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 SEPTEMBER 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 (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 September 29, 2001 ----- ------------------------------------ Common Stock, No par value 3,638,413 -1-
PART I FINANCIAL INFORMATION THE EASTERN COMPANY ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ------ ASSETS <TABLE> <CAPTION> September 29, 2001 December 30, 2000 ------------------ ----------------- CURRENT ASSETS <S> <C> <C> Cash and cash equivalents $ 4,883,395 $ 4,541,706 Accounts receivable, less allowance: 2001 - $342,000; 2000 - $362,000 12,203,477 13,506,033 Inventories 17,249,372 17,102,635 Prepaid expenses and other current assets 1,983,892 1,974,044 Deferred income taxes 944,300 944,300 ------------ ------------ Total Current Assets 37,264,436 38,068,718 -------------------- Property, plant and equipment 41,739,425 40,297,858 Accumulated depreciation (15,278,580) (12,970,152) ------------ ------------ 26,460,845 27,327,706 Prepaid pension cost 5,399,276 5,293,873 Goodwill, less accumulated amortization 10,794,849 11,435,086 Other assets, less accumulated amortization 2,520,291 2,731,687 ------------ ------------ TOTAL ASSETS $ 82,439,697 $ 84,857,070 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,863,191 $ 4,624,749 Accrued compensation 2,026,800 2,275,582 Other accrued expenses 1,751,671 1,966,902 Current portion of long-term debt 3,279,773 2,903,542 ------------ ------------ Total Current Liabilites 10,921,435 11,770,775 ------------------------ Deferred income taxes 2,855,700 3,350,700 Long-term debt less current portion 26,067,900 28,539,515 Accrued postretirement benefits 2,633,532 2,658,532 Accrued interest rate swap 1,233,896 - Shareholders' Equity -------------------- Common Stock, no par value: Authorized Shares - 25,000,000 Issued and outstanding shares: 2001-3,638,413; 2000-3,636,757, excluding 1,652,320 shares held in treasury 976,848 878,024 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 (1,010,460) (806,618) Derivative financial instruments (738,896) - ------------ ------------ (1,749,356) (806,618) Retained earnings 39,661,742 38,630,205 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 38,727,234 38,537,548 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 82,439,697 $ 84,857,070 ============ ============ </TABLE> See accompanying notes. -2-
THE EASTERN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Three Months Ended Sept. 29, 2001 Sept. 30, 2000 Sept. 29, 2001 Sept. 30, 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net sales $63,918,185 $ 65,234,247 $20,551,161 $ 24,695,211 Interest income 92,896 180,041 24,632 62,217 ----------- ------------ ----------- ------------ 64,011,081 65,414,288 20,575,793 24,757,428 Cost of products sold 47,798,692 46,680,470 15,950,291 17,563,511 ----------- ------------ ----------- ------------ 16,212,389 18,733,818 4,625,502 7,193,917 Selling and administrative expenses 10,392,996 9,611,656 3,148,444 3,277,717 Interest expense 1,780,011 1,082,463 540,151 714,754 Goodwill amortization 594,040 211,597 198,461 185,311 ----------- ------------ ----------- ------------ INCOME BEFORE INCOME TAXES 3,445,342 7,828,102 738,446 3,016,135 Income taxes 1,213,983 2,612,617 209,174 1,004,580 ----------- ------------ ----------- ------------ NET INCOME $ 2,231,359 $ 5,215,485 $ 529,272 $ 2,011,555 =========== ============ =========== ============ Net income per share: Basic $ 0.62 $ 1.44 $ 0.15 $ 0.56 Diluted $ 0.61 $ 1.42 $ 0.15 $ 0.56 Cash dividends per share $ 0.33 $ 0.33 $ 0.11 $ 0.11 See accompanying notes. </TABLE> -3-
THE EASTERN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Sept. 29, 2001 Sept. 30, 2000 -------------- -------------- OPERATING ACTIVITIES: <S> <C> <C> Net income $ 2,231,359 $ 5,215,485 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,272,665 2,602,809 (Gain) loss on sales of equipment and other assets 488 (231) Postretirement benefits other than pensions (25,000) - Provision for losses on accounts receivable (18,418) (182,414) Issuance of Common Stock for directors' fees 100,882 82,988 Changes in operating assets and liabilities: Accounts receivable 1,276,511 (2,331,772) Inventories (201,334) 422,659 Prepaid expenses (21,832) (290,994) Prepaid pension (105,403) (227,716) Accounts payable (866,988) 873,418 Accrued expenses (309,541) 1,524,704 Other assets (146,924) (142,239) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,186,465 7,546,697 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,546,338) (3,834,512) Business acquisitions - (27,547,304) Other - 12,837 ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (1,546,338) (31,368,979) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt - 30,330,453 Principal payments on long-term debt (2,080,905) (6,703,197) Proceeds from sales of Common Stock 23,438 93,009 Purchases of Common Stock for treasury (23,432) (416,439) Dividends paid (1,199,822) (1,200,467) ----------- ----------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (3,280,721) 22,103,359 Effect of exchange rate changes on cash (17,717) 26,548 ----------- ----------- CHANGE IN CASH AND CASH EQUIVALENTS 341,689 (1,692,375) Cash and Cash Equivalents at Beginning of Period 4,541,706 5,940,190 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,883,395 $ 4,247,815 =========== =========== </TABLE> -4-
THE EASTERN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended Three Months Ended Sept. 29, 2001 Sept. 30, 2000 Sept. 29, 2001 Sept. 30, 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net income $ 2,231,359 $5,215,485 $ 529,272 $ 2,011,555 Other comprehensive (loss) income items: Foreign currency translation (203,842) (3,066) (237,153) (101,790) 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 $230,000 and $175,000 respectively (338,140) - (250,136) - ----------- ---------- --------- ------------- Comprehensive income $ 1,893,219 $5,215,485 $ 279,136 $ 2,011,555 =========== ========== ========= ============= </TABLE> -5-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 29, 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> Nine Months Ended Three Months Ended Sept. 29, 2001 Sept. 30, 2000 Sept. 29, 2001 Sept. 30, 2000 -------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> Basic: Weighted average shares outstanding 3,633,174 3,641,344 3,635,430 3,634,306 Contingent shares outstanding (11,250) (18,750) (11,250) (18,750) --------- --------- --------- --------- Denominator for basic earnings per share 3,621,924 3,622,594 3,624,180 3,615,556 ========= ========= ========= ========= Diluted: Weighted average shares outstanding 3,633,174 3,641,344 3,635,430 3,634,306 Contingent shares outstanding (11,250) (18,750) (11,250) (18,750) Dilutive stock options 58,517 37,809 24,534 1,912 --------- --------- --------- --------- Denominator for diluted earnings per share 3,680,441 3,660,403 3,648,714 3,617,468 ========= ========= ========= ========= </TABLE> -6-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 29, 2001 Note C - Segment Information Segment financial information follows: <TABLE> <CAPTION> NINE MONTHS ENDED THREE MONTHS ENDED Sept. 29, 2001 Sept. 30, 2000 Sept. 29, 2001 Sept. 30, 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues: Sales to unaffiliated customers: Industrial Hardware $22,022,936 $26,314,248 $ 6,610,316 $ 8,543,023 Security Products 27,294,370 22,095,158 9,359,413 10,638,022 Metal Products 14,600,879 16,824,841 4,581,432 5,514,166 ----------- ----------- ----------- ----------- 63,918,185 65,234,247 20,551,161 24,695,211 General corporate 92,896 180,041 24,632 62,217 ----------- ----------- ----------- ----------- $64,011,081 $65,414,288 $20,575,793 $24,757,428 =========== =========== =========== =========== Income Before Income Taxes: Industrial Hardware $ 3,053,409 $ 4,531,372 $ 846,827 $ 1,642,691 Security Products 2,404,967 3,289,977 1,007,068 1,861,418 Metal Products 1,254,856 2,465,458 127,163 701,213 ----------- ----------- ----------- ----------- Operating Profit 6,713,232 10,286,807 1,981,058 4,205,322 General corporate expenses (1,487,879) (1,376,242) (702,461) (474,433) Interest expense (1,780,011) (1,082,463) (540,151) (714,754) ----------- ----------- ------------ ----------- $ 3,445,342 $ 7,828,102 $ 738,446 $ 3,016,135 =========== =========== ============ =========== </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 No. 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 an accounting change of $400,756 and a current year charge of $338,140 ($250,136 for the most recent quarter) 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 $2,639,000 or $.73 per share (basic) and $665,000 or $.18 per share (basic) for the nine and three months ended September 29, 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 30, 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). 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> Nine Months Ended Three Months Ended Sept. 29, 2001 Sept. 30, 2000 Sept. 29, 2001 Sept. 30, 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net sales $63,918,185 $74,027,250 $20,551,161 $24,695,211 Net income 2,231,359 5,130,860 529,272 2,011,555 Per share: Basic $0.62 $1.42 $0.15 $0.56 Diluted $0.61 $1.40 $0.15 $0.56 </TABLE> Note F - Inventories The components of inventories follow: <TABLE> <CAPTION> Sept. 29, 2001 December 30, 2000 -------------- ----------------- <S> <C> <C> Raw materials and component parts $ 8,779,930 $ 8,707,420 Work in process 4,415,840 4,375,425 Finished goods 4,053,602 4,019,970 ------------ ------------ $ 17,249,372 $ 17,102,635 ============ ============ </TABLE> -8-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net income for the third quarter of 2001 was $529,000 or $.15 per share (basic) on sales of $20.6 million compared to $2.0 million or $.56 per share (basic) on sales of $24.7 million in the third quarter of 2000. Net income for the first nine months of 2001 was $2.2 million or $.62 per share (basic) on sales of $63.9 million as compared to the first nine months of 2000 of $5.2 million or $1.44 per share (basic) on sales of $65.2 million. Sales for the third quarter 2001 were down 17% compared to the same period a year ago. New product sales contributed 2%, price increases added 1% and volume decreased 20%. Sales for the first nine months of 2001 were down 2% compared to the same period a year ago. Volume was down 6%, price increases were up 1% and new product sales were up 3% The Industrial Hardware segment's third quarter sales were down 22% compared to the third quarter of 2000. Increases in new product sales of 5% along with price increases of 2% were more than offset by a volume reduction of 29% compared to the third quarter of 2000. Sales for the first nine months of 2001 were down 16% compared to the same period in 2000. New product sales increased 7% coupled with price increases of 2% were not enough to offset the decrease in volume of 25% in the first nine months. New products included tonneau cover hardware, toolbox hardware and several rotary latches for use on various door enclosures. The volume decrease was attributable to a continued 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 39% for the first nine months of 2001 as compared to the same period a year ago. This market is not expected to improve until the second half of 2002. Sales of industrial hardware products to original equipment manufacturers are down 14% while sales to distributors are down 20% through the first nine months of 2001 as compared to the same period a year ago. Sales of our automotive accessories which include toolbox locks, push button locks and rotary latches for tonneau covers were up 5% from prior year levels. However, sales of school bus door closures were down 15% from prior year levels. Despite the slowness in our business, the company continues to invest in the development of new products including an electronic door control device which is scheduled for release beginning in November of 2001. The Security Products segment's sales were down 12% in the third quarter 2001 as compared to the third quarter of 2000. Price increases and new products were up 1% and volume was down 13%. Sales for the first nine months of 2001 were up 23% compared to the first nine months of 2000. Price increases were up 1% and volume was up 22%. 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% for the first nine months as compared to the same period a year ago. Sales of locks to the computer industry continue to be severely affected by the current economic environment, down as much as 50% through the nine months ended September 29, 2001, as compared to the same period a year ago. Also affecting sales of locks to the computer industry is 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 to the coin operated vending, gaming and amusement industries were off 25% for the first nine months of 2001 as compared to the same period a year ago. The decline in sales is the direct result of a slow down in expansion of casinos and game rooms and a corresponding slow down in commercial development requiring new coin operated vending equipment. -9-
Sales of locks to distributors servicing lower volume accounts has remained comparable to prior year levels as well as sales to the access door, furniture, electronics and vehicular markets. During the third quarter the Company introduced a new drawer slide product line, which is being met with positive response from our local sales representatives, current customers and trade show attendees. This new product should have a positive effect on most of our sales markets. Sales of luggage locks for the travel industry is down 15% while sales to locksmiths are off 10% from prior year levels. Sales of security products to the commercial laundry industry continues to be affected by the slowdown in the economy. Sales to original equipment manufacturers such as Whirlpool, GE, Maytag, Alliance were off in total by 13% from previous year levels. Sales to distributors were up 4% but this was offset by a 4% decline in sales to route operators. On the positive side, sales of smart card products continue to increase, up 40% from prior year levels. Sales in our security product segment are expected to remain down through the balance of the year. The Metal Products segment's sales were down 17% in the third quarter 2001 as compared to the third quarter of 2000. Volume was down 19% and prices increased 2%. Sales for the first nine months were down 13% compared to the first nine months of 2000, all attributable to decreased volume. Current year sales for contract castings were down 37% from the comparable period in 2000. The decrease in contract casting was mainly the result of the orders received in the first nine months 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 13% for the first nine months of 2001 compared to the same period a year ago. The contract casting business continues to be adversely affected by the importation of castings from China, Germany and Mexico, with lower labor and environmental compliance costs, but also by countries with weak currency exchange rates creating pricing pressures in the malleable iron casting markets. Sales of mine roof support anchors were up 21% 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 and the contract casting business, 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 nine months ended September 29, 2001 were approximately 25% and 23% respectively compared to 29% 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 down 4% or $129 thousand and up 8% or $781 thousand for the three and nine months ended September 29, 2001 compared to the same periods a year ago. The third quarter decrease was due to lower legal and professional fees, which more than offset slight increases in other areas. For the first nine months of 2001, selling and administrative expenses were up due to increased salaries, advertising and travel expenses which were partially offset by decreased legal and professional fees. Interest expense decreased by $175 thousand or 24% for the third quarter of 2001 and increased $698 thousand or 64% for nine months as compared to the same periods in 2000. The decrease in the third quarter was due to lower average outstanding loan balances resulting from principal payments made during the year. The increase for the nine month period was due to higher outstanding loan balances for the full year resulting from the Greenwald acquisition made in mid-2000. Earnings before income taxes for the three and nine months ended September 29, 2001 were down 76% or $2.3 million and 56% or $4.4 million respectively, as compared to the same periods of 2000. -10-
The Industrial Hardware segment was down 48% or $796 thousand and 33% or $1.5 million as compared to the same periods a year ago. The Security Products segment earnings before income taxes for the three and nine month periods ended September 29, 2001 were down 46% or $854 thousand and 27% or $885 thousand respectively from the comparable periods a year ago. The Metal Products segment earnings were down 82% or $574 thousand and 49% or $1.2 million for the third quarter and first nine months of 2001 over the same periods a year ago. Decreases in all business segments were attributable to lower sales volume. Liquidity and Sources of Capital Cash flows from operations were $5.2 million for the first nine months of 2001 versus $7.5 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. 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 $1.5 million during the first nine months of 2001 versus $3.8 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 September 29, 2001 were $17.2 million or $146 thousand higher than year-end 2000. The inventory turnover ratio of 3.7 turns at the end of the third quarter was slightly lower than the prior year third quarter of 3.8 turns and slightly higher than the year-end ratio of 3.6 turns. Accounts receivable decreased by $1.3 million from year-end 2000 and $2.8 million from the prior year period, primarily due to lower sales activity at certain locations. The average day's sales in accounts receivable for the third quarter of 2001 was 54 days compared to the third quarter of 2000 of 55 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 $2,639,000 or $.73 per share (basic) and $665,000 or $.18 per share (basic) for the nine and three months ended September 29, 2001. -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 $13,250,000 as of September 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 $148,850 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. Note: The preceding information under items 2 and 3 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 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 -12-
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: November 9, 2001 /s/Leonard F. Leganza ---------------- --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: November 9, 2001 /s/John L. Sullivan, III ---------------- ------------------------ John L. Sullivan, III Vice President, Secretary and Treasurer -13-