10-K 1 tenk2002.txt 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 ----------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 112 Bridge Street, Naugatuck, Connecticut 06770 ----------------------------------------- ----- (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 ----- -------------------------------- 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. -2- 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. -3- 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. -5- 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. -6- (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 ---- ---- ---- ---- ---- 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-