, the Company established a Swiss subsidiary, Bulova Swiss SA, in the third quarter of 2002 to distribute product throughout Europe. Bulova Swiss SA began selling Bulova products in Italy, Greece and the Netherlands during the first quarter of 2003. In addition, the Company has signed new distribution agreements for Brazil, Central America and the Philippines, and has entered into license agreements for the territories of Hong Kon g, China, Taiwan and Macao. In addition, Bulova Swiss SA signed a new distribution agreement for Poland. For additional information concerning the Company's sales in foreign markets, see Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.

   The Company 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 the Company's consumer products are sold through major department stores, jewelry store chains, and premium outlets through the Company's commission sales force and independent sales representatives. In Canada and Mexico, the Company, through marketing subsidiaries, sells directly to retailers. The customer base is comprised of large retailers, small local chains and local independent jewelry shops. In 2002, 2001 and 2000, one customer represented approximately 13%, 16% and 15%, respectively, of sales. No other customer represented more than 10% of the Company's sales.

   The watch and clock business is intensely competitive. The principal methods of competition are price, styling, product availability, aftersale service, warranty and product performance. The Company believes that there are approximately ten major competitors with well established names and positions in the principal markets in which the Company competes and that certain of these have sales and assets substantially greater than the Company. In addition, there are an indeterminate number of smaller competitors.

   It is characteristic of the Company's business and of the watch industry generally that customer receivables from watch sales are carried for relatively long periods. The Company grants its retailers seasonal credit terms, depending on the product and date of sale. In certain circumstances, the Company 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.

   The Company currently employs approximately 560 persons, approximately 190 of whom are union members, and has experienced satisfactory labor relations.

Item 2. Properties.

   The Company owns an 80,000 square-foot facility in Woodside, New York which it uses for executive and sales offices, watch distribution, service and warehouse purposes and also owns a 91,000 square foot facility in Brooklyn, New York, which it uses for clock service and warehouse purposes. The Company also owns 6,100 square feet of office space in Hong Kong which it uses for quality control and sourcing purposes. The Company leases an approximately 31,000 square-foot facility in Toronto, Canada, which it uses for watch and clock sales

and service; an approximately 27,000 square-foot office and manufacturing facility in Ontario, Canada which it uses for its grandfather clock operations; approximately 5,400 square feet of office space in Mexico, Federal District, and approximately 6,000 square feet of office space in Fribourg, Switzerland.

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.

2002             

2001              

________________________________________________

High

Low

High

Low

________________________________________________________________________________________

First Quarter

$24.10

$24.00

$16.00

$13.13

Second Quarter

25.00

24.10

17.00

15.75

Third Quarter

26.00

25.00

30.00

16.75

Fourth Quarter

25.50

25.00

25.00

21.00

Dividend Information

   The Company paid no dividends for the years ended December 31, 2002 and 2001.

Approximate Number of Equity Security Holders

Year Ended December 31

2002

2001

2000

1999 

1998

________________________________________________________________________________________

(In thousands, except per share data)

Results of Operations:

  Net sales

$164,538 

$143,813

$150,771

$134,937 

$130,099

  Net income

12,268 

10,456

15,436

14,620 

10,920

  Net income per share

2.67 

2.27

3.36

3.18 

2.37

Financial Position:

  Total assets

210,907 

194,000

187,785

178,793 

164,452

  Shareholders' equity

143,428 

131,151

121,532

106,749 

91,831

  Dividends per share

None 

None

None

None 

None

  Shares of common stock outstanding

4,599 

4,599

4,599

4,599 

4,599

CRITICAL ACCOUNTING ESTIMATES

   The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America, applied on a consistent basis. The Company continually evaluates the accounting policies and estimates used to prepare the consolidated financial statements. In general, management's estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that are believed to be reasonable under the known facts and circumstances.

   The accounting policies discussed below are considered by management to be critical to an understanding of the Company's financial statements as their application places the most significant demands on management's judgment. Due to the inherent uncertainties involved with this type of judgment, actual results could differ significantly from estimates and have a material adverse impact on the Company's results of operations, equity or financial position.

Allowance for Doubtful Accounts

   Sales are recognized upon shipment of products to customers since title passes upon shipment. Allowances for estimated uncollectible accounts, discounts, returns and allowances are provided when sales are recorded based upon historical experience and current trends. Management makes judgments, assumptions and estimates regarding the level of the allowance for doubtful accounts.

Inventory Reserve

   The Company has established a reserve for the valuation of inventory. The cost of inventory is determined on a first-in, first out basis. In determining the value of inventory, management considers sales history of the individual product, current consumer purchasing trends, secondary distribution channels as well as overall sales activity. Management makes judgments, assumptions and estimates regarding the level of the inventory reserve.

Warranty Reserve

   The Company maintains a reserve for costs that it estimates will be needed to cover future product warranty obligations for products sold during the year. This estimate is based upon the Company's historical experience as well as current production techniques. Management of the Company makes judgments, assumptions and estimates regarding the level of the warranty reserve.

Reserve for Environmental Matters

   The Company has established a reserve for the expected costs of remediation relating to environmental contaminates at various manufacturing facilities formerly owned by the Company. These estimates are periodically reviewed and adjusted to reflect the current remediation progress, estimates of required activity and other relevant factors including technological or regulatory changes.

Pension and Other Postretirement Benefits

   The Company's pension and other postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by the Company to our actuaries, including the discount rate and expected long-term rate of return on plan assets. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. The expected long-term rate of return on pension plan assets is selected by taking into account historical trends, the expected duration of the projected benefit obligation for the plans, the asset mix of the plans, and known economic and market conditions at the time of valuation. Material changes in the Company's pension and postretirement benefit costs may occur in the future due to changes in these assumptions. For the years ended December 31, 2002, 2001 and 2000, the Company recorded an additional minimum pension liability, adjusted for taxes, of $242,000, $4 18,000 and $109,000, respectively, as a reduction to shareholders' equity. See Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this 10-K.

RESULTS OF OPERATIONS

2002 Compared with 2001

   Net sales and income before taxes increased $20,725,000 and $3,821,000, or 14.4% and 21.5%, respectively, as compared to 2001.
  

   The increase in net sales in 2002 is primarily attributable to a full year of Wittnauer watch brand sales, which was acquired during the third quarter of 2001. In addition, net sales were positively impacted by sales of the Harley Davidson licensed product associated with the license agreement signed in May 2001 and initial line distributions in 2002, and an increase in clock unit volume sales of 21.5%, as compared to the prior year. These increases were partially offset by an 11.1% unit volume decrease of the Company's Bulova brand for the year ended December 31, 2002, as compared to the prior year. 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 procurement practices. Gross profit as a percentage of net sales was 52.7% for the year ended December 31, 2002, as compared to 51.7% for the prior year. This increase is attributable to the addition of sales of higher margin products under the Wittnauer watch brand, which was acquired in September 2001.

   Selling, general and administrative expenses as a percentage of net sales for 2002 were 40.9%, as compared to 41.6% for the prior year. This decrease was due to the absence of system development costs and hardware related to the Company's re-platforming of its computer systems in 2001, partially offset by the Company recognizing a $1,194,000 charge relating to environmental remediation costs in 2002.

   Royalty income in 2002 decreased by $743,000, as compared to the prior year. Royalty income represents final minimum royalty payments received under the Company's principal Europe and Far East licenses agreements, each of which has expired. The Company's principal Far East license agreement expired on December 31, 2001, and its principal European license agreement expired on December 31, 2002. In anticipation of the expiration of the European license agreement, the Company established a Swiss subsidiary, Bulova Swiss SA, in the third quarter of 2002 to distribute products throughout Europe. Bulova Swiss SA began selling Bulova products in Italy, Greece and the Netherlands during the first quarter of 2003. In addition, the Company has signed new distribution agreements for Brazil, Central America and the Philippines, and has entered into license agreements for the territories of Hong Kong, China, Taiwan and Macao. In addition, Bulova Swiss SA signed a new distribution agreement for Poland.

   Interest -- net declined by $708,000 from $990,000 in 2001 to $282,000 in 2002 due primarily to a lower level of invested assets, as well as lower interest rates.

2001 Compared with 2000

   Net sales and income before income taxes decreased $6,958,000 and $9,193,000, or 4.6% 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 an increase of $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.

   Gross profit as a percentage of net sales was 51.7% for the year ended December 31, 2001, as compared to 50.7% for the prior year. This increase is attributable to a shift from lower gross margin to higher gross margin products.

   Selling, general and administrative expenses as a percentage of net sales for 2001 were 41.6%, as compared to 39.7% for the prior year. The primary reason for the increase is the sales decline noted above as well as systems development costs, including consulting and training costs, related to the Company's re-platforming 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.
        

   Interest -- net declined by $1,002,000 from $1,992,000 in 2000 to $990,000 in 2001 due primarily to lower interest rates.

Contingencies

   During the third quarter of 2002, the Company received notice of potential additional environmental contaminates at two facilities formerly owned by the Company, and settled a claim relating to contaminates at an offsite disposal location formerly used by the Company. The Company recorded a charge of $1,194,000, related to the foregoing matters for the year ended December 31, 2002. At December 31, 2002, the environmental liability is approximately $675,000, which represents the Company's estimate of its remaining costs for these properties.
        

Foreign Currency

   The Company imports most of its watch and clock products. In 2002, approximately 2% 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 affects 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, 2002, 2001 and 2000. Future foreign currency fluctuations, however, could impact gross profit, income and cash flow.

LIQUIDITY AND CAPITAL RESOURCES

Payments Due by Period

________________________________________________________

Less than

More than

December 31, 2002

Total

1 Year

1-3 Years

4-5 Years

5 Years

______________________________________________________________________________________

(In thousands)

Operating leases

$    3, 474    

$     390     

$       734    

$      757     

$   1,593     

=======    

    ======

=======    

======     

======     

Cash Flow

   The Company utilized net cash in operations of $7,583,000 for the year ended December 31, 2002, as compared to net cash provided of $15,944,000 for the same period in 2001. The decrease of $23,527,000 in net cash flow is primarily the result of the increase in inventory purchases directly related to the introduction of the Wittnauer product line and Harley Davidson license products and an increase in accounts receivable due to higher sales volume. These decreases were partially offset by a change in timing of accounts payable and accrued expenses.

   The Company and Loews, which owns approximately 97% of the Company's common stock, have a credit agreement (the "Credit Agreement") which provides, under terms and conditions set forth therein, for unsecured loans to be made by Loews from time to time, in principal amounts aggregating up to $50,000,000. The Company has not utilized the Credit Agreement since 1995 and there are no amounts currently outstanding. The Company may require working capital advances under this agreement to finance line extensions for Wittnauer and the Harley Davidson licensed product as well as international expansion efforts and operating needs.

   Cash and cash equivalents, and short-term investments amounted to $10,159,000 at December 31, 2002, as compared to $18,937,000 at December 31, 2001.

ACCOUNTING STANDARDS

   In June of 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/or the normal operation of long-lived assets, except for certain obligations of lessees. Adoption of this statement is required for fiscal years beginning after June 15, 2002 and will not have a material impact on the consolidated results of operations or financial position of the Company.

   In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this standard to have a material impact on its results of operations or financial position.

   In January of 2003, the FASB issued Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." This Interpretation clarifies the application of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Prior to the issuance of this Interpretation, ARB No. 51 defined a controlling financial interest as ownership of a majority voting interest. FIN No. 46 requires an entity to consolidate a variable interest entity even though the entity does not, either directly or indirectly, own more than 50% of the outstanding voting shares. FIN No. 46 defines a variable interest entity as having one or both of the following characteristics (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (2) the equity investors lack one or more of the following (a) the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity, if they occur, which makes it possible for the entity to finance its activities and (c) the right to receive the expected residual returns of the entity, if they occur, which is the compensation for the risk of absorbing the expected losses. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to interests obtained after that date to an interim reporting period beginning after June 15, 2003. The Company does not believe adoption of this interpretation will have a material impact on its results of operations 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, the Company's ability to renew or find new licensees or distributors to replace those terminated in 2002 and 2001, and various other matters, many of which are beyond the Company's control. These forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Item 7A. Quantitative and Qualitative Disclosure 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.

                                                       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, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audit also included the financial statement schedule listed in the index at Item 15(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 the Corporation at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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

March 4, 2003

Bulova Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

_________________________________________________________________________________________

_________________________________________________________________________________________

Assets:

______________________________________________________________________________

December 31

2002  

2001 

_________________________________________________________________________________________

(Amounts in thousands of dollars)

Current assets:

  Cash and cash equivalents (Note 1)

$        9,930 

$        18,937 

  Short-term investments (Note 1)

229 

  Receivables, less allowance for doubtful accounts and cash discounts of

     $4,445 and $4,635 (Note 1)

87,483 

77,008 

  Inventories (Note 1)

67,293 

48,914 

  Prepaid expenses (Note 5)

1,704 

2,607 

  Deferred income taxes (Notes 1 and 4)

11,209 

11,809 

_________________________________________________________________________________________

Total current assets

177,848 

159,275 

_________________________________________________________________________________________

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

  Land, buildings and improvements

19,814 

19,782 

  Machinery and equipment

4,760 

3,973 

  Furniture, fixtures and leasehold improvements

4,816 

4,945 

_________________________________________________________________________________________

29,390 

28,700 

  Less accumulated depreciation and amortization

13,133 

12,055 

_________________________________________________________________________________________

Property, plant and equipment-net

16,257 

16,645 

_________________________________________________________________________________________

Other assets:

  Deferred income taxes (Notes 1 and 4)

11,448 

12,904 

  Trademarks (Notes 1 and 3)

4,983 

4,983 

  Other assets

371 

193 

_________________________________________________________________________________________

Total other assets

16,802 

18,080 

_________________________________________________________________________________________

Total assets

$      210,907 

$      194,000 

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

Bulova Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

________________________________________________________________________________________

________________________________________________________________________________________

Liabilities and Shareholders' Equity:

________________________________________________________________________________________

December 31

2002 

2001 

________________________________________________________________________________________

(Amounts in thousands of dollars)

Current liabilities:

  Accounts payable

$          14,231 

$           8,391 

  Accrued expenses:

     Salaries, wages and commissions

3,051 

2,903 

     Postretirement benefits (Note 5)

1,676 

1,064 

     Advertising and promotions (Note 1)

7,730 

3,788 

     Accrued federal and foreign income taxes (Notes 1 and 4)

787 

1,140 

     Other

10,215 

12,502 

________________________________________________________________________________________

Total current liabilities

37,690 

29,788 

________________________________________________________________________________________

Other non-current liabilities:

  Postretirement benefits payable (Note 5)

27,460 

31,041 

  Pension benefits payable (Note 5)

2,329 

2,020 

________________________________________________________________________________________

Total other liabilities and credits

29,789 

33,061 

________________________________________________________________________________________

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

101,494 

89,226 

  Accumulated other comprehensive loss

(4,257)

(4,266)

________________________________________________________________________________________

143,433 

131,156 

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

5 

5 

________________________________________________________________________________________

Total shareholders' equity

143,428 

131,151 

________________________________________________________________________________________

Total liabilities and shareholders' equity

$          210,907 

$         194,000 

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

Bulova Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

______________________________________________________________________________

Year Ended December 31 

2002 

2001 

2000 

________________________________________________________________________________________

(Amounts in thousands, except per share data)

Net sales

$         164,538 

$       143,813 

$        150,771 

Cost of sales

77,889 

69,449 

74,287 

_________________________________________________________________________________________

Gross profit

86,649 

74,364 

76,484 

Selling, general and administrative expenses

67,270 

59,834 

59,809 

_________________________________________________________________________________________

Operating income

19,379 

14,530 

16,675 

Royalty income

1,677 

2,420 

8,039 

Interest -- net

282 

990 

1,992 

Other income (expense)

270 

(153)

274 

_________________________________________________________________________________________

Income before income taxes

21,608 

17,787 

26,980 

Income taxes (Notes 1 and 4)

9,340 

7,331 

11,544 

________________________________________________________________________________________

Net income

$           12,268 

$        10,456 

$          15,436 

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

Net income per share (Note 1)

$               2.67 

$            2.27 

$              3.36 

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

Bulova Corporation and Subsidiaries

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, 2000

$      22,999 

$      23,197 

$      63,334 

$             (2,776)

$               (5)

Comprehensive income:

    Net income

$          15,436 

15,436 

___________

    Other comprehensive loss

       net of taxes:

        Exchange rate changes

          during the year (net of

          income tax benefit of $293)

(544)

(544)

            $59) (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 of income tax benefit of            $225) (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)

Comprehensive income:

    Net income

$           12,268 

12,268 

___________

    Other comprehensive

      income, net of taxes:

       Exchange rate changes

          during the year (net of

          income tax expense of $135)

251 

251 

       Pension liability adjustment          (net of income tax benefit            of $98) (Note 5)

(242)

(242)

___________

    Other comprehensive income

9 

___________

Comprehensive income

$            12,277 

==========

__________________________________________________

Balance, December 31, 2002

$      22,999 

$      23,197 

$    101,494 

$             (4,257)

$               (5)

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

Bulova Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

________________________________________________________________________________________

Year Ended December 31

2002 

2001 

2000 

________________________________________________________________________________________

(Amounts in thousands)

Operating Activities:

Net income

$            12,268 

$            10,456 

$          15,436 

Adjustments to reconcile net income to net cash

   (used in) provided by operating activities:

     Amortization of investments

(115)

8 

     Depreciation and amortization

1,345 

920 

855 

     Gain on disposition of assets

(4)

(3)

     Gain on sale of investments

(70)

     Provision for losses and cash discounts on accounts

        receivable

2,786 

1,095 

2,804 

     Deferred income taxes

2,056 

56 

3,501 

Changes in operating assets and liabilities-net:

     Receivables

(13,145)

(3,977)

(10,119)

     Inventories

(17,943)

10,383 

(19,285)

     Prepaid expenses

903 

643 

(2,056)

     Other assets

(178)

(21)

3 

     Accounts payable and accrued expenses

8,255 

(2,525)

3,206 

     Accrued federal and foreign income taxes

(353)

1,770 

(1,681)

     Other-net

(3,388)

(2,856)

(8,599)

________________________________________________________________________________________

(7,583)

15,944 

(15,930)

________________________________________________________________________________________

Investing Activities:

Acquisitions

(743)

(11,929)

Purchases of short-term investments

(20,445)

(9,444)

Proceeds from sales of short-term investments

20,423 

21,500 

Purchases of property, plant and equipment

(659)

(1,944)

(1,296)

Proceeds from disposal of property, plant and equipment

4 

5 

________________________________________________________________________________________

(1,424)

(13,869)

10,765

________________________________________________________________________________________

Net change in cash and cash equivalents

(9,007)

2,075 

(5,165)

Cash and cash equivalents, beginning of year

18,937 

16,862 

22,027 

________________________________________________________________________________________

Cash and cash equivalents, end of year

$              9,930 

$            18,937 

$           16,862 

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

Bulova Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

________________________________________________________________________________________

Note 1. Summary of Significant Accounting Policies

   (a) Business -- Bulova Corporation and its subsidiaries (the "Company") are engaged in the distribution and sale of watches and clocks for consumer use. The principal watch brands are Bulova, Caravelle, Wittnauer and Accutron. Clocks are principally sold under the Bulova brand name. Bulova's principal markets are the United States, Canada and Mexico. Royalties represent minimum royalty payments received from the Company's principal Europe and Far East licenses. The Company's principal Far East license agreement expired on December 31, 2001 and the Company's principal European license agreement expired on December 31, 2002. In anticipation of the expiration of the European license agreement on December 31, 2002, the Company established a Swiss subsidiary in the third quarter of 2002, Bulova Swiss SA, to handle sales and distribution throughout Europe. Bulova Swiss SA operations are planned to commence in 2003. 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 -- At December 31, 2002 and 2001, cash and cash equivalents were comprised of cash and investments in money-market accounts.

   (e) Short-term Investments -- At December 31, 2002 the Company had investments in United States treasury bills.

   (f) 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, 2002 and 2001 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 13%, 16% and 15% of sales for the years ended December 31, 2002, 2001 and 2000, respectively. As is characteristic of the Company's business and of the watch industry generally, the Company extends this customer seasonal credit terms which results in the Company carrying this customer's receivables for relatively long periods, exposing the Company to credit risk associated with non-payment by this customer. Trade receivables from th is customer outstanding as of December 31, 2002 have been collected. No other customer represented more than 10% of the Company's sales. The carrying amount of receivables approximates fair value.

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

   (h) Property, Plant and Equipment -- Depreciation is calculated on the straight-line method over the estimated useful lives of the various classes of assets. Leasehold improvements are, if such period is shorter, amortized over the life of the lease. Asset lives range from 2 to 12 years for machinery, equipment, and furniture and fixtures and from 15 to 40 years for buildings and improvements.

   (i) Trademarks -- The Company purchased the Wittnauer trademark in September of 2001. In accordance with Statement of Financial Accounting Standards ("SFAS")  No. 142, "Goodwill and Other Intangible Assets," which was adopted at that time, no amortization was recorded, since the life of the trademarks is believed to be indefinite. See Note 3 for further discussion.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

______________________________________________________________________________ Note 1. Summary of Significant Accounting Policies -- Continued

   (j) Income Taxes -- The Company is included in the consolidated federal tax return of Loews. 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.

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

   (l) 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.

   (m) Reclassifications -- Certain amounts applicable to prior periods have been reclassified to conform to the 2002 presentation.

   (n) 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, 2002). 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, none of which are outstanding.

   (o) 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.

   (p) 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, 2002 and 2001, no foreign exchange contracts were entered into.

   (q) 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 intangibles with finite lives, under certain circumstances, are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value less cost to sell.

   (r) Accounting Pronouncements -- In 2002, the Company implemented the provisions of the 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 did not have a material impact on the Company's results of operations or financial position.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

_________________________________________________________________________________________

Note 1. Summary of Significant Accounting Policies -- Continued

   In June of 2001, the Financial Accounting Standards Board ("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/or 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 or financial position.

   Effective January 1, 2002, the Company adopted 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 did not have a material impact on the Company's results of operations or financial position.

   In April of 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections." This Statement rescinds and amends existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The provisions of SFAS No. 145 were adopted upon its effective date, May 15, 2002, and did not have a material effect on the Company's results of operations or financial position.

   In June of 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this standard to have a material impact on its results of operations or financial position.

   In November of 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others (an interpretation of SFAS No. 5, 57 and 107 and rescission of FIN No. 34)." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions are required on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is not a party to any agreement in which it is a guarantor of indebtedness of others. Accordingly, this pronouncement is currently not applicable to the Company.

   In January of 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation clarifies the application of ARB No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest. Prior to the issuance of this Interpretation, ARB No. 51 defined a controlling financial interest as ownership of a majority voting interest. FIN 46 requires an entity to consolidate a variable interest entity even though the entity does not, either directly or indirectly, own more than 50% of the outstanding voting shares. FIN No. 46 defines a variable interest entity as having one or both of the following characteristics (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (2) the equity investors lack one or m ore of the following (a) the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity, if they occur, which makes it possible for the entity to finance its activities and (c) the right to receive the expected residual returns of the entity, if they occur, which is the compensation for the risk of absorbing the expected losses. FIN 46 applies immediately to variable interests entities created after January 31, 2003, and to interests obtained after that date to an interim reporting period beginning after June 15, 2003. This interpretation is not believed to have a material impact on the Company's results of operations or financial position.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

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 $3,000,000, $3,000,000 and $3,009,000 for the years ended December 31, 2002, 2001 and 2000, respectively. In addition, the Company has reimbursed to Loews approximately $534,000, $538,000 and $540,000 in salaries and related employee benefits for the years ended December 31, 2002, 2001, and 2000, 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. This project was undertaken concurrently with a Loews information technology project. The Company and Loews each paid their direct costs and the Company paid certain costs which were borne by Loews and then allocated to the Company. Reflected in the Consolidated 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, 2002, 2001 and 2000 were approximately $754,000, $1,600,000 and $900,000, respectively. Of these costs, an aggregate of approximately $990,000 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 $405,000, $254,000 and $222,000 for premiums paid during the years ended December 31, 2002, 2001 and 2000, respectively.

   The Company and Loews are parties to the Credit Agreement under which the Company may take unsecured loans from Loews from time to time, in principal amounts aggregating up to $50,000,000. The Company has not utilized the Credit Agreement since 1995 and there are no amounts outstanding. The Company may require working capital advances under this agreement to finance line extensions for Wittnauer and the Harley Davidson licensed product as well as the Company's international expansion efforts and operating needs.

   Certain of the Company's employee health and life insurance benefits are provided by an insurance subsidiary of CNA Financial Corporation, a 90% owned subsidiary of Loews. Premiums and fees for such insurance amounted to approximately $181,000, $165,000 and $153,000 during the years ended December 31, 2002, 2001 and 2000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

_________________________________________________________________________________________

Note 3. Acquisitions -

   On July 2, 2002, the Company acquired the inventory and receivables of a grandfather clock manufacturer for a purchase price, including related payments, aggregating approximately $743,000. Net sales in 2002 of the grandfather clocks were not material in relation to the consolidated sales of the Company. Pro forma data, had the acquisition occurred on January 1, 2000 was not available. The purchase price was funded from the Company's existing working capital balances. The following table summarizes the estimated fair value of the assets, in thousands of dollars, acquired at the date of the acquisition.

Current assets:

  Accounts receivable

$                117   

  Inventories

436   

________________________________________________________________________________________

     Total current assets

553   

Machinery and equipment

190   

________________________________________________________________________________________

     Total assets acquired

$                 743   

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

   On September 5, 2001, the Company acquired the Wittnauer trademarks, related inventory and receivables, including the Wittnauer trademark for timepieces, for a purchase price, including related payments, aggregating approximately $11,929,000. Net sales in 2001 of the Wittnauer brand were not material in relation to the consolidated sales of the Company. Pro forma data had the acquisition occurred on 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, in thousands of dollars, 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 Loews's consolidated federal income tax 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 $4,413,000, $4,318,000 and $5,034,000 for the years ended December 31, 2002, 2001 and 2000, respectively. This agreement may be cancelled by the Company or Loews upon thirty days written notice. No valuation allowance is deemed necessary as in the opinion of management, it is more likely than not that such deferred tax assets will be realized.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

_________________________________________________________________________________________

Note 4. Income Taxes -- Continued

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

Year Ended December 31

2002 

2001 

2000 

_________________________________________________________________________________________

(In thousands)

Income before income taxes:

  Domestic

$          19,471 

$         14,525 

$          24,379 

  Foreign

2,137 

3,262 

2,601 

_________________________________________________________________________________________

Total

$          21,608 

$         17,787 

$          26,980 

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

Year Ended December 31

2002 

2001 

2000 

________________________________________________________________________________________

(In thousands)

Income tax expense (benefit):

  Federal:

    Current

$            4,413 

$           4,318 

$            5,034 

    Deferred

1,644 

277 

2,553 

  State and local:

    Current

1,456 

1,545 

1,920 

    Deferred

598 

61 

964 

  Foreign:

    Current

1,258 

1,073 

1,440 

    Deferred

(29)

57 

(367)

_________________________________________________________________________________________

Income tax expense

$             9,340 

$           7,331 

$          11,544 

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

   Deferred tax assets (liabilities) are as follows:

December 31

2002 

2001 

_________________________________________________________________________________________

(In thousands)

Employee benefits

$         14,118 

$          13,871 

Inventory

8,931 

8,611 

Accrued expenses

(2,260)

374 

Accounts receivable

1,868 

1,857 

_________________________________________________________________________________________

Deferred tax assets -- net

$         22,657 

$          24,713 

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

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

December 31

2002 

2001 

2000 

_________________________________________________________________________________________

Income taxes computed at statutory rate

35.0

%

35.0 

%

35.0

%

Increase (decrease) in taxes resulting from:

  State and local taxes

6.2

5.5 

6.9

  Foreign taxes

2.3

1.0 

.9

  Other

(.3

)

(.3

)

_________________________________________________________________________________________

Effective income tax rate

43.2

%

41.2 

%

42.8

%

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

________________________________________________________________________________________

Note 4. Income Taxes -- Continued

   Federal, foreign, state and local income tax payments amounted to approximately $5,069,000, $4,337,000 and $8,599,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

   Federal income tax returns of Loews have been examined and settled through 1997. The years 1998 through 2001 are currently under examination. The Company's Canadian tax returns have been examined and settled through 1996 and the years 1997 through 2001 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 Sheets are 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.

   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, 2002, 2001 and 2000, the Company's minimum pension liability exceeded its unrecognized prior service cost and net transition obligation by $2,329,000, $2,020,000 and $1,364,000 respectively. This excess is recorded as a reduction to shareholders' equity of $1,412,000, $1,170,000 and $752,000 net of tax benefits of $727,000, $630,000 and $405,000 and intangible assets of $190,000, $220,000 and $207,000 for the years ended December 31, 2002, 2001 and 2000, 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

2002 

2001 

2000 

2002 

2001 

2000 

_________________________________________________________________________________________

(In thousands)

Service costs

$        919 

$         797 

$       669 

$           89 

$            77 

$          118 

Interest cost

2,306 

2,177 

2,154 

990 

932 

944 

Expected return on plan assets

(2,212)

(1,983)

(1,814)

Amortization of unrecognized

   net asset

(478)

Amortization of unrecognized

   net loss (gain)

83 

58 

(759)

(1,012)

(1,440)

Amortization of unrecognized

   prior service cost

33 

29 

29 

(1,612)

(1,575)

(1,231)

_________________________________________________________________________________________

Net periodic benefit costs (income)

$      1,129 

$     1,020 

$       618 

$     (1,292)

$     (1,578)

$      (1,609)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

________________________________________________________________________________________

Note 5. Benefit Plans -- Continued
      

   Changes in benefit obligations are as follows:

Other

Pension Benefits

Postretirement Benefits

________________________

_______________________

December 31

2002 

2001 

2002 

2001 

________________________________________________________________________________________

(In thousands)

Benefit obligation at January 1

$        32,895 

$         30,407 

$         14,259 

$         13,026 

Service cost

919 

797 

89 

77 

Interest cost

2,306 

2,177 

990 

932 

Plan participants' contributions

343 

334 

Amendments

2 

42 

(614)

(338)

Actuarial loss

1,700 

1,325 

2,922 

1,626 

Benefits paid

(1,853)

(1,853)

(2,019)

(1,398)

________________________________________________________________________________________

Benefit obligation at December 31

35,969 

32,895 

15,970 

14,259 

________________________________________________________________________________________

Change in plan assets:

Fair value of plan assets at January 1

30,078 

26,868 

Actual return on plan assets

3,309 

2,292 

Company contributions

600 

2,771 

1,676 

1,064 

Plan participants' contributions

343 

334 

Benefits paid

(1,853)

(1,853)

(2,019)

(1,398)

________________________________________________________________________________________

Fair value of plan assets at December 31

32,134 

30,078 

________________________________________________________________________________________

Benefit obligation over plan assets

3,835 

2,817 

         15,970 

14,259 

Unrecognized net actuarial (loss) gain

(4,834)

(4,315)

4,921 

8,603 

Unrecognized prior service (cost) gain

(190)

(220)

8,245 

9,243 

________________________________________________________________________________________

Net benefit (prepaid) obligation

$         (1,189)

$          (1,718)

$         29,136 

$         32,105 

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

   Amounts recognized in the Consolidated Balance Sheets consist of:

Other

Pension Benefits

Postretirement Benefits

_________________________

________________________

December 31

2002 

2001 

2002

2001 

________________________________________________________________________________________

(In thousands)

Prepaid benefit cost

$        (1,189)

Accrued benefit liability

2,329 

$              302 

$         29,136 

$         32,105 

Intangible asset

(190)

(220)

Accumulated other comprehensive loss

(2,139)

(1,800)

________________________________________________________________________________________

Net benefit (prepaid) obligation

$        (1,189)

$          (1,718)

$         29,136 

$         32,105 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

________________________________________________________________________________________

Note 5. Benefit Plans -- Continued

   Weighted-average assumptions are as follows:

Pension Benefits

Other Postretirement Benefits

_____________________________

____________________________

Year Ended December 31

2002   

2001  

2000    

2002    

2001   

2000    

_________________________________________________________________________________________

Discount rate

6.75%