SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 (I.R.S. Employer incorporation or organization) Identification No.) 112 Bridge Street, Naugatuck, Connecticut 06770 - ----------------------------------------- ------- (Address of principal executive offices) (Zip Code) (203) 729-2255 -------------- (Registrant's Telephone Number, Including Area Code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of June 30, 2001 ----- ------------------------------- Common Stock, No par value 3,634,129 -1-
PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) ------ ASSETS <TABLE> <CAPTION> June 30, 2001 December 30, 2000 ------------- ----------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 4,030,421 $ 4,541,706 Accounts receivable, less allowance: 2001 - $356,000; 2000 - $362,000 12,487,171 13,506,033 Inventories 18,520,259 17,102,635 Prepaid expenses and other current assets 1,807,699 1,974,044 Deferred income taxes 944,300 944,300 ----------- ----------- Total Current Assets 37,789,850 38,068,718 -------------------- Property, plant and equipment 41,355,220 40,297,858 Accumulated depreciation (14,560,100) (12,970,152) ----------- ----------- 26,795,120 27,327,706 Prepaid pension cost 5,398,462 5,293,873 Goodwill, less accumulated amortization 11,025,616 11,435,086 Other assets, net 2,602,002 2,731,687 ----------- ----------- TOTAL ASSETS $ 83,611,050 $ 84,857,070 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,331,428 $ 4,624,749 Accrued compensation 1,955,866 2,275,582 Other accrued expenses 1,806,649 1,966,902 Current portion of long-term debt 3,156,293 2,903,542 ----------- ----------- Total Current Liabilites 11,250,236 11,770,775 ------------------------ Deferred income taxes 3,030,700 3,350,700 Long-term debt less current portion 26,894,504 28,539,515 Accrued postretirement benefits 2,633,532 2,658,532 Accrued interest rate swap 808,760 - Shareholders' Equity Common Stock, No Par Value: Authorized Shares - 25,000,000 Issued and outstanding shares: 2001-3,634,129; 2000-3,636,757, excluding 1,650,726 shares held in treasury 951,529 878,024 Preferred Stock, No Par Value Authorized shares - 2,000,000 (No shares issued) Unearned compensation (162,000) (164,063) Accumulated other comprehensive loss: Foreign currency transalation (839,929) (806,618) Derivative financial instruments (488,760) - ----------- ----------- (1,328,689) (806,618) Retained earnings 39,532,478 38,630,205 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 38,993,318 38,537,548 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 83,611,050 $ 84,857,070 ============ ============ </TABLE> See accompanying notes. -2-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------ ------------- ------------ <S> <C> <C> <C> <C> Net sales $43,367,024 $40,539,036 $20,690,102 $ 20,324,617 Interest income 68,264 117,824 28,839 54,616 ----------- ----------- ----------- ------------ 43,435,288 40,656,860 20,718,941 20,379,233 Cost of products sold 31,848,401 29,093,406 15,356,556 14,593,376 ----------- ----------- ----------- ------------ 11,586,887 11,563,454 5,362,385 5,785,857 Selling and administrative expenses 7,244,552 6,333,939 3,643,994 3,018,095 Interest expense 1,239,860 367,709 593,975 190,409 Goodwill amortization 395,579 49,839 155,816 41,115 ----------- ----------- ----------- ------------ INCOME BEFORE INCOME TAXES 2,706,896 4,811,967 968,600 2,536,238 Income taxes 1,004,809 1,608,037 418,385 840,770 ----------- ----------- ----------- ------------ NET INCOME $ 1,702,087 $ 3,203,930 $ 550,215 $ 1,695,468 =========== =========== =========== ============ Net income per share: Basic $ 0.47 $ 0.88 $ 0.15 $ 0.47 Diluted $ 0.46 $ 0.87 $ 0.15 $ 0.46 Cash dividends per share $ 0.22 $ 0.22 $ 0.11 $ 0.11 </TABLE> -3-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended June 30, 2001 July 1, 2000 ------------- ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 1,702,087 $ 3,203,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,223,073 1,538,309 Loss (gain) on sales of equipment and other assets 488 (232) Postretirement benefits other than pensions (25,000) - Provision for losses on accounts receivable (5,926) 6,817 Issuance of Common Stock for directors' fees 75,569 51,596 Changes in operating assets and liabilities: Accounts receivable 1,008,233 (1,486,857) Inventories (1,430,740) 935,032 Prepaid expenses 157,435 (511,361) Prepaid pension (104,589) (81,535) Accounts payable (387,977) 1,183,064 Accrued expenses (322,833) 994,350 Other Assets (110,024) (106,347) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,779,796 5,726,766 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,094,373) (1,983,412) Business acquisitions - (27,497,006) Other - 12,880 ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (1,094,373) (29,467,538) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 29,509,694 Principal payments on long-term debt and notes payable (1,386,881) (6,635,141) Proceeds from sales of Common Stock - 93,009 Purchases of Common Stock for treasury (416,439) Dividends paid (799,814) (800,711) ----------- ----------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (2,186,695) 21,750,412 Effect of exchange rate changes on cash (10,013) 37,593 ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (511,285) (1,952,767) Cash and Cash Equivalents at Beginning of Period 4,541,706 5,940,190 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,030,421 $ 3,987,423 =========== =========== </TABLE> -4-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> Net income 1,702,087 3,203,930 550,215 1,695,468 Other comprehensive income -- Foreign currency translation 33,311 98,724 173,477 129,521 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 $55,000 and ($50,000) respectively (88,004) - 74,427 - --------- --------- --------- --------- Comprehensive income 1,246,638 3,302,654 798,119 1,824,989 ========= ========= ========= ========= </TABLE> See accompanying notes. -5-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Refer to the Company's consolidated financial statements and notes thereto included in its Form 10-K for the year ended December 30, 2000 for additional information. The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. The condensed balance sheet as of December 30, 2000 has been derived from the audited consolidated balance sheet at that date. Note B - Earnings Per Share The denominators used in the earnings per share computations follow: <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------ ------------- ------------- <S> <C> <C> <C> <C> Basic: Weighted average shares outstanding 3,632,015 3,644,916 3,632,819 3,636,623 Contingent shares outstanding (11,250) (18,750) (11,250) (18,750) --------- --------- --------- --------- Denominator for basic earnings per share 3,620,765 3,626,166 3,621,569 3,617,873 ========= ========= ========= ========= Diluted: Weighted average shares outstanding 3,632,015 3,644,916 3,632,819 3,636,623 Contingent shares outstanding (11,250) (18,750) (11,250) (18,750) Dilutive stock options 75,509 55,757 69,008 28,422 --------- --------- --------- --------- Denominator for diluted earnings per share 3,696,274 3,681,923 3,690,577 3,646,295 ========= ========= ========= ========= </TABLE> -6-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2001 Note C - Segment Information Segment financial information follows: <TABLE> <CAPTION> SIX MONTHS ENDED THREE MONTHS ENDED June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------ ------------- ------------ <S> <C> <C> <C> <C> Revenues: Sales to unaffiliated customers: Industrial Hardware $15,412,620 $17,771,225 $ 7,379,061 $ 9,428,499 Security Products 17,934,957 11,457,136 8,436,751 4,913,542 Metal Products 10,019,447 11,310,675 4,874,290 4,982,576 ----------- ----------- ----------- ----------- 43,367,024 40,539,039 20,690,102 20,324,617 General corporate 68,264 117,824 28,839 54,616 ----------- ----------- ----------- ----------- $43,435,288 $40,656,860 $20,718,941 $20,379,233 =========== =========== =========== =========== Income Before Income Taxes: Industrial Hardware $ 2,206,582 $ 2,888,681 $ 927,707 $ 1,481,936 Security Products 1,397,899 1,428,559 498,769 757,932 Metal Products 1,127,693 1,764,245 760,062 776,058 ----------- ----------- ----------- ----------- Operating Profit 4,732,174 6,081,485 2,186,538 3,015,926 General corporate expenses (785,418) (901,809) (623,963) (289,279) Interest expense (1,239,860) (367,709) (593,975) (190,409) ----------- ----------- ----------- ----------- $ 2,706,896 $ 4,811,967 $ 968,600 $ 2,536,238 ========== =========== =========== =========== </TABLE> The Greenwald businesses (see Note E) were added to the Security Products segment in the third quarter of 2000. Note D - New Accounting Standards Effective December 31, 2000, the Company adopted FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities. The statement requires the Company to recognize all derivatives in the balance sheet at fair value. Further, 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 of derivatives 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 accounting change of $400,756 and a current year charge of $88,004 recorded as other comprehensive loss in the Condensed Consolidated Statements of Comprehensive Income. -7-
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, ("Statement Nos. 141 and 142) effective for fiscal years beginning after December 15, 2001. 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. The Company will adopt the new standards on accounting for goodwill and other intangible assets effective December 30, 2001. If the provisions of Statement Nos. 141 and 142 were applied effective December 31, 2000 the net income for the Company would have been $1,974,000 or $.55 per share (basic) and $658,000 or $.18 per share (basic) for the six and three months ended June 30, 2001. Note E - Business Acquisitions As referred to in the Company's consolidated financial statements and notes thereto included in its Form 10-K for the year ended December 31,2000, 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) and 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. 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 for the Greenwald businesses, which assume the Greenwald businesses were acquired January 1, 2000, follow: <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000 ------------- ------------ ------------- ------------ <S> <C> <C> <C> <C> Net sales $43,367,024 $49,332,039 $20,690,102 $22,519,789 Net income 1,702,087 3,119,305 550,215 1,630,191 Per share: Basic $0.47 $0.86 $0.15 $0.45 Diluted $0.46 $0.85 $0.15 $0.43 </TABLE> Note F - Inventories The components of inventories follow: <TABLE> <CAPTION> June 30, 2001 December 30, 2000 ------------- ----------------- <S> <C> <C> Raw materials and component parts $ 9,426,812 $ 8,707,420 Work in process 4,741,186 4,375,425 Finished goods 4,352,261 4,019,970 ----------- ----------- $18,520,259 $17,102,635 =========== =========== </TABLE> -8-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net income per share (basic) for the second quarter of 2001 was $550,000 or $.15 per share (basic) on sales of $20.7 million compared to $1.7 million or $.47 per share (basic) on sales of $20.3 million in the second quarter of 2000. Net income for the first six months of 2001 was $1.7 million or $.47 per share (basic) on sales of $43.4 million as compared to the first six months of 2000 of $3.2 million or $.88 per share (basic) on sales of $40.5 million. Sales for the second quarter 2001 were up 1.8% compared to the same period a year ago. New product sales contributed 2.7%, price increases were up 0.4% and volume decreased 1.3%. Sales for the first half of 2001 were up 7.0% compared to the same period a year ago. Volume was up 2.7%, price increases were up 0.9% and new product sales were up 3.4% The Industrial Hardware segment's second quarter sales were down 21.7% compared to the second quarter of 2000. Increases in new product sales of 6% along with price increases of 2% were more than offset by a volume reduction of 30% compared to the second quarter of 2000. Sales for the first six months of 2001 were down 13.3% compared to the same period in 2000. New product sales increased 8% coupled with price increases of 2% were not enough to offset the decrease in volume of 23% in the first half. New products included new paddle slam latches and several mini rotary latches. The volume decrease was attributable to an overall slowdown in the manufacturing sector of the economy. Sales of heavy hardware to the tractor-trailer market continues to be depressed with business being off 35% for the first half of 2001 as compared to the same period a year ago. Sales of our industrial hardware products to original equipment manufacturers and distributors are also down 13% from 2000 levels. Business is expected to continue to be slow in the third quarter with only a moderate improvement forecasted for the fourth quarter of 2001. Despite the slowness in our business, the company continues to invest in the development of new products including an electronic school bus door control device. The Security Products segment's sales were up 43% in the second quarter 2001 as compared to the second quarter of 2000. Price increases were up 1% and volume was up 42%. Sales for the first half of 2001 were up 57% compared to the first half of 2000. Price increases were up 1% and volume was up 56%. 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 27% for the first half as compared to the same period a year ago. Sales of locks to the computer industry were down 50% for the first half of 2001 as compared to the first half of 2000, the result of a major computer manufacturer postponing introduction of new business servers and computers. Sales of security products to the commercial laundry industry have also been adversely affected by the slowdown in the economy. Several large original equipment manufacturers have cut back orders as much as 25% from previous years levels. However, the smart card product line continues to show increased sales over the prior year levels. The Company completed consolidation of its two U.S. lock locations during the second quarter of 2001, which involved moving CCL Security Products from New Britain, Connecticut into the Illinois Lock Company facility in Wheeling, Illinois. Incremental, one-time charges for closing and moving CCL were not material to the consolidated operating results of the Company. The two units will continue to be run as separate divisions from one facility. -9-
The Metal Products segment's sales were down 2% in the second quarter 2001 as compared to the second quarter of 2000. Volume was up 1% and prices decreased 3%. Sales for the first half were down 11% compared to the first half of 2000. Volume was down 10% and prices were down 1% in the six month period. Current year sales for contract castings were down 36%, while mining was up 16% for the comparable period in 2000. The decrease in contract casting was mainly the result of the orders received in the first half of 2000 from another foundry, which had temporarily shut down due to a fire and subsequently reopened. Without this temporary contract casting business included for 2000, business would have been down only 16% for the first half of 2001 compared to the same prior year period. Sales of mine roof supporting anchors were up 26% compared to the same period a year ago. The current demand for power has resulted in the opening of several underground coal mines where the use of our roof support systems are required. Although sales of our mine roof support products were up over year 2000 levels, the long-term trend appears to be a continual reduction in this business as mining techniques continue to evolve requiring less mine roof support products. In response to the changing business climate in the mining industry, we have shifted the utilization of this facility toward the manufacture of a wide variety of contract casting products used by a number of original equipment manufacturers. But even these markets continue to be negatively affected by the increased importation of castings from China and Mexico. With their extremely low labor costs, the competition in the contract casting market is becoming increasingly difficult. The Company continues to look at new manufacturing methods and alternative products to remain competitive, including adding ductile iron casting capability. Gross margin as a percentage of sales for the three and six months ended June 30, 2001 were approximately 27% and 26% respectively compared to 28% for both comparable periods a year ago. The decrease in gross margin is primarily the result of product mix and reduced sales volume and lower utilization of our production facilities. Selling and administrative expenses were up 21% or $625 thousand and 14% or $911 thousand for the three and six months ended June 30, 2001 compared to the same periods a year ago. The second quarter increase was due to higher workers compensation costs and the addition of Greenwald compared to the second quarter of 2000. For the first half, selling and administrative expenses were up due to the addition of Greenwald which was partially offset by decreased spending on advertising, travel expense, legal and professional fees, and personnel relations costs at our other locations. Interest expense increased by $404 thousand or 211% for the second quarter of 2001 and $872 thousand or 237% for six months as compared to the same periods in 2000. This increase in interest expense was due to additional borrowing resulting from the Greenwald acquisition made during 2000. Earnings before income taxes for the three and six months ended June 30, 2001 were down 62% or $1.6 million and 43% or $2.1 million respectively, as compared to the same periods of 2000. The Industrial Hardware segment was down 37% or $554 thousand and 24% or $682 thousand as compared to the same periods a year ago. The decreases were attributable to decreased sales of industrial and transportation hardware. The Security Products segment earnings before income taxes for the three and six month periods ended June 30, 2001 were down 34% or $259 thousand and 2% or $31 thousand respectively from the comparable periods a year ago. This decrease was the result lower sales volume. The Metal Products segment earnings were down 2% or $16 thousand and 36% or $637 thousand for the second quarter and first half of 2001 over the same periods a year ago. -10-
Liquidity and Sources of Capital Cash flows from operations were $2.8 million for the first half of 2001 versus $5.7 million for the same period in 2000. The change in cash flows resulted from changes in the level of sales at all locations and the associated timing differences for collections of accounts receivable and payments of liabilities and changes in inventories. Cash flow from operations coupled with cash on hand at the beginning of the year was sufficient to fund capital expenditures, debt service and dividend payments. Additions to property, plant and equipment were $1.1 million during the first half of 2001 versus $2.0 million for the comparable period a year ago. The higher level of capital expenditures in 2000 was the result of an addition to our Eberhard facility in Cleveland, Ohio. Total 2001 capital expenditures are not expected to exceed the annual expected $3.2 million level of depreciation. Total inventories as of June 30, 2001 were $18.5 million or $1.4 million higher than year end 2000. The inventory turnover ratio of 3.5 turns at the end of the second quarter was slightly lower than the prior year second quarter and the year end ratio which were both 3.6 turns. Accounts receivable decreased by $1.0 million from year end 2000, primarily due to lower sales activity at certain locations. Accounts receivable increased by $812 thousand over the second quarter of 2000, mainly due to the Greenwald acquisition. The average day's sales in accounts receivable for the second quarter of 2001 was 56 days compared to the second quarter of 2000 of 52 days and year end of 55 days. Cash flow from operating activities and funds available under the revolving credit portion of the Company's loan agreement should be sufficient to cover future working capital requirements. Other Matters In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, ("Statement Nos.141 and 142) effective for fiscal years beginning after December 15, 2001. 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. The Company will adopt the new standards on accounting for goodwill and other intangible assets effective December 30, 2001. If the provisions of Statement Nos. 141 and 142 were applied effective December 31, 2000 the net income for the Company would have been $1,974,000 or $.55 per share (basic) and $658,000 or $.18 per share (basic) for the six and three months ended June 30, 2001. Note: The preceding information contains forward looking statements which reflect the Company's current expectations regarding its future operating performance and achievements and is subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. Such risks and uncertainties include changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices and problems associated with foreign sourcing of parts and products. The Company is not obligated to update or revise the aforementioned statements for new developments -11-
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------ ---------------------------------------------------------- The Company maintains manufacturing facilities in foreign countries, which account for approximately 12% of total sales and 9% of total assets. The United States operations buy and sell to the foreign affiliated companies and export less than 10% of total sales to foreign non-affiliated companies. This trade activity could be affected by fluctuations in the foreign currency exchange or weak economic conditions. The Company's currency exposure is concentrated in four foreign currencies, Canada dollar, Mexican peso, New Taiwan dollar and the Hong Kong dollar. Because of the Company's limited exposure to foreign markets, currency exchange gains or losses are generally not material. The Company is exposed to interest rate change market risk with respect to its unsecured $45,000,000 Loan Agreement with interest based on LIBOR plus a spread of up to 2%. The spread is determined based on the Company's operating performance compared to agreed upon financial targets. As such, the interest rate paid by the Company under its Loan Agreement is closely linked to 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 during fiscal 2001 will affect the Company's interest expense. The Company has a swap contract on a portion of the term loan portion of the Loan Agreement with an all in rate of 9.095% to hedge against future LIBOR rate increases. The notional amount of the swap contract is reduced on a quarterly basis in accordance with the principle repayment schedule of the term portion of the Loan Agreement. The notional amount of the swap contract is $13,875,000 as of June 30, 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. -12-
PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - - ------ ------------------- There are no significant pending legal proceedings, other than ordinary routine litigation incidental to the Company's business, to which either the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - ------ ----------------------------------------- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES- - ------ ------------------------------- None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- None ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- None SIGNATURES Pursuant to the requirements 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. THE EASTERN COMPANY ------------------- (Registrant) DATE: August 14, 2001 /s/Leonard F. Leganza --------------- --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: August 14, 2001 /s/John L. Sullivan, III --------------- ------------------------ John L. Sullivan, III Vice President, Secretary and Treasurer -13-