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 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 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 February 22, 2002.
Common Stock, No Par Value - $49,719,835
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 22, 2002
----- --------------------------------
Common Stock, No Par Value 3,629,185
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement dated March 18, 2002 are incorporated by
reference into Part III.
The Eastern Company
Form 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
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 10.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 16.
Item 8. Financial Statements and Supplementary Data 17.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 40.
PART III
Item 10. Directors and Executive Officers of the Registrant 41.
Item 11. Executive Compensation 41.
Item 12. Security Ownership of Certain Beneficial Owners
and Management 41.
Item 13. Certain Relationships and Related Transactions 41.
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 42.
Signatures 44.
Exhibit Index 45.
-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 five U.S. operations and
four wholly-owned foreign subsidiaries. The Company maintains nine physical
locations.
RECENT DEVELOPMENTS
Effective February 1, 2000, the Company acquired all 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). These proprietary locks are used 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
Industrial Hardware Group's core line of vehicular hardware. It was integrated
into our Canadian manufacturing facilities in Tillsonburg, Ontario.
The cost of the above acquisitions was approximately $4,070,000 and has
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
acquisitions of Ashtabula or Hansen 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.
Proforma 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.
(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.
-4-
Industrial Hardware
The Industrial Hardware segment consists of Eberhard Manufacturing,
Eberhard Hardware Manufacturing Ltd. 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, 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 and school bus door closure hardware. The products are
sold to original equipment manufacturers or distributors 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 Industrial Hardware segment sells its products to a diverse array of
markets from the truck, bus and automotive industries 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 supplies the firearms, 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 and
CCL Security Products sales include cabinet locks, cam locks, electric switch
locks, tubular key locks and combination padlocks. Many of the locks are sold
under the names DUO, X-STATIC(R), EXCALIBUR(TM), WARLOCK(TM), LITE LOCK(TM),
SESAMEE(R), PRESTOLOCK(R), HUSKI(TM), GUN BLOK(R), TRIGGER BLOK(TM) and
CABLELOCK(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 foundries has
adversely affected demand in the contract castings market. 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 2001 and are expected to be
readily available in 2002 and the foreseeable future. The Company also obtains
materials from Asian affiliated and nonaffiliated sources. The Company has not
experienced any problems obtaining material from its Asian sources in 2001 and
does not expect any problems in 2002.
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 29, 2001.
The dollar amount of the level of orders in the Company is believed to
be firm as of fiscal year ended December 29, 2001 at $7,760,000, as compared
to $11,504,000 at December 30, 2000.
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 2001 were $1,006,000 and
represented approximately 1% of gross revenues. In 2000 and 1999 they were
$176,000 and $72,000, 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 new mine roof
fasteners, ductile iron processes, transportation and industrial hardware
products, pushbutton locks and luggage locks, and a new remote keyless entry
system for tonneau covers, truck toolboxes and utility truck bodies.
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 2001 was 596.
-6-
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company includes five separate operating divisions located within
the United States, a wholly-owned Canadian subsidiary located in Tillsonburg,
Ontario, 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 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 Division leases land and a building containing 44,000
square feet in Wheeling, Illinois. During 2001 the CCL Security Product's
manufacturing facility was moved to this site utilizing approximately 13,500
square feet of this facility. The building is brick and located in an
industrial park. A five-year lease was signed in 2001, which expires on
May 31, 2006.
The CCL Security Products Division' sales office is located in New
Britain, Connecticut where 5,000 square feet of a building is leased. The four
storied building is of brick and stone construction. A monthly lease is in
place.
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 29, 2001 was 726.
High and low stock prices and dividends for the last two years were:
2001 2000
------------------------------------------------------- ----------------------------------------------------------
Sales Price Sales Price
Quarter High Low Dividend Quarter High Low Dividend
------------------------------------------------------- ----------------------------------------------------------
First $17.05 $13.00 $.11 First $16.44 $13.63 $.11
Second 15.60 14.15 .11 Second 14.63 12.75 .11
Third 15.31 12.50 .11 Third 14.75 11.25 .11
Fourth 13.45 11.65 .11 Fourth 16.00 11.75 .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 dependant on future earnings, capital requirements, and financial
conditions. In addition, the payment of dividends is subject to the
restrictions of the Company's loan agreement, with a financial institution, if
such payment would result in an event of default.
-9-
ITEM 6 SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
INCOME STATEMENT ITEMS (in thousands)
Net sales $ 82,825 $ 88,192 $ 74,678 $ 70,750 $ 67,331
Cost of products sold 60,783 62,192 52,460 49,470 48,780
Depreciation and amortization 4,461 3,639 2,723 2,912 2,978
Interest expense 2,259 1,786 646 549 297
Income before income taxes 6,085 10,657 9,894 8,723 5,808
Income taxes 2,172 3,602 3,356 3,280 2,085
Net income 3,913 7,055 6,538 5,443 3,723
Dividends 1,599 1,601 1,573 1,429 1,268
BALANCE SHEET ITEMS (in thousands)
Inventories $ 18,591 $ 17,103 $ 14,040 $ 12,778 $ 12,415
Working capital 27,631 26,298 24,734 21,121 14,859
Property, plant and equipment, net 25,986 27,328 16,365 15,033 13,437
Total assets 81,896 84,857 54,894 50,072 45,798
Shareholders' equity 40,056 38,538 33,400 28,486 29,243
Capital expenditures 1,895 5,065 3,690 4,397 2,230
Long-term obligations, less current portion 25,014 28,540 8,565 8,552 60
PER SHARE DATA
Net income per share
Basic $ 1.08 $ 1.95 $ 1.80 $ 1.49 $ 0.93
Diluted 1.07 1.93 1.75 1.43 0.92
Dividends 0.44 0.44 0.43 0.39 0.32
Shareholders' equity 11.06 10.64 9.21 7.81 7.33
Average shares outstanding (Basic) 3,623,291 3,621,449 3,626,001 3,645,360 3,987,272
The information in the table above reflects a 3-for-2 stock split effective May
1999.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net income for 2001 totaled $3.9 million, or $1.08 per basic share, on
sales of $82.8 million. These results represent a 45% decrease in net income
from 2000 and a 6% decrease in sales. Net income for 2000 totaled $7.1 million,
or $1.95 per basic share, on sales of $88.2 million. With Greenwald sales
excluded, earnings and sales for 2001 would have decreased 57% and 16%,
respectively. The reason earnings declined more sharply than sales was that the
Company incurred additional overhead through its building expansion programs and
acquisition initiatives in 1999 and 2000. The Company had expected these higher
overhead costs to be absorbed by the significantly greater sales volume it
anticipated for 2001, but such volume failed to materialize as the manufacturing
sector of the U.S. economy fell into a recession. The Company ended 2001 with a
backlog level 33% below that at year-end 2000, but still totaling $7.8 million.
Net income for the 2001 fourth quarter totaled $1.7 million, or $.46 per
basic share, on sales of $18.9 million. These figures represent a 9% decline in
net income and an 18% decline in sales from 2000. Net income for the 2000 fourth
quarter totaled $1.8 million, or $.51 per basic share, on sales of $23.0
million. The decrease in 2001 sales and earnings was the result of the
significant slowdown in the manufacturing sector of the economy. The negative
impact on earnings, however, was partly offset by two positive developments:
lower-than-anticipated utility and compensation expenses; and the receipt of
about 26,000 shares of common stock from Prudential Financial Inc. following
Prudential's conversion from a mutual insurance company to a stockholder-owned
company. The lower expenses contributed approximately $410,000, or $.11 per
basic share, to net income, while the Prudential stock contributed about
-10-
$450,000, or $.12 per basic share. Without these favorable items, fourth quarter
net income would have been approximately $820,000, or $.23 per basic share, a
decrease of 55% from the fourth quarter of 2000.
The gross margin for the fourth quarter of 2001 was 31% of net sales as
compared to 32% for the fourth quarter of 2000. Product mix in the fourth
quarter accounted for the reduction in the gross margin percentage.
Selling and administrative expenses in the 2001 fourth quarter totaled
$3.6 million, a 10% decrease from the 2000 level. This decrease was due to lower
legal and professional expenses, lower compensation and personnel-related
expenses.
RESULTS OF OPERATIONS
The following table shows, for 1999-2001, each line item from the
consolidated statements of income as a percentage of net sales.
2001 2000 1999
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 73.4% 70.5% 70.2%
Gross margin 26.6% 29.5% 29.8%
Selling and administrative expense 17.6% 15.6% 16.0%
Other income 1.0% 0.2% 0.4%
Interest expense 2.7% 2.0% 0.9%
Income before income taxes 7.3% 12.1% 13.3%
Income taxes 2.6% 4.1% 4.5%
Net income 4.7% 8.0% 8.8%
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 reduced sales by 10%, while new product
introductions raised sales by 3% and price increases raised them by 1%.
The Industrial Hardware segment experienced an 18% decline in sales.
Volume 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 them 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. This market is expected to show a
moderate improvement in the second half of 2002 as manufacturers begin to
replenish their inventories.
Sales of industrial hardware (such as rotary locks, locking recessed
handles, multi-point paddle handles and slam latches) to original equipment
manufactures 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. This device is currently undergoing
field-testing by several school bus manufacturers. Once testing is completed and
the product is approved, the Company expects to begin receiving orders in the
second half of 2002.
-11-
In the Security Products segment, sales were 12% higher than in 2000.
Price increases raised sales by 1%, and volume increases raised them 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. With Greenwald sales excluded from the security segment, 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. However, there have been some signs in 2002 that the
luggage lock business is picking up. 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 such as Whirlpool, GE, Maytag and Alliance 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
off 4%. Sales of Smart Card products, 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 have been met with a positive response from our local sales
representatives, current customers and trade show attendees, and should have a
positive effect on the markets we serve. Although sales of our security products
have gotten off to a slow start for the first two months of 2002, the Company is
optimistic that business will pick up as the economy begins to recover from the
recession.
In the Metal Products segment, sales were down 14% from the previous
year. Volume reduced sales 15%, while price increases raised them 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, Germany 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. Coal remains the cornerstone of the U.S. energy supply.
Approximately 1.1 billion tons of coal are mined from 1,400 mines 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. 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 been looking at new
manufacturing methods and at alternative products. 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. We expect that the market for ductile iron will grow
as this metal is substituted for malleable iron. Also, the Company is developing
new mine roof anchor systems to more effectively compete with resin bolt
systems.
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%.
-12-
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.
Fiscal 2000 Compared to Fiscal 1999
Total net sales for 2000 increased 18% ($13.5 million) to $88.2 million
from $74.7 million for 1999. New product introductions raised sales by 13%;
price increases, by 1%; and volume increases, by 4%.
The Industrial Hardware segment experienced a 22% increase in sales from
1999. Volume increased sales by 1%, while internally developed new products
increased sales 11%. Products acquired during 2000 increased sales by another
10%. (Internally developed products were items for the electronics cabinetry and
truck accessory markets. Acquired products consisted of door closure hardware
for school buses and new toolbox locks for the truck accessory market.) Sales of
heavy hardware to the tractor-trailer market decreased 30% from 1999 levels.
Sales of industrial hardware (such as rotary locks, locking recessed handles,
multi-point paddle handles and slam latches) to original equipment manufacturers
and distributors more than offset the decline in the tractor-trailer market. Due
to demand for the industrial hardware products in 1999 and expected growth in
the school bus market, the Company expanded its Cleveland manufacturing facility
by 40,000 square feet. At the Company's Mexican operation, sales grew 58% as
demand increased for high-quality industrial and vehicular products.
In June of 2000, the Company acquired Greenwald Industries and
incorporated it into the Security Products segment (formerly the Custom Locks
segment). Greenwald manufactures coin acceptors and other coin security products
used primarily in the commercial laundry industry. Greenwald also produces
cashless payment systems that use advanced Smart Card technology. In the
Security Products segment, sales increased 38% from 1999. Volume increased sales
by 37% and prices increased them by 1%. The volume increase was attributable to
the addition of Greenwald sales for the last half of 2000.
In other areas of the Security Products segment, sales of locks were
down slightly from 1999. Lock sales to the computer industry were down 17%
primarily because of delays in the introduction of new business computers and
servers. Sales to the gaming machine market were also off from 1999 levels due
to minimal new casino construction and few expansions of existing casinos. A 21%
increase in sales from our Asian operations helped offset the declines in sales
to the computer and gaming industries. Sales of PrestoLock(R) padlocks for
soft-sided luggage increased 6% from 1999 levels. Sales of Sesamee(R) keyless
padlocks increased 16%. Although sales of Sesamees were generally up across all
markets served, the advance was greatest in the telecommunications market, where
sales were fueled by increased construction of cell phone towers. Sesamee
padlocks are used to secure gates and sheds around the towers.
In the Metal Products segment, sales were down 6% from the previous
year. Volume brought sales down 25%, while price increases raised sales 3% and
new products increased them 16%. The sales of new products were the result of
-13-
orders received from a foundry that had temporarily shut down due to a fire but
subsequently reopened. Without the infusion of new business from this foundry,
our contract casting business would have been down 27% from the previous year.
The segment was affected by an overall decline in domestic production of
malleable iron castings and a parallel increase in the importation of foreign
castings. Castings imported from countries in Asia, Latin America and Europe
with weak currency exchange rates created pricing pressure and eroded our
contract casting business. This business was further weakened by declines in the
market for residential gas fittings and residential and commercial electrical
fittings, and by the phaseout of certain automotive products.
Metal Products was also affected by a 13% drop in sales of mine roof
support products. Although coal remains one of the country's largest energy
resources, the sales decrease was due to a continued reduction in the prevalence
of underground mining.
Total gross margin for 2000 increased 17%, or $3.8 million, from 1999.
The increase resulted from higher sales. The gross margin percentage for 2000
was comparable to 1999's--29.5% versus 29.8%--since the Company was able to
integrate the Greenwald acquisition with little disruption of current operations
and without incurring any additional charges which would have affected margins.
Total selling and administrative expenses were up 15%, or $1.9 million,
from 1999. Most of the increase was due to the inclusion of Greenwald. Other
items that increased included goodwill amortization expenses (associated with
the acquisitions made in 2000), payroll expenses and advertising expenses.
Interest expense jumped 177%, or $1.1 million, from 1999. This was due
to additional borrowings, principally for the acquisition of Greenwald in 2000.
Earnings before income taxes in 2000 increased 8%, or $763,000, from
1999. Pretax earnings for the Industrial Hardware segment rose by 29%, or $1.5
million. This increase was due to greater sales volume, full use of production
facilities and sales of new products with higher profit margins. The Security
Products segment experienced a gain of 4%, or $152,000, in pretax earnings. This
increase resulted from the Greenwald acquisition; otherwise, pretax income would
have been negatively affected by lower earnings from existing lock operations.
In the Metal Products segment, earnings were down 5%, or $137,000, due to a
reduction in mine roof anchor sales and increased foreign competition in the
contract casting market. Corporate expenses were down 30%, or $422,000, as the
result of lower compensation expenses and lower group insurance costs.
The effective tax rate in 2000 was 34%, the same as in 1999.
Liquidity and Sources of Capital
2001 2000 1999
---- ---- ----
Current ratio 3.8 3.2 4.4
Average days' sales in accounts receivable 52 55 48
Inventory turnover 3.3 3.6 3.7
Ratio of working capital to sales 33.4% 29.8% 33.1%
Total debt to market capitalization 65.8% 66.5% 15.5%
Total debt to equity 70.9% 81.6% 26.5%
In 2000, the Company entered into an unsecured loan agreement (the Loan
Agreement) with a financial institution. The proceeds under the Loan Agreement
were used to finance the Greenwald acquisition and to increase our line of
credit for future working capital needs. Under the term portion of the Loan
Agreement, the Company borrowed $25.0 million, which is payable in quarterly
principal payments of $625,000 during the first year. The quarterly principal
payments increase annually up to $1.0 million. A final principal payment of $9.0
million is due at maturity, on July 1, 2005. The Loan Agreement requires the
Company to maintain an interest rate swap contract with the lender for $15.0
million. This sum is to be reduced each quarter in accordance with the principal
repayment schedule for the term portion of the Loan Agreement. The interest rate
on the swap contract is fixed at 9.095%. Under the revolving credit portion of
-14-
the Loan Agreement, the Company may borrow up to $20.0 million until July 2,
2003. A quarterly commitment fee of 0.25% is to be paid on the unused portion.
As of December 29, 2001, $5.0 million was outstanding under the revolving credit
portion of the Loan Agreement; the Company does not expect to make any
repayments before July 3, 2003.
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.
The ratio of working capital to sales was 33.4% in 2001, 29.8% in 2000
and 33.1% in 1999. 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. The higher ratio in 1999 was due to a higher cash
balance to finance the purchase of two small product lines (school bus door
closure hardware and toolbox locks) in 2000. These acquisitions were not
material to the Company's financial position or operating results.
Accounts receivable decreased 20%, or $2.7 million, from the 2000 level.
This decrease was the direct result of lower sales volume. The average days'
sales in accounts receivable equaled 52 in 2001 compared with 55 days in 2000
and 48 days in 1999. The increase in collection days from 1999 to 2000 was due
to a higher number of foreign trade accounts, which often pay more slowly than
do domestic trade accounts. The Company continues to monitor and press for
current collections of accounts receivable.
Inventories increased in 2001 by 9%, or $1.5 million, from 2000. The
increase was due to the stocking of additional inventory for CCL's move from New
Britain, CT, to Wheeling, IL, and for a planned three-week shutdown at Frazer &
Jones in January 2002 for machine maintenance and test pouring of ductile iron.
Inventory turnover remained substantially unchanged at 3.3 times in 2001 versus
3.6 times in 2000 and 3.7 times in 1999. Inventories are slightly higher than
required, and the Company continues working to reduce levels in order to free up
working capital.
Capital expenditures in 2001, 2000 and 1999 were $1.9 million, $5.1
million and $3.7 million, respectively. The Company continuously upgrades and
replaces existing equipment to expand capacity, improve efficiency and satisfy
safety and environmental requirements. The Company expects that capital
expenditures for 2002 will be lower than projected depreciation expense of $3.0
million.
The present financial strength of the Company's balance
sheet--demonstrated by a current ratio of 3.8 to 1, positive cash flow from
operating activities and availability of a $15.0 million credit line --will
enable the Company to meet its current obligations and continue to grow in 2002.
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.
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
-15-
financial statements approximates current cost and thus provides a closer
matching of revenue and expenses in periods of increasing costs.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign manufacturing facilities account for approximately
12% of total sales and 11% of total assets. Its U.S. operations buy from and
sell to these foreign affiliates, and also make limited sales (less than 10% of
total sales) to non-affiliated 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 are not material.
The Company is exposed to interest rate risk with respect to its
unsecured $45 million 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 $12.5 million as of December 29, 2001.
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 a
$142,600 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.
-16-
Item 8. Financial Statements and Supplementary Data
The Eastern Company
Consolidated Balance Sheets
December 29 December 30
2001 2000
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 4,955,020 $ 4,541,706
Investment in common stock 850,017 -
Accounts receivable, less allowances of $344,000 in 2001 and
$362,000 in 2000 10,814,017 13,506,033
Inventories:
Raw materials and component parts 8,228,364 8,707,240
Work in process 4,390,818 4,375,425
Finished goods 5,971,665 4,019,970
18,590,847 17,102,635
Prepaid expenses and other 1,690,917 1,974,044
Deferred income taxes 640,200 944,300
------------ ------------
Total Current Assets 37,541,018 38,068,718
Property, Plant and Equipment
Land 700,960 701,173
Buildings 11,447,209 11,501,635
Machinery and equipment 28,175,455 28,095,050
Accumulated depreciation (14,337,979) (12,970,152)
------------ ------------
25,985,645 27,327,706
Other Assets
Goodwill, less accumulated amortization of $1,256,477 in 2001 and
$476,658 in 2000 10,603,638 11,435,086
Patents, technology, licenses and trademarks, less accumulated
amortization of $1,988,233 in 2001 and $1,983,163 in 2000
2,444,643 2,731,687
Prepaid pension cost 5,321,110 5,293,873
------------ ------------
18,369,391 19,460,646
------------ ------------
$ 81,896,054 $ 84,857,070
============ ============
-17-
Consolidated Balance Sheets
December 29 December 30
2001 2000
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,471,951 $ 4,624,749
Accrued compensation 982,464 2,275,582
Other accrued expenses 2,066,734 1,966,902
Current portion of long-term debt 3,388,662 2,903,542
------------ ------------
Total Current Liabilities 9,909,811 11,770,775
Deferred income taxes 3,126,500 3,350,700
Long-term debt, less current portion 25,013,906 28,539,515
Accrued postretirement benefits 2,735,910 2,658,532
Interest rate swap obligation 1,054,420 -
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:3,629,185 shares in 2001 and 3,636,757 shares in
2000; excluding shares held in treasury of 1,652,320
in 2001 and 1,650,726 in 2000 839,155 878,024
Retained earnings 40,944,315 38,630,205
Unearned compensation - (164,063)
Accumulated other comprehensive income (loss)
Foreign currency translation (1,156,515) (806,618)
Derivative financial instruments (632,420) -
Unrealized holding gain on investment in common stock 60,972 -
------------ ------------
(1,727,963) (806,618)
------------ ------------
Total Shareholders' Equity 40,055,507 38,537,548
------------ ------------
$ 81,896,054 $ 84,857,070
============ ============
See accompanying notes.
-18-
Consolidated Statements of Income
Year ended
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Net sales $ 82,825,353 $ 88,192,294 $ 74,678,420
Other income 866,031 227,305 296,985
------------ ------------ ------------
83,691,384 88,419,599 74,975,405
Costs and expenses
Cost of products sold 60,782,769 62,191,769 52,459,895
Selling and administrative 14,563,913 13,784,638 11,975,508
Interest 2,259,347 1,786,325 645,991
------------ ------------ ------------
77,606,029 77,762,732 65,081,394
------------ ------------ ------------
Income before income taxes 6,085,355 10,656,867 9,894,011
Income taxes 2,172,436 3,601,378 3,356,079
------------ ------------ ------------
Net income $ 3,912,919 $ 7,055,489 $ 6,537,932
============ ============ ============
Earnings per Share
Basic $ 1.08 $ 1.95 $ 1.80
============ ============ ============
Diluted $ 1.07 $ 1.93 $ 1.75
============ ============ ============
See accompanying notes.
Consolidated Statements of Comprehensive Income
Year ended
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Net income $ 3,912,919 $ 7,055,489 $ 6,537,932
Other comprehensive income/(loss) -
Currency translation (349,897) (88,463) 112,112
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 income taxes of
$157,000
(231,664) - -
Unrealized holding gain on investment in
common stock, net of income taxes 60,972 - -
------------ ------------ ------------
(921,345) (88,463) 112,112
------------ ------------ ------------
Comprehensive income $ 2,991,574 $ 6,967,026 $ 6,650,044
============ ============ ============
See accompanying notes.
-19-
Consolidated Statements of Shareholders' Equity
Common Stock Retained Unearned
Earnings Compensation
------------ ------------ ------------
Balances at January 2, 1999 $ 1,465,360 $ 28,210,340 $ (359,531)
Net income 6,537,932
Cash dividends declared, $.43 per share (1,573,045)
Purchase of 48,857 shares of Common Stock for (783,260)
treasury
Issuance of 69,825 shares of Common Stock upon the 538,705
exercise of stock options
Issuance of 5,561 shares of Common Stock for 81,467
director fees
11,250 shares of Common Stock cancelled under (148,125) 148,125
restricted stock award program
------------ ------------ ------------
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 $ -
============ ============ ============
See accompanying notes.
-20-
Consolidated Statements of Cash Flows
Year ended
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Operating Activities
Net income $ 3,912,919 $ 7,055,489 $ 6,537,932
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,460,704 3,639,384 2,722,885
Common stock received (748,345) - -
Loss on sales of equipment and other assets 258 6,054 1,129
Provision for doubtful accounts (4,002) (92,581) 87,808
Deferred income taxes 461,200 659,300 383,200
Issuance of Common Stock for directors' fees 125,189 82,987 81,467
Changes in operating assets and liabilities:
Accounts receivable 2,673,430 (910,198) (782,864)
Inventories (1,485,460) 69,855 (1,153,634)
Prepaid expenses and other 212,848 (523,288) (47,657)
Prepaid pension cost (27,237) (313,184) (413,407)
Other assets (211,999) (243,561) (200,028)
Accounts payable (1,097,265) 526,086 415,737
Accrued compensation (1,281,060) 381,824 (162,928)
Other accrued expenses (30,143) 71,519 (1,064,785)
------------- ------------ ------------
Net cash provided by operating activities 6,961,037 10,409,686 6,404,855
Investing Activities
Purchases of property, plant and equipment (1,894,723) (5,065,275) (3,690,157)
Business acquisitions, net of cash acquired - (27,547,304) -
Proceeds from sales of equipment and other assets - 98,872 7,538
------------- ------------ ------------
Net cash used by investing activities (1,894,723) (32,513,707) (3,682,619)
Financing Activities
Proceeds from issuance of long-term debt - 30,009,694 2,471,870
Principal payments on long-term debt (3,028,830) (7,396,103) (2,265,721)
Proceeds from sales of Common Stock 23,437 104,671 538,705
Purchases of Common Stock for treasury (23,432) (416,438) (783,260)
Dividends paid (1,598,809) (1,600,511) (1,573,045)
------------- ------------ ------------
Net cash provided (used) by financing activities (4,627,634) 20,701,313 (1,611,451)
------------- ------------ ------------
Effect of exchange rate changes on cash $ (25,366) $ 4,224 $ 39,504
------------- ------------ ------------
Net change in cash and cash equivalents 413,314 (1,398,484) 1,150,289
Cash and cash equivalents at beginning of year 4,541,706 5,940,190 4,789,901
------------- ------------ ------------
Cash and cash equivalents at end of year $ 4,955,020 $ 4,541,706 $ 5,940,190
============= ============ ============
See accompanying notes.
-21-
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 (formerly custom locks), 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 firearms, 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. Revenue from sales
transactions is recognized at the point of shipment. Ongoing credit evaluations
are made of customers for which collateral is generally not required.
Allowances for credit losses are provided; such losses have been within
management's expectations.
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. The year 1999
ended January 1, 2000.
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.
-22-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
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.
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 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 of this investment is $748,345 based
on the fair value of the shares at the time of receipt and is reported in
"Other income, net". The subsequent related unrealized holding gain of
$101,672, less deferred income taxes of $40,700 to December 29, 2001 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 received have
been sold and no dividends have been received.
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 $3,080,000 at December 29, 2001 and $2,971,000 at
December 30, 2000.
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 ($3,173,277 in 2001, $2,730,392 in
2000 and $2,387,077 in 1999) is computed generally using the straight-line
method based on the estimated useful lives of the assets.
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 five to 17 years. Goodwill is being amortized
over periods ranging from five to 15 years.
In the event that facts and circumstances indicate that the carrying value of
long-lived assets, including goodwill and other 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.
-23-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Effective December 30, 2001, the Company will adopt Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets. Under
the new standards, goodwill will no longer be amortized but will be subject to
annual impairment tests; other intangible assets will continue to be amortized
over their useful lives. If the provisions of Statement No. 142 were applied
effective December 31, 2000, the net income for the Company would have been
$4,388,000 or $1.21 per share for 2001.
Product Development Costs
Product development costs, charged to expense as incurred, were $1,005,555 in
2001, $176,498 in 2000 and $71,867 in 1999.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$678,479 in 2001, $630,889 in 2000 and $491,008 in 1999.
Earnings Per Share
The denominators used in the earnings per share computations follow:
Basic: 2001 2000 1999
---- ---- ----
Weighted average shares outstanding 3,623,291 3,640,199 3,644,751
Contingent shares outstanding - (18,750) (18,750)
--------- --------- ---------
Denominator for basic earnings per share 3,623,291 3,621,449 3,626,001
========= ========= =========
Diluted:
Weighted average shares outstanding 3,623,291 3,640,199 3,644,751
Contingent shares outstanding - (18,750) (18,750)
Dilutive stock options 43,888 39,474 112,898
--------- --------- ---------
Denominator for diluted earnings per share 3,667,179 3,660,923 3,738,899
========= ========= =========
Derivatives
Effective December 31, 2000, the Company adopted Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. In connection therewith, the Company recognizes 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 adoption of Statement
No. 133 resulted in a charge for the cumulative effect of an accounting change
of $400,756 and a current year charge of $231,664 recorded as other
comprehensive loss in the consolidated statements of comprehensive income.
-24-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. BUSINESS ACQUISITIONS
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.
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 that is being amortized using the straight-line method
over 15 years.
Neither the actual results nor the pro forma effects of the acquisitions of
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 1999
---- ----
Net sales $ 96,985,297 $ 92,107,420
Net income 6,841,451 6,251,932
Per share:
Basic $1.89 $1.72
Diluted $1.87 $1.67
4. CONTINGENCIES
In 1999, all litigation relating to environmental matters was settled without
any material impact on financial condition, operating results or cash flows.
The aggregate provision for losses related to these and other contingencies
arising in the ordinary course of business was not material to operating
results for any year presented. There is a nominal aggregate liability for all
contingencies as of December 29, 2001 and December 30, 2000.
-25-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. DEBT
In 2000, the Company entered into an unsecured loan agreement (the Loan
Agreement) with a financial institution. Under the term portion of the Loan
Agreement the Company borrowed $25,000,000 which is payable in quarterly
principal payments of $625,000. The quarterly principal payments increase
annually up to $1,000,000 with a final principal payment due at maturity on
July 1, 2005 of $9,000,000. The Company maintains an interest rate swap
contract as required, with the lender, for $15,000,000 reduced on a quarterly
basis in accordance with the principal repayment schedule of the term portion
of the Loan Agreement. The interest rate on the swap contract is fixed at
9.095%. The Company may borrow up to $20,000,000 to July 2, 2003 under the
revolving credit portion of the Loan Agreement with a quarterly commitment fee
of 1/4% on the unused portion. As of December 29, 2001, $5,009,694 was
outstanding under the revolving credit portion of the Loan Agreement; the
Company does not anticipate any repayments thereof prior to July 3, 2003.
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% for the term portion and 1.25% to 1.75% 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:
2001 2000
---- ----
Term loan $ 21,750,000 $ 24,375,000
Revolving credit loan 5,009,694 5,009,694
Capital lease obligation with interest at 4.99% and
payable in monthly installments of $21,203 through
April 2009 1,559,908 1,731,827
Other 82,966 326,536
------------ ------------
28,402,568 31,443,057
Less current portion 3,388,662 2,903,542
------------ ------------
$ 25,013,906 $ 28,539,515
============ ============
The Company paid interest of $2,752,643 in 2001, $1,308,108 in 2000 and
$642,330 in 1999.
-26-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. DEBT (continued)
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.
The Company obtained a waiver for the required maximum leverage ratio under the
Loan Agreement for 2001. In addition, the required amount was modified for 2002
to one with which the Company expects to comply.
As of December 29, 2001 scheduled annual principal maturities of long-term
debt, including capital lease obligations, for each of the next five years
follow: 2002 - $3,388,662; 2003 - $9,824,616; 2004 - $4,199,618; 2005 -
$10,209,811; and 2006 - $220,523.
6. STOCK RIGHTS
The Company has a stock rights plan. At December 29, 2001 there were 3,623,291
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
The Company has five incentive stock option plans for officers, other key
employees, and nonemployee directors: 1983, 1989, 1995, 1997 and 2000. The 2000
Plan was approved by the Company's shareholders in 2001. Options granted under
the 1983 and 1989 plans 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. Under the 1995, 1997 and 2000 plans, nonqualified
stock options granted to participants will have exercise prices determined by
the Compensation Committee of the Company's Board of Directors. All options
granted in 1999, 2000, and 2001 were granted at prices equal to the fair market
value of the stock on the dates granted.
-27-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 29, 2001, no shares of the Company's unissued Common Stock were
reserved for options under its 1983 Incentive Stock Option Plan. Changes in
stock options under this plan follow:
2001 2000 1999
------------ ------------ ------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 3,750 $6.25 3,750 $6.25 18,750 $6.25
Exercised (3,750) $6.25 - - (15,000) $6.25
-------- -------- --------
Outstanding, end of year - - 3,750 $6.25 3,750 $6.25
======== ======== ========
Exercisable, end of year:
At $6.25 - 3,750 3,750
At December 29, 2001, 59,642 of the Company's unissued Common Stock were
reserved for options under its 1989 Incentive Stock Option Plan. Changes in
stock options under this plan follow:
2001 2000 1999
------------ ------------ ------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 59,642 $11.16 70,517 $10.62 125,342 $8.63
Exercised - - (10,875) $7.64 (54,825) $6.08
-------- -------- --------
Outstanding, end of year 59,642 $11.16 59,642 $11.16 70,517 $10.62
======== ======== ========
Exercisable, end of year:
At $6.25 - - 3,000
At $8.17 - - 7,875
At $9.92 30,000 30,000 30,000
At $11.92 22,500 22,500 22,500
At $14.00 7,142 7,142 7,142
-28-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 29, 2001, 326,249 shares of the Company's unissued Common Stock
were reserved for options and awards under its 1995 Incentive Stock Option
Plan. Changes in stock options and restricted stock awards under this plan
follow:
Stock Options
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 326,249 $14.55 207,858 $14.62 75,358 $12.96
Granted - - 118,391 $14.25 132,500 $15.56
-------- -------- --------
Outstanding, end of year 326,249 $14.53 326,249 $14.55 207,858 $14.62
======== ======== ========
Exercisable, end of year:
At $11.92 37,500 37,500 37,500
At $14.00 37,858 37,858 37,858
At $14.25 61,135 25,274 -
At $15.25 120,000 120,000 120,000
At $18.50 12,500 10,800 10,800
Stock Awards
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 18,750 $11.28 18,750 $11.28 30,000 $11.99
Cancelled (18,750) $11.28 - - (11,250) $13.17
-------- -------- --------
Outstanding, end of year - - 18,750 $11.28 18,750 $11.28
======== ======== ========
-29-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 29, 2001, 249,000 shares of the Company's unissued Common Stock
were reserved for options under its 1997 plan. Changes in stock options under
this plan follow:
2001 2000 1999
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 249,000 $12.49 250,000 $12.48 187,500 $11.55
Granted - - - - 62,500 $15.25
Exercised - - (1,000) $9.92 - -
-------- -------- --------
Outstanding, end of year 249,000 $12.49 249,000 $12.49 250,000 $12.48
======== ======== ========
Exercisable, end of year:
At $9.92 111,500 111,500 112,500
At $14.00 75,000 75,000 75,000
At $15.25 62,500 62,500 62,500
At December 29, 2001, 44,109 shares of the Company's unissued Common Stock were
reserved for options under its 2000 plan. Changes in stock options under this
plan follow:
2001
----
Weighted
Average
Exercise
Options Price
-------- --------
Granted 44,109 $14.40
--------
Outstanding, end of year 44,109 $14.40
========
Exercisable, end of year:
At $14.40 24,109
Compensation expense for stock options is recognized under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. As such, no expense is recognized if, at the date of grant, the
exercise price of the option is at least equal to the fair market value of the
Company's Common Stock. Compensation expense for restricted stock awards
granted is recognized when earned based on the achievement of targeted annual
operating results through December 30, 2000.
-30-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
If stock options were accounted for using the fair value method under FASB
Statement No. 123, Accounting for Stock Based Compensation, net income, basic
earnings per share and diluted earnings per share would have been $3,713,279,
$1.03, and $1.01, respectively in 2001, $6,753,124, $1.86, and $1.84,
respectively in 2000 and $5,857,372, $1.62, and $1.60, respectively in 1999. In
connection therewith, fair value was estimated using the "Black Scholes" method
referred to in FASB Statement No. 123 with the following weighted-average
assumptions:
2001 2000 1999
---- ---- ----
Risk free interest rate 4.84% 5.70% 6.50%
Expected volatility 0.302 0.310 0.322
Expected option life 5 years 5 years 5 years
Weighted-average dividend yield 3.1% 3.1% 2.6%
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:
2001 2000 1999
---- ---- ----
Property, plant and equipment $ 2,801,500 $ 2,430,800 $ 2,239,000
Pension accruals 2,027,400 2,027,500 1,942,400
Investment in common stock 325,800 - -
Other 196,500 171,100 125,600
------------ ------------ ------------
Total deferred income tax liabilities 5,351,200 4,629,400 4,307,000
Other postretirement benefits (1,042,400) (1,018,200) (1,087,900)
Inventories (598,800) (555,600) (516,300)
Allowance for doubtful accounts (119,200) (119,700) (189,900)
Accrued compensation (257,900) (231,300) (340,900)
Interest rate swap obligation (422,000) - -
Accrual for contingencies - - (39,000)
Other (424,600) (298,200) (385,900)
------------ ------------ ------------
Total deferred income tax assets (2,864,900) (2,223,000) (2,559,900)
------------ ------------ ------------
Net deferred income tax liabilities $ 2,486,300 $ 2,406,400 $ 1,747,100
============ ============ ============
-31-
The Eastern Company
Notes to Financial Statements (continued)
8. INCOME TAXES (continued)
Income before income taxes consists of:
2001 2000 1999
---- ---- ----
Domestic $ 4,819,818 $ 8,732,558 $ 8,646,360
Foreign 1,265,537 1,924,309 1,247,651
----------- ----------- -----------
$ 6,085,355 $10,656,867 $ 9,894,011
=========== =========== ===========
Income taxes follow:
2001 2000 1999
---- ---- ----
Current:
Federal $ 1,122,932 $ 2,240,200 $ 2,392,200
Foreign 435,304 303,978 220,879
State 153,000 397,900 359,800
Deferred 461,200 659,300 383,200
----------- ----------- -----------
$ 2,172,436 $ 3,601,378 $ 3,356,079
=========== =========== ===========
A reconciliation of income taxes computed using the U.S. federal statutory
rate to those reflected in operations follows:
2001 2000 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Income taxes using U.S.
federal statutory rate
$ 2,069,000 34% $ 3,623,300 34% $ 3,364,000 34%
State income taxes, net
of federal benefit 127,000 2 293,400 3 271,400 3
Impact of foreign
subsidiaries on
effective tax rate (147,500) (2) (350,300) (3) (203,300) (2)
Other--net 123,936 2 34,978 - (76,021) (1)
----------- -- ----------- -- ----------- --
$ 2,172,436 36% $ 3,601,378 34% $ 3,356,079 34%
=========== == =========== == =========== ==
Total income taxes paid were $1,035,531 in 2001, $2,520,234 in 2000 and
$3,560,889 in 1999.
United States income taxes have not been provided on the undistributed earnings
of foreign subsidiaries ($5,469,894 at December 29, 2001) because such earnings
are intended to be reinvested abroad indefinitely or repatriated only when
substantially free of such taxes.
-32-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
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.
Future minimum payments under operating leases with initial or remaining terms
in excess of one year during each of the next five years follow:
2002 $ 253,597
2003 257,115
2004 259,875
2005 265,899
2006 176,808
------------
$ 1,213,294
============
Rent expense for all operating leases was $303,784 in 2001, $406,631 in 2000
and $301,330 in 1999.
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.
-33-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Significant disclosures relating to these benefit plans follow:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $ (31,608,192) $ (30,882,054) $ (2,481,466) $ (2,762,631)
Change due to availability of final actual
assets and census data 6,541 (168,031) 110,131 335,524
Plan amendment (a) - (288,272) - -
Service cost (1,040,857) (745,299) (71,617) (70,474)
Interest cost (2,131,340) (2,111,917) (158,638) (163,608)
Actuarial gain 436,776 647,714 - -
Benefits paid 2,082,184 1,939,667 210,155 179,723
Benefit obligation at end of year $ (32,254,888) $ (31,608,192) $ (2,391,435) $ (2,481,466)
============= ============= ============= =============
Change in Plan Assets
Fair value of plan assets at beginning of year
$ 36,036,545 $ 35,711,003 $ 934,873 $ 863,442
Change due to availability of final actual
assets and census data (31,058) (25,672) (225,780) (11,975)
Actual return on plan assets (1,095,651) 2,198,637 55,285 76,924
Employer contributions - 92,244 - 6,482
Benefits paid (2,082,184) (1,939,667) (189,629) -
------------- ------------- ------------- -------------
Fair value of plan assets at end of year $ 32,827,652 $ 36,036,545 $ 574,749 $ 934,873
============= ============= ============= =============
Funded status- over (under) $ 572,764 $ 4,428,353 $ (1,816,686) $ (1,546,593)
Unrecognized prior service cost 1,006,234 1,177,138 (122,322) (143,411)
Unrecognized net actuarial loss (gain) 4,607,993 810,272 (796,902) (968,528)
Unrecognized net asset at transition (865,881) (1,121,890) - -
------------- ------------- ------------- -------------
Prepaid (accrued) benefit costs $ 5,321,110 $ 5,293,873 $ (2,735,910) $ (2,658,532)
============= ============= ============= =============
(a) A plan was amended to increase benefits for specified retired participants.
-34-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
All of the plans' assets at December 29, 2001 and December 30, 2000 are
invested in listed stocks and bonds and pooled investment funds, including
430,874 shares of the Common Stock of the Company having a market value of
$5,127,401 and $5,655,221 at those dates, respectively. Dividends received
during 2001 and 2000 on the Common Stock of the Company were $189,585 for each
year.
Pension Benefits
2001 2000 1999
---- ---- ----
Assumptions
Discount rate 7.0% 7.0% 7.0%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 4.25% 4.25% 4.25%
Components of Net Benefit Income
Service cost $ 1,040,857 $ 745,299 $ 785,095
Interest cost 2,131,339 2,111,917 1,993,294
Actual return on plan assets (1,858,990) (2,678,131) (3,387,907)
Net amortization and deferral (1,314,916) (474,594) 306,030
Defined contribution plans expense 149,586 120,038 129,771
----------- ----------- -----------
Net benefit expense (income) $ 147,876 $ (175,471) $ (173,717)
=========== =========== ===========
Postretirement Benefits
2001 2000 1999
---- ---- ----
Assumptions
Discount rate 7% 7% 7%
Expected return on plan assets 9% 9% 9%
Components of Net Benefit Cost
Service cost $ 71,617 $ 70,474 $ 70,970
Interest cost 158,638 163,608 182,370
Actual return on plan assets (55,285) (76,924) (71,467)
Net amortization and deferral (77,066) (101,735) (78,026)
----------- ----------- -----------
Net benefit cost $ 97,904 $ 55,423 $ 103,847
=========== =========== ===========
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; that rate is
expected to remain at 4.5% for the year 2000 and thereafter.
-35-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
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 $ 31,142 $ (14,872)
Effect on postretirement benefit obligation $ 274,306 $ (143,727)
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 29, 2001 and December 30, 2000 approximate fair value.
Fair value was based on expected cash flows and current market conditions.
12. REPORTABLE SEGMENTS
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.
2001 2000 1999
---- ---- ----
Revenue:
Sales to unaffiliated customers:
Industrial Hardware $ 28,213,054 $ 34,434,876 $ 28,272,937
Security Products 35,556,863 31,643,219 22,892,284
Metal Products 19,055,436 22,114,199 23,513,199
------------ ------------ ------------
82,825,353 88,192,294 74,678,420
General corporate 866,031 227,305 296,985
------------ ------------ ------------
$ 83,691,384 $ 88,419,599 $ 74,975,405
============ ============ ============
-36-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
2001 2000 1999
---- ---- ----
Intersegment Revenue:
Industrial Hardware $ 65,026 $ 94,172 $ 98,523
Security Products 737,619 726,730 378,931
----------- ----------- -----------
$ 802,645 $ 820,902 $ 477,454
=========== =========== ===========
Income Before Income Taxes:
Industrial Hardware $ 3,378,933 $ 6,587,954 $ 5,122,149
Security Products 3,133,873 3,968,999 3,816,595
Metal Products 2,429,306 2,894,827 3,032,282
----------- ----------- -----------
Operating Profit 8,942,112 13,451,780 11,971,026
General corporate expenses (597,410) (1,008,588) (1,431,024)
Interest expense (2,259,347) (1,786,325) (645,991)
----------- ----------- -----------
$ 6,085,355 $10,656,867 $ 9,894,011
=========== =========== ===========
Geographic Information:
Net Sales:
United States $72,768,061 $76,298,084 $66,124,407
Foreign 10,057,292 11,894,210 8,554,013
----------- ----------- -----------
$82,825,353 $88,192,294 $74,678,420
=========== =========== ===========
Identifiable Assets:
United States $72,607,182 $75,933,931 $48,512,143
Foreign 9,288,872 8,923,139 6,382,249
----------- ----------- -----------
$81,896,054 $84,857,070 $54,894,392
=========== =========== ===========
Industrial Hardware $22,630,057 $23,202,232 $14,415,840
Security Products 32,428,409 33,991,827 9,437,909
Metal Products 15,652,026 16,597,956 20,546,949
----------- ----------- -----------
70,710,492 73,792,015 44,400,698
General corporate 11,185,562 11,065,055 10,493,694
----------- ----------- -----------
$81,896,054 $84,857,070 $54,894,392
=========== =========== ===========
Depreciation and Amortization
Industrial Hardware $ 1,176,490 $ 866,778 $ 550,275
Security Products 1,561,542 909,427 341,568
Metal Products 1,675,980 1,830,038 1,812,449
----------- ----------- -----------
4,414,012 3,606,243 2,704,292
General corporate 46,692 33,141 18,593
----------- ----------- -----------
$ 4,460,704 $ 3,639,384 $ 2,722,885
=========== =========== ===========
-37-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
2001 2000 1999
---- ---- ----
Capital Expenditures
Industrial Hardware $ 451,099 $ 3,962,555 $ 1,374,651
Security Products 527,034 545,906 261,370
Metal Products 717,951 493,535 1,999,929
----------- ----------- -----------
1,696,084 5,001,996 3,635,950
Currency translation adjustment (40) 6,424 (5,225)
General corporate 198,679 56,855 59,432
----------- ----------- -----------
$ 1,894,723 $ 5,065,275 $ 3,690,157
=========== =========== ===========
13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information (unaudited) follows:
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
<FN>
(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.
</FN>
2000
First Second Third Fourth Year
----- ------ ----- ---------- ----
Net sales $ 20,214,419 $ 20,324,617 $ 24,695,211 $ 22,958,047 $ 88,192,294
Gross profit 5,705,665 5,690,126 7,157,986 7,446,748 26,000,525
Selling and administrative expenses 3,315,844 3,018,095 3,463,028 3,987,671 13,784,638
Net income 1,508,462 1,695,468 2,011,555 1,840,004 7,055,489
Net income per share:
Basic $ .42 $ .47 $ .56 $ .51 $ 1.95
Diluted $ .41 $ .46 $ .56 $ .50 $ 1.93
-38-
Report of Ernst & Young LLP, Independent Auditors
THE Board of Directors
The Eastern Company
We have audited the accompanying consolidated balance sheets of The Eastern
Company as of December 29, 2001 and December 30, 2000, 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 29,
2001. Our audits also included the financial statement schedule listed in the
Index at Item 14(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 29, 2001 and December 30, 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 29, 2001, 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.
/s/ Ernst & Young LLP
Hartford, Connecticut
January 25, 2002
-39-
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-40-
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 6 and 7 of said proxy statement, being the
portion captioned "Security Ownership of Certain Beneficial Shareholders", 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 14 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
Not Applicable.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Not applicable
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
-41-
PART IV
ITEM 14 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 29, 2001 and December 30, 2000.............17.
Consolidated Statements of Income-- Fiscal years ended December 29, 2001,
December 30, 2000 and January 1, 2000.............................................19.
Consolidated Statements of Comprehensive Income -- Fiscal years ended
December 29, 2001, December 30, 2000, and January 1, 2000.........................19.
Consolidated Statements of Shareholders' Equity -- Fiscal years ended
December 29, 2001, December 30, 2000 and January 1, 2000..........................20.
Consolidated Statements of Cash Flows--Fiscal years ended December 29, 2001,
December 30, 2000, and January 1, 2000............................................21.
Notes to Consolidated Financial Statements........................................22.
Report of Ernst & Young LLP, Independent Auditors.................................39.
(2) Financial Statement Schedule
Schedule II-- Valuation and qualifying accounts...................................43.
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.
(3) Exhibits
See the index to exhibits at page 45 of this Form 10-K
Annual Report
(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 29, 2001.
-42-
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 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
======== ======= ======= ========
Fiscal year ended January 1, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $439,000 $87,808 $ 808 (a) $526,000
======== ======= ======= ========
<FN>
(a) Uncollectible accounts written off, net of recoveries
</FN>
-43-
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 18, 2002 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 18, 2002
---------------------------
Leonard F. Leganza
Director, President
and Chief Executive Officer
/s/ John W. Everets March 18, 2002
---------------------------
John W. Everets
Director
/s/ Charles W. Henry March 18, 2002
---------------------------
Charles W. Henry
Director
/s/ David C. Robinson March 18, 2002
---------------------------
David C. Robinson
Director
/s/ Donald S. Tuttle, III March 18, 2002
---------------------------
Donald S. Tuttle III
Director
-44-
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.
-45-
(21) List of subsidiaries as follows:
Eberhard Hardware Mfg. Ltd., a private corporation
organized under the laws of the Province of Ontario,
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 47.
(99) Letter to our shareholders from the Annual Report 2001 is
attached on page 48.
-46-
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-29452) pertaining to The Eastern Company 1983 Stock Option Plan, the
Registration Statement (Form S-8 No. 2-86285) pertaining to The Eastern Company
1989 Stock Option Plan, the Registration Statement (Form S-8 No. 333-21349)
pertaining to The Eastern Company 1995 Executive Stock Incentive Plan, the
Registration Statement (Form S-8 No. 333-21351) pertaining to The Eastern
Company Directors Fee Program, the Registration Statement (Form S-8 No.
333-45315) pertaining to The Eastern Company 1997 Directors Stock Option Plan,
and the Registration Statement (Form S-8 No. 333-62196) pertaining to The
Eastern Company 2000 Executive Stock Incentive Plan of our report dated January
25, 2001, with respect to the consolidated financial statements and schedule of
The Eastern Company included in this Annual Report (Form 10-K) for the year
ended December 29, 2001.
/s/ Ernst & Young LLP
Hartford, Connecticut
March 18, 2002
-47-
Exhibit 99
Letter to our Shareholders
The Company and its employees faced unexpected challenges in 2001, both economic
and emotional. Before I discuss them, I would like to reassure our shareholders,
in the wake of the many reports about corporate accounting irregularities and
inadequate disclosures, that our annual report to you contains more than
adequate disclosure of our business activities and the financial results of
those activities. In the back pocket is a copy of the Company's Form 10-K, which
contains extensive descriptions of our business, complete financial statements
and related footnotes, and the opinion of our independent auditors, Ernst &
Young, LLP. I invite all of you to read the 10-K. Further, you should know that
the Company does not engage its independent auditors to perform any consulting
services outside the realm of accounting and tax matters.
As for last year, it began with a sluggish business environment that only
worsened as the months went by. With the weak conditions came an ongoing debate
as to whether the economy had slipped into recession. This debate led to
additional business uncertainties, and in some cases business retrenchments,
that had a very negative impact on all the markets we serve. Then the
catastrophic events of September 11 cast a further pall over many business and
personal activities, causing a greater erosion of the business marketplace and
postponement of any appearance of a more robust economy.
The manufacturing sector of the economy, in which our business units primarily
operate, reacted as it normally would in anticipation of recessionary
conditions--it curtailed purchases. Consequently, our sales volume for the
year--$82.8 million--was significantly lower than what we had expected when the
year began. It was also 6% lower than the $88.2 million we achieved in 2000. Net
income for 2001 declined by 45%, to $3.9 million from $7.1 million in 2000.
Earnings declined more sharply than sales because of the additional fixed
overhead charges we incurred in connection with our building expansion programs
and acquisition initiatives in 1999 and 2000. This increase in overhead required
higher sales levels, which had been anticipated but did not materialize as the
manufacturing sector of the economy fell into a recession.
Throughout the year, we took steps to respond to the changing economic
conditions. We made reductions in personnel, lowered capital expenditures and
cut expenses. However, we implemented those measures as cautiously as we could
so we would not jeopardize achievement of our longer-range goals.
As previously reported, our primary goals are to keep our finances strong,
sustain internal product growth and operating efficiencies, and seek out
acquisitions or other strategic growth opportunities. We believe that these
objectives continue to be in the best long-term interest of our shareholders.
While our progress toward these goals was slowed down somewhat by the economic
and other events of 2001, we have not abandoned them and indeed will pursue them
vigorously in the months ahead.
The economic downturn notwithstanding, there was a positive development in 2001
that benefited the operations of our Frazer & Jones Division in the Metal
Products Group. This division is the premier producer of mine roof anchors used
in underground mining. The positive development was the unexpected strength of
-48-
the marketplace for coal and the consequent need for our product, sales of which
grew 16% in 2001. During 2000, higher prices for natural gas had led to
increased demand for coal. As coal stockpiles dwindled in 2001, mines--including
the many underground mines that use our roof anchors--operated at peak levels to
replenish supplies and keep up with the increased market demand. The demand for
coal has remained strong thus far in 2002. While underground mining activity may
not continue at these higher levels, it is still expected that coal will remain
the cornerstone of our country's energy supply.
Total shipments of malleable iron castings from Frazer & Jones declined
throughout 2001, but we expect to see a rebound around mid-2002 as overall
casting demand rises. However, despite such increases in overall demand, we also
expect that imports from around the world will continue to affect shipments of
malleable iron castings from all domestic foundries. In response, the Company
has invested in the necessary equipment and developed the technical knowledge
necessary to begin the production of ductile iron. Ductile iron is a superior
metal when compared to malleable iron, and it is lower in cost to produce. We
also expect that the market for ductile iron will grow as it is substituted for
malleable iron.
The markets for our Industrial Hardware Group began weakening in the latter part
of 2000, and that trend continued throughout 2001. The principal area of decline
was in the heavy hardware we sell to the tractor-trailer industry. As the
economy contracted, the need to move goods lessened and there was less demand
for tractor-trailer equipment. We expect that the transportation industry will
recover as the economy rebounds.
New product development in the Industrial Hardware Group focused on the other
markets we serve, such as specialty trucks and emergency and service vehicles.
One new product we introduced was an electronic door control device for school
and courtesy bus doors. Several school bus manufacturers are currently testing
this product, and once it is approved, we anticipate orders in the second
quarter of 2002. Overall, sales of new products were not nearly enough to offset
the decline in the heavy hardware portion of our business.
Building the security segment of our business has been, and will continue to be,
one of the strategic objectives of our company. The events of September 11 have
made "safety" and "security" an even more important part of our daily
vocabularies. We believe this heightened concern will provide us with many
future business opportunities, including the further development of access
control devices that utilize Smart Card technologies.
At the Greenwald Division of our Security Products Group, for example, our Smart
Card products have been widely accepted for use in commercial laundry, access
control and parking applications. We are now exploring the addition of biometric
sensors that read fingerprints to our Smart Cards to provide even greater
security in access control applications. During 2001, however, sales of both the
Smart Card products and the division's basic product line--coin acceptors, coin
chutes, money boxes and meter cases--were negatively affected by the downturn in
the economy.
-49-
Our lock manufacturing units also saw reduced sales as a result of the
significant events of 2001. Our Illinois Lock Division is an important supplier
to the computer industry, which suffered a downturn along with many other
high-technology businesses. Our CCL Security Products Division, which supplies
products to the luggage industry, was affected by the sharp reduction in travel
caused by the events of September 11. In addition, other CCL markets related to
travel and entertainment, such as gaming and vending, were also depressed as a
result of the reduction in travel.
During the year, we successfully consolidated our CCL manufacturing operations
(previously located in New Britain, Connecticut) with those of Illinois Lock in
Wheeling, Illinois. The move should result in greater productivity and future
cost savings.
In the months ahead, we will continue to focus on the development of new
products and new markets in order to improve our operating efficiencies and
effectively compete with low-wage countries like China and Mexico. We also will
continue to seek growth through acquisitions which complement our product lines
and enhance our market position.
Though far less than we had anticipated at the beginning of the year, the
financial results we achieved in 2001 demanded the dedication and hard work of
all our employees in the face of a very difficult economy. I thank them all for
their great efforts.
-51-