UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 28, 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 0-599
----------------------------
THE EASTERN COMPANY
(Exact name of registrant as specified in its charter)
Connecticut 06-0330020
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
112 Bridge Street, Naugatuck, Connecticut 06770
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 729-2255
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
(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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 29, 2002:
Common Stock, No Par Value - $52,410,063
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at February 21, 2003
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Common Stock, No Par Value 3,631,869
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement dated March 17, 2003 are incorporated by
reference into Part III.
The Eastern Company
Form 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
TABLE OF CONTENTS
Page
Table of Contents 2.
Safe Harbor Statement 3.
PART I
Item 1. Business 4.
Item 2. Properties 8.
Item 3. Legal Proceedings 9.
Item 4. Submission of Matters to a Vote of Security Holders 9.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9.
Item 6. Selected Financial Data 10.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 18.
Item 8. Financial Statements and Supplementary Data 19.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 41.
PART III
Item 10. Directors and Executive Officers of the Registrant 42.
Item 11. Executive Compensation 42.
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42.
Item 13. Certain Relationships and Related Transactions 42.
Item 14. Controls and Procedures 43.
PART IV
Item 15. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 43.
Signatures 46.
Exhibit Index 47.
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect the Company's current expectations regarding its products,
its markets and its future financial and operating performance. These
statements, however, are subject to risks and uncertainties that may cause the
Company's actual results in future periods to differ materially from those
expected. Such risks and uncertainties include, but are not limited to,
unanticipated slowdowns in the Company's major markets, changing customer
preferences, lack of success of new products, loss of customers, competition,
increased raw material prices, problems associated with foreign sourcing of
parts and products, worldwide conditions and foreign currency fluctuations
that may affect results of operations and other factors discussed from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company is not obligated to update or revise the aforementioned statements for
those new developments.
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PART I
ITEM 1 BUSINESS
(a) General Development of Business
The Eastern Company (the Company) was incorporated under the laws of the
State of Connecticut in October, 1912, succeeding a co-partnership established
in October, 1858.
The business of the Company is the manufacture and sale of industrial
hardware, security products and metal products from four U.S. operations and
five wholly-owned foreign subsidiaries. The Company maintains nine physical
locations.
RECENT DEVELOPMENTS
Effective October 1, 2002 the Company acquired all of the issued and
outstanding common stock of Canadian Commercial Vehicles Corporation (CCV) for
cash of approximately $70,000 and the assumption of approximately $130,000 of
debt, which the Company paid upon closing. CCV was established as a Canadian
Subsidiary of The Eastern Company, located in Kelowna, British Columbia,
Canada. CCV manufactures lightweight sleeper boxes used in Class 8 trailer
trucks.
Effective March 1, 2002 the Company acquired certain assets of the Big
Tag Division of Dolan Enterprises, Inc. for cash of approximately $260,000. Big
Tag was combined into the Illinois Lock/CCL division of the Company located in
Wheeling, Illinois. Big Tag provides high-visibility, custom luggage tags,
which the Company will market in conjunction with its custom logo luggage locks
to the travel, incentive and premium markets.
Effective February 1, 2000, the Company acquired all of the issued and
outstanding Common Stock of Ashtabula Industrial Hardware Co. (Ashtabula),
which was integrated into the Company's Industrial Hardware Group. Ashtabula
produces proprietary hardware for school and courtesy bus doors.
Effective April 6, 2000, the Company acquired two product lines from
Hansen International Inc. (Hansen). The product lines produce proprietary locks
to secure the lids of tool boxes that are installed in the beds of pickup
trucks and other service vehicles. This acquisition represents a natural
adjunct to the Industrial Hardware Group's core line of vehicular hardware. It
was integrated into our Canadian manufacturing facility in Tillsonburg,
Ontario.
The cost of the Ashtabula and Hansen acquisitions was approximately
$4,070,000. All of the above acquisitions have been accounted for using the
purchase method. The acquired businesses are included in the consolidated
operating results of the Company from their date of acquisition. Neither the
actual results nor the pro forma effects of the above acquisitions are material
to the Company's financial statements.
Effective June 29, 2000, the Company acquired the assets and businesses
and assumed certain liabilities of Greenwald Industries, Inc. and Greenwald
Intellicard, Inc. (the Greenwald businesses). The Greenwald businesses design,
manufacture and market coin acceptance systems and provide smart cards, smart
card readers, value transfer stations, card management software and interface
boards primarily for the commercial laundry industry. The cost of the
acquisition of the Greenwald businesses was approximately $24,285,000,
including the assumption of approximately $749,000 of current liabilities. Pro
forma information for this acquisition is presented in Note 3 to the Company's
financial statements included at Item 8 of this Annual Report on Form 10-K.
-4-
(b) Business Segment Information
Financial information about business segments is included in Note 12 to
the Company's financial statements, included at Item 8 of this Annual Report on
Form 10-K.
(c) Narrative Description of Business
The Company operates in three business segments: Industrial Hardware,
Security Products and Metal Products.
Industrial Hardware
The Industrial Hardware segment consists of Eberhard Manufacturing,
Eberhard Hardware Manufacturing Ltd., Canadian Commercial Vehicles
Corporation, and Sesamee Mexicana, S.A. de C.V., and designs, manufactures and
markets a diverse product line of industrial and vehicular hardware throughout
North America. The segment's locks, latches, hinges, handles and related
hardware can be found in tractor-trailer trucks, moving vans, off-road
construction and farming equipment, school buses, military vehicles and
recreational boats. They are also used in pickup trucks, sport utility
vehicles and fire and rescue vehicles. In addition, the segment manufactures a
wide selection of fasteners and other closure devices used to secure access
doors on various types of industrial equipment such as metal cabinets,
machinery housings and electronic instruments.
Typical products include passenger restraint locks, slam and draw
latches, dead bolt latches, compression latches, cam-type vehicular locks,
hinges, tool box locks, light-weight sleeper boxes and school bus door closure
hardware. The products are sold to original equipment manufacturers and
distributors through a distribution channel consisting of in-house salesmen
and outside sales representatives. Sales and customer service efforts are
concentrated through in-house sales personnel where greater representation of
our diverse product lines can be promoted across a variety of markets.
The Industrial Hardware segment sells its products to a diverse array of
markets for the truck, bus and automotive industries and to the industrial
equipment, military and marine sectors. Although service, quality and price
are major criteria for servicing these markets, the continued introduction of
new and improved product designs and acquisition of synergistic product lines
is vital for maintaining and increasing market share.
Security Products
The Security Products segment, made up of Greenwald Industries, Illinois
Lock Company/CCL Security Products, World Lock Company Ltd. and World Security
Industries Ltd.--is a leading manufacturer of security products. This segment
manufactures electronic and mechanical locking devices, both keyed and
keyless, for the computer, electronics, vending and gaming industries. The
segment also supplies the luggage, furniture, laboratory equipment and
commercial laundry industries. With the acquisition of Greenwald the segment
manufactures and markets coin acceptors and other coin security products used
primarily in the commercial laundry markets. In addition, through the use of
"smart card" technology, the segment provides a new level of security for the
access control, municipal parking and vending markets.
Greenwald's product sales include timers, drop meters, coin chutes,
money boxes, meter cases, smart cards, value transfer stations, smart card
readers, card management software and access control units. Illinois Lock
Company/CCL Security Products sales include cabinet locks, cam locks, electric
switch locks, tubular key locks and combination padlocks. Many of the products
are sold under the names DUO, X-STATIC(R), EXCALIBUR(TM), WARLOCK(TM), LITE
LOCK(TM), SESAMEE(R), BIG TAG(R), PRESTOLOCK(R) and HUSKI(TM). These products
are sold to original equipment manufacturers, distributors, route operators,
and locksmiths through a distribution channel consisting of in-house salesmen,
outside sales representatives and distributors. Sales efforts are concentrated
through in-house sales personnel where greater representation of our diverse
product lines can be promoted across a variety of markets.
The Security Products segment continuously seeks new markets where it
can offer competitive pricing and provide customers with engineered solutions
to their security application needs.
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Metal Products
The Metal Products segment, based at the Company's Frazer & Jones
facility, is the largest and most efficient producer of expansion shells for
use in supporting the roofs of underground mines. This segment also
manufactures specialty castings, which serve the construction and electrical
industries.
Typical products include mine roof support anchors, couplers for braking
systems, adjustable clamps for construction and fittings for electrical
installations. Mine roof support anchors are sold to distributors and directly
to mines, while specialty castings are sold to original equipment
manufacturers.
Although there continues to be a need for the highly engineered
proprietary mine roof support products produced by this segment of the
Company, changes in mining technology continue to decrease demand for
mechanical anchoring systems. Intense competition from foreign countries has
adversely affected our ability to compete effectively in the contract castings
market. As a result, the Company began to phase out of its low-margin contract
castings business and concentrate on its proprietary mine roof support
systems. To offset declines in the production of malleable iron castings, the
Company has invested in the necessary equipment for the production of ductile
iron castings.
Raw materials and outside services were readily available from domestic
sources for all of the Company's segments during 2002 and are expected to be
readily available in 2003 and the foreseeable future. The Company also obtains
materials from Asian affiliated and nonaffiliated sources. The Company has not
experienced any significant problems obtaining material from its Asian sources
in 2002 and does not expect any problems in 2003.
Patent protection for the various product lines within the Company is
limited, but is sufficient to enhance competitive positions. Foreign sales and
license agreements are not significant.
None of the Company's business segments is seasonal.
The Company, across all its business segments, has increased its
emphasis on customer service by fulfilling the rapid delivery requirements of
our customers. As a result, investments in additional inventories are made on
a selective basis.
Customer lists for all business segments are broad-based geographically
and by markets and sales are not highly concentrated by customer. No customer
accounted for 10% or more of the Company's consolidated revenue for the year
ended December 28, 2002.
The dollar amount of the level of orders in the Company is believed to
be firm as of fiscal year ended December 28, 2002 at $9,672,000, as compared
to $7,760,000 at December 29, 2001.
The Company encounters competition in all of its business segments. The
Company has been successful in dealing with this competition by offering high
quality diversified products with the flexibility of meeting customer needs on
a timely basis. This is accomplished by effectively using internal engineering
resources, cost effective manufacturing capabilities, expanding product lines
through product development and acquisitions and maintaining sufficient
inventory for fast turnaround of customer orders. However, imports from Asia,
Latin America and Europe with weak currency exchange rates have created
additional competitive pressures.
Research and development expenditures in 2002 were $1,041,000 and
represented approximately 1% of gross revenues. In 2001 and 2000 they were
$1,006,000 and $176,000, respectively. The increase in research costs is
primarily attributable to the Greenwald division, where ongoing research in
both the mechanical and smart card product lines is necessary in order to
remain competitive and to continue to provide technologically advanced smart
card systems. Other research projects include the development of a remote
entry lock, a mini switch lock, a tonneau lock, new mining products, and
various transportation and industrial hardware products.
The Company does not anticipate that compliance with federal, state or
local environmental laws or regulations will have a material effect on the
Company's capital expenditures, earnings or competitive position.
The average number of employees in 2002 was 540.
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(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company includes four separate operating divisions located within
the United States, two wholly-owned Canadian subsidiaries, one located in
Tillsonburg, Ontario, Canada, and one in Kelowna, British Columbia, Canada, a
wholly-owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly-owned
subsidiary in Hong Kong and a wholly-owned subsidiary in Mexico.
The Canadian, Taiwanese, Hong Kong and Mexican subsidiaries' revenue and
assets are not significant. Substantially all other revenues are derived from
customers located in the United States.
Financial information about foreign and domestic operations' net sales
and identifiable assets is included in Note 12 to the Company's financial
statements, included at Item 8 of this Annual Report on Form 10-K.
-7-
ITEM 2 PROPERTIES
The corporate office of the Company is located in Naugatuck, Connecticut
in a two-story 8,000 square foot administrative building on 3.2 acres of land.
All of the Company's properties are owned or leased and are adequate to
satisfy current requirements. All of the Registrant's properties have the
necessary flexibility to cover any long-term expansion requirements.
The Industrial Hardware Group includes the following:
The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6 acres
of land and a building containing 138,000 square feet, located in an
industrial park. The building is steel frame, one-story, having curtain walls
of brick, glass and insulated steel panel. The building has two high bays, one
of which houses two units of automated warehousing.
The Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian
subsidiary in Tillsonburg, Ontario, owns 4.4 acres of land and a building
containing 31,000 square feet in an industrial park. The building is steel
frame, one-story, having curtain walls of brick, glass and insulated steel
panel. It is particularly suited for light fabrication, assembly and
warehousing and is adequate for long-term expansion requirements.
The Canadian Commercial Vehicles Corporation, a wholly-owned subsidiary
in Kelowna, British Columbia, leases 32,500 square feet of building space
located in an industrial park. The building is made from brick and concrete,
contains approximately 2,400 square feet of office space and houses a modern
paint booth for finishing our products. The building is protected by a F1
rated fire suppression system and alarmed for fire and security. The current
lease is renewable for another 3 years.
The Sesamee Mexicana subsidiary is leasing 1,950 square feet of a block
building located in an industrial park in Lerma, Mexico on an open-end basis.
The Security Products Group includes the following:
The Greenwald Industries Division in Chester, Connecticut owns 26 acres
of land and a building containing 120,000 square feet. The building is steel
frame, one story, having brick over concrete blocks. The Company also leases a
5,000 square foot facility in Boynton Beach, Florida. The building is of
concrete block construction. A monthly lease is in place.
The Illinois Lock Company/CCL Security Products Division leases land and
a building containing 44,000 square feet in Wheeling, Illinois. The building is
brick and located in an industrial park. A five-year lease was signed in 2001,
which expires on May 31, 2006 and is renewable.
The World Lock Co. Ltd. subsidiary leases a brick and concrete building
containing 7,870 square feet and is located in Taipei, Taiwan.
The Metal Products Group consists of:
The Frazer and Jones Division in Solvay, New York, owns 17.9 acres of
land and buildings containing 205,000 square feet constructed for foundry use.
These facilities are well adapted to handle the division's current and future
casting requirements.
All owned properties are free and clear of any encumbrances.
-8-
ITEM 3 LEGAL PROCEEDINGS
There are no legal proceedings, other than ordinary routine litigation
incidental to the Company's business, or to which either the Company or any of
its subsidiaries is a party or to which any of their property is the subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the American Stock Exchange
(ticker symbol EML). The approximate number of record holders of the Company
common stock on December 28, 2002 was 701.
High and low stock prices and dividends for the last two years were:
2002 2001
------------------------------------------------------- ----------------------------------------------------------
Market Price Market Price
Quarter High Low Dividend Quarter High Low Dividend
------------------------------------------------------- ----------------------------------------------------------
First $16.25 $11.75 $.11 First $17.05 $13.00 $.11
Second 16.10 14.36 .11 Second 15.60 14.15 .11
Third 14.60 12.00 .11 Third 15.31 12.50 .11
Fourth 12.35 11.00 .11 Fourth 13.45 11.65 .11
The Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends because they
are dependent on future earnings, capital requirements, and financial
conditions. The payment of dividends is subject to the restrictions of the
Company's loan agreement if such payment would result in an event of default.
The following table sets forth information regarding securities
authorized for issuance under the Company's equity compensation plans as of
December 28, 2002, including the Company's 1989, 1995, 1997 and 2000 plans.
Equity Compensation Plan Information
------------------------------------
Plan category Number of securities Weighted-average Number of securities
remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
------------------------ ------------------- -----------------------------
(a) (b) (c)
Equity compensation plans approved
by security holders 440,000 (1) $14.02 257,142 (2)
Equity compensation plans not
approved by security holders 249,000 (3) 12.49 52,500 (4)
------------------------ ------------------- -----------------------------
Total 689,000 $13.48 309,642
======================== =================== =============================
1 Includes options outstanding under the 1989, 1995 and 2000 plans.
2 Includes shares available for future issuance under the 1989, 1995 and
2000 plans.
3 Includes options outstanding under the 1997 plan.
4 Includes shares available for future issuance under the 1997 plan.
-9-
On September 17, 1997 the compensation committee of the board of directors of
the Company adopted The Eastern Company 1997 Directors Stock Option Plan (the
"1997 Plan") which by its terms will expire either on September 16, 2007 or upon
any earlier termination date established by the board of directors. The 1997
Plan authorizes the grant of non-qualified stock options to the non-employee
directors of the Company to purchase shares of common stock. The exercise price
of any options granted under the 1997 Plan is set by the compensation committee.
However, all options granted to date under the 1997 Plan have required an
exercise price equal to 100% of the fair market value of the shares of common
stock of the Company on the date of grant. On December 15, 1999, the board of
directors approved an increase in the total number of shares of common stock
which may be issued under options granted under the 1997 Plan from 225,000
shares to 325,000 shares.
On March 26, 1997, the shareholders of the Company approved The Eastern Company
Directors Fee Program (the "Program"). Under the terms of the Program, all
retainer fees and meeting fees paid to the non-employee directors of the Company
are paid in shares of common stock of the Company rather than in cash. The
number of shares of common stock that will be issued under the Program will
depend on the amount of retainer fees and meeting fees payable to the
non-employee directors and the fair market value of the shares of common stock
of the Company at the time of their issuance under the Program.
ITEM 6 SELECTED FINANCIAL DATA
2002 2001 2000 1999 1998
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INCOME STATEMENT ITEMS (in thousands)
Net sales $ 81,337 $ 82,825 $ 88,192 $ 74,678 $ 70,750
Cost of products sold 60,637 60,783 62,192 52,460 49,470
Depreciation and amortization 3,565 4,461 3,639 2,723 2,912
Interest expense 1,716 2,259 1,786 646 549
Income before income taxes 4,734 6,085 10,657 9,894 8,723
Income taxes 1,442 2,172 3,602 3,356 3,280
Net income 3,292 3,913 7,055 6,538 5,443
Dividends 1,598 1,599 1,601 1,573 1,429
BALANCE SHEET ITEMS (in thousands)
Inventories $ 16,535 $ 18,591 $ 17,103 $ 14,040 $ 12,778
Working capital 25,600 27,131 26,298 24,734 21,121
Property, plant and equipment, net 25,050 26,486 27,328 16,365 15,033
Total assets 76,133 81,896 84,857 54,894 50,072
Shareholders' equity 37,903 40,056 38,538 33,400 28,486
Capital expenditures 1,560 1,895 5,065 3,690 4,397
Long-term obligations, less current portion 18,921 25,014 28,540 8,565 8,552
PER SHARE DATA
Net income per share
Basic $ .91 $ 1.08 $ 1.95 $ 1.80 $ 1.49
Diluted .89 1.07 1.93 1.75 1.43
Dividends 0.44 0.44 0.44 0.43 0.39
Shareholders' equity 10.44 11.06 10.64 9.21 7.81
Average shares outstanding (Basic) 3,631,278 3,623,291 3,621,449 3,626,001 3,645,360
The per share data in the table above reflects a 3-for-2 stock split effective
May 1999.
-10-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net income for 2002 totaled $3.3 million, or $.89 per diluted share, on
sales of $81.3 million. These results represent a 16% decrease in net income
from 2001 and a 2% decrease in sales. Net income for 2001 was $3.9 million, or
$1.07 per diluted share, on sales of $82.8 million. Net income declined more
sharply than sales because the Company incurred additional costs related to
workers compensation; higher property and liability premiums as a result of a
tight insurance market; higher health insurance costs; and increased pension
expenses due to the declines in the stock market. The Company ended 2002 with
a backlog level 25% above that at year-end 2001, totaling $9.7 million.
Net income for the 2002 fourth quarter totaled $1.2 million, or $.32 per
diluted share, on sales of $19.7 million. These figures represent a 30%
decline in net income and a 4% increase in sales from 2001. Net income for the
2001 fourth quarter totaled $1.7 million, or $.46 per diluted share, on sales
of $18.9 million. The increase in 2002 sales was mainly due to the acquisition
of Canadian Commercial Vehicles in the fourth quarter of 2002. The decline in
2002 earnings was due to a one-time gain of $450,000 ($0.12 per diluted share)
recorded in the 2001 fourth quarter as the result of the Company's receiving
approximately 26,000 shares of Prudential Financial Inc. common stock.
The gross margin for the fourth quarter of 2002 was 26% of net sales as
compared to 31% for the fourth quarter of 2001. Product mix and higher costs
related to insurance, workers compensation and pensions accounted for the
reduction in the gross margin percentage.
Selling and administrative expenses in the 2002 fourth quarter totaled
$3.4 million, a 6% decrease from the 2001 level. This decrease was mainly due
to lower advertising expenses in 2002.
RESULTS OF OPERATIONS
The following table shows, for 2000-2002, each line item from the
consolidated statements of income as a percentage of net sales.
2002 2001 2000
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 74.6% 73.4% 70.5%
Gross margin 25.4% 26.6% 29.5%
Selling and administrative expense 17.6% 17.6% 15.6%
Other income 0.1% 1.0% 0.2%
Interest expense 2.1% 2.7% 2.0%
Income before income taxes 5.8% 7.3% 12.1%
Income taxes 1.8% 2.6% 4.1%
Net income 4.0% 4.7% 8.0%
Fiscal 2002 Compared to Fiscal 2001
Net sales for 2002 decreased 2% ($1.5 million) to $81.3 million from
$82.8 million for 2001. Volume of existing products reduced sales by 6%, while
new product introductions raised sales by 4%.
The Industrial Hardware segment experienced a 4% increase in sales.
Volume of existing products decreased sales by 4%, while internally developed
new products (for the utility truck and vehicular accessory markets) increased
sales by 8%. Sales of heavy hardware to the tractor-trailer industry decreased
4% from 2001 levels. Sales to this market have been down since the latter half
of 2000. In the second quarter of 2002, the trailer industry began to see
signs of recovery when trailer orders rose to their highest level in nine
quarters. Despite the overall improvement in the trailer industry, several of
our customers saw their trailer sales decline from the previous year. This
-11-
market is expected to show further improvement throughout 2003. However, with
the continued slow economy and record-high fuel costs, the trailer industry's
recovery could be weakened.
Sales of industrial hardware (such as rotary locks, locking recessed
handles, multi-point paddle handles and slam latches) to original equipment
manufacturers and distributors were down 5% from 2001. This was primarily due
to the continued softness in the economy. Sales of school bus door closures
increased 27% in 2002 as customers came back to our standard door control
after moving to a competitor's linear door control design in 2001, whose
products resulted in numerous user complaints. Sales of automotive accessories
(toolbox locks, push-button locks and rotary latches) rose 52%; the improved
demand for our hardware was due to an increase in sales of light trucks that
resulted from auto industry promotions. Sales at the Company's Mexican
operations decreased 3% from 2001 primarily due to economic conditions in
Mexico.
Despite the slowdown in the economy, the Company continued to invest in
new products and acquire businesses that complement its existing operations or
provide opportunities to enter new markets. To that end, on October 1, 2002,
the Company acquired 100% of the outstanding stock of Canadian Commercial
Vehicles Corporation. This company, located in Kelowna, British Columbia,
manufactures lightweight sleeper boxes for Class 8 trailer trucks. By using a
core composite honeycomb technology in the fabrication process, the company is
able to produce extremely lightweight panels in a range of strengths and
stiffnesses. Panels with low strength and stiffness are suitable for such
low-load applications as domestic internal doors, while panels with high
strength and stiffness are suitable for such high-load applications as
aircraft components.
Canadian Commercial Vehicles currently does not have a material effect
on the Company's consolidated financial position and results of operations.
However, the product it produces lends itself to the industrial,
transportation and marine industries, markets to which we presently provide
locking, latching and other hardware devices. This acquisition will open
opportunities for both Eberhard Manufacturing and Canadian Commercial Vehicles
to sell complete systems such as doors or hatches with the hardware
pre-installed. The Company intends to invest in the resources necessary to
expand Canadian Commercial Vehicles' current operations and focus it on
additional market areas such as the automotive, recreational vehicle and
marine industries. In addition, this acquisition gives the Company an
opportunity to introduce its automotive accessory hardware into the Class 8
truck market, an area where it has had little presence previously.
In the Security Products segment, sales were 2% higher than in 2001.
Volume of existing products decreased sales by 1% while new product
introductions increased sales by 2% and price increases raised sales by 1%.
Sales of locks to the computer industry grew 50% in 2002. The increase was
primarily caused by the introduction of new computer products requiring locks,
which resulted in a gain in market share from competitors. Sales of
high-security locks for coin-operated vending and gaming equipment were up 8%
in 2002. That increase was primarily the result of our gaining market share
from our competition in an otherwise flat or down market. Sales of locks to
distributors servicing lower-volume accounts increased 14%, while sales to the
industrial controls and accessories market decreased slightly. Sales of locks
for access doors, furniture, electronics equipment and vehicular applications
were down 11% from 2001 levels, mainly because of the overall softness in the
general economy. Sales of luggage locks for the travel industry declined 27%;
sales to this market have been hard-hit in the wake of the September 11
terrorist attacks, and they continue to be impacted by the Transportation
Security Administration (TSA) declaration that passengers should not lock
their checked baggage on commercial airline flights. As a result, the CCL
Security Products Division has introduced PrestosealTM, a device which allows
the TSA access to checked luggage and lets the owner of the bag know when
someone has opened it.
In March 2002, the Company acquired certain assets of the Big Tag
Division of Dolan Enterprises, Inc. Among these assets was a high-visibility
luggage tag (The Big Tag(R)) which the Company is marketing with its
PRESTOLOCK(R) to the travel and premium markets.
Sales of security products to the commercial laundry industry increased
5% from 2001. Sales of Smart Card products continued to grow, offsetting any
declines that occurred in sales of the Company's mature products for the
laundry sector. The growth in Smart Card product sales was driven by greater
acceptance of Smart Card technology among both existing and new customers. The
successful introduction of our new coin acceptor product also contributed to
-12-
the higher sales to the laundry industry. During the year, the Company
completed its move of the CCL Security Products Division from New Britain,
Connecticut, to Wheeling, Illinois, where it was combined with the Company's
Illinois Lock Company Division.
In the Metal Products segment, sales were down 18% from the previous
year. Volume accounted for the reduction in sales. Sales of contract castings
were down 20% from 2001. This decrease was mainly due to the loss of customers
who decided to source their contract casting work from China and Mexico.
Because of lower labor and operating costs in these countries coupled with
favorable currency exchange rates, the price of imported castings is often
below that of U.S.-produced castings. Beginning in the third quarter of 2002,
the Company began to phase out its low-margin contract casting business and
concentrate instead on its proprietary mine roof anchor systems. However, the
Company will continue to offer contract castings to customers when profit
margins are acceptable. In addition, to maintain utilization rates in its
factory, the Company has developed capabilities for producing castings from
ductile iron (previously, it used only malleable iron for its castings
business). The new capabilities will enable the Company to supply additional
products and services to its customers.
Sales of mine roof support anchors decreased 16% from 2001. During 2002,
demand for these products declined as a result of an unusually warm 2001-2002
winter, which caused the demand for electric power to drop for the first time
in 10 years. Faced with a lower demand for power, utility companies reduced
their use of coal.
Management believes coal, however, will remain the backbone of the U.S.
energy supply. Known coal reserves are spread over 100 countries and will last
200 years at current production levels. In contrast, known oil and gas
reserves worldwide are expected to last around 40 and 60 years, respectively,
at current production levels; 70% of those reserves are in the Middle East.
Approximately 1 billion tons of coal are mined in the United States each year,
and about 92% of that volume is consumed by power companies. Although the
demand for coal is influenced by the weather and the price of natural gas and
oil, coal is still the least costly and most price-stable energy source
available today. The Bush administration has placed coal at the forefront of
its plans to meet projected U.S. energy demands over the next 20 years.
With new clean coal technologies that can cut emissions of pollutants
from power plants by as much as 90%, utility companies have shown a great
interest in building more new coal-fired plants to meet U.S. energy needs.
Already, as many as 43 additional facilities have been proposed throughout the
country. Although changes in coal mining technology have caused the number of
underground coal mines to decline, there continues to be a need for mine roof
support systems. To more effectively meet this need and to compete with resin
bolt systems, we have developed a new mine roof anchor system that provides
additional bolting solutions.
Total gross margin for 2002 decreased 6%, or $1.3 million, from 2001.
The decrease resulted from the combination of lower sales and increased costs
for workers compensation, insurance and pensions. The gross margin percentage
for 2002 was approximately 1 percentage point below the 2001 level--25.4%
versus 26.6%.
Total selling and administrative expenses were down 2%, or $247,000,
from 2001. The decrease was due to the elimination of the goodwill
amortization expense in 2002 as a result of the Company's adoption of
Financial Accounting Board Statement No. 142 "Goodwill and Other Intangible
Assets". The elimination of this expense item was offset somewhat by increased
compensation expenses in 2002.
Interest expense decreased 24%, or $543,000, from 2001 due to lower
interest rates and lower outstanding balances resulting from payments on debt.
Earnings before income taxes in 2002 decreased 22%, or $1.4 million,
from 2001. Pretax earnings for the Industrial Hardware segment rose by 24%, or
$810,000. This increase was due to higher sales volume and increased
utilization of production facilities and sales of new products with higher
margins. The Security Products segment experienced an increase of 29%, or
$904,000, in pretax earnings. This increase was mainly due to an increase in
sales volume and increased efficiency resulting from the consolidation of CCL
Security Products into the Company's Illinois Lock Company. In the Metal
Products segment, pretax earnings were down 103%, or $2.5 million, due to an
18% reduction in sales volume, an under-utilization of productive capacity,
personnel costs associated with the downsizing of our operation and a
significant increase in workers compensation costs, these costs related to
both the current year premium and additional costs associated with claims
under prior year policies. The Company's prior policies have reached their
-13-
maximum expense for all but one policy period. The Company expects additional
maximum expense related to this one policy period of approximately $200,000 to
be reached in 2003. Corporate expenses were 184%, or $1.1 million more than
2001 due to higher personnel expenses in 2002, and the fact that 2001
corporate expense included a one-time gain before income taxes of $748,000
received from Prudential Financial Inc. in its issuance of stock during its
demutualization to a public company.
The effective tax rate in 2002 was 31%, down from 36% in 2001. The lower
rate for 2002 was due to a higher percentage of earnings derived in countries
with a lower tax rate.
Fiscal 2001 Compared to Fiscal 2000
Net sales for 2001 decreased 6% ($5.4 million) to $82.8 million from
$88.2 million for 2000. Volume of existing products reduced sales by 10%,
while new product introductions raised sales by 3% and price increases raised
sales by 1%.
The Industrial Hardware segment experienced an 18% decline in sales.
Volume of existing products decreased sales by 26%, while internally developed
new products (for the utility truck and vehicular accessory markets) increased
sales by 6% and price increases raised sales 2%. Sales of heavy hardware to
the tractor-trailer market decreased 39% from 2000 levels. Sales to this
market began to decline in the latter half of 2000, when truck and trailer
manufacturers with excessive inventories started to reduce their purchases.
Sales of industrial hardware (such as rotary locks, locking recessed
handles, multi-point paddle handles and slam latches) to original equipment
manufacturers and distributors were off 15% from 2000. This was primarily due
to the downturn in the manufacturing sector of the economy. Sales of school
bus door closures decreased 13%; and sales of automotive accessories (toolbox
locks, push-button locks and rotary latches) declined 8%. Sales at the
Company's Mexican operations decreased 4% from 2000. Despite the slowdown in
the economy, the Company continued to invest in new products, including a
recently developed electronic bus door control device.
In the Security Products segment, sales were 12% higher than in 2000.
Price increases raised sales by 1%, and volume increases raised sales 11%. The
volume increases were primarily due to the acquisition of the Greenwald
businesses, which were added to the Security Products segment in the third
quarter of 2000. Excluding the effect of Greenwald, sales would have been down
16% in 2001.
Sales of locks to the computer industry decreased 30% in 2001. The
decrease resulted partly from the downturn in the computer industry, and
partly from a recent decision by one of our major customers to offer locking
mechanisms as an option on new business servers and computers. Sales of
high-security locks for coin-operated vending, gaming and amusement equipment
were off 17% in 2001. This decline was the direct result of a slowdown in the
expansion of casinos and game rooms, and a slowing of commercial development
requiring new coin-operated vending equipment. Sales of locks to distributors
servicing lower-volume accounts decreased 4% in 2001. Also down 4% were sales
of locks for access door, furniture, electronics and vehicular applications.
Sales of luggage locks for the travel industry declined 15%; fourth-quarter
sales to this market were especially hard-hit. Sales to locksmiths were off
10% in 2001.
Sales of security products to the commercial laundry industry were also
affected by the slowdown in the economy. Sales to original equipment
manufacturers were off by 8% for the year. Sales to distributors in the
commercial laundry industry were comparable to prior-year levels, while sales
to the route operators in that industry were down slightly. Sales of Smart
Card products to the industry, however, grew by 24% from the prior year due to
greater acceptance of Smart Card technology and an increase in our customer
base.
Despite the decline in business during 2001, the Company continued to
invest in research and development in order to introduce new products and
technology in the mechanical and Smart Card product lines. During 2001, the
Company introduced a high-security push-button lock for medical cabinetry
applications, and also introduced a new drawer slide product line. These new
products met with a positive response from our local sales representatives and
current customers and from trade show attendees.
-14-
In the Metal Products segment, sales were down 14% from the previous
year. Volume reduced sales 15%, while price increases raised sales 1%. Sales
of contract castings were down 37% from 2000. This decrease was mainly due to
the loss in 2001 of orders we had received from another foundry in 2000 when
that foundry was temporarily shut down by a fire. Without this temporary
contract casting business included in 2000, sales would have been down 13% in
2001. The contract casting business continues to be adversely affected by the
importation of castings from China and Mexico. Because of lower labor costs in
these countries and favorable currency exchange rates, the imports are
creating pricing pressures in the casting markets.
Sales of mine roof support anchors increased 16% from 2000. The energy
crisis in California and the surge in natural gas prices in 2000 and early
2001 led to a heightened demand for coal, which in turn led to the reopening
of several underground coal mines that used the Company's proprietary mine
roof anchor support systems. Although the demand for coal is influenced by the
weather and the price of natural gas and oil, coal is still the least costly
and most price-stable energy source available today. At the same time, mining
technology has evolved over the years; with fewer underground mines in
operation, there is now less call for mine roof support systems than there was
in the past. To remain competitive as mining techniques have changed, the
Company has developed alternative products and new manufacturing methods. A
new mine roof anchor system has been developed to more effectively compete
with resin bolt systems. In addition, the Company has invested in the
equipment and developed the technical knowledge necessary to begin the
production of ductile iron. Ductile iron is superior to malleable iron, and is
lower in cost to produce.
Total gross margin for 2001 decreased 15%, or $4.0 million, from 2000.
The decrease resulted from the combination of lower sales and under-absorbed
overhead. The gross margin percentage for 2001 was approximately 3 percentage
points below the 2000 level--26.6% versus 29.5%.
Total selling and administrative expenses were up 6%, or $779,000, from
2000. Most of the increase was due to the inclusion of Greenwald for the full
12 months of 2001. Other items that increased included goodwill amortization
expenses (associated with the acquisitions made in 2000), payroll expenses and
advertising expenses.
Interest expense increased 27%, or $473,000, from 2000. This was due to
the additional borrowings (principally for the Greenwald acquisition in 2000)
that were on the books for the 12 months of 2001.
Earnings before income taxes in 2001 decreased 43%, or $4.6 million,
from 2000. Pretax earnings for the Industrial Hardware segment sank by 49%, or
$3.2 million. This decrease was due to lower sales volume and under-utilized
production facilities. The Security Products segment experienced a decrease of
21%, or $835,000, in pretax earnings. This decrease was partially offset by
results from the Greenwald acquisition; with Greenwald excluded, the negative
impact would have been greater. In the Metal Products segment, pretax earnings
were down 16%, or $466,000, due to a reduction in contract casting business.
Corporate expenses were down 41%, or $411,000, as the result of lower
compensation expenses and the income received from the Prudential
demutualization.
The effective tax rate in 2001 was 36%, up from 34% in 2000. The higher
rate for 2001 was due to higher foreign taxes associated with the repatriation
of foreign earnings through a dividend distribution.
Liquidity and Sources of Capital
2002 2001 2000
---- ---- ----
Current ratio 3.5 3.7 3.2
Average days' sales in accounts receivable 50 52 55
Inventory turnover 3.7 3.3 3.6
Ratio of working capital to sales 31.5% 33.4% 29.8%
Total debt to market capitalization 52.4% 65.8% 66.5%
Total debt to total shareholders' equity 56.9% 70.9% 81.6%
On December 27, 2002, the Company amended its unsecured loan agreement
(the Loan Agreement) with its lender. As a result, the term portion of the
Loan Agreement ($18.6 million on December 27, 2002) is to be paid in quarterly
principal payments of $600,000 during 2003, and the payments are then to
-15-
increase annually until maturity on January 1, 2009. As required, the Company
maintains an interest rate swap contract with the lender with an original
amount of $15.0 million; this amount is reduced on a quarterly basis in
accordance with the principal repayment schedule of the term portion of the
Loan Agreement ($11.2 million on December 28, 2002). The interest rate on the
swap contract is fixed at 9.095%. Under the revolving credit portion of the
Loan Agreement, the Company may borrow up to $7.5 million through July 1,
2005, and must pay a quarterly commitment fee of 0.25% on the unused portion.
As of December 28, 2002, $1.5 million was outstanding under the revolving
credit portion of the Loan Agreement.
The interest rates on the term and the revolving credit portions of the
Loan Agreement may vary. For the term portion, the interest rate is based on
LIBOR plus additional interest of 1.5% to 2.0%. For the revolving credit
portion, the rate is based on LIBOR plus 1.25% to 1.75%. The additional
interest percentages are based on operating results calculated on a
rolling-four-quarter basis.
In 1999, the Company borrowed $2.0 million to finance specific building
improvements and equipment acquisitions. The borrowing was structured in the
form of a lease classified as a capital lease obligation. The lease obligation
is collateralized by a security interest in the aforementioned equipment and a
$900,000 letter of credit.
As of December 28, 2002 scheduled annual principal maturities of
long-term debt, including capital lease obligations, for each of the next five
years follow: 2003 - $2,628,664; 2004 - $2,606,076; 2005 - $4,509,811; 2006 -
$3,420,523; and 2007 - $3,831,782.
The ratio of working capital to sales was 31.5% in 2002, 33.4% in 2001
and 29.8% in 2000. The higher ratio in 2001 was due to planned increases in
inventory levels and an investment in common stock received as compensation
from Prudential Financial in connection with Prudential's demutualization in
the fourth quarter of 2001.
Accounts receivable were at approximately the same levels at the end of
2002 and 2001. The average days' sales in accounts receivable equaled 50 in
2002 compared with 52 days in 2001 and 55 days in 2000. The Company continues
to focus on improvement and collection of accounts receivable.
Inventories decreased in 2002 by 11%, or $2.1 million, from 2001. The
decrease reflected a planned reduction at Frazer & Jones resulting from a
decline in contract casting customers; it also was due to the stocking of
additional inventory in 2001 for CCL's move from New Britain, CT, to Wheeling,
IL. Inventory turnover remained substantially unchanged at 3.7 times in 2002
versus 3.3 times in 2001 and 3.6 times in 2000. Inventories at some locations
are slightly higher than required, and the Company continues to focus on
reducing levels in order to free up working capital.
Capital expenditures in 2002, 2001 and 2000 were $1.6 million, $1.9
million and $5.1 million, respectively. The Company continuously upgrades and
replaces existing equipment to expand capacity, improve efficiency and satisfy
safety and environmental requirements. The Company expects capital
expenditures for 2003 will be approximately $1.5 million to $2.5 million.
The Company's leases certain equipment and buildings under cancelable
and non-cancelable operating leases expiring at various dates up to ten years.
Rent expense amounted to $306,000 in 2002, $304,000 in 2001 and $407,000 in
2000.
Cash flow generated from operations in 2002 was $11.4 million, which was
more than sufficient to service our term loan, pay dividends, fund capital
expenditures, pay down $3.5 million on our revolving credit loan and
internally finance two small business acquisitions.
The present financial strength of the Company's balance
sheet--demonstrated by a current ratio of 3.5 to 1, positive cash flow from
operating activities and availability of a $7.5 million credit line --will
enable the Company to meet its current obligations and continue to grow in
2003.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations has not been significant, as
the Company has generally been able to adjust its prices to reflect higher
manufacturing costs, or has been able to improve its manufacturing processes to
achieve increased productivity.
-16-
Historical data as presented in the financial statements reasonably
relate current costs, except for depreciation, to revenues generated in the
period. Depreciation expense based on the current replacement cost of plant
and equipment would be higher than depreciation expense reported in historical
financial statements.
The Company uses the last-in, first-out (LIFO) method of accounting for
its domestic inventories and the first-in, first-out (FIFO) method for all
other inventories. Under the LIFO method, the cost of products sold reported
in the financial statements approximates current cost and thus provides a
closer matching of revenue and expenses in periods of increasing costs.
Other Matters
Critical Accounting Policies
The preparation of the financial statements in accordance with generally
accepted accounting principles (GAAP) requires management to make judgments,
estimates and assumptions regarding uncertainties that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Areas of
uncertainty that require judgments, estimates and assumptions include the
accounting for derivatives, environmental matters, the testing of goodwill and
other intangible assets for impairment, proceeds on assets to be sold,
pensions and other postretirement benefits, and tax matters. Management uses
historical experience and all available information to make its estimates and
assumptions, and actual results will inevitably differ from the estimates and
assumptions that are used to prepare the Company's financial statements at any
given time. Despite these inherent limitations, management believes that
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and related footnotes provide a
meaningful and fair picture of the Company.
Management believes that the application of these estimates and
assumptions on a consistent basis enables the Company to provide the users of
the financial statements with useful and reliable information about the
Company's operating results and financial condition.
Allowance for Doubtful Accounts
We continuously monitor payments from our customers and maintain
allowances for doubtful accounts, that is, for estimated losses resulting from
the inability of our customers to make required payments. When we evaluate the
adequacy of our allowances for doubtful accounts, we take into account various
factors including our accounts receivable aging, customer creditworthiness,
historical bad debts and geographic risk. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances might be required.
Inventory Reserve
Inventories are valued at the lower of cost or market, generally
determined by the last-in, first-out (LIFO) method. Accordingly, a LIFO
valuation reserve is calculated using the link chain method and is maintained
to properly value these inventories. We review the net realizable value of
inventory in detail on an ongoing basis, giving consideration to
deterioration, obsolescence and other factors. Based on these assessments, we
provide for an inventory reserve in the period in which an impairment is
identified. The reserve fluctuates with market conditions, design cycles and
other economic factors.
Goodwill and Intangible Assets
Intangible assets with finite useful lives are amortized generally on a
straight-line basis over the periods benefited. Goodwill and intangible assets
with indefinite useful lives are not amortized. Prior to 2002, goodwill and
indefinite-lived intangible assets were amortized over periods ranging from 5
to 17 years. Each year during the second quarter, the carrying value of
goodwill and other intangible assets with indefinite useful lives is tested
for impairment. During 2002, the Company used the discounted cash flow method
to calculate the fair value of its reporting units with goodwill. If it is
-17-
determined that the carrying value exceeds fair value, an impairment loss is
recognized at that time. The determination of discounted cash flows is based
on the businesses' strategic plans and long-range planning forecasts. The
revenue growth rates included in the plans are management's best estimates
based on current and forecasted market conditions, and profit margin
assumptions are projected by each segment based on the current cost structure
and anticipated cost reductions. If different assumptions were used in these
plans, the related undiscounted cash flows used in measuring impairment could
be different and additional impairment of assets might be required to be
recorded.
Pension and Other Postretirement Benefits
The amounts recognized in the consolidated financial statements related
to pension and other postretirement benefits are determined from actuarial
valuations. Inherent in these valuations are assumptions about such factors as
expected return on plan assets, discount rates at which liabilities could be
settled, rate of increase in future compensation levels, mortality rates and
trends in health insurance costs. These assumptions are reviewed annually and
updated as required. In accordance with GAAP, actual results that differ from
the assumptions are accumulated and amortized over future periods and,
therefore, affect the expense recognized and obligations recorded in future
periods.
The expected long-term rate of return on assets is developed with input
from the Company's actuarial firms. Also considered is the Company's
historical experience with pension fund asset performance in comparison with
expected returns. The long-term-rate-of-return assumption used for determining
net periodic pension expense for 2002 was 9%. The Company reviews the
long-term rate of return each year. Raising or lowering the expected long-term
rate of return by 0.25% would impact 2003 pension expense by approximately
$67,000. Future actual pension income and expense will depend on future
investment performance, changes in future discount rates and various other
factors related to the population of participants in the Company's pension
plans.
The recent declines in equity markets and interest rates have had a
negative impact on the Company's pension plan liability and the fair value of
its plan assets. As a result, the accumulated benefit obligation exceeded the
fair value of plan assets at the end of 2002 for two of the Company's plans,
which resulted in a $4 million charge to shareholders' equity in the fourth
quarter.
The Company expects to make cash contributions to its pension plans of
approximately $1 million in 2003.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign manufacturing facilities account for approximately
14% of total sales and 13% of total assets. Its U.S. operations buy from and
sell to these foreign affiliates, and also make limited sales (less than 11%
of total sales) to nonaffiliated foreign customers. This trade activity could
be affected by fluctuations in foreign currency exchange or by weak economic
conditions. The Company's currency exposure is concentrated in the Canadian
dollar, Mexican peso, New Taiwan dollar and Hong Kong dollar. Because of the
Company's limited exposure to foreign markets, any currency exchange gains or
losses have not been material and are not expected to be material.
The Company is exposed to interest rate risk with respect to its
unsecured Loan Agreement, which provides for interest based on LIBOR plus a
spread of up to 2%. The spread is determined by a comparison of the Company's
operating performance with agreed-upon financial targets. Since the Company's
performance depends to a large extent on the overall economy, the interest
rate paid by the Company under its Loan Agreement is closely linked to the
trend in the U.S. economy. The current interest rate spread is 1.75% on the
term loan portion and 1.50% on the revolving credit line portion of the Loan
Agreement. Changes in LIBOR rates will also affect the Company's interest
expense. To hedge against future LIBOR rate increases, the Company has a swap
contract on part of the term loan portion of the Loan Agreement. The interest
rate on the contract is 9.095%. The notional amount of the swap contract is
reduced on a quarterly basis in accordance with the principal repayment
schedule for the term portion of the Loan Agreement. The notional amount of
the swap contract was $11.2 million as of December 28, 2002.
The remainder of the term debt is subject to the volatility of
short-term interest rates, where a 1% change in interest rates would cause an
$89,500 increase or decrease in the Company's annual interest cost. While the
Company could enter into an additional swap agreement to fix the rate, it does
not expect to do so.
-18-
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Eastern Company
Consolidated Balance Sheets
December 28 December 29
2002 2001
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 5,939,232 $ 4,955,020
Investment in common stock, at market 807,438 850,017
Accounts receivable, less allowances of $304,000 in 2002 and
$344,000 in 2001 10,824,807 10,814,017
Inventories:
Raw materials and component parts 7,658,722 8,228,364
Work in process 4,226,858 4,390,818
Finished goods 4,649,077 5,971,665
----------- -----------
16,534,657 18,590,847
Prepaid expenses and other 1,336,383 1,190,917
Deferred income taxes 564,000 640,200
----------- -----------
Total Current Assets 36,006,517 37,041,018
Property, Plant and Equipment
Land 701,016 700,960
Buildings 11,351,043 11,447,209
Machinery and equipment 28,390,569 28,675,455
Accumulated depreciation (15,392,659) (14,337,979)
----------- -----------
25,049,969 26,485,645
Other Assets
Goodwill and trademarks, less accumulated amortization of
$1,256,442 in 2002 and $1,292,848 in 2001 10,514,047 10,701,735
Patents, technology and licenses, less accumulated amortization
of $2,382,037 in 2002 and $1,951,862 in 2001
2,111,865 2,346,546
Intangible pension asset 1,112,129 -
Prepaid pension cost 1,338,010 5,321,110
----------- -----------
15,076,051 18,369,391
----------- -----------
$76,132,537 $81,896,054
=========== ===========
-19-
Consolidated Balance Sheets
December 28 December 29
2002 2001
---- ----
Current Liabilities
Accounts payable $ 3,838,412 $ 3,471,951
Accrued compensation 1,923,463 982,464
Other accrued expenses 2,015,979 2,066,734
Current portion of long-term debt 2,628,664 3,388,662
----------- -----------
Total Current Liabilities 10,406,518 9,909,811
Deferred income taxes 737,987 3,126,500
Long-term debt, less current portion 18,920,747 25,013,906
Accrued postretirement benefits 2,578,156 2,735,910
Interest rate swap obligation 1,138,086 1,054,420
Accrued pension obligation 4,448,197 -
Shareholders' Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value:
Authorized: 25,000,000 shares
Issued: 3,631,869 shares in 2002 and 3,629,185 shares in 2001;
excluding shares held in treasury of 1,657,320 in 2002 and
1,652,320 in 2001 883,695 839,155
Retained earnings 42,638,351 40,944,315
Accumulated other comprehensive income (loss):
Foreign currency translation (898,137) (1,156,515)
Additional minimum pension liability, net of taxes (4,073,870) -
Derivative financial instruments, net of taxes (683,086) (632,420)
Unrealized holding gain on investment in common stock, net of 35,893 60,972
taxes
----------- -----------
(5,619,200) (1,727,963)
----------- -----------
Total Shareholders' Equity 37,902,846 40,055,507
----------- -----------
$76,132,537 $81,896,054
=========== ===========
See accompanying notes.
-20-
Consolidated Statements of Income
Year ended
December 28 December 29 December 30
2002 2001 2000
---- ---- ----
Net sales $ 81,337,207 $ 82,825,353 $ 88,192,294
Other income 67,564 866,031 227,305
------------ ------------ ------------
81,404,771 83,691,384 88,419,599
Costs and expenses
Cost of products sold 60,637,151 60,782,769 62,191,769
Selling and administrative 14,317,256 14,563,913 13,784,638
Interest 1,716,056 2,259,347 1,786,325
------------ ------------ ------------
76,670,463 77,606,029 77,762,732
------------ ------------ ------------
Income before income taxes 4,734,308 6,085,355 10,656,867
Income taxes 1,442,408 2,172,436 3,601,378
------------ ------------ ------------
Net income $ 3,291,900 $ 3,912,919 $ 7,055,489
============ ============ ============
Earnings per Share
Basic $ .91 $ 1.08 $ 1.95
============ ============ ============
Diluted $ .89 $ 1.07 $ 1.93
============ ============ ============
See accompanying notes.
Consolidated Statements of Comprehensive Income
Year ended
December 28 December 29 December 30
2002 2001 2000
---- ---- ----
Net income $ 3,291,900 $ ,912,919 $ 7,055,489
Other comprehensive income/(loss) -
Currency translation 258,378 (349,897) (88,463)
Cumulative effect of accounting change for
derivative financial instruments, net of
income taxes of $265,000 - (400,756) -
Change in fair value of derivative financial
instruments, net of 2002 income taxes of
$33,000 and 2001 income taxes of $157,000
(50,666) (231,664) -
Unrealized holding gain on investment in
common stock, net of income taxes (25,079) 60,972 -
Additional minimum pension liability net
of income taxes of $2,715,913 (4,073,870) - -
------------ ------------ ------------
(3,891,237) (921,345) (88,463)
------------ ------------ ------------
Comprehensive (loss)/income $ (599,337) $ 2,991,574 $ 6,967,026
============ ============ ============
See accompanying notes.
-21-
Consolidated Statements of Shareholders' Equity
Common Stock Retained Unearned
Earnings Compensation
------------ ------------ ------------
Balances at January 1, 2000 $ 1,154,147 $ 33,175,227 $ (211,406)
Net income 7,055,489
Cash dividends declared, $.44 per share (1,600,511)
Purchase of 29,154 shares of Common Stock for treasury (416,438)
Issuance of 11,875 shares of Common Stock upon the exercise
of stock options 104,671
Issuance of 6,094 shares of Common Stock for director fees 82,987
Change in fair value of restricted stock awards (47,343) 47,343
------------ ------------ ------------
Balances at December 30, 2000 878,024 38,630,205 (164,063)
Net income 3,912,919
Cash dividends declared, $.44 per share (1,598,809)
Purchase of 1,594 shares of Common Stock for treasury (23,432)
Issuance of 3,750 shares of Common Stock upon the exercise of
stock options 23,437
Issuance of 9,022 shares of Common Stock for director fees 125,189
18,750 shares of Common Stock cancelled under restricted
stock award program (164,063) 164,063
------------ ------------ ------------
Balances at December 29, 2001 839,155 40,944,315 -
Net income 3,291,900
Cash dividends declared, $.44 per share (1,597,864)
Purchase of 5,000 shares of Common Stock for treasury (55,855)
Issuance of 7,684 shares of Common Stock for director fees
100,395
------------ ------------ ------------
Balances at December 28, 2002 $ 883,695 $ 42,638,351 $ -
============ ============ ============
See accompanying notes.
-22-
Consolidated Statements of Cash Flows
Year ended
December 28 December 29 December 30
2002 2001 2000
Operating Activities
Net income $ 3,291,900 $ 3,912,919 $ 7,055,489
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,565,460 4,460,704 3,639,384
Common stock received - (748,345) -
Loss on sales of equipment and other assets - 258 6,054
Provision for doubtful accounts 91,296 (4,002) (92,581)
Deferred income taxes 454,200 461,200 659,300
Issuance of Common Stock for directors' fees 100,395 125,189 82,987
Changes in operating assets and liabilities:
Accounts receivable 259,870 2,673,430 (910,198)
Inventories 2,191,677 (1,485,460) 69,855
Prepaid expenses and other (137,673) 212,848 (523,288)
Prepaid pension cost 349,385 (27,237) (313,184)
Other assets 47,536 (211,999) (243,561)
Accounts payable 875,185 (1,097,265) 526,086
Accrued compensation 1,002,865 (1,281,060) 381,824
Other accrued expenses (724,373) (30,143) 71,519
------------ ------------ ------------
Net cash provided by operating activities 11,367,723 6,961,037 10,409,686
Investing Activities
Purchases of property, plant and equipment (1,559,863) (1,894,723) (5,065,275)
Business acquisitions, net of cash acquired (303,746) - (27,547,304)
Proceeds from sales of equipment and other assets - - 98,872
------------ ------------ ------------
Net cash used by investing activities (1,863,609) (1,894,723) (32,513,707)
Financing Activities
Proceeds from issuance of long-term debt - - 30,009,694
Principal payments on long-term debt (6,853,694) (3,028,830) (7,396,103)
Proceeds from sales of Common Stock - 23,437 104,671
Purchases of Common Stock for treasury (55,855) (23,432) (416,438)
Dividends paid (1,597,864) (1,598,809) (1,600,511)
------------ ------------ ------------
Net cash provided (used) by financing activities (8,507,413) (4,627,634) 20,701,313
Effect of exchange rate changes on cash (12,489) (25,366) 4,224
------------ ------------ ------------
Net change in cash and cash equivalents 984,212 413,314 (1,398,484)
Cash and cash equivalents at beginning of year 4,955,020 4,541,706 5,940,190
------------ ------------ ------------
Cash and cash equivalents at end of year $ 5,939,232 $ 4,955,020 $ 4,541,706
============ ============ ============
See accompanying notes.
-23-
The Eastern Company
Notes to Consolidated Financial Statements
1. OPERATIONS
The operations of The Eastern Company (the Company) consist of three business
segments: industrial hardware, security products, and metal products. The
industrial hardware segment produces latching devices for use on industrial
equipment and instrumentation as well as a broad line of proprietary hardware
designed for truck bodies and other vehicular type equipment. The security
products segment manufactures and markets a broad range of locks for
traditional general purpose security applications as well as specialized locks
for soft luggage, coin-operated vending and gaming equipment, and electric and
computer peripheral components. This segment also manufactures and markets coin
acceptors and metering systems to secure cash used in the commercial laundry
industry and produces cashless payment systems utilizing advanced smart card
technology. The metal products segment consists of a foundry, which produces
anchoring devices used in supporting the roofs of underground coal mines. This
segment also manufactures specialty products, which serve the construction,
automotive and electrical industries.
Sales are made to customers primarily in North America.
2. ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fiscal Year
The Company's year ends on the Saturday nearest to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated.
Foreign Currency Translation
For foreign operations, balance sheet accounts are translated at the current
year-end exchange rate; income statement accounts are translated at the average
exchange rate for the year. Resulting translation adjustments are made directly
to a separate component of shareholders' equity--"Accumulated other
comprehensive loss - foreign currency translation". Foreign currency exchange
gains and losses are not material in any year.
Cash Equivalents
Highly liquid investments purchased with a maturity of three months or less are
considered cash equivalents.
Reclassification
Certain prior year amounts have been reclassified to conform to the 2002
presentation.
-24-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and determinable, delivery has occurred,
and there is a reasonable assurance of collections of the sales proceeds. We
generally obtain written purchase authorizations from our customers for a
specified amount of product at a specified price and consider delivery to have
occurred at the time of shipment. Revenue is recorded net of applicable
allowances, including estimated allowance for returns, rebates, and other
discounts. We have demonstrated the ability to make reasonable and reliable
estimates of product returns and of allowances for doubtful accounts based on
the Company's and industry trends.
Investment in Common Stock
The investment in common stock consists solely of shares of common stock of a
single issuer. Such shares were received as compensation during 2001 in
connection with the "demutualization" of the issuer. This investment is
classified as "available-for-sale" and, as such, is measured and reported at
fair value in the consolidated balance sheet. The cost basis of this investment
is $748,345 based on the fair value of the shares at the time of receipt and
was reported in "Other income, net". The subsequent related unrealized holding
gain of $59,093, less deferred income taxes of $23,200 to December 28, 2002 and
any future holding gains or losses, net of deferred income taxes are reported
as a separate component of stockholder's equity. To date, no shares have been
sold. The Company received dividend income of $10,322 during 2002.
Inventories
Inventories are valued at the lower of cost or market, generally determined by
the last-in, first-out (LIFO) method. Current cost exceeded the LIFO carrying
value by approximately $3,368,000 at December 28, 2002 and $3,080,000 at
December 29, 2001. There was no material LIFO quantity liquidation in 2002 or
2001.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment (including equipment under a capital lease) are
stated on the basis of cost. Depreciation ($3,006,994 in 2002, $3,173,277 in
2001 and $2,730,392 in 2000) is computed generally using the straight-line
method based on the estimated useful lives of the assets.
Goodwill, Intangibles and Impairment of Long-Lived Assets
Patents are amortized using the straight-line method over the lives of the
patents. Technology and licenses are generally amortized on a straight-line
basis over periods ranging from 5 to 17 years. Prior to December 30, 2001,
Goodwill was being amortized over periods ranging from 5 to 15 years.
Amortization expense in 2002, 2001 and 2000 was $558,466, $1,287,427 and
$908,992, respectively. Total amortization expense for each of the next five
years is estimated to be as follows: 2003 - $355,262; 2004 - $240,891; 2005 -
$167,558; 2006 - $160,891; 2007 - $152,305.
Effective December 30, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 142, Goodwill and Other Intangible Assets. Under the new
standards, goodwill is no longer amortized but is subject to annual impairment
tests; other definite life intangible assets continue to be amortized over
their useful lives. Impairment exists if the carrying value of the reporting
unit exceeds the fair value of the reporting unit. Based on the impairment test
the Company believes no impairment exists. As of December 28, 2002, the
Company's goodwill is allocated between the segments as follows: Industrial
Hardware - $1,631,734 and Security Products - $8,732,406.
-25-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
If the provisions of Statement No. 142 were applied effective January 2, 2000,
the net income for the Company would have been:
2001 2000
---- ----
Earning as reported $ 3,912,919 $ 7,055,489
Amortization of goodwill, net of taxes 508,058 293,092
----------- -----------
Pro forma earnings 4,420,977 7,348,581
=========== ===========
Earnings as reported per diluted share $1.07 $1.93
Amortization of goodwill, net of taxes,
perdiluted share 0.14 0.08
----------- -----------
Pro forma earnings per diluted share $1.21 $2.01
=========== ===========
The changes in the carrying amount of goodwill for the year ended December 28,
2002, follow:
Balance as of December 29, 2001 $10,603,638
Adjustment to Greenwald purchase price (300,000)
Goodwill acquired 50,735
Change due to foreign currency translation 9,767
-----------
Balance as of September 28, 2002 $10,364,140
===========
In the event that facts and circumstances indicate that the carrying value of
long-lived assets, including definite life intangible assets, may be impaired,
an evaluation is performed to determine if a write-down is required. No events
or changes in circumstances have occurred that indicate that the carrying
amount of such long-lived assets held and used may not be recovered.
Effective December 30, 2001, the Company adopted Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Statement No. 144
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, however it retains the
fundamental provisions of that statement related to the recognition and
measurement of the impairment of long-lived assets to be "held and used." In
addition, Statement 144 provides more guidance on estimating cash flows when
performing a recoverability test, requires that a long-lived asset (group) to
be disposed of other than by sale (e.g. abandoned) be classified as "held and
used" until it is disposed of, and establishes more restrictive criteria to
classify an asset (group) as "held for sale." The adoption of Statement No. 144
did not have an impact on the Company's financial position.
Product Development Costs
Product development costs, charged to expense as incurred, were $1,040,661 in
2002, $1,005,555 in 2001 and $176,498 in 2000.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$495,889 in 2002, $678,479 in 2001 and $630,889 in 2000.
-26-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Earnings Per Share
The denominators used in the earnings per share computations follow:
Basic: 2002 2001 2000
- ------ ---- ---- ----
Weighted average shares outstanding 3,631,278 3,623,291 3,640,199
Contingent shares outstanding - - (18,750)
--------- --------- ---------
Denominator for basic earnings per share 3,631,278 3,623,291 3,621,449
========= ========= =========
Diluted:
Weighted average shares outstanding 3,631,278 3,623,291 3,640,199
Contingent shares outstanding - - (18,750)
Dilutive stock options 49,806 43,888 39,474
--------- --------- ---------
Denominator for diluted earnings per share 3,681,084 3,667,179 3,660,923
========= ========= =========
Derivatives
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, requires companies to recognize all derivatives in its consolidated
balance sheet at fair value. Derivatives that are not hedges are adjusted to
fair value through operations. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value are either offset against the
change in fair value of assets, liabilities, or firm commitments through
operations or recognized in other comprehensive income until the hedged item is
recognized in operations. The Company's interest rate swap agreement is
considered `effective' under Statement No. 133 and, as a result, changes in
fair value of the agreement are recorded in current assets or liabilities with
the offset amount recorded to accumulated other comprehensive income (loss) in
stockholders' equity, net of taxes. The adoption of Statement No. 133 resulted
in a charge in 2001 for the cumulative effect of an accounting change of
$400,756, a current year charge for 2002 of $50,666 and for 2001 of $231,664,
which have been recorded as other comprehensive loss in the consolidated
statements of comprehensive income, net of taxes.
Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (the Interpretation). The Interpretation requires
companies to recognize, at inception of the guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee and also requires a
guarantor to make significant new disclosures, even when the likelihood of
making any payments under the guarantee is remote. The Interpretation provides
specific guidance identifying the characteristics of contracts that are subject
to its guidance in its entirety from those only subject to the initial
recognition and measurement provisions. The recognition and measurement
provisions of the Interpretation are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements of the Interpretation are effective for interim and annual period
financial statements ending after December 15, 2002. The Company does not
believe any additional disclosure is needed currently related to the
Interpretation and will apply the Interpretation prospectively if guarantees
are entered into.
-27-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Stock Based Compensation
The Company accounts for stock options in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As such,
it does not recognize compensation expense for stock options granted under its
stock option plans if the exercise price is at least equal to the fair market
value of the Company's common stock on the date granted. Stock-based
compensation costs for stock awards are reflected in net income over the
awards' vesting period.
Pro forma information regarding net income and earnings per share, as required
by Statement No. 123 "Accounting for Stock-Based Compensation", has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value of the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2002, 2001, and 2000:
2002 2001 2000
---- ---- ----
Risk free interest rate 3.89% 4.84% 5.70%
Expected volatility 0.309 0.302 0.310
Expected option life 5 years 5 years 5 years
Weighted-average dividend yield 3.1% 3.1% 3.1%
The weighted average fair value of options granted was $14.19 in 2002, $14.40
in 2001, and $14.25 in 2000.
(in thousands, except per share amounts) 2002 2001 2000
---------------------------------------- ---- ---- ----
Pro forma net income $3,154 $3,713 $6,753
Pro forma basic earnings per share 0.87 1.03 1.86
Pro forma diluted earnings per share 0.86 1.01 1.84
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
3. BUSINESS ACQUISITIONS
Effective October 1, 2002 the Company acquired all of the issued and
outstanding stock of Canadian Commercial Vehicles Corporation (CCV) for cash of
approximately $70,000 and the assumption of approximately $130,000 of debt,
which the Company paid upon closing. CCV will be established as a Canadian
Subsidiary of The Eastern Company, located in Kelowna, British Columbia,
Canada. CCV manufactures lightweight sleeper boxes used in Class 8 trailer
trucks.
-28-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. BUSINESS ACQUISITIONS (continued)
Effective March 1, 2002 the Company acquired certain assets of the Big Tag
Division of Dolan Enterprises, Inc. for cash of approximately $260,000. Big Tag
was merged into the CCL division of the company located in Wheeling, Illinois.
Big Tag provides high-visibility, custom luggage tags, which the Company will
market in conjunction with its custom logo luggage locks to the travel,
incentive and premium markets.
Effective June 29, 2000, the Company acquired the assets and businesses and
assumed certain liabilities of Greenwald Industries, Inc. and Greenwald
Intellicard, Inc. (the Greenwald businesses). The Greenwald businesses design,
manufacture and market coin acceptance systems and provide smart cards, smart
card readers, value transfer stations, card management software and interface
boards primarily for the commercial laundry industry. The cost of the
acquisition of the Greenwald businesses was approximately $24,285,000,
including the assumption of approximately $749,000 of current liabilities.
Effective February 1, 2000 and April 6, 2000 the Company also acquired all the
issued and outstanding Common Stock of Ashtabula Industrial Hardware Co.
(Ashtabula) and two product lines from Hansen International Inc. (Hansen),
respectively. Ashtabula produces proprietary hardware for school and courtesy
bus doors. The Hansen product lines produce proprietary locks to secure the
lids of toolboxes that are installed in the beds of pickup trucks and other
vehicles. The cost of these two acquisitions was approximately $4,070,000.
All of the above acquisitions have been accounted for using the purchase
method. The acquired businesses are included in the consolidated operating
results of the Company from their date of acquisition. The excess of the cost
of the acquired businesses over the fair market value of the net assets
acquired has been allocated to goodwill.
Neither the actual results nor the pro forma effects of the acquisitions of
CCV, Big Tag, Ashtabula or Hansen are material to the Company's financial
statements. Unaudited pro forma results assuming the Greenwald businesses were
acquired January 2, 1999, follow:
2000
----
Net sales $96,985,297
Net income 6,841,451
Per share:
Basic $1.89
Diluted $1.87
4. CONTINGENCIES
The Company is involved in various matters of litigation incidental to the
normal conduct of its business. In management's opinion, the disposition of
these matters will not have a material effect on the financial condition or
results of operations of the Company.
-29-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. DEBT
On December 27, 2002, the Company amended its unsecured loan agreement (the Loan
Agreement) with its lender. The term portion of the Loan Agreement ($18,625,000
on December 27, 2002) is payable in quarterly principal payments of $600,000 in
2003 and increases annually through maturity on January 1, 2009. The Company
maintains an interest rate swap contract, as required, with the lender, with an
original amount of $15,000,000 reduced on a quarterly basis in accordance with
the principal repayment schedule of the term portion of the Loan Agreement
($11,175,000 on December 28, 2002). The interest rate on the swap contract is
fixed at 9.095%. The Company may borrow up to $7,500,000 through July 1, 2005
under the revolving credit portion of the Loan Agreement with a quarterly
commitment fee of 0.25% on the unused portion. As of December 28, 2002,
$1,500,000 was outstanding under the revolving credit portion of the Loan
Agreement.
The interest rates on the term and the revolving credit portions of the Loan
Agreement may vary. The interest rates may vary based on LIBOR rate plus a
margin spread of 1.5% to 2.0% (3.19% at 12/28/02) for the term portion and
1.25% to 1.75% (2.94% at 12/28/02) for the revolving credit portion. The margin
rate spread is based on operating results calculated on a rolling-four-quarter
basis.
In 1999, the Company borrowed $2,000,000 to finance specific building
improvements and equipment acquisitions. The borrowing was structured in the
form of a lease classified as a capital lease obligation. The lease obligation
is collateralized by a security interest in the equipment referred to above and
a $900,000 letter of credit.
Debt consists of:
2002 2001
---- ----
Term loan $ 18,625,000 $ 21,750,000
Revolving credit loan 1,500,000 5,009,694
Capital lease obligation with interest at 4.99% and payable in
monthly installments of $21,203 through April 2009 1,379,212 1,559,908
Other 45,199 82,966
------------ ------------
21,549,411 28,402,568
Less current portion 2,628,664 3,388,662
------------ ------------
$ 18,920,747 $ 25,013,906
============ ============
The Company paid interest of $1,741,511 in 2002, $2,752,643 in 2001 and
$1,308,108 in 2000.
Collectively, under the covenants of the Loan Agreement and capital lease
obligation, the Company is required to maintain specified financial ratios and
amounts. In addition, the Company is restricted to, among other things, capital
leases, purchases or redemptions of its capital stock, mergers and
divestitures, and new borrowing.
As of December 28, 2002 scheduled annual principal maturities of long-term
debt, including capital lease obligations, for each of the next five years
follow: 2003 - $2,628,664; 2004 - $2,606,076; 2005 - $4,509,811; 2006 -
$3,420,523; and 2007 - $3,831,782.
At December 28, 2002 and December 29, 2001, building improvements and equipment
with a cost of $1,976,084 was recorded under capital leases with accumulated
depreciation of approximately $332,310 and $221,540, respectively.
-30-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. STOCK RIGHTS
The Company has a stock rights plan. At December 28, 2002 there were 3,631,869
stock rights outstanding under the plan. Each right may be exercised to
purchase one share of the Company's Common Stock at an exercise price of $80,
subject to adjustment to prevent dilution.
The rights generally become exercisable ten days after an individual or group
acquires 10% of the Company's outstanding common shares or after commencement
or announcement of an offer for 10% or more of the Company's Common Stock. The
stock rights, which do not have voting privileges, expire on July 22, 2008, and
may be redeemed by the Company at a price of $.0067 per right at any time prior
to their expiration. In the event that the Company were acquired in a merger or
other business combination transaction, provision shall be made so that each
holder of a right shall have the right to receive, upon exercise thereof at the
then current exercise price, that number of shares of common stock of the
surviving company which at the time of such transaction would have a market
value of two times the exercise price of the right.
7. STOCK OPTIONS AND AWARDS
Stock Options
The Company has four incentive stock option plans for officers, other key
employees, and non-employee directors: 1989, 1995, 1997 and 2000. Under all
plans, options granted to participants will have exercise prices determined by
the Compensation Committee of the Company's Board of Directors, except that
options granted under the 1989 plan and incentive stock options granted under
the 1995 and 2000 plans must have exercise prices that are not less than 100%
of the fair market value of the stock on the dates the options are granted.
Restricted stock awards may also be granted to participants under the 1995 and
2000 plans with restrictions determined by the Incentive Compensation Committee
of the Company's Board of Directors. All options granted in 2000, 2001, and
2002 were granted at prices equal to the fair market value of the stock on the
dates granted. No restricted stock was granted in 2002, 2001 or 2000.
As of December 28, 2002, there were 309,642 shares available for future grant
under the above noted plans.
Information with respect to the Company's stock option plans is summarized
below:
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at January 1, 2000 550,875 $12.966
Granted 118,391 14.250
Exercised (11,875) 7.832
------- -------
Outstanding at December 30, 2000 657,391 13.322
Granted 44,109 14.400
Cancelled (18,750) 11.280
Exercised (3,750) 6.250
------- -------
Outstanding at December 29, 2001 679,000 13.477
Granted 35,000 14.190
Cancelled (25,000) 14.251
------- -------
Outstanding at December 28, 2002 689,000 13.475
======= =======
-31-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND aWARDS (continued)
Options Outstanding
-------------------
Weighted
Average
Outstanding as of Remaining Weighted Average
Range of Exercise Prices December 28, 2002 Contractual Life Exercise Price
----------------- ---------------- --------------
$ 9.92 - $11.92 194,000 4.8 10.461
$14.00 - 15.25 482,500 7.1 14.539
$18.50 12,500 6.6 18.500
------- --- -------
689,000 6.5 $13.475
Options Exercisable
-------------------
Exercisable as of Weighted Average
Range of Exercise Prices December 28, 2002 Exercise Price
----------------- --------------
$ 9.92 - $11.92 194,000 10.461
$14.00 - 15.25 416,006 14.583
$18.50 12,500 18.500
------- ------
622,506 13.377
8. INCOME TAXES
Deferred income taxes are provided on temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
those for income tax reporting purposes. Deferred income tax liabilities
(assets) relate to:
2002 2001 2000
---- ---- ----
Depreciation $ 3,057,400 $ 2,801,500 $ 2,430,800
Pension accruals 1,889,200 2,027,400 2,027,500
Investment in common stock 307,500 325,800 -
Other 164,400 196,500 171,100
------------ ------------ ------------
Total deferred income tax liabilities 5,418,500 5,351,200 4,629,400
Other postretirement benefits (979,700) (1,042,400) (1,018,200)
Inventories (316,300) (598,800) (555,600)
Allowance for doubtful accounts (82,900) (119,200) (119,700)
Accrued compensation (198,200) (257,900) (231,300)
Interest rate swap obligation (455,000) (422,000) -
Pension cost (2,715,913) - -
Other (496,500) (424,600) (298,200)
------------ ----------- ------------
Total deferred income tax assets (5,244,513) (2,864,900) (2,223,000)
------------ ----------- ------------
Net deferred income tax liabilities $ 173,987 $ 2,486,300 $ 2,406,400
============ =========== ============
-32-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (continued)
Income before income taxes consists of:
2002 2001 2000
---- ---- ----
Domestic $ 2,736,969 $ 4,819,818 $ 8,732,558
Foreign 1,997,339 1,265,537 1,924,309
------------ ------------ ------------
$ 4,734,308 $ 6,085,355 $ 10,656,867
============ ============ ============
Income taxes follow:
2002 2001 2000
---- ---- ----
Current:
Federal $ 458,302 $ 1,122,932 $ 2,240,200
Foreign 437,506 435,304 303,978
State 92,400 153,000 397,900
Deferred 454,200 461,200 659,300
------------ ------------ ------------
$ 1,442,408 $ 2,172,436 $ 3,601,378
============ ============ ============
A reconciliation of income taxes computed using the U.S. federal statutory
rate to those reflected in operations follows:
2002 2001 2000
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Income taxes using U.S.
federal statutory rate $ 1,609,700 34% $ 2,069,000 34% $ 3,623,300 34%
State income taxes, net of
federal benefit 73,500 2 127,000 2 293,400 3
Impact of foreign
subsidiaries on
effective tax rate (291,000) (6) (147,500) (2) (350,300) (3)
Other--net 26,808 1 123,936 2 34,978 -
----------- --- ----------- --- ----------- ---
$ 1,419,008 31% $ 2,172,436 36% $ 3,601,378 34%
=========== === =========== === =========== ===
Total income taxes paid were $1,239,668 in 2002, $1,035,531 in 2001 and
$2,520,234 in 2000.
United States income taxes have not been provided on the undistributed earnings
of foreign subsidiaries ($7,401,985 at December 28, 2002) because such earnings
are intended to be reinvested abroad indefinitely or repatriated only when
substantially free of such taxes and therefore, the Company believes the impact
will not be material.
9. LEASES
The Company leases certain equipment and buildings under operating lease
arrangements. Certain leases contain renewal options for periods ranging from
one to ten years.
-33-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
9. LEASES (continued)
Future minimum payments under operating leases with initial or remaining terms
in excess of one year during each of the next five years follow:
2003 $ 362,583
2004 357,512
2005 363,536
2006 360,945
2007 356,728
----------
$1,801,304
==========
Rent expense for all operating leases was $306,293 in 2002, $303,784 in 2001
and $406,631 in 2000.
10. RETIREMENT BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering most
U.S. employees. Plan benefits are generally based upon age at retirement, years
of service and, for its salaried plan, the level of compensation. The Company
also sponsors unfunded nonqualified supplemental retirement plans that provide
certain current and former officers with benefits in excess of limits imposed
by federal tax law. U.S. salaried employees and most employees of the Company's
Canadian subsidiary are covered by defined contribution plans.
The Company also provides health care and life insurance for substantially all
retired salaried employees in the United States.
Significant disclosures relating to these benefit plans follow:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $ (32,254,888) $ (31,608,192) $ (2,391,435) $ (2,481,466)
Change due to availability of final actual
assets and census data (136,351) 6,541 383,853 110,131
Plan amendment (a) (358,640) - - -
Service cost (1,073,638) (1,040,857) (73,311) (71,617)
Interest cost (2,198,127) (2,131,340) (132,966) (158,638)
Actuarial gain 240,287 436,776 - -
Benefits paid 2,044,133 2,082,184 216,135 210,155
------------- ------------- ------------- -------------
Benefit obligation at end of year $ (33,737,224) $ (32,254,888) $ (1,997,724) $ (2,391,435)
============= ============= ============= =============
-34-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Pension Benefits Postretirement Benefits
---------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Change in Plan Assets
Fair value of plan assets at beginning
of year $ 32,853,847 $ 36,036,545 $ 574,749 $ 934,873
Change due to availability of final
actual assets and census data 14,574 (31,058) 166,614 (225,780)
Actual return on plan assets (1,995,676) (1,095,651) 66,224 55,285
Employer contributions 25,527 - - -
Benefits paid (2,081,595) (2,082,184) (11,080) (189,629)
------------- ------------- ------------- -------------
Fair value of plan assets at end of year $ 28,816,677 $ 32,827,652 $ 796,507 $ 574,749
============= ============= ============= =============
Funded status- over (under) $ (4,920,547) $ 572,764 $ (1,201,217) $ (1,816,686)
Unrecognized prior service cost 1,137,165 1,006,234 (101,233) (122,322)
Unrecognized net actuarial loss (gain) 9,203,552 4,607,993 (1,275,706) (796,902)
Unrecognized net asset at transition (628,445) (865,881) - -
------------- ------------- ------------- -------------
Net amount recognized in the balance sheet $ 4,791,725 $ 5,321,110 $ (2,578,156) $ (2,735,910)
============= ============= ============= =============
(a) A plan was amended to increase benefits for specified retired participants.
Prepaid benefit cost $ 1,338,010 $ 5,321,110 $ - $ -
Accrued benefit liability (4,448,197) - (2,578,156) (2,735,910)
Deferred income taxes 2,715,913 - - -
Intangible asset 1,112,129 - - -
Accumulated other comprehensive loss 4,073,870 - - -
------------- ------------- -------------
Net amount recognized in the balance sheet $ 4,791,725 $ 5,321,110 $ (2,578,156) $ (2,735,910)
============= ============= ============= =============
The table above includes two plans with a combined projected benefit obligation
of $27,377,767, combined fair value of plan assets of $22,599,696 and a
combined accumulated benefit obligation of $26,658,206.
All of the plans' assets at December 28, 2002 and December 29, 2001 are
invested in listed stocks and bonds, including 430,874 shares of the Common
Stock of the Company having a market value of $4,881,802 and $5,127,401 at
those dates, respectively. Dividends received during 2002 and 2001 on the
Common Stock of the Company were $189,585 for each year.
Pension Benefits
2002 2001 2000
---- ---- ----
Assumptions
Discount rate 7% 7% 7%
Expected return on plan assets 9% 9% 9%
Rate of compensation increase 4.25% 4.25% 4.25%
-35-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Pension Benefits (continued)
2002 2001 2000
---- ---- ----
Components of Net Benefit Expense /(Income)
Service cost $ 1,073,638 $ 1,040,857 $ 745,299
Interest cost 2,198,127 2,131,339 2,111,917
Actual return on plan assets (1,577,856) (1,858,990) (2,678,131)
Net amortization and deferral (1,146,850) (1,314,916) (474,594)
Defined contribution plans expense 139,598 149,586 120,038
----------- ------------ -----------
Net benefit expense (income) $ 686,657 $ 147,876 $ (175,471)
=========== ============ ===========
Postretirement Benefits
2002 2001 2000
---- ---- ----
Assumptions
Discount rate 7% 7% 7%
Expected return on plan assets 9% 9% 9%
Components of Net Benefit Cost
Service cost $ 73,311 $ 71,617 $ 70,474
Interest cost 132,966 158,638 163,608
Actual return on plan assets (66,224) (55,285) (76,924)
Net amortization and deferral (92,752) (77,066) (101,735)
----------- ------------ -----------
Net benefit cost $ 47,301 $ 97,904 $ 55,423
=========== ============ ===========
For measurement purposes relating to the postretirement benefit plan, the life
insurance cost trend rate is 1%. The health care cost trend rate for
participants retiring after January 1, 1991 is nil; no increase in that rate is
expected because of caps placed on benefits. The health care cost trend rate
for participants who retired prior to January 1, 1991 is also nil; because of
the caps placed on benefits that rate is expected to remain at 4.5% for the
year 2000 and thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects on the postretirement benefit plan:
1-Percentage Point
Increase Decrease
-------- --------
Effect on total of service and interest cost components $ 27,882 $ (13,223)
Effect on postretirement benefit obligation $ 229,292 $(121,032)
11. FINANCIAL INSTRUMENTS
The carrying values of financial instruments (cash and cash equivalents,
accounts receivable, accounts payable, an interest rate swap obligation, and
debt) as of December 28, 2002 and December 29, 2001 approximate fair value.
Fair value was based on expected cash flows and current market conditions.
-36-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS
The segments of the Company are described in Note 1. The accounting policies of
the segments are substantially the same as those described in Note 2. Operating
profit is total revenue less operating expenses, excluding interest and general
corporate expenses. Intersegment revenue, which is eliminated, is recorded on
the same basis as sales to unaffiliated customers. Identifiable assets by
reportable segment consist of those directly identified with the segment's
operations. Corporate assets consist primarily of cash and cash equivalents,
notes and other investments.
2002 2001 2000
---- ---- ----
Revenue:
Sales to unaffiliated customers:
Industrial Hardware $ 29,271,624 $ 28,213,054 $ 34,434,876
Security Products 36,388,970 35,556,863 31,643,219
Metal Products 15,676,613 19,055,436 22,114,199
------------ ------------ ------------
81,337,207 82,825,353 88,192,294
General corporate 67,564 866,031 227,305
------------ ------------ ------------
$ 81,404,771 $ 83,691,384 $ 88,419,599
============ ============ ============
Intersegment Revenue:
Industrial Hardware $ 44,669 $ 65,026 $ 94,172
Security Products 1,286,004 737,619 726,730
------------ ------------ ------------
$ 1,330,673 $ 802,645 $ 820,902
============ ============ ============
Income Before Income Taxes:
Industrial Hardware $ 4,188,944 $ 3,378,933 $ 6,587,954
Security Products 4,037,505 3,133,873 3,968,999
Metal Products (76,586) 2,429,306 2,894,827
------------ ------------ ------------
Operating Profit 8,149,863 8,942,112 13,451,780
General corporate expenses (1,699,498) (597,410) (1,008,588)
Interest expense (1,716,057) (2,259,347) (1,786,325)
------------ ------------ ------------
$ 4,734,308 $ 6,085,355 $ 10,656,867
============ ============ ============
Geographic Information:
Net Sales:
United States $ 70,279,299 $ 72,768,061 $ 76,298,084
Foreign 11,057,908 10,057,292 11,894,210
------------ ------------ ------------
$ 81,337,207 $ 82,825,353 $ 88,192,294
============ ============ ============
Identifiable Assets:
United States $ 66,135,214 $ 72,607,182 $ 75,933,931
Foreign 9,997,323 9,288,872 8,923,139
------------ ------------ ------------
$ 76,132,537 $ 81,896,054 $ 84,857,070
============ ============ ============
Industrial Hardware $ 22,457,174 $ 22,630,057 $ 23,202,232
Security Products 31,932,295 32,428,409 33,991,827
Metal Products 13,879,715 15,652,026 16,597,956
------------ ------------ ------------
68,269,184 70,710,492 73,792,015
General corporate 7,863,353 11,185,562 11,065,055
------------ ------------ ------------
$ 76,132,537 $ 81,896,054 $ 84,857,070
============ ============ ============
-37-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
2002 2001 2000
---- ---- ----
Depreciation and Amortization
Industrial Hardware $ 1,135,449 $ 1,176,490 $ 866,778
Security Products 829,561 1,561,542 909,427
Metal Products 1,540,606 1,675,980 1,830,038
------------ ------------ ------------
3,505,616 4,414,012 3,606,243
General corporate 59,844 46,692 33,141
------------ ------------ ------------
$ 3,565,460 $ 4,460,704 $ 3,639,384
============ ============ ============
Capital Expenditures
Industrial Hardware $ 519,101 $ 451,099 $ 3,962,555
Security Products 404,355 527,034 545,906
Metal Products 596,388 717,951 493,535
------------ ------------ ------------
1,519,844 1,696,084 5,001,996
Currency translation adjustment (679) (40) 6,424
General corporate 40,698 198,679 56,855
------------ ------------ ------------
$ 1,559,863 $ 1,894,723 $ 5,065,275
============ ============ ============
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, (Statement 146) which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 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)." Statement No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred as opposed to when management is committed to an exit
plan. Such liabilities should be recorded based on their fair values, as
defined. Statement No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company will assess the impact of this
Statement if or when an exit plan for an activity exists.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, it amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The annual requirements of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002 and the interim requirements are effective for
interim periods beginning after December 15, 2002. The Company does not plan to
transition to the fair value method of accounting for its stock-based employee
compensation.
-38-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information (unaudited) follows:
2002
First Second Third Fourth Year
----- ------ ----- ------ ----
Net sales $20,320,517 $21,291,745 $20,040,682 $19,684,263 $81,337,207
Gross profit 5,109,559 4,813,198 5,576,655 5,200,644 20,700,056
Selling and administrative expenses
3,641,780 3,269,684 4,054,823 3,350,969 14,317,256
Net income 677,107 758,518 678,043 1,178,232 3,291,900
Net income per share:
Basic $.19 $.21 $.19 $.32 $.91
Diluted $.18 $.20 $.19 $.32 $.89
2001
First Second Third Fourth (a) Year
----- ------ ----- ---------- ----
Net sales $22,676,922 $20,690,102 $20,551,161 $18,907,168 $82,825,353
Gross profit 6,185,077 5,333,546 4,600,870 5,923,091 22,042,584
Selling and administrative expenses
3,840,321 3,799,810 3,346,905 3,576,877 14,563,913
Net income 1,151,872 550,215 529,272 1,681,560 3,912.919
Net income per share:
Basic $.32 $.15 $.15 $.46 $1.08
Diluted $.31 $.15 $.15 $.46 $1.07
(a) Changes in estimates in the quarter for prior period accruals for utility
and compensation expenses increased net income by $410,000 or $.11 per share.
Also, shares of common stock were received from an issuer in connection with
that company's demutualization. The fair value of the shares received increased
net income by $450,000 or $.12 per share.
-39-
Report of Independent Auditors
THE Board of Directors
The Eastern Company
We have audited the accompanying consolidated balance sheets of The Eastern
Company as of December 28, 2002 and December 29, 2001, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows for each of the three years in the period ended December 28,
2002. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Eastern
Company at December 28, 2002 and December 29, 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 28, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 2 to the Consolidated Financial Statements, effective
December 30, 2001, the Company adopted Statement of Financial Standards No.
142, "Goodwill and Other Intangible Assets".
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Hartford, Connecticut
January 24, 2003
-40-
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-41-
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve the election
of Directors, the information appearing on pages 3 and 4 of said proxy
statement, being the portion captioned "Item No. 1. Election of Directors",
the information appearing on page 10 and 11 of said proxy statement, being the
portion captioned "Executive Compensation", and the information appearing on
page 8 of said proxy statement, being the portion captioned "Section 16(a)
Beneficial Ownership Reporting Compliance." The Registrant's only Executive
Officers are Leonard F. Leganza, President and Chief Executive Officer and
John L. Sullivan III, Vice President, Secretary and Treasurer.
ITEM 11 EXECUTIVE COMPENSATION
There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve executive
compensation, the information appearing on pages 10 through 16 of said proxy
statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve the security
ownership of certain beneficial shareholders, the information appearing on
pages 6 and 7 of said proxy statement.
(b) There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve the security
ownership of management, the information appearing on pages 3 and 4, and 6 and
7, and 10 and 11 of said proxy statement.
(c) Changes in Control
None.
(d) The information relating to the securities authorized for issuance
under the Registrant's equity compensation plans is set forth in Part II, Item
5 of this Form 10-K Annual Report.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) None.
(b) None.
(c) None.
(d) None.
-42-
ITEM 14 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of
1934, within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. In designing and evaluating our disclosure controls and
procedures, we and our management recognize that any controls and procedures,
no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and our management
necessarily was required to apply its judgment in evaluating and implementing
possible controls and procedures. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that they believe
that as of the date of completion of the evaluation, our disclosure controls
and procedures were reasonably effective to ensure that information required
to be disclosed by us in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms. In
connection with the new rules, we will continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, on an ongoing basis, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that
our systems evolve with our business.
(b) Changes in internal controls.
None.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial statements Page
Consolidated Balance Sheets - December 28, 2002 and December 29, 2001............................19.
Consolidated Statements of Income-- Fiscal years ended December 28, 2002,
December 29, 2001 and December 30, 2000..........................................................21.
Consolidated Statements of Comprehensive Income -- Fiscal years ended
December 28, 2002, December 29, 2001, and December 30, 2000......................................21.
Consolidated Statements of Shareholders' Equity -- Fiscal years ended
December 28, 2002, December 29, 2001 and December 30, 2000.......................................22.
Consolidated Statements of Cash Flows--Fiscal years ended December 28, 2002,
December 29, 2001, and December 30, 2000.........................................................23.
Notes to Consolidated Financial Statements.......................................................24.
Report of Ernst & Young LLP, Independent Auditors................................................40.
(2) Financial Statement Schedule
Schedule II-- Valuation and qualifying accounts..................................................45.
Schedules other than that listed above have been omitted
because the required information is contained in the financial
statements and notes thereto, or because such schedules are not
required or applicable.
-43-
(3) Exhibits
Exhibits are as set forth in the "Exhibit Index" which
follows Notes to the Financial Statements.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last
quarter of the fiscal year ended December 28, 2002.
-44-
The Eastern Company and Subsidiaries
Schedule II - Valuation and Qualifying accounts
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
(1) (2)
Balance at Beginning Charged to Costs Charged to Other Deductions - Balance at End
Description Of Period and Expenses Accounts-Describe Describe of Period
- ----------------------------------- ---------------------- ------------------ --------------------- -------------- --------------
Fiscal year ended December 28, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $344,000 $91,563 $131,563 (a) $304,000
======== ======= ======== ========
Fiscal year ended December 29, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $362,000 ($5,126) $12,874 (a) $344,000
======== ======= ======= ========
Fiscal year ended December 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $526,000 ($92,581) $71,419 (a) $362,000
======== ======== ======= ========
(a) Uncollectible accounts written off, net of recoveries
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated March 17, 2003 THE EASTERN COMPANY
By /s/ John L. Sullivan III
------------------------
John L. Sullivan III
Vice President, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Leonard F. Leganza March 17, 2003
-------------------------
Leonard F. Leganza
Director, President
and Chief Executive Officer
/s/ John W. Everets March 17, 2003
-------------------------
John W. Everets
Director
/s/ Charles W. Henry March 17, 2003
-------------------------
Charles W. Henry
Director
/s/ David C. Robinson March 17, 2003
-------------------------
David C. Robinson
Director
/s/ Donald S. Tuttle, III March 17, 2003
-------------------------
Donald S. Tuttle III
Director
-46-
EXHIBIT INDEX
(3) Restated Certificate of Incorporation dated August 14, 1991
is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
28, 1991 and the Registrant's Form 8-K filed on
February 13, 1991. Amended and restated bylaws dated
July 29, 1996 is incorporated by reference to the
Registrant's Form 8-K filed on July 29, 1996.
(4) Rights Agreement entered into between the Registrant and
BankBoston N.A. dated as of August 6, 1998 and Letter to all
shareholders of the Registrant, dated July 22, 1998 together
with Press Release dated July 22, 1998 describing the
Registrant's redemption of shareholders Purchase Rights dated
September 16, 1991 and the issuance of a new Purchase Rights
dividend distribution are incorporated by reference to the
Registrant's Form 8-K filed on August 6, 1998.
(10)(a) Amendment to the Deferred Compensation Agreement with Russell
G. McMillen dated May 1, 1988 is incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988. The Deferred Compensation Agreement
with Russell G. McMillen dated October 28, 1980 and amended on
March 27, 1986 is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 3, 1987.
(b) The Eastern Company 1995 Executive Stock Incentive Plan
effective as of April 26, 1995 incorporated by reference to
the Registrant's Form S-8 filed on February 7, 1997.
(c) The Eastern Company Directors Fee Program effective as of
October 1, 1996 incorporated by reference to the Registrant's
Form S-8 filed on February 7, 1997, as amended by Amendment
No.1 and Amendment No. 2 are incorporated by reference to the
Registrant's Form 10-K filed on March 29, 2000.
(d) The Eastern Company 1997 Directors Stock Option Plan effective
as of September 17, 1997 incorporated by reference to the
Registrant's Form S-8 filed on January 30, 1998, and
Post-Effective Amendment No. 1 to the Registrants Form S-8
filed on March 2, 2000.
(e) Supplemental Retirement Plan dated September 9, 1998 with
Leonard F. Leganza is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999.
(f) Severance Agreement dated February 21, 2001 with Leonard F.
Leganza is incorporated by reference to the Registrant's
Annual Report on Form 10-K for fiscal year ended December 30,
2000.
(g) The Eastern Company 2000 Executive Stock Incentive Plan
effective July 2000 is incorporated by reference to the
Registrant's Annual Report on Form 10-K for fiscal year ended
December 30, 2000.
-47-
(21) List of subsidiaries as follows:
Eberhard Hardware Mfg. Ltd., a private corporation
organized under the laws of the Province of Ontario,
Canada.
Canadian Commercial Vehicles Corporation, a private
corporation organized under the laws of the Province of
British Columbia, Canada.
World Lock Co. Ltd., a private corporation organized
under the laws of Taiwan (The Republic of China).
Sesamee Mexicana, Subsidiary, a private corporation
organized under the laws of Mexico.
World Security Industries Co. Ltd., a private
corporation organized under the laws of Hong Kong.
(23) Consent of independent auditors attached hereto on page 49.
(99)(a) Letter to our shareholders from the Annual Report 2002 is
attached on page 50.
(b) Exhibit A - Certifications of Chief Executive Officer and
Chief Financial Officer under Rule 13a-14 or Rule 15d-14 is
attached on page 53.
(c) Exhibit B - Certifications of Chief Executive Officer and
Chief Financial Officer under 18 United States Code Section
1350 is attached on page 55.
-48-