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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended January 2, 1999 Commission File Number 0-599
THE EASTERN COMPANY
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(Exact name of registrant as specified in its charter)
Connecticut 06-0330020
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
112 Bridge Street, Naugatuck, Connecticut 06770
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)729-2255
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
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(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
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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 27, 1999.
Common Stock, No Par Value - $57,916,156
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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 27, 1999
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Common Stock, No Par Value 2,438,575
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 annual report to shareholders (fiscal year ended January 2,
1999) are incorporated by reference into Parts I and II.
Portions of the annual proxy statement dated March 15, 1999 are incorporated by
reference into Part III.
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PART I
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ITEM 1 BUSINESS
(a) General Development of Business
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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, custom locks and metal products from four U.S. operations and four
wholly-owned foreign subsidiaries. The Company maintains seven physical
locations.
RECENT DEVELOPMENT
On March 12, 1999 the Company announced that its board of directors had
approved a three-for-two stock split of the Company's common shares. This
announcement was subsequent to the issuance of the Company's 1998 Annual Report
but before the filing of this Form 10-K. As a result of the stock split,
shareholders of record on May 28, 1999 will be entitled to receive one
additional share for every two shares they own on that date. The Company will
arrange for issuance of these shares June 15, 1999. Any fractional shares
created as a result of this split will be paid by cash. The date on which the
shares will begin trading at the split price is June 16, 1999. Eastern's
common stock purchase rights under its Rights Agreement dated August 21, 1998,
will also be appropriately adjusted to reflect the stock split.
The board of directors also announced a 10 percent increase in its
quarterly dividend, from 15 cents (10 cents after-split) to 16.5 cents (11 cents
after-split) per share. The 11 cent quarterly dividend will be payable on June
15, 1999 to stockholders of record as of May 28, 1999. As a result, the annual
indicated dividend will increase from 40 cents to 44 cents per after-split
share. This will be The Eastern Company's 235th consecutive quarterly dividend
since 1940 and the third dividend increase since December 1997.
(b) Business Segment Information
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Financial Information about business segments is incorporated herein by
reference from page 21-22 of the Company's 1998 Annual Report to Shareholders
captioned "Reportable Segments".
(c) Narrative Description of Business
---------------------------------
The Company operations consist of three business segments: The
Industrial Hardware Group, The Custom Locks Group and The Metal Products
Group.
The Industrial Hardware Group designs, manufactures and markets a
diverse product line of locking bars and hinges for use in the trailer truck
body industry and a variety of latches, handles and hinges for use on pickup
trucks, utility and service vehicles. In addition, the Industrial Hardware
Group produces a wide selection of latching mechanisms, fasteners and other
closure devices which are used to secure the doors and access panels on
various types of industrial equipment such as metal enclosures, machinery
housings, and electronic instrumentation.
Typical products include large locks, multi-point and single point
paddle locks, rotary locks, locking and non-locking recessed handles and hinges.
The products are sold to original equipment manufacturers or distributors
through a distribution channel consisting of in-house salesmen, outside sales
representatives
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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 Group sells its products to many diverse
markets. New locking devices or modifications to existing locks and latches
were introduced for automotive and truck accessories, fire and rescue vehicles,
medical support equipment, and food processing markets. Although service,
quality and price are major criteria for servicing these markets, the continued
introduction of new and improved product designs is vital for maintaining and
increasing market share.
The Custom Locks Group manufactures and markets a broad range of locks
for the computer industry, gaming industry, businesses tha manufacture coin
operated machinery, high end office furniture and laboratory equipment industry.
This segment also produces specialized locks for the firearms and soft luggage
industry.
The products sold included keyed and keyless combination padlocks,
keyed cylinder locks and electronic switch locks. Many of the locks are sold
under the names DUO, X-STATIC(R), EXCALIBUR(TM), WARLOCK(TM), LITE LOCK(TM),
SESAMEE(R), PRESTOLOCK(R) and GUN BLOK(R). These products are sold to original
equipment manufacturers, distributors 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.
This Custom Locks Group continuously seeks new markets where it can
offer competitive pricing and provide customers with engineered solutions to
their security application needs.
During 1998, this segment purchased the tooling and assets from the
Eagle Lock Company which will allow the Company to produce various
military-specified brass padlocks for the Defense Department and Government
agencies.
Two additional markets recently entered into are the
premium/promotional markets where customer names and logos can be affixed
to the face of a PrestoLock combination padlock. This feature affords greater
marketing and sales opportunities to sell directly to the soft luggage
manufacturers. The other market area is selling the padlocks to a broad range
of companies where they too can affix their name and logos to the padlocks to
promote their company via product give-aways.
The Metal Products Group consists of a foundry which 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, automotive and electrical industries. Typical
products include adjustable clamps, pipe fittings and similar items.
Expansion shells are sold to distributors and directly to mines, while
specialty castings are sold to original equipment manufacturers.
The underground mining industry continues to evolve and with new
mining techniques the demand for mechanical anchoring systems has declined.
Although expansion shells continue to be a significant portion of this
segment's business, new business is being obtained in the contract casting
market.
Raw materials and outside services were readily available from domestic
sources for all of the Company's segments during 1998 and are expected to be
readily available in 1999 and the foreseeable future.
Patent protection for the various product lines within the Company is
fairly limited, but is sufficient to enhance competitive positions. Foreign
sales and license agreements are not significant.
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None of the Company's business segments are 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 January 2, 1999.
The dollar amount of the level of orders in the Company is believed to
be firm as of fiscal year ended January 2, 1999 at $8,355,000, as compared to
$7,364,000 at January 3, 1998.
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,
national distributors and in-house sales personnel targeted to niche markets.
Research and development expenditures in 1998 were $132,000 and
represented less than 1% of gross revenues. In 1997 and 1996 they were $84,000
and $142,000, respectively. The projects involved mine roof fasteners and
other malleable iron products, transportation and industrial hardware and
locking device hardware.
The average number of employees in 1998 was 511.
(d) Financial Information about Foreign and Domestic Operations and
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Export Sales
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The Company includes four 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 found on page 22 of the Annual Report to Shareholders
for the year ended January 2, 1999 is incorporated herein by reference.
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ITEM 2 PROPERTIES
The corporate office of the Registrant 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 95,000 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 one high bay in
which two units of automated warehousing are located. This facility's plant
capacity is adequate to satisfy current requirements. However, the extensive
acreage and plant design provides for flexibility in expansion requirements.
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 Custom Locks Group includes the following:
The Illinois Lock Division leases land and a building containing 44,000
square feet in Wheeling, Illinois. The building is brick and located in an
industrial park. A five-year lease option was exercised under favorable terms,
effective July 1, 1995 and expiring June 30, 2000.
The CCL Security Products Division is located in New Britain,
Connecticut where 26,000 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.
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ITEM 3 LEGAL PROCEEDINGS
In April 1988, Murtha Enterprises Inc. and related parties
(collectively "Murtha"), as the result of a February 1987 suit (docket number
N-87-52 PCD) brought by the U. S. Environmental Protection Agency (the "EPA")
and others, concerning the Beacon Heights and Laurel Park landfills,
instituted third-party actions against approximately 200 companies or
individuals including the Registrant. The underlying suit against Murtha was
settled with EPA and the other parties and the Consent Decree has been
approved by the Court.
On September 22, 1988, the EPA filed a complaint against the Registrant
and seven other defendants seeking recovery of present and future response
costs incurred by the United States in connection with the Beacon Heights
landfill. The complaint alleged total damages of approximately $1.8 million
($1.3 million actual and $.5 million future). On October 31, 1988 the court
consolidated the EPA action against the Registrant with the other cases under
docket number N-87-52 (PCD).
By complaint dated September 6, 1990, the Beacon Heights Coalition (the
"Beacon Coalition"), a group of parties who have entered into a consent order
with EPA, instituted a direct action against the Registrant and approximately
400 other named parties concerning the Beacon Heights landfill. The Beacon
Coalition claimed that these defendants generated or transported hazardous
substances disposed of at the Beacon Heights landfill, and are therefore
responsible for a share of the Beacon Coalition's response costs.
The Registrant filed answers to both the EPA Complaint and the Beacon
Coalition Complaint.
In March 1991, a Laurel Park Coalition which did not include the
Registrant entered into Consent Decree and Administrative Order by Consent
with the EPA and the State of Connecticut to remediate the Laurel Park
landfill. The Consent Decree has been approved by the Court.
In May 1991, EPA and the State of Connecticut ("State") each filed a
complaint against the Registrant and three other defendants seeking recovery
of present and future response costs incurred in connection with the Laurel
Park landfill. The EPA claims costs in excess o f $1.8 million and the state
claims costs in excess of $2.5 million. On July 1, 1991, the court
consolidated these actions against the Registrant with the other cases under
docket number N-87-52 (PCD). The Registrant filed answers to both of these
complaints.
By order dated February 8, 1994, the court granted a motion filed by
Registrant for judgment on the pleadings against EPA and the state with
respect to each of their claims against Registrant. By motions dated February
22, 1994 and February 23, 1994, EPA and the state respectively moved for
reconsideration of the court's order, which motions were denied.
By order dated February 8, 1994, the court permitted the Laurel Park
Coalition to file a complaint against eight parties including the Registrant,
which claims were to be assigned for trial if the Coalition files a complaint.
On June 24, 1994 , the Registrant settled all claims with both the
Beacon Heights Coalition and the Laurel Park Coalition and the respective
complaints against the Registrant on behalf of the Coalitions were dismissed
by stipulation.
On March 17, 1995, the U.S. District Court entered a final judgement in
the consolidated proceedings (docket number N-87-52(PCD)) which included the
granting of Registrant's motion for judgement on the pleadings. As a result of
this judgement, no complaints were then pending in the U.S. District Court
involving the Registrant.
On April 17, 1995, the State filed its notice of appeal from this final
judgement with the U.S. District Court. On May 10, 1995, EPA filed its notice of
appeal from the judgement.
On November 1, 1996 the U.S. Court of Appeals for the Second Circuit
reversed the District Court ruling dismissing EPA and State of Connecticut
environmental claims against the Registrant and environmental claims by the
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Laurel Park and Beacon Heights Coalitions against numerous defendants. The Court
of Appeals remanded the case to the U.S. District Court in Connecticut for
further proceedings. The governmental lawsuits, brought after governmental
settlements with the Coalitions, seek to recover remediation costs of the
governments' unreimbursed by the Coalition settlements or the settlement with
the owner/operator in connection with the Laurel Park and Beacon Heights
landfills.The EPA has claimed that the Registrant and two other corporate
defendants are responsible for an aggregate of $3.1 million in remediation costs
with respect to the Beacon Heights landfill and that the Registrant and one
other corporate defendant are responsible for an aggregate of $2.3 million in
remediation costs with respect to the Laurel Park landfill; Connecticut has
claimed that the Registrant and one other defendant are responsible for an
aggregate of $.8 million in remediation costs with respect to the Laurel Park
landfill. The Registrant intends to continue to vigorously contest any liability
relating to these governmental claims. The Registrant would also pursue its
rights of contribution against the other defendants in the event of any
liability, which the Registrant expects would significantly reduce any liability
imposed. In addition, it would file claims against its insurance carriers.
In its decision, the Second Circuit also reversed the U.S. District
Court's dismissal of numerous actions brought by the Beacon Heights and Laurel
Park Coalitions against non-settling parties. These Coalitions assumed full
responsibility for cleaning up the two landfill sites and, as noted above, the
Registrant has settled with both Coalitions with respect to liability at these
sites in 1994.
After rejecting motions for rehearing, the Court of Appeals returned
the cases to the US District Court. On July 21, 1997, the District Court issued
an order appointing a Special Master to mediate, find facts if necessary and
report back to the court within six months as to all remaining claims for
contribution. The Registrant is actively participating in this process as it
pertains to the EPA Claims against the Registrant and the Registrant's
contribution rights against the United States and third-party defendants. In
January 1998, the Registrant entered into a proposed consent decree with the
State which was approved by the court.
In May 1998, the Registrant and its co-defendants entered into a
proposed consent decree with the EPA, which, if approved, would resolve the
Registrant's remaining liability with respect to the Laurel Park and Beacon
Heights landfills.
The consent decree is now pending before the United States District Court.
The Registrant will continue to vigorously pursue its legal interest in
this matter. The Registrant believes that these actions will not have a
materially adverse impact on the Registrant's consolidated financial position,
operating results or liquidity.
There are no other significant legal proceedings, other than ordinary
routine litigation incidental to the Company's business, or to which either the
Registrant or any of its subsidiaries is a party to or to which any of their
property is the subject.
ITEM 4 SUBMISSION OF MATTERS TO SHAREHOLDERS
None
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PART II
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ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The portion of the 1998 Annual Report to Shareholders appearing on
page 1 under the heading "Financial Highlights" and on page 28 under the
heading "Common Stock Market Prices and Dividends" is incorporated herein
by reference.
ITEM 6 SELECTED FINANCIAL DATA
The financial data on page 28 of the 1998 Annual Report to
Shareholders, captioned "1998 - 1994 Summary of Operations" is incorporated
herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following portions of the 1998 Annual Report to Shareholders are
incorporated herein by reference:
(a) All of the material in the President's Letter found on page 2 of
the Annual Report.
(b) All of the material on pages 23 through 27 under the heading
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
ITEM 7 AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This portion of the 1998 Annual Report to Shareholders appearing on
page 27 under the heading "Market Risk Disclosures" is incorporated herein
by reference.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and its
subsidiaries and report of independent auditors included on pages 10 to 23 of
the Annual Report to Shareholders for the fiscal year ended January 2, 1999
are incorporated herein by reference as follows:
(a) Consolidated Balance Sheets - January 2, 1999 and January 3, 1998.
(b) Consolidated Statements of Income -- Fiscal years ended January 2,
1999, January 3, 1998 and December 28, 1996.
(c) Consolidated Statements of Comprehensive Income -- Fiscal years
ended January 2, 1999, January 3, 1998, and December 28, 1996.
(d) Consolidated Statements of Shareholders' Equity -- Fiscal years
ended January 2, 1999, January 3, 1998 and December 28, 1996.
(e) Consolidated Statements of Cash Flows -- Fiscal years ended
January 2, 1999, January 3, 1999 and December 28, 1996.
-8-
(f) Notes to Consolidated Financial Statements -- January 2, 1999 and
January 3, 1998 and December 28, 1996.
(g) Report of Ernst & Young LLP, Independent Auditors.
Quarterly Results of Operations are incorporated herein by reference
from the following portions of the 1998 Annual Report to Shareholders:
(a) The portion of the 1998 Annual Report to Shareholders appearing
on page 27 under the heading "Quarterly Results of Operations
(unaudited)" is incorporated herein by reference.
(b) Paragraphs 2, 3 and 4 under the caption "General" on page 23.
(c) Paragraphs on page 26 under the caption "Impact of Inflation and
Changing Prices."
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 Stock
Options. This information appears on page 7, pages 9 through 10 and pages 12
through 14.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
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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 through 4 of said proxy
statement, being the portion captioned "Item No. 1. Election of Directors" 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 Donald E. Whitmore, Jr., Executive Vice President,
Chief Financial Officer and Secretary.
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 9 through 15 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 through 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 6 through 7, 9 through 10 and 12 through 13 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.
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PART IV
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ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1 and 2. The response to this portion of Item 14 is submitted
as a separate section of this report appearing on page
14 and 15.
3. Exhibits
(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 Letters 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 1989 Executive Stock
Incentive Plan effective as of April 26, 1989
incorporated by reference to the Registrant's
Form S-8 filed on June 21, 1989.
(c) 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.
(d) 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.
(e) 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.
(f) Deferred Compensation Agreement dated September
9, 1998 with Leonard F. Leganza attached beginning
on page 32.
(g) Supplemental Retirement Plan dated September 9,
1998 with Leonard F. Leganza is beginning on page 37.
-11-
(13) 1998 Annual Report to Shareholders attached
hereto on page 44.
(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 Hon
Kong.
(23) Consents of independent auditors attached hereto
on pages 16 and 17.
(27) Financial Data Schedul e attached hereto
beginning on page 76.
(99) (a) Financial Statements and Supplemental
Schedules and report of independent auditors
for the period ended December 31, 1998, 1997
and 1996 of The Eastern Company Savings and
Investment Plan is attached beginning on page 18.
(b) Press Release dated March 12, 1999 describing
the Registrant's three for two stock split and ten
percent increase in the quarterly dividend for
shareholders of record as of May 28, 1999 payable
on June 15, 1999 is attached beginning on page 31.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last
quarter of the fiscal year ended January 2, 1999.
(c) The required Exhibits are listed in (a) 3. above.
(d) Financial statement schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page 15.
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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 29, 1999 THE EASTERN COMPANY
By /s/ Donald E. Whitmore, Jr.
------------------------------
Donald E. Whitmore, Jr.
Director, Executive
Vice President, Chief Financial
Officer and Secretary and
Principal Accounting Officer
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 29, 1999
---------------------------
Leonard F. Leganza
Director, President
and Chief Executive Officer
/s/ Donald E. Whitmore, Jr. March 29, 1999
---------------------------
Donald E. Whitmore, Jr.
Director, Executive Vice President, Chief Financial
Officer and Secretary and Principal Accounting
Officer
/s/ John W. Everets March 29, 1999
---------------------------
John W. Everets
Director
/s/ Charles W. Henry March 29, 1999
---------------------------
Charles W. Henry
Director
/s/ Russell G. McMillen March 29, 1999
---------------------------
Russell G. McMillen
Director
/s/ David C. Robinson March 29, 1999
---------------------------
David C. Robinson
Director
/s/ Donald S. Tuttle, III March 29, 1999
---------------------------
Donald S. Tuttle III
Director
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The Eastern Company and Subsidiaries
Form 10-K-Item 14 (a) (1) and (2)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of The Eastern Company and
subsidiaries and report of independent auditors, included in the annual report
of the Registrant to its shareholders for the fiscal year ended January 2,
1999 are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets - January 2, 1999 and January 3, 1998
Consolidated Statements of Income - Fiscal years ended January 2, 1999,
January 3, 1998 and December 28, 1996
Consolidated Statements of Comprehensive Income - Fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1996
Consolidated Statements of Shareholders' Equity - Fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1996
Consolidated Statements of Cash Flows - Fiscal years ended January 2,
1999, January 3, 1998 and December 28, 1996
Notes to Consolidated Financial Statements
The following financial statement schedule of The Eastern Company and
subsidiaries is included in Item 14 (d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
-14-
The Eastern Company and Subsidiaries
Schedule II - Valuation and Qualifying accounts
COL. A COL. B COL. C COL. D COL. E
Balance at Beginning ADDITIONS Deductions- Balance at End
of Period (1) (2) Describe of Period
Description Charged to Costs Charged to Other
and Expenses Accounts-Describe
Fiscal year ended January 2, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $329,000 $136,304 $26,304 (a) $439,000
======== ======== ======= ========
Fiscal year ended January 3, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $567,000 $370,755 $698,755 (a) $329,000
======== ======== ======== ========
Fiscal year ended December 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $501,000 $251,881 $185,881 (a) $567,000
======== ======== ======== ========
(a) Uncollectible accounts written off, net of recoveries
-15-
Exhibit 23 (a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Eastern Company of our report dated January 25, 1999, included in the
1998 Annual Report to Shareholders of The Eastern Company.
Our audits also included the financial statement schedule of The Eastern
Company listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We also 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. 33-79324) pertaining to The Eastern Company Savings and Investment
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, and the Registration Statement (Form S-8 No. 333-45315)
pertaining to The Eastern Company 1997 Directors Stock Option Plan of our
report dated January 25, 1999, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of The Eastern Company.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Hartford, Connecticut
March 25, 1999
-16-
Exhibit 23 (b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-79324) pertaining to The Eastern Company Savings and
Investment Plan of our report dated March 10, 1999 with respect to the
financial statements and schedule of The Eastern Company Savings and
Investment Plan included in this Annual Report (Form 10-K) as Exhibit 99 for
the fiscal year ended January 2, 1999.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Hartford, Connecticut
March 25, 1999
-17-
Financial Statements
and Supplemental Schedule
The Eastern Company Savings
and Investment Plan
(Exhibit 99(a) to Form 10-K)
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
Contents
Report of Independent Auditors...................................19
Financial Statement
Statements of Assets Available for Benefits......................20
Statements of Changes in Assets Available for Benefits...........22
Notes to Financial Statements....................................26
Supplemental Schedule
Schedule of Investments..........................................30
-18-
Report of Independent Auditors
Plan Administrator of
The Eastern Company Savings and
Investment Plan
We have audited the accompanying statements of assets available for benefits
of The Eastern Company Savings and Investment Plan (the "Plan") as of December
31, 1998 and 1997, and the related statements of changes in assets available
for benefits for each of the three years in the period ended December 31,
1998. Our audits also included the supplemental schedule of investments as of
December 31, 1998 and 1997. These financial statements and supplemental
schedule are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 assets available for benefits of the Plan at
December 31, 1998 and 1997, and the changes in assets available for benefits
for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. Also, in our
opinion, the related supplemental schedule of investments, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects, the information set forth therein.
The fund information in the financial statements is presented for purposes of
additional analysis rather than to present the assets available for benefits
and changes in assets available for benefits of each fund. The fund
information has been subjected to the auditing procedures applied in our
audits of the financial statements and, in our opinion, is fairly stated in
all material respects in relation to the financial statements taken as a
whole.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Hartford, Connecticut
March 10, 1999
-19-
The Eastern Company Savings and
Investment Plan
Statements of Assets Available for
Benefits
Fund Information
New Sub Totals
Participant Investor Vista International to
Loan Fund Fund Fund Opportunities Growth Page 21
Fund Fund
--------------- --------------- --------------- -------------- --------------- ---------------
December 31, 1998
Assets
Investments:
Mutual funds $ 80,645 $ 41,999 $ 48,264 $ 33,641 $ 204,549
Participant loans
receivable $ 65,131 $ 65,131
-------- ------------
Assets available for
benefits $ 65,131 $ 80,645 $ 41,999 $ 48,264 $ 33,641 $ 269,680
======== =========== =========== =========== =========== ============
December 31, 1997
Assets
Investments:
Mutual funds
Participant loans
receivable $ 26,978 $ 26,978
-------- ------------
Total investments 26,978 26,978
Funds in transit
Dividends receivable
Due from (to) other funds -------- ----------- ----------- ----------- ----------- ------------
Assets available for
benefits $ 26,978 $ 26,978
======== =========== =========== =========== =========== ============
See accompanying notes.
-20-
The Eastern Company Savings and Investment Plan
Statements of Assets Available for Benefits (continued)
Fund Information
Sub Totals Growth and Money
from Income International Income Market
Page 20 Fund Growth and Fund Fund TOTAL
Income Fund
--------------- --------------- --------------- -------------- --------------- ---------------
December 31, 1998
Assets
Investments:
Mutual funds $ 204,549 $ 1,610,486 $ 38,255 $ 246,747 $ 129,335 $ 2,229,372
Participant loans
receivable 65,131 65,131
============ =========== =========== =========== ============ ===========
Assets available for
benefits $ 269,680 $ 1,610,486 $ 38,255 $ 246,747 $ 129,335 $ 2,294,503
============ =========== =========== =========== ============ ===========
December 31, 1997
Assets
Investments:
Mutual funds $ 1,030,823 $ 219,692 $ 315,520 $ 1,566,035
Participant loans
receivable $ 26,978 26,978
------------ ----------- ----------- ----------- ------------ -----------
Total investments 26,978 1,030,823 219,692 315,520 1,593,013
Funds in transit 26,145 26,145
Dividends receivable 4,276 620 91 4,987
Due from (to) other funds 254,419 5,887 (260,306) -
============ =========== =========== =========== ============ ===========
Assets available for
benefits $ 26,978 $ 1,289,518 $ 226,199 $ 81,450 $ 1,624,145
============ =========== =========== =========== ============ ===========
See accompanying notes.
-21-
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
Year ended December 31, 1998
Fund Information
New Sub Totals
Investor Vista International to
Participant Fund Fund Opportunities Growth Page 23
Loan Fund Fund Fund
------------- --------------- --------------- --------------- --------------- --------------
Dividends $ 2,036 $ 3,041 $ 1,504 $ 984 $ 7,565
Net realized and
unrealized appreciation
(depreciation) in fair
value of investments 10,000 1,676 4,840 661 17,177
----------- ----------- ----------- ----------- -----------
12,036 4,717 6,344 1,645 24,742
Contributions:
Employee 52,549 29,959 33,097 26,743 142,348
Employer 11,476 7,572 7,377 5,484 31,909
----------- ----------- ----------- ----------- -----------
64,025 37,531 40,474 32,227 174,257
Benefits paid to
participants (878) (607) (411) (965) (2,861)
Interfund transfers $ 38,153 5,462 358 1,857 734 46,564
----------- ----------- ----------- ----------- ----------- -----------
Net increase 38,153 80,645 41,999 48,264 33,641 242,702
Assets available for
benefits:
Beginning of year 26,978 0 0 0 0 26,978
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 65,131 $ 80,645 $ 41,999 $ 48,264 $ 33,641 $ 269,680
=========== =========== =========== =========== =========== ===========
See accompanying notes.
-22-
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
Year ended December 31, 1998 (continued)
Fund Information
Sub Totals Growth and Money
from Income International Income Market
Page 22 Fund Growth and Fund Fund TOTAL
Income Fund
------------- --------------- --------------- --------------- --------------- --------------
Dividends $ 7,565 $ 132,267 $ 2,329 $ 10,578 $ 6,942 $ 159,681
Net realized and
unrealized appreciation
(depreciation) in fair
value of investments 17,177 48,325 (1,666) (3,743) 60,093
----------- ----------- ----------- ---------- --------- ----------
24,742 180,592 663 6,835 6,942 219,774
Contributions:
Employee 142,348 182,143 29,407 24,946 15,180 394,024
Employer 31,909 46,554 7,738 7,996 6,401 100,598
----------- ----------- ----------- ---------- --------- ---------
174,257 228,697 37,145 32,942 21,581 494,622
Benefits paid to
participants (2,861) (33,124) (684) (3,469) (3,900) (44,038)
Interfund transfers 46,564 (55,197) 1,131 (15,760) 23,262 -
----------- ----------- ----------- ---------- --------- ---------
Net increase 242,702 320,968 38,255 20,548 47,885 670,358
Assets available for
benefits:
Beginning of year 26,978 1,289,518 0 226,199 81,450 1,624,145
----------- ----------- ----------- ---------- --------- ----------
End of year $ 269,680 $ 1,610,486 $ 38,255 $ 246,747 $ 129,335 $2,294,503
=========== =========== =========== ========== ========= ==========
See accompanying notes
-23-
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
Year ended December 31, 1997
Fund Information
------------------------------------------------------------------------------
Eastern
Growth and Money Common
Participant Income Income Market Stock
Loan Fund Fund Fund Fund Fund TOTAL
--------------- ----------- ----------- ----------- ----------- -----------
Dividends $ 18,235 $ 8,397 $ 3,831 $ 5,449 $ 35,912
Net realized and unrealized
appreciation in fair value of
investments 170,008 2,706 54,200 226,914
----------- ----------- ----------- ----------- -----------
188,243 11,103 3,831 59,649 262,826
Contributions:
Employee 258,247 46,605 17,988 23,404 346,244
Employer 38,901 8,086 3,333 4,481 54,801
----------- ----------- ----------- ----------- -----------
297,148 54,691 21,321 27,885 401,045
Benefits paid to participants (84,152) (6,011) (11,095) (1,415) (102,673)
Interfund transfers $ 154,146 25,812 19,075 (222,912) -
23,879
----------- ----------- ----------- ----------- ------------ -----------
Net increase 23,879 555,385 85,595 33,132 (136,793) 561,198
Assets available for benefits:
Beginning of year 3,099 734,133 140,604 48,318 136,793 1,062,947
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 26,978 $ 1,289,518 $ 226,199 $ 81,450 $ - $ 1,624,145
=========== =========== ============ =========== =========== ===========
See accompanying notes.
-24-
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
Year ended December 31, 1996
Fund Information
------------------------------------------------------------------------------
Eastern
Growth and Money Common
Participant Income Income Market Stock
Loan Fund Fund Fund Fund Fund TOTAL
--------------- ----------- ----------- ----------- ----------- -----------
Dividends $ 54,469 $ 7,266 $ 3,130 $ 4,104 $ 68,969
Net realizedand unrealized
appreciation (depreciation) in
fair value of investments 46,662 (2,271) 7,923 52,314
----------- ----------- ----------- ----------- -----------
101,131 4,995 3,130 12,027 121,283
Contributions:
Employee 201,676 44,187 13,622 33,187 292,672
Employer 30,460 7,354 2,413 5,750 45,977
----------- ----------- ----------- ----------- -----------
232,136 51,541 16,035 38,937 338,649
Benefits paid to participants (22,480) (14,140) (1,010) (3,595) (41,225)
Loan default $ (732) (732)
Interfund transfers (1,506) 7,904 (420) (3,125) (2,853) -
----------- ----------- ----------- ----------- ------------ -----------
Net increase (2,238) 318,691 41,976 15,030 44,516 417,975
Assets available for benefits:
Beginning of year 5,337 415,442 98,628 33,288 92,277 644,972
----------- ----------- ----------- ----------- ------------ -----------
End of year $ 3,099 $ 734,133 $ 140,604 $ 48,318 $ 136,793 $ 1,062,947
=========== =========== =========== =========== =========== ===========
See accompanying notes.
-25-
The Eastern Company Savings and Investment Plan
Notes to Financial Statements
December 31, 1998
1. Description of Plan
The Eastern Company Savings and Investment Plan (the "Plan") is a defined
contribution plan of The Eastern Company (the "Company"). The following
description of the Plan provides only general information. Participants should
refer to the Plan document for a more complete description of the Plan's
provisions.
General
The Plan covers all full-time United States salaried employees of the Company
who have worked at least 35 hours per week during a consecutive six-month
period. The Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA").
Contributions
Participants may contribute between 1% and 18% of their compensation up to the
maximum allowed by the Internal Revenue Code. The Company makes matching
contributions on a formula basis on the first 4% of participant contributions.
The Company's match was 50% in 1998 and 25% in 1997 and 1996.
Participant Accounts
Each participant's account is credited with the participant's contributions
and allocations of (a) the Company's contributions and (b) Plan earnings.
Allocations are based on participant earnings or account balances, as defined.
Forfeited balances of terminated participants' nonvested accounts are used to
reduce future Company contributions ($1,560 and $1,327 at December 31, 1998
and 1997, respectively).
Vesting
Participants are immediately vested in their voluntary contributions. Vesting
in the Company contribution portion of their accounts plus actual earnings
thereon is based on years of continuous service. A participant is 20% vested
after three years of service, 40% vested after four years and 100% vested
after five years of credited service.
-26-
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
Investment Options
Upon enrollment in the Plan, a participant may direct contributions in 10%
increments to any of eight investment options as follows:
Number of Participants
Description of Fund December 31
Name of Fund Investments 1998 1997 1996
- ------------------------------------------- -------------------------------------- ------------ ------------ ------------
Money Market Fund Money market instruments 67 57 39
Income Fund Diversified portfolio of
fixed-income securities 95 85 66
Growth and Income Fund Primarily common stocks 156 151 132
Investor Fund Primarily common stocks 53 -- --
Vista Fund Diversified portfolio of common
stocks 50 -- --
International Growth and Income Fund Primarily international common
stocks 49 -- --
New Opportunities Fund Primarily common stocks 43 -- --
International Growth Fund Primarily in equity securities of 37 -- --
companies located in a country
other than the United States
Eastern Common Stock Fund Common Stock of The Eastern Company
-- -- 64
Participants may elect to change their investment options at any time
throughout the year.
-27-
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
Participant Loans
Participants may borrow from their fund accounts a minimum of $1,000 up to a
maximum of $50,000 or 50% of their account balance. Loan transactions are
treated as a transfer from (to) the investment fund to (from) the loan fund.
Loan terms range from 1-5 years or up to 10 years for the purchase of a
primary residence. The loans are secured by the balance in the participant's
account and bear interest at the prime rate (as published in the Wall Street
Journal) plus one percent, or such other rate as may be determined by the Plan
Administrator to be a reasonable rate of interest.
Payment of Benefits
On termination of service, a participant may receive a lump-sum amount equal
to the vested value of his or her account, or upon death, the participant's
beneficiary may elect to receive annual installments over a two-year period.
As of December 31, 1998 and 1997, there were no assets allocated but not yet
paid to participants who had withdrawn from the Plan.
Plan Termination
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate
the Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100 percent vested in their accounts.
2. Accounting Policies
The preparation of the accompanying financial statements requires the use of
estimates. Actual results could differ from those estimates.
Investments in mutual funds are stated at fair value as estimated by reference
to quoted market prices.
Administrative expenses of the Plan are paid by the Company.
-28-
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
3. Investments
Plan investments that represent 5 percent or more of the Plan's assets follow:
December 31
1998 1997
-----------------------
Mutual funds:
Putnam Growth and Income Fund $ 1,610,486 $ 1,030,823
Putnam Income Fund 246,747 219,692
Putnam Money Market Fund 129,335 315,520
------------- -------------
$ 1,986,568 $ 1,566,035
============= =============
The Plan's investments appreciated in value as follows:
Year Ended December 31
1998 1997 1996
-------------------------------------
Mutual funds $ 60,093 $ 172,714 $ 44,391
The Eastern Company Common Stock 54,200 7,923
---------- --------- ---------
$ 60,093 $ 226,914 $ 52,314
========== ========= =========
4. Income Tax Status
The Plan is qualified under the applicable section of the Internal Revenue
Code and, as such, is not subject to income tax under present tax laws. The
Plan Administrator is not aware of any course of action or series of events
that have occurred which might adversely affect the Plan's qualified status.
5. Transactions with Parties-in-Interest
At December 31, 1996, the Plan owned 9,722 shares of the Company's Common
Stock valued at $128,817 under the Plan's Eastern Common Stock Fund. During
1997, the Plan sold all such shares as directed by the Plan's participants in
connection with a change in investment service provider. The Eastern Common
Stock Fund is no longer an available investment option within the Plan. The
proceeds from the aforementioned sale were reinvested as directed by the
Plan's participants.
-29-
The Eastern Company Savings and Investment Plan
Schedule of Investments
Balance Held at Close of Value of Each
Period. Number of Item at Close
Shares-Principal Amount of of Period
Name of Issuer and Title of Issue Bonds and Notes
- -------------------------------------------------------------------------------------------------------------------
December 31, 1998
Putnam-Money Market Fund 129,335.350 Units $ 129,335
Putnam-Income Fund Cl. A 21,428.138 Units 147,425
Putnam-Income Fund Cl. B 14,352.834 Units 99,322
Putnam-Growth and Income Fund Cl. A 51,334.606 Units 1,038,499
Putnam-Growth and Income Fund Cl. B 27,915.424 Units 571,987
Putnam-Investors Fund 5,441.642 Units 80,645
Putnam-Vista Fund 3,213.416 Units 41,999
Putnam-International Growth and Income Fund 3,452.592 Units 38,255
Putnam-New Opportunities Fund 826.011 Units 48,264
Putnam-International Growth Fund 1,749.405 Units 33,641
Participant loans Various 65,131
===========
$ 2,294,503
===========
December 31, 1997
Putnam-Money Market Fund 315,519.800 Units $ 315,520
Putnam-Income Fund Cl. A 8,388.438 Units 59,642
Putnam-Income Fund Cl. B 22,637.885 Units 160,050
Putnam-Growth and Income Fund Cl. A 2,653.058 Units 51,841
Putnam-Growth and Income Fund Cl. B 50,698.213 Units 978,982
Participant loans Various 26,978
-----------
$ 1,593,013
===========
-30-
Exhibit (99 (b))
FOR IMMEDIATE RELEASE
Friday, March 12, 1999
THE EASTERN COMPANY'S BOARD OF DIRECTORS APPROVES
THREE-FOR-TWO STOCK SPLIT
Company Increases Quarterly Dividend by 10 Percent
Naugatuck, CT-The Eastern Company (AMEX-EML) announced today that its board of
directors has approved a three-for-two stock split of the Company's common
shares and increased the quarterly dividend by 10%.
"This stock split and dividend increase are a reflection of Eastern's solid
performance during the past two years," said Leonard F. Leganza, Eastern's
president and chief executive officer. "This action reaffirms our confidence
that our momentum in both sales and earnings will be sustained in 1999. A
further demonstration of this optimism is the fact that Eastern has purchased
228,042 shares of its own stock within the past year. We believe the stock
split will bring the value of Eastern's shares to an attractive level for
individual investors, as well as improve our liquidity and create a broader
shareholder base for the Company. The three-for-two stock split will increase
the number of outstanding Eastern common shares from approximately 2.4 million
to approximately 3.6 million."
The board of directors also announced a 10 percent increase in its quarterly
dividend, from 15 cents (10 cents after split) to 16.5 cents (11 cents after
split) per share. The 11 cent quarterly dividend will be payable on June 15,
1999 to stockholders of record as of May 28, 1999. As a result, the annual
indicated dividend will increase from 40 cents to 44 cents per after split
share. This will be The Eastern Company's 235th consecutive quarterly dividend
since 1940 and the third dividend increase since December 1997.
As a result of the stock split, shareholders of record on May 28, 1999 will be
entitled to receive one additional share for every two shares they own on that
date. The Company will arrange for issuance of these shares on June 15, 1999.
Any fractional shares created as a result of this split will be paid by cash.
The date on which the shares will begin trading at the split price is June 16,
1999. Eastern's common stock purchase rights under its Rights Agreement dated
August 21, 1998, will also be appropriately adjusted to reflect the stock
split.
The Eastern Company manufactures and markets a broad range of locks, latches,
fasteners and other security hardware that meets diverse security and safety
needs of industrial and commercial customers. Headquartered in Naugatuck, CT,
the Company has seven manufacturing locations in the U.S.A., Canada, Mexico
and the Pacific Rim.
Contact: John Dibble
(203) 729-2255, Ext. 241
Forward-Looking Statements: Information in this news release contains
-----------------------------
statements which reflect the Company's current expectations regarding its
future operating performance and achievements. Actual results may differ due
to the many economic uncertainties that affect the Company's business
environment. Further information about the potential factors which could
affect the Company's financial result are included in the Company's reports
and filings with the Securities and Exchange Commission. The Company is not
obligated to update or revise the aforementioned statements for those new
developments.
-31-
Exhibit 10 (f)
DEFERRED COMPENSATION AGREEMENT
-------------------------------
AGREEMENT dated as of September 9, 1998 by and between THE EASTERN
------------------ -----------
COMPANY, a Connecticut corporation having its principal office at 112 Bridge
--------
Street, Naugatuck, CT 06770 (hereinafter, "Company") and LEONARD F. LEGANZA of
------------------
62 Tunxis Village, Farmington, CT 06032 (hereinafter, "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is serving as the chief executive officer of the
Company; and
WHEREAS, the Company wishes to provide the Executive with certain
deferred compensation following his termination of employment with the
Company.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Definitions. For purposes of this Agreement, the following
------------
terms shall have the following meanings:
(a) "Base Amount" shall mean the average of the Executive's
annual compensation over the five calendar years ending prior to the date of a
Statutory Change in Control (or such shorter period of time during which the
Executive is employed by the Company), as determined pursuant to Section 280G
of the Code. If the five calendar year period includes a calendar year in
which the Executive was not employed for the entire year, the Executive's
compensation for such calendar year shall be annualized.
(b) "Change of Control" shall mean the acquisition by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of more than 50% of either the then outstanding shares
of common stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors; provided, however, that the following acquisitions
shall not constitute a Change of Control: (i) any acquisition directly from
the Company, (ii) any acquisition by the Company, and (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986,
as amended (the "Code").
(d) "Total Parachute Payments" shall mean any and all payments
or benefits which are in the nature of compensation and which are received (or
to be received) by the Executive in connection with a Statutory Change in
Control (whether pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with the Company, its successors, any person whose
actions result in a Statutory Change in Control, or any corporation which is
an affiliate of the Company or which, as a result of the completion of the
transactions causing a Statutory Change in Control, will become an affiliate
of the Company), as determined pursuant to Section 280G of the Code.
(e) "Statutory Change in Control" shall mean a change in
ownership or effective control of the Company, or a change in the ownership of
a substantial portion of the assets of the Company, as determined pursuant to
Section 280G of the Code.
(f) "Parachute Payment Limit" shall mean 2.99 times the
Executive's Base Amount, as determined pursuant to Section 280G of the Code.
(g) "Tax Advisor" shall mean the independent accounting firm
engaged by the Company.
-32-
2. Payments in the Event of a Change in Control. If: (a) a Change in
----------------------------------------------
Control of the Company occurs on or before the third anniversary of the date
of this Agreement; (b) in connection with the Change in Control, the
shareholders of the Company receive consideration equal to or greater than
thirty-five dollars ($35.00) per share of common stock of the Company; and (c)
the Executive terminates his employment in connection with the Change in
Control, then the Company shall pay to the Executive the following amounts:
(a) A severance payment equal to the lesser of:
(i) the sum of: (A) 2.0 times the Executive's
annual base salary (equal to twelve times the highest monthly base salary
paid or payable to the Executive by the Company during the twelve month period
immediately preceding the month in which the Change in Control occurs), plus
(B) the bonuses payable to the Executive under the Company's incentive
compensation plan for the two full fiscal years immediately prior to the
Change in Control (annualized in the event that the Executive is not employed
by the Company for the whole of such fiscal year); or
(ii) the Parachute Payment Limit.
The severance payment described in this Section 2(a) shall be
paid to the Executive in a single lump sum amount within thirty (30) days
following the Executive's termination of employment.
(b) A supplemental severance payment having a present
value equal to the excess (if any) of:
(i) the Parachute Payment Limit, over
(ii) the Total Parachute Payments payable to
the Executive (including but not limited to the severance payment described
in Section 2(a) but calculated without regard to
the supplemental severance payment described in this Section 2(b)).
The supplemental severance payment described in this Section
2(b) shall be paid to the Executive in five annual installments, commencing
within thirty (30) days following the Executive's termination of employment.
In the event the Executive dies prior to the receipt of the five annual
installments, the remaining installments shall be paid to the Executive's
surviving spouse or, if he has no surviving spouse, to his estate.
For purposes of determining the present value of the
supplemental severance payment, the discount rate described in Section
280G(d)(4) of the Code shall be used.
(c) Notwithstanding anything else in this Agreement to the
contrary, in the event that the Total Parachute Payments are determined by the
Tax Advisor not to be deductible, in whole or in part, by the Company, an
affiliate of the Company or any other person making such payment or providing
such benefit as a result of Section 280G of the Code, then the severance
payments described in this Section 2 shall be reduced (beginning first with
the supplemental severance payment described in Section 2(b)) until no portion
of the Total Parachute Payments is not deductible as a result of Section 280G
of the Code, or the severance payments to be made pursuant to this Section 2
are reduced to zero. For purposes of this limitation, no portion of the Total
Parachute Payments shall be taken into account to the extent that the receipt
of such payments, in the determination of the Tax Advisor, is effectively
waived by the Executive prior to the date which is fifteen (15) days following
the date of the Executive's termination of employment and prior to the earlier
of the date of constructive receipt and the date of payment thereof. The
determination of the Tax Advisor as to the deductibility of the Total
Parachute Payments shall be completed not later than forty-five (45) days
following the Executive's termination of employment, and such determination
shall be communicated in writing to the Company, with a copy to the Executive,
within said forty-five (45) day period. The good faith determination of the
Tax Advisor as to the deductibility of the Total Parachute Payments shall be
deemed conclusive and binding on the Company and the Executive. The Company
shall pay the fees and other costs of the Tax Advisor hereunder. In the event
that the Tax Advisor is unable or declines to serve for purposes of making the
foregoing determination, the Company shall appoint another accounting firm of
national reputation to serve as the Tax Advisor, with the Executive's consent.
-33-
3. Continuation of the Company. The provisionsof this Section 3
----------------------------
shall apply in the event that severance payments are not payable under the
provisions of Section 2.
(a) If: (i) during the three fiscal years of the Company
ending prior to the third anniversary of the date of this Agreement, the
pre-tax earnings of the Company has increased at an annual compounded rate
equal to or greater than fifteen percent (15%); (ii) the price per share of
common stock of the Company (as reported on the American Stock Exchange)
equals or exceeds thirty-five dollars ($35.00) for a period of sixty (60)
consecutive calendar days; (iii) no later than the second anniversary of the
date of this Agreement, the board of directors of the Company has selected an
individual to replace the Executive as the chief executive officer of the
Company following his termination of employment; and (iv) the Executive
terminates his employment no later than the third anniversary of the date of
this Agreement, then the Company shall pay to the Executive a severance
payment equal to the sum of:
(A) 2.0 times the Executive's annual base salary
(equal to twelve times the highest monthly base
salary paid or payable to the Executive by the Company during the twelve month
period immediately preceding the month in which the Executive's termination of
employment occurs), plus
(B) the bonuses payable to the Executive under the
Company's incentive compensation plan for the two full fiscal years
immediately prior to the Executive's termination ofemployment (annualized
in the event that the Executive is not employed by the Company for the whole
of such fiscal year).
(b) If: (i) the Executive is not entitled to the severance
payment described in Section 3(a); (ii) no later than the second anniversary
of the date of this Agreement, the board of directors of the Company has
selected an individual to replace the Executive as the chief executive officer
of the Company following his termination of employment; and (iii) the
Executive terminates his employment no later than the third anniversary of the
date of this Agreement, then the Company shall pay to the Executive a
severance payment equal to 1.5 times the Executive's annual base salary (equal
to twelve times the highest monthly base salary paid or payable to the
Executive by the Company during the twelve month period immediately preceding
the month in which the Executive's termination of employment occurs).
(c) The severance payment described in this Section 3 shall be
paid to the Executive in a single lump sum amount within thirty (30) days
following the Executive's termination of employment.
(d) Notwithstanding anything in this Agreement to the
contrary, in the event that a Statutory Change in Control has occurred (even
though a Change in Control may not have occurred) and the Total Parachute
Payments are determined by the Tax Advisor not to be deductible, in whole or
in part, by the Company, an affiliate of the Company or any other person
making such payment or providing such benefit as a result of Section 280G of
the Code, then the severance payment described in this Section 3 shall be
reduced until no portion of the Total Parachute Payments is not deductible as
a result of Section 280G of the Code, or the severance payment to be made
pursuant to this Section 3 is reduced to zero. For purposes of this
limitation, no portion of the Total Parachute Payments shall be taken into
account to the extent that the receipt of such payments, in the determination
of the Tax Advisor, is effectively waived by the Executive prior to the date
which is fifteen (15) days following the date of the Executive's termination
of employment and prior to the earlier of the date of constructive receipt and
the date of payment thereof. The determination of the Tax Advisor as to the
deductibility of the Total Parachute Payments shall be completed not later
than forty-five (45) days following the Executive's termination of employment,
and such determination shall be communicated in writing to the Company, with a
copy to the Executive, within said forty-five (45) day period. The good faith
determination of the Tax Advisor as to the deductibility of the Total
Parachute Payments shall be deemed conclusive and binding on the Company and
the Executive. The Company shall pay the fees and other costs of the Tax
Advisor hereunder. In the event that the Tax Advisor is unable or declines to
serve for purposes of making the foregoing determination, the Company shall
appoint another accounting firm of national reputation to serve as the Tax
Advisor, with the Executive's consent.
-34-
4. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
--------------------------
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor shall anything herein
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or subsequent
to his termination of employment shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
5. Full Settlement. The Company's obligation to make the payments
-----------------
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and
such amounts shall not be reduced whether or not the Executive obtains other
employment. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Code.
6. Successors.
-----------
(a) This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean
the Company as herein before defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
7. Miscellaneous.
--------------
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by
the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
--------------------
Leonard F. Leganza
62 Tunxis Village
Farmington, CT 06032
-35-
If to the Company:
------------------
The Eastern Company
112 Bridge Street
P.O. Box 460
Naugatuck, CT 06770
Attn: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision of this Agreement or the failure to
assert any right the Executive or the Company may have hereunder shall not be
deemed to be a waiver of such provision or right or any other provision or
right of this Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
ATTEST: THE EASTERN COMPANY
/s/ Donald E. Whitmore, Jr. By /s/ Russell G. McMillen
--------------------------- --------------------------
Donald E. Whitmore, Jr. Russell G. McMillen
Its Secretary Its Chairman of
Compensation Committee
/s/ Leonard F. Leganza
----------------------
Leonard F. Leganza
-36-
Exhibit 10 (g)
SUPPLEMENTAL RETIREMENT PLAN
FOR THE CHIEF EXECUTIVE OFFICER OF
THE EASTERN COMPANY
The Eastern Company, a Connecticut corporation having its principal
office at 112 Bridge Street, Naugatuck, CT 06770 (hereinafter "Company"), does
hereby create and adopt a supplemental retirement plan for the benefit of its
chief executive officer on the terms and conditions hereinafter set forth:
ARTICLE 1
DESIGNATION AND PURPOSE
-----------------------
1.1 Designation. The Plan is designated the "Supplemental
------------
Retirement Plan for the Chief Executive Officer of The Eastern Company".
1.2 Purpose. Under the direction and l eadership of its chief
--------
executive officer, the Company has shown substantial growth in size and
earnings. The purpose of this Plan is to provide the chief executive
officer with supplemental retirement benefits.
ARTICLE 2
DEFINITIONS
-----------
When used herein, each of the words and phrases defined hereinafter
shall have the following meaning unless a different meaning is clearly
required by the context of the Plan.
2.1 "Actuarial Equivalence" shall be determined using the
actuarial assumptions which are set forth in the Salaried Plan.
2.2 "Adjusted Annual Retirement Benefit" shall mean the annual
retirement benefit computed by using the retirement benefit formula set forth
in the Salaried Plan, except that: (a) such formula shall be applied whether
or not the Participant has attained a vested benefit under the Salaried Plan;
(b) such formula shall be applied without regard to the limitations on
benefits set forth in Section 415 of the Code; and (c) such formula shall be
applied without regard to the limitations on compensation set forth in Section
401(a)(17) of the Code. For purposes of determining the Participant's Adjusted
Annual Retirement Benefit, all amounts which are received by the Participant
and either are includible in his gross income for Federal income tax purposes
or are not includible in his gross income under Section 402(e)(3) or Section
125 of the Code shall be taken into account.
The Adjusted Annual Retirement Benefit shall be calculated as if it is
payable as a Five Year Certain Annuity commencing when the Participant reaches
his Normal Retirement Date or incurs a Termination of Employment (whichever
occurs later).
2.3 "Adjusted Pre-retirement Survivor Annuity" shall mean the
fifty percent (50%) survivor benefit payable under the terms of a 100/50 Joint
and Survivor Annuity, based on the following assumptions: (a) the 100/50 Joint
and Survivor Annuity is Actuarially Equivalent to the Adjusted Annual
Retirement Benefit of the Participant, determined as of the date immediately
preceding his date of death; and (b) the 100/50 Joint and Survivor Annuity
commenced immediately prior to the Participant's date of death, reduced to its
Actuarial Equivalent if it commences before his Normal Retirement Date.
2.4 "Beneficiary" shall mean the person or persons named by
the Participant as his beneficiary pursuant to the provisions of Section 7.5.
-37-
2.5 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.6 "Company" shall mean The Eastern Company, any affiliate of
The Eastern Company (within the meaning of Section 414(b) or Section 414(c) of
the Code) which adopts this Plan, and any successor to said entity which
assumes the obligations of this Plan by execution of a written agreement
adopting this Plan.
2.7 "Five Year Certain Annuity" shall mean an annuity for the
life of the Participant with the provision that, if the Participant dies prior
to the receipt of sixty (60) monthly payments, the balance of said sixty (60)
monthly payments shall then be paid to the Participant's Beneficiary.
2.8 "Normal Retirement Date" shall have th e same meaning for
purposes of the Plan as it has for purposes of the Salaried Plan.
2.9 "100/50 Joint and Survivor Annuity" shall mean an annuity
payable for the life of the Participant with the provision that, after
his death, fifty percent (50%) of the benefit payable during the life of the
Participant shall then be paid to and during the lifetime of his surviving
Spouse.
2.10 "Participant" shall mean Leonard F. Leganza, the chief
executive officer of the Company.
2.11 "Plan" shall mean the Supplemental Retirement Plan for the
Chief Executive Officer of The Eastern Company set forth herein and in
all subsequent amendments hereto.
2.12 "Qualified Plan Benefits" shall mean the vested annual
retirement benefits (if any) payable to the Participant from the Salaried
Plan, computed by using the retirement benefit formula set forth in the
Salaried Plan.
The Qualified Plan Benefits shall be calculated as if they are payable
as a Five Year Certain Annuity commencing when the Participant reaches his
Normal Retirement Date or incurs a Termination of Employment (whichever occurs
later). If the retirement benefits under the Salaried Plan are payable to the
Participant in a form other than a Five Year Certain Annuity, such retirement
benefits shall be adjusted to be an Actuarially Equivalent benefit payable as
a Five Year Certain Annuity commencing when the Participant reaches his Normal
Retirement Date or incurs a Termination of Employment (whichever occurs
later).
2.13 "Qualified Pre-retirement Survivor Annuity" shall mean
the qualified pre-retirement survivor annuity payable to the surviving Spouse
of the Participant pursuant to the terms of the Salaried Plan.
2.14 "Salaried Plan" shall mean the Salaried Employees' Retirement
Plan of The Eastern Company, as it may be amended from time to time, or any
other defined benefit pension plan adopted by the Company for the benefit
of its salaried employees.
2.15 "Spouse" shall mean the person who is legally married to
the Participant on the earlier of his date of death or the date of his
Termination of Employment.
2.16 "Termination of Employment" shall mean termination of
employment with the Company and all affiliates of the Company, whether
voluntarily or involuntarily.
2.17 "Total and Permanent Disability" shall have the same meaning
for purposes of the Plan as it has for purposes of the Salaried Plan.
2.18 "Years of Service" shall mean the years of service which
are credited to the Participant for purposes of the Salaried Plan.
-38-
ARTICLE 3
ELIGIBILITY
-----------
Leonard F. Leganza, the chief executive officer of the Company, shall
be the sole Participant in the Plan so long as he continues to serve as the
president and the chief executive officer of the Company.
ARTICLE 4
RETIREMENT BENEFITS
-------------------
4.1 Amount of Retirement Benefits. Following the Participant's
-------------------------------
Termination of Employment, he shall be entitled to receive retirement
benefits hereunder. The retirement benefits payabl e to the Participant
during a calendar year shall be determined as follows:
(a) First, calculate the excess of: (i) the Participant's
Adjusted Annual Retirement Benefit, as determined under Section 2.2 at the
time of his Termination of Employment; over (ii) the Participant's Qualified
Plan Benefits, as determined under Section 2.12 at the time of his
Termination of Employment;
(b) Second, if the benefit calculated pursuant to Section 4.1(a)
commences before the Participant's Normal Retirement Date, the benefit shall
be reduced to its Actuarial Equivalent in order to reflect commencement before
the Participant's Normal Retirement Date; and
(c) Third, if the Participant is married at the time of his
Termination of Employment, the benefit calculated pursuant to Sec tion 4.1(b)
shall be adjusted to an Actuarially Equivalent 100/50 Joint and Survivor
Annuity.
4.2 Payment of Retirement Benefits. The Company shall commence
----------------------------------
payment of the benefit described in Section 4.1 as of the first day of
the month following the date of the Participant's Termination of
Employment. Such benefit shall be payable in monthly installments as
a Five Year Certain Annuity if the Participant is not married at the time
of his Termination of Employment or as an Actuarially Equivalent 100/50
Joint and Survivor Annuity if the Participant is married at the time of his
Termination of Employment.
ARTICLE 5
DEATH AND DISABILITY BENEFITS
-----------------------------
5.1 Amount of Death Benefits.
-------------------------
(a) In the event of the death of the Participant prior to
his Termination of Employment, the Participant's surviving Spouse (if any)
shall receive a pre-retirement survivor annuity equal to the excess of:
(i) the Adjusted Pre-retirement Survivor Annuity, as determined under
Section 2.3; over (B) the Qualified Pre-retirement Survivor Annuity, as
determined under Section 2.13. Such pre-retirement survivor annuity shall
commence as of the first day of the month following the Participant's death
and shall be payable for and during the lifetime of his surviving Spouse.
(b) In the event of the death of a married Participant after
commencing to receive his retirement benefits under Section 4.1 or his
disability retirement benefits under Section 5.2, his surviving Spouse shall
receive the survivor benefit payable under the 100/50 Joint and Survivor
Annuity for the remainder of her life. In the event of the death of an
unmarried Participant after commencing to receive his retirement benefits
under Section 4.1 or his disability retirement benefits under Section 5.2,
but prior to the receipt of sixty (60) monthly payments, the balance of said
sixty (60) monthly payments shall then be paid to the Participant's
Beneficiary.
5.2 Amount of Disability Benefits. In the event the Participant
--------------------------------
incurs a Total and Permanent Disability prior to his Termination of Employment
and is eligible to receive disability benefits under Title II of the Social
-39-
Security Act, then he shall be entitled to receive disability retirement
benefits under the Plan. Such benefits shall be equal to the monthly
retirement benefit determined in accordance with Section 4.1 which the
Participant would have been entitled to receive if he had incurred a
Termination of Employment immediately prior to the date of his Total and
Permanent Disability.
ARTICLE 6
VESTING
-------
6.1 Vested Benefits. The Participant shall at all times be fully
----------------
vested in his right to receive retirement benefits under this Plan following
his Termination of Employment.
ARTICLE 7
OTHER PLAN PROVISIONS
---------------------
7.1 Funding.
--------
(a) It is the intention of the Company, the Participant, his
surviving Spouse and Beneficiary, and each other party to the Plan that the
arrangements hereunder be unfunded for tax purposes and for purposes of Title
I of ERISA. The rights of the Participant and his surviving Spouse and
Beneficiary shall be solely those of a general unsecured creditor of the
Company. The Plan constitutes a mere promise by the Company to make benefit
payments in the future.
(b) Any trust which may be created by the Company and any assets
which may be held by the trust to assist the Company in meeting its
obligations under the Plan will conform to the terms of the model trust
described in Revenue Procedure 92-64 issued by the Internal Revenue
Service (or any successor thereto).
(c) The Administrator may direct that payments be made before
they would otherwise be due if, based on a change in the Federal tax or
revenue laws, a published ruling or similar announcement issued by the
Internal Revenue Service, a regulation issued by the Secretary of the
Treasury, a decision by a court of competent jurisdiction involving a
Participant or his Spouse or Beneficiary or a closing agreement made under
Section 7121 of the Code that is approved by the Internal Revenue
Service and involved a Participant or his Spouse or Beneficiary, the
Administrator determines that a Participant or his Spouse or Beneficiary has
or will recognize income for Federal income tax purposes with respect to
amounts that are or will be payable under the Plan before they are to be paid.
Amounts so paid shall then be used as an offset to the benefits, if any,
thereafter payable hereunder.
7.2 Qualified Plan Benefits. The benefits payable under the Plan
------------------------
shall be based on the benefits which the Participant (or his surviving
Spouse or Beneficiary) are entitled to receive under the Salaried Plan,
whether or not payment of such amounts is delayed, suspended, reduced or
forfeited because of failure to apply, other employment or any other reasons.
7.3 Consent to Insurance Procedures. In order to be eligible
-----------------------------------
for benefits hereunder, a Participant must agree that the Company may from
time to time apply for and take out in its own name and at its own expense
such life, health, accident or other insurance upon the Participant as the
Company may deem necessary or advisable to protect its interests hereunder.
The Participant must also agree to submit to any medical or other
examination necessary for such purpose and to assist and cooperate with the
Company in procuring such insurance. The Participant and his surviving
Spouse and Beneficiary must also agree that they shall have no right, title
or interest in and to such insurance whether presently existing or hereafter
procured.
7.4 Benefits Not Assignable. Except as required by law, the right
------------------------
of any Participant or his surviving Spouse or Beneficiary to any benefit or
paymen under the Plan: (a) shall not be subject to voluntary or involuntary
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors of the Participant or his surviving
Spouse or Beneficiary; (b) shall not be considered an asset of the Participant
-40-
or his surviving Spouse or Beneficiary in the event of any divorce, insolvency
or bankruptcy; and (c) shall not be subject to attachment, execution,
garnishment, sequestration or other legal or equitable process. In the event
that a Participant or his surviving Spouse or Beneficiary who is receiving or
is entitled to receive benefits under the Plan attempts to assign, transfer or
dispose of such right, or if an attempt is made to subject said right to such
process, such assignment, transfer, disposition or process shall, unless
otherwise required by law, be null and void.
7.5 Beneficiaries. A Participant may designate one or more
--------------
Beneficiaries and contingent Beneficiaries to receive any benefits payable
under the Plan after his death by delivering a written designation thereof
over his signature to the Administrator. A Participant may designate different
Beneficiaries at any time by delivering a new written designation over his
signature to the Administrator. Any such designation shall become effective
only upon its receipt by the Administrator. The last effective designation
received by the Administrator shall supersede all prior designations. If a
Participant fails to designate a Beneficiary, or if no designated Beneficiary
survives the Participant, the Participant shall be deemed to have designated
the following Beneficiaries (if then living) in the following order of
priority: (a) his Spouse; (b) his children, in equal shares; (c) his parents,
in equal shares; and (d) his estate.
ARTICLE 8
SUSPENSION AND TERMINATION OF BENEFIT PAYMENTS
----------------------------------------------
8.1 Suspension of Benefit Payments. In the event that a Participant
-------------------------------
commences receiving benefits hereunder and is subsequently re-employed on a
full-time basis by the Company or any of its affiliates, the payment of
benefits under this Plan shall be suspended during the period of such
re-employment and shall recommence on the date on which he again incurs a
Termination of Employment.
8.2 Termination of Benefit Payments. In the event that a Participant
--------------------------------
who is receiving benefits hereunder violates any agreement with the Company or
any of its affiliates (including, without limitation, any agreement relating
to the nondisclosure of secret or confidential information or knowledge,
noncompetition, or the assignment of inventions), then all rights to future
benefit payments with respect to such Participant shall terminate.
ARTICLE 9
ADMINISTRATION
--------------
9.1 Plan Administrator. The board of directors of the Company
--------------------
shall have the responsibility for the administration of the Plan. The
board of directors may, by written instruction, designate one or more persons
to carry out any specified responsibilities under the Plan and may, in the
same manner, revoke such delegation of responsibilities; provided, however,
that in no event may the board of directors appoint the Participant to
carry out any administrative responsibilities under the Plan. Upon the
designation of such a person or persons and the delegation of such
responsibilities to him or them, all references in this Plan to
"Administrator" shall be deemed to refer to such person or persons.
9.2 Powers of Administrator. The Administrator shall have such
------------------------
authority and powers as may be necessary to discharge its duties hereunder,
including, but not by way of limitation, the following:
(a) to construe and interpret the Plan, decide all questions
of eligibility for and determine the
amount and time of payment of any benefits hereunder;
(b) to prescribe procedures to be followed by Participants
and their surviving spouses for filingapplications for benefits;
(c) to prepare and distribute information explaining the
Plan; and
-41-
(d) to appoint or employ individuals to assist in the
administration of the Plan and any other agents it deems advisable, including
legal counsel (who may be counsel for the Company).
9.3 Facility of Payment. Whenever, in the Administrator's opinion,
--------------------
a person entitled to receive any payment of a benefit or installment thereof
hereunder is under a legal disability or is incapacitated in any way so as to
be unable to manage his financial affairs, the Administrator may issue
directions that payments shall be made to another person for his benefit, or
the Administrator may direct that payments be applied for the benefit of such
person in such manner as the Administrator considers advisable. Any payment of
a benefit or installment thereof in accordance with the provisions of this
Section 9.3 shall be a complete discharge of any liability for the making of
such payment under the provisions of the Plan.
ARTICLE 10
BENEFIT CLAIMS PROCEDURE
------------------------
10.1 Claims for Benefits. Any claim for benefits under the Plan
----------------------
shall be made in writing to the Administrator. If such claim for benefits is
wholly or partially denied, the Administrator shall, within thirty (30) days
after receipt of the claim, notify the claimant of the denial of the claim.
Such notice of denial: (a) shall be in writing; (b) shall be written in a
manner calculated to be understood by the claimant; and (c) shall contain
(i) the specific reason or reasons for denial of the claim, (ii) a specific
reference to the pertinent Plan provisions upon which the denial is based,
(iii) a description of any additional material or information necessary to
perfect the claim, along with an explanation of why such material or
information is necessary, and (iv) an explanation of the claim review
procedure.
10.2 Request for Review of Denial. Within sixty (60) days after the
-------------------------------
receipt by the claimant of a written notice of denial of the claim, or such
later time as shall be deemed reasonable taking into account the nature of the
benefit subject to the claim and any other attendant circumstances, the
claimant may file a written request with the Administrator that it conduct a
full and fair review of the denial of the claim for benefits.
10.3 Decisionion Review of Denial. The Administrator shall deliver
-------------------------------
to the claimant a written decision on the claim within thirty (30) days after
receipt of the aforesaid request for review, except that if there are special
circumstances (such as the need to hold a hearing) which require an extension
of time for processing, the aforesaid thirty (30) day period shall be extended
to sixty (60) days. Such decision shall: (a) be written in a manner calculated
to be understood by the claimant; (b) include the specific reason or reasons
for the decision; and (c) contain a specific reference to the pertinent Plan
provisions upon which the decision is based.
ARTICLE 11
AMENDMENT AND TERMINATION
-------------------------
11.1 Right to Amend. At any time, and from time to time, the board of
---------------
directors of the Company, by resolutions adopted by it, may amend the Plan or
change the designation of eligible Participants under the Plan. However, no
such amendment shall have the effect of reducing the accrued benefit of any
Participant as of the effective date of the amendment.
11.2 Right to Terminate Plan. It is the intention of the Company to
--------------------------
continue the Plan indefinitely. However, the Company expressly reserves the
right, subject to its contractual obligations, to terminate the Plan, in whole
or in part, at any time if the board of directors of the Company shall
determine, in its sole and absolute discretion, that business, financial, or
other good cause makes it necessary or desirable to do so.
11.3 Effect of Termination. Upon termination or partial termination of
----------------------
the Plan, the rights of each Participant as of the date of such termination or
partial termination (and the rights of his surviving Spouse and Beneficiary)
shall be fully vested with respect to those benefits accrued as of such date.
Upon a termination or partial termination of the Plan, the benefits payable to
a Participant, his surviving Spouse or Beneficiary shall not commence prior to
the date on which they are otherwise payable in accordance with the terms of
the Plan.
-42-
ARTICLE 12
MISCELLANEOUS
-------------
12.1 Titles are for Reference Only. The titles in this Plan are for
-------------- --------- -----
reference only. In the event of a conflict between a title and the content of
a section, the content of the section shall control.
12.2 Construction. The provisions of the Plan shall be interpreted,
-------------
construed and administered in accordance with the laws of the State of
Connecticut.
12.3 No Contract. This Plan shall not be deemed a contract of
-------------
employment with the Participant, nor shall any provision hereof restrict the
right of the Company or any of its subsidiaries to terminate the Participant's
employment.
12.4 Spouse's and Beneficiary's Rights. Wherever the rights of a
------------------------------------
Participant are stated or limited in the Plan, his Spouse and Beneficiary
shall be bound thereby.
12.5 Gender and Number. Where appearing in the Plan, the masculine
------------------
gender shall be deemed to include the feminine gender and the singular number
shall include the plural, unless the context clearly indicates to the
contrary.
IN WITNESS WHEREOF, the undersigned has executed this Plan at
Naugatuck, Connecticut on the 9th day of September, 1998.
ATTEST: THE EASTERN COMPANY
/s/ Donand E. Whitmore, Jr. By /s/ Russell G. McMillen
--------------------------- --------------------------
Donald E. Whitmore, Jr Russell G McMillen
Its Secretary Its Chairman of
Compensation Committee
-43-
THE EASTERN COMPANY ANNUAL REPORT
[GRAPH SHOWING EARNING PER SHARE FOR 1996 TO PRESENT QUARTERLY]
Earnings Per Share
1ST QTR 2ND QTR 3RD QTR 4TH QTR
---------------------------------------------
96 (.07) .13 .18 .09
97 .23 .30 .40 .47
98 .50 .55 .59 .60
1998
[FRONT COVER]
-44-
[INSIDE FRONT COVER]
How would one best describe today's Eastern Company?
Eastern is a 141 year old manufacturer of industrial hardware, custom locks and
metal products with seven operating locations in the USA, Canada, Mexico and the
Pacific Rim.
Sales -- 32% Metal products; 36% Industrial hardware; 32% Custom locks
1998 marked 58 years of uninterrupted dividend payments and eight consecutive
quarters of increased per share earinings.
Earnings -- 33% Metal products; 35% Industrial hardware; 32% Custom locks
On the cover:
Increased earnings per share are graphically depicted from 1996 to the present.
(The same chart in a more detailed form appears at right.)
-45-
FINANCIAL HIGHLIGHTS
1998 1997
----- -----
Net Sales $70,749,529 $ 67,331,422
Income Before Income Taxes 8,723,467 5,807,526
Net Income 5,443,187 3,722,530
Income Per Share (basic) 2.24 1.40
Dividends Per Share .58 .47 1/2
Book Value Per Share 11.72 11.00
Working Capital Per Share 8.69 5.59
Capital Expenditures 4,396,641 2,230,113
Depreciation and Amortization 2,911,850 2,978,250
Number of Employees 511 492
Number of Stockholders 802 848
Average Shares Outstanding (basic) 2,430,240 2,658,181
FINANCIAL RATIOS
1998 1997
---- ----
Return on Shareholders' Equity 19% 13%
Income Before Taxes as a % of Sales 12% 9%
Net Income as a % of Sales 8% 6%
Sales per Employee $ 138,453 $ 136,852
Net Income per Employee $ 10,662 $ 7,566
Current Ratio 3.8 to 1 2.3 to 1
PAGE 1 OF ANNUAL REPORT
-46-
THE EASTERN COMPANY
TO OUR SHAREHOLDERS
1998 was an outstanding year for The Eastern Company. Sales of $70.7 million,
earnings of $5.4 million and a 19% return on investment were all records in the
141-year history of the Company. We also posted our eighth consecutive quarter
of higher earnings, and our quarterly dividend to shareholders was increased by
15%.
Eastern's earnings momentum, which began in early 1997, was driven by several
factors. The robust economy had a significant impact on the markets we serve and
was particularly influential in the excellent performance and earnings
contribution of our Industrial Hardware Group.
In addition to the favorable effect of a thriving economy, Eastern's solid
performance in the past two years has been the result of improvements in our
planning techniques which include setting and achieving a number of operating
and financial goals. One key factor has been the initiation of new incentive
programs that closely link the responsibility of our management teams with goal
achievement. With these initiatives in place and the dedicated commitment of
our operating management, we look for 1999 to be another year of steady growth
in sales and in earnings.
Management's focus and the Company's resources will continue to be directed
toward internal growth. At the same time we will be charting the Company's
future course through the careful analysis of various strategic opportunities
and alternatives.
I invite you to read the following pages of this report where we discuss
developments that are currently underway at our operating units, all of which
are focused on strengthening our position in the markets that we serve.
I thank all of our employees for their wonderful efforts and our Directors for
their wise counsel and support. Their commitment was pivotal in helping the
company to achieve another record year and ultimately our principal goal-that of
enhancing shareholder value.
/s/ Leonard F. Leganza
- ----------------------
Leonard F. Leganza
President and Chief Executive Officer
PAGE 2 OF ANNUAL REPORT
-47-
Why has The Eastern Company started to report its products by groups?
New SEC Rules on segment reporting require that we do this. We also believe
this policy will help our shareholders and the investment community better
understand the financial dynamics of our business. All three of our product
groups have specific expertise, but manufacturing and marketing are still the
common threads that relate to all three groups.
On several occasions you have written about Eastern's plans for acquisitions and
other strategic alliances. Why is this important to The Eastern Company?
In the past two years our internal sales growth has increased only moderately
while our earnings growth has increased significantly. We anticipate this
internal growth will continue in the future. We believe, however, that we would
position ourselves for more meaningful expansion by making well thought out
acquisitions.
Have you actually looked into any acquisitions or strategic alliances?
Yes, on an ongoing basis we continue to explore opportunities in various allied
markets to determine if they would be compatible with Eastern's current
operations. This procedure requires a substantial amount of investigation and
firm discipline in order to conform to our stringent acquisition criteria. These
standards mandate that we only pursue opportunities that extend our reach into
related areas, further strengthen our product portfolio or enhance our
manufacturing capabilities. Although we do not shy away from exposure to new
business involvements, we try to consider only ventures that are beneficial to
our shareholders from the onset.
What are your thoughts on how Eastern's stock performed in 1998?
Our stock performed well in 1998, having gained 28.5%. This compares to a 16.1%
gain for the Dow Jones Industrial Average and a 3.45% loss for the Russell 2000
Index of small companies. Nevertheless, Eastern's top priority is to grow the
business and to ensure long-term success rather than focus on short-term stock
gains.
In what specific areas do you foresee growth in Eastern's product lines?
All of our groups are committed to developing products for new and interesting
markets, although we believe the Industrial Hardware Group's line of industrial
and vehicular hardware has the greatest potential.
PAGE 3 OF ANNUAL REPORT
-48-
Industrial hardware
THE EASTERN COMPANY 1998
What new markets does the Eberhard division anticipate entering in 1999?
The majority of our targeted markets reflect the customers' ever-changing demand
for new and better products. Eberhard has designed new locking devices for
automotive and truck accessories, fire and rescue vehicles, medical support
equipment, and for marine and commercial food processing markets. Some will
utilize modifications of our existing locks and latches; others will
require us to provide new and innovative designs. Eberhard's diverse product
lines are also used in unique applications including latches for removable car
tops on sports cars, furniture recliners retail store displays and industrial
health care equipment.
PAGE 4 OF ANNUAL REPORT
-49-
What kinds of security hardware does the Industrial Hardware Group manufacture
and what markets do they serve?
Eberhard designs and manufactures product lines which serve the needs of many
diverse markets. One of the lines is locking bars and hinges principally for the
trailer truck body industry. Another line is vehicular hardware, which consists
of a variety of latches, handles and hinges for pickup trucks, and for utility
and service type vehicles. In addition, Eberhard produces a wide selection of
latching mechanisms, fasteners and other closure devices which are used to
secure the doors and access panels on various types of industrial equipment such
as metal enclosures, machinery housings, and electronic instrumentation.
How do you account for Eberhard's growth in recent years?
Eberhard has become a leader in the vehicular and industrial hardware markets.
Much of this success is due to providing customers with product design and
engineering services for new locking and latching applications. These problem
solving abilities, along with an expanded quality product line, have led to a
growing trust and confidence by Eberhard's customers.
PAGE 5 OF ANNUAL REPORT
-50-
Custom locks
THE EASTERN COMPANY 1998
Are there any new markets or new customers being targeted for your keyed locks
in 1999?
Illinois Lock has already targeted several new and interesting markets. This
division has substantially increased penetration into the Mexican furniture
manufacturing industry by initiating new sales and marketing programs. Another
new market has emerged as a result of purchasing certain tooling and production
equipment from the Eagle Lock Company, which has enabled us to produce various
military-specified brass padlocks for the Defense Department and other
government agencies. This transaction expands Illinois Locks business into a
new niche market. Illinois Lock has also recently started production on two
custom, top-of- the-line Warlocks(TM) for the steering column and ignition lock
in the recently introduced Excelsior-Henderson heavyweight cruising motorcycle.
Based on the high interest levels for this new cycle, we are optimistic that
this will develop into meaningful new business in 1999.
What principal markets does Illinois Lock currently serve with its keyed locks?
There are four market areas where Illinois Lock's presence is strongest. They
are the computer industry, gaming industry, businesses that manufacture coin
operated machinery and the high-end office furniture and laboratory equipment
industry.
PAGE 6 OF ANNUAL REPORT
-51-
Where do you see growth for your PrestoLock(R) combination padlock?
Our CCL division has expanded its Prestolock business into two new but allied
market segments. This has been accomplished by affixing the customers' names and
logos on to the faces of the padlocks. Providing this new customized feature
affords greater marketing and sales opportunities to sell directly to all
segments of the soft luggage industry. The other market segment is a broad range
of companies who wish to promote their corporate image via customized product
give-aways.
Who are the principal end users of your Sesamee(R) and PrestoLock combination
padlocks?
The Sesamee locks are marketed to locksmiths nationwide, and they have an
almost unlimited number of end uses. The PrestoLock, a smaller, lighter, and
less costly line of padlocks, is used mainly by the growing soft luggage
industry.
PAGE 7 OF ANNUAL REPORT
-52-
Metal products
THE EASTERN COMPANY 1998
What products does Frazer & Jones make and what principal markets use these
products?
This division manufactures two different product groups. The first group
consists of various anchoring devices used in roof support systems throughout
the underground mining industry. The second is high volume production of small
size castings which serve a variety of industrial markets principally in the
construction, electrical and automotive industries. Frazer & Jones manufactures
metal products, such as adjustable clamps, pipe fittings and other metal parts,
to contract specifications. Each customer then incorporates these parts
into their own product line.
For years Frazer & Jones specialized in producing security products for
underground coal mines. Will this market be important looking into the future?
The underground mining market remains important to The Eastern Company. In fact,
we are still the largest and most efficient producer of expansion bolts for the
mining industry. This business still represents a meaningful portion of our
overall production.
PAGE 8 OF ANNUAL REPORT
-53-
Do you anticipate continued growth in produciing castings to meet other
customers' specifications?
Yes. There is a definite need by American industries for high quality and
efficient metal casting producers like Frazer & Jones. As manufacturers across
the nation focus on their core competencies and strive to reduce costs, they
are increasingly outsourcing the production of metal castings to independent
foundries. We believe this trend reaffirms our optimism for continued demand
for these products.
PAGE 9 OF ANNUAL REPORT
-53-
THE EASTERN COMPANY
Financial Statements
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and January 3, 1998
1998 1997
ASSETS
Current Assets
Cash and cash equivalents $ 4,789,901 $ 2,111,289
Accounts receivable, less allowances of $439,000 in 1998 and $329,000 in 1997 8,572,700 8,725,167
Inventories:
Raw materials and component parts 4,902,822 5,502,526
Work in process 3,762,179 3,736,500
Finished goods 4,113,109 3,175,840
--------- ---------
12,778,110 12,414,866
Prepaid expenses and other 1,412,683 1,819,857
Deferred income taxes 1,182,300 1,026,700
--------- ---------
Total Current Assets 28,735,694 26,097,879
Property, Plant and Equipment
Land 221,854 227,622
Buildings 4,402,340 3,936,441
Machinery and equipment 22,716,877 21,270,361
Accumulated depreciation (12,307,918) (11,997,894)
----------- -----------
15,033,153 13,436,530
Other Assets
Goodwill, less accumulated amortization of $35,166 in 1998 and $51,411 in 1997 9,945 13,701
Patents, technology, licenses and trademarks, less accumulated amortization
of $1,397,648 in 1998 and $1,034,253 in 1997 1,704,369 1,989,410
Prepaid pension cost 4,567,282 4,217,604
Other assets 21,272 43,037
------ ------
6,302,868 6,263,752
--------- ---------
$ 50,071,715 $ 45,798,161
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,015,259 $ 3,499,857
Accrued compensation 2,057,235 1,413,418
Other accrued expenses 2,469,480 2,662,088
Short-term borrowings -- 3,500,000
Current portion of long-term debt 72,878 163,662
------ -------
Total Current Liabilities 7,614,852 11,239,025
Deferred income taxes 2,546,200 2,492,200
Long-term debt 8,551,512 60,000
Accrued postretirement benefits 2,873,249 2,763,795
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: 2,421,775 shares in 1998 and 2,593,089 shares in 1997;
excluding shares held in treasury of 1,048,477 in 1998 and 831,780 in 1997 1,465,360 6,078,427
Retained earnings 28,210,340 24,220,894
Unearned compensation (359,531) (492,969)
Accumulated other comprehensive loss - currency translation (830,267) (563,211)
---------- ----------
Total Shareholders' Equity 28,485,902 29,243,141
---------- ----------
$ 50,071,715 $ 45,798,161
============== ==============
See notes to consolidated financial statements.
PAGE 10 OF ANNUAL REPORT
-55-
THE EASTERN COMPANY
Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 2, 1999, January 3, 1998 and December 28, 1996
1998 1997 1996
Net sales $ 70,749,529 $ 67,331,422 $ 57,853,669
Other income 181,466 139,116 88,191
------- ------- ------
70,930,995 67,470,538 57,941,860
Costs and expenses
Cost of products sold 49,469,844 48,779,527 45,173,447
Selling and administrative 12,188,613 12,586,893 11,025,975
Interest 549,071 296,592 215,426
------- ------- -------
62,207,528 61,663,012 56,414,848
---------- ---------- ----------
Income before income taxes 8,723,467 5,807,526 1,527,012
Income taxes 3,280,280 2,084,996 647,195
--------- --------- -------
Net income $ 5,443,187 $ 3,722,530 $ 879,817
============= ============== ==============
Earnings per share
Basic $ 2.24 $ 1.40 $ .33
======= ======= ======
Diluted $ 2.15 $ 1.38 $ .32
======= ======= ======
See notes to consolidated financial statements.
THE EASTERN COMPANY
Financial Statements
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Fiscal Years Ended January 2, 1999, January 3, 1998 and December 28, 1996
1998 1997 1996
Net income $ 5,443,187 $ 3,722,530 $ 879,817
Other comprehensive loss - Currency translation (267,056) (80,148) (144,602)
-------- ------- --------
Comprehensive income $ 5,176,131 $ 3,642,382 $ 735,215
============= ============== ==============
See notes to consolidated financial statements.
PAGE 11 OF ANNUAL REPORT
-56-
THE EASTERN COMPANY
Financial Statements
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Fiscal Years Ended January 2, 1999, January 3, 1998 and December 28, 1996
Accumulated
Other
Comprehensive
Common Retained Unearned Loss - Currency
Stock Earnings Compensation Translation
Balances at December 30, 1995 $ 8,017,738 $ 22,127,407 -- $ (338,461)
Net income -- 879,817 -- --
Cash dividends declared, $.46 per share -- (1,241,331) -- --
Issuance of 3,000 shares of Common Stock
upon the exercise of stock options 28,125 -- -- --
Issuance of 1,930 shares of Common Stock
for director fees 25,813 -- -- --
Issuance of 15,000 shares of Common Stock
for restricted stock awards 200,938 -- (200,938) --
Currency translation adjustment -- -- -- (144,602)
---------- ---------- --------- --------
Balances at December 28, 1996 8,272,614 21,765,893 (200,938) (483,063)
Net income -- 3,722,530 -- --
Cash dividends declared, $.475 per share -- (1,267,529) -- --
Purchase of 220,793 shares of Common Stock
for treasury (3,421,825) -- -- --
Issuance of 70,293 shares of Common Stock
upon the exercise of stock options 721,656 -- -- --
Issuance of 4,875 shares of Common Stock
for director fees 75,201 -- -- --
Issuance of 22,500 shares of Common Stock
for restricted stock awards 405,469 -- (405,469) --
7,500 shares of Common Stock earned
under restricted stock award program 25,312 -- 113,438 --
Currency translation adjustment -- -- -- (80,148)
---------- ---------- --------- --------
Balances at January 3, 1998 6,078,427 24,220,894 (492,969) (563,211)
Net income -- 5,443,187 -- --
Cash dividends declared, $.58 per share -- (1,429,474) -- --
Redemption of stock rights -- (24,267) -- --
Purchase of 216,697 shares of Common Stock
for treasury (5,455,231) -- -- --
Issuance of 39,250 shares of Common Stock
upon the exercise of stock options 570,591 -- -- --
Issuance of 3,633 shares of Common Stock
for director fees 85,817 -- -- --
Issuance of 2,500 shares of Common Stock
for restricted stock awards 55,937 -- (55,937) --
12,500 shares of Common Stock earned
under restricted stock award program 129,819 -- 189,375 --
Currency translation adjustment -- -- -- (267,056)
---------- ---------- --------- --------
Balances at January 2, 1999 $ 1,465,360 $ 28,210,340 $ (359,531) $ (830,267)
============= ============= ============= =============
See notes to consolidated financial statements.
PAGE 12 OF ANNUAL REPORT
-57-
THE EASTERN COMPANY
Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 2, 1999, January 3, 1998 and December 28, 1996
1998 1997 1996
Operating Activities
Net income $ 5,443,187 $ 3,722,530 $ 879,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,911,850 2,978,250 2,952,876
(Gain) loss on sales of equipment and other assets (86,872) (4,618) 9,780
Provision for doubtful accounts 136,304 370,755 251,881
Deferred income taxes (101,600) (106,300) 32,500
Issuance of Common Stock for directors' fees 85,817 75,201 25,813
Compensation related to earned contingent
shares of Common Stock 319,194 138,750 --
Changes in operating assets and liabilities:
Accounts receivable 375,957 (2,181,557) 534,741
Inventories (548,041) (1,612,166) 882,531
Prepaid expenses and other (28,788) (358,019) (159,412)
Prepaid pension cost (349,677) (200,206) (948,332)
Other assets (69,144) (313,827) (1,178,406)
Accounts payable (460,777) 1,557,083 (854,183)
Accrued compensation 649,745 576,064 (47,719)
Other accrued expenses (26,104) 1,546,392 88,706
------- --------- ------
Net cash provided by operating activities 8,251,051 6,188,332 2,470,593
Investing Activities
Purchases of property, plant and equipment (4,396,641) (2,230,113) (2,915,041)
Proceeds from sales of equipment and other assets 301,996 54,497 13,600
------- ------ ------
Net cash used by investing activities (4,094,645) (2,175,616) (2,901,441)
Financing Activities
Proceeds from line of credit 5,000,000 2,000,000 2,500,000
Payments on line of credit -- (2,000,000) --
Proceeds from issuance of long-term debt 67,120 -- --
Principal payments on long-term debt (159,114) (116,831) (102,373)
Proceeds from sales of Common Stock 570,591 721,656 28,125
Purchases of Common Stock for treasury (5,455,231) (3,421,825) --
Redemption of stock rights (24,267) -- --
Dividends paid (1,429,474) (1,267,529) (1,241,331)
---------- ---------- ----------
Net cash (used) provided by financing activities (1,430,375) (4,084,529) 1,184,421
Effect of exchange rate changes on cash $ (47,419) $ (85,929) $ (5,903)
------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents 2,678,612 (157,742) 747,670
Cash and cash equivalents at beginning of year 2,111,289 2,269,031 1,521,361
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,789,901 $ 2,111,289 $ 2,269,031
============= ============== =============
See notes to consolidated financial statements.
PAGE 13 OF ANNUAL REPORT
-58-
THE EASTERN COMPANY
Financial Statements
NOTES OF CONSOLIDATED
FINANCIAL STATEMENTS
January 2, 1999, January 3, 1998 and December 28, 1996
1. OPERATIONS
The operations of The Eastern Company (the Company) consist of three business
segments. The Industrial Hardware Group 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
Custom Locks Group manufactures and markets a broad range of locks for
traditional general purpose security applications. This segment also produces
specialized locks for firearms, soft luggage, coin-operated vending and gaming
equipment and electric and computer peripheral components. The Metal Products
Group 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 generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal Year
The Company's year ends on the Saturday nearest to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated.
Foreign Currency Translation
For foreign operations, balance sheet accounts are translated at the current
year-end exchange rate; income statement accounts are translated at the average
exchange rate for the year. Resulting translation adjustments are made
directly to a separate component of shareholders' equity--"Accumulated other
comprehensive loss-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.
Inventories
Inventories are valued generally at the lower of cost, determined by the
last-in, first-out (LIFO) method, or market. Current cost exceeded the LIFO
carrying value by approximately $2,769,000 at January 2, 1999 and $2,854,000 at
January 3, 1998.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment are stated on the basis of cost. Depreciation
($2,539,547 in 1998, $2,597,806 in 1997 and $2,688,305 in 1996) is computed
generally using the straight-line method based on the estimated useful lives of
the assets.
Intangibles
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 20 years.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value of
long-lived assets, including 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 long-lived
assets held and used may not be recovered.
PAGE 14 OF ANNUAL REPORT
-59-
Product Development Costs
Product development costs, charged to expense as incurred, were $131,857 in
1998, $84,290 in 1997 and $142,358 in 1996.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$421,018 in 1998, $442,965 in 1997 and $597,877 in 1996.
Earnings Per Share
The denominators used in the earnings per share computations follow:
1998 1997 1996
Basic:
Weighted average shares outstanding 2,450,240 2,688,181 2,713,191
Contingent shares outstanding (20,000) (30,000) (15,000)
------- ------- -------
Denominator for basic earnings per share 2,430,240 2,658,181 2,698,191
========= ========= =========
Diluted:
Weighted average shares outstanding 2,450,240 2,688,181 2,713,191
Contingent shares outstanding (20,000) (30,000) (15,000)
Dilutive stock options 102,628 39,820 35,381
------- ------ ------
Denominator for diluted earnings per share 2,532,868 2,698,001 2,733,572
========= ========= =========
Retirement Benefit Plans
The Company maintains defined benefit pension plans and a defined contribution
plan. In addition, the Company also provides postretirement health care benefits
to eligible individuals. During 1998, the Company adopted Financial Accounting
Standards Board (FASB) Number (No.) 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. This statement amends FASB Statements No. 87,
88, and 106 and revises employers' disclosures about pension and other
postretirement benefit plans. Refer to Note 9 for the resulting disclosure
changes.
3. CONTINGENCIES
In 1996, the United States Court of Appeals reversed a 1995 District Court
ruling relating to environmental remediation complaints against the Company and
other potentially responsible parties. The contingency for these environmental
complaints was substantially resolved during 1998. 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 either 1998 or 1997. The
aggregate liability for all contingencies is approximately $450,000 and
$1,200,000 as of January 2, 1999 and January 3, 1998, respectively, and is
included in current liabilities under the caption, "Other accrued expenses".
Although possible, no significant change in these estimated liabilities is
contemplated.
4. DEBT
1998 1997
Debt consists of:
Note payable with interest at the LIBOR rate plus one and thirty-five
hundredths percentage points and payable in quarterly installments of
$425,000
commencing January 1, 2001 $ 8,500,000 $ --
Other 124,390 223,662
------- -------
8,624,390 223,662
Less current portion 72,878 163,662
------ -------
$ 8,551,512 $ 60,000
============= ===========
Interest paid was $485,621 in 1998, $248,314 in 1997 and $174,325 in 1996.
In 1998, the Company refinanced $8,500,000 of short-term debt on a long-term
basis under a loan agreement (the Loan Agreement) with a bank. Under the
covenants of the Loan Agreement the Company is, among other things, prohibited
from disposing of substantially all its assets and is required to maintain
certain financial ratios. The Loan Agreement also provides for a line of credit
of $5,000,000 with a quarterly commitment fee of 1/8% on the unused portion.
The line of credit expires July 1, 2001 but may be renewed annually thereafter.
Interest on amounts borrowed under the line of credit bear interest at either
the "base rate", as defined or LIBOR plus 1 1/44 percentage points. There were
no borrowings under the line of credit portion of the Loan Agreement as of
January 2, 1999.
PAGE 15 OF ANNUAL REPORT
-60-
4. DEBT (continued)
The Company has an agreement to borrow approximately $2,000,000 to finance
future building construction and specific equipment acquisitions. The related
note will be payable in equal monthly installments over ten years with interest
at 4.99% and will be collateralized by a security interest in the equipment
referred to above and a $900,000 letter of credit. The Company expects to close
on this financing arrangement in the first quarter of 1999.
In connection with the Company's cash management program, compensating balances
(approximately $440,000 as of January 2, 1999) are required to be maintained.
5. STOCK RIGHTS
During 1998, the Company redeemed stock rights previously granted under its 1991
program for cash of $24,267 ($.01 per right). Concurrently therewith, it
adopted a new shareholder rights plan. At January 2, 1999 there were
2,421,775 stock rights outstanding under the new plan. Each right may be
exercised to purchase one share of the Company's Common Stock at an exercise
price of $120, 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 $.01 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.
6. STOCK OPTIONS AND AWARDS
The Company has four incentive stock option plans for officers, other key
employees, and nonemployee directors: 1983, 1989, 1995, and 1997. Under the
1983, 1989, and 1995 plans, options may be granted to the participants to
purchase shares of Common Stock at prices 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 plan with restrictions
determined by the Incentive Compensation Committee of the Company's Board of
Directors. Under the 1997 plan, options may be granted to the participants to
purchase shares of Common Stock at prices determined by the Compensation
Committee of the Company's Board of Directors. All options under the 1997 plan
were granted at prices equal to the fair market value of the stock on those
dates.
At January 2, 1999, 12,500 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:
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding, beginning of year 22,500 $9.375 29,640 $9.34 40,590 $9.27
Exercised (10,000) $9.375 (7,140) $9.25 -- --
Forfeited -- -- -- -- (10,950) $9.08
------- ------ -------
Outstanding, end of year 12,500 $9.375 22,500 $9.375 29,640 $9.34
====== ====== ======
Exercisable, end of year:
At $9.08 -- -- 3,000
At $9.375 12,500 22,500 26,640
PAGE 16 OF ANNUAL REPORT
-61-
At January 2, 1999, 100,400 shares 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:
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
Outstanding, beginning of year 93,050 $12.19 121,203 $10.00 124,203 $ 9.99
Granted 4,761 $21.00 35,000 $16.16 -- --
Exercised (14,250) $10.66 (63,153) $10.19 (3,000) $ 9.375
------- ------- ------
Outstanding, end of year 83,561 $12.95 93,050 $12.19 121,203 $ 10.00
====== ====== =======
Exercisable, end of year:
At $9.08 31,550 31,550 33,750
At $9.375 7,000 10,000 53,703
At $11.00 -- 11,250 11,250
At $12.25 5,250 5,250 11,250
At $12.50 -- -- 11,250
At $14.875 20,000 20,000 --
At $17.875 15,000 15,000 --
At $21.00 4,761 -- --
At January 2, 1999, 230,000 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
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding, beginning of year 25,000 $17.875 -- --
Granted 25,239 $21.00 25,000 $17.875
------ ------
Outstanding, end of year 50,239 $19.44 25,000 $17.875
====== ======
Exercisable, end of year:
At $17.875 25,000 25,000
At $21.00 25,239 --
Stock Awards
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Value Fair Value Fair Value
at Date of at Date of at Date of
Awards Grant Awards Grant Awards Grant
------ ----- ------ ----- ------ -----
Outstanding, beginning of year 30,000 $16.43 15,000 $13.40 -- --
Granted 2,500 $22.375 22,500 $18.02 15,000 $13.40
Earned (12,500) $15.15 (7,500) $15.13 -- --
------- ------ ------
Outstanding, end of year 20,000 $17.98 30,000 $16.43 15,000 $13.40
====== ====== ====== ====== ====== ======
PAGE 17 OF ANNUAL REPORT
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6. STOCK OPTIONS AND AWARDS (continued)
At January 2, 1999, 135,000 shares of the Company's unissued Common Stock were
reserved for options under its 1997 Incentive Stock Option Plan.
Changes in stock options under this plan follow:
1998 1997
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding, beginning of year 90,000 $14.875 -- --
Granted 50,000 $21.00 90,000 $14.875
Exercised (15,000) $14.875 -- --
------- ------
Outstanding, end of year 125,000 $17.33 90,000 $14.875
======= ====== ====== =======
Exercisable, end of year:
At $14.875 75,000 90,000
At $21.00 50,000 --
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 31, 2000. Compensation expense related to
stock awards of $319,194 in 1998 and $138,750 in 1997 was required to be
recognized.
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 $5,247,825,
$2.16, and $2.07, respectively in 1998 and $3,454,430, $1.30, and $1.28,
respectively in 1997. 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:
1998 1997
Risk free interest rate 4.65% 5.62%
Expected volatility 0.223 0.164
Expected option life 5 years 5 years
Weighted-average dividend yield 2.9% 3.34%
7. 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:
1998 1997 1996
Property, plant and equipment $ 2,105,100 $ 2,054,700 $ 1,949,000
Pension accruals 1,781,100 1,640,600 1,571,300
Other 56,600 275,100 129,800
------ ------- -------
Total deferred income tax liabilities 3,942,800 3,970,400 3,650,100
Other postretirement benefits (1,120,600) (1,075,100) (1,099,700)
Inventories (422,900) (288,800) (291,000)
Allowance for doubtful accounts (160,800) (120,000) (179,600)
Accrued compensation (364,700) (304,700) (271,700)
Accrual for contingencies (112,500) (408,500) --
Other (397,400) (307,800) (236,300)
-------- -------- --------
Total deferred income tax assets (2,578,900) (2,504,900) (2,078,300)
---------- ---------- ----------
Net deferred income tax liabilities $ 1,363,900 $ 1,465,500 $ 1,571,800
============= ============= ============
PAGE 18 OF ANNUAL REPORT
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Income before income taxes consists of:
1998 1997 1996
Domestic $ 7,520,617 $ 5,107,701 $ 1,476,346
Foreign 1,202,850 699,825 50,666
--------- ------- ------
$ 8,723,467 $ 5,807,526 $ 1,527,012
============= ============= ============
Income taxes follow:
1998 1997 1996
Current:
Federal $ 2,526,414 $ 1,749,800 $ 525,000
Foreign 411,166 170,966 35,795
State 444,300 270,500 53,900
Deferred (101,600) (106,300) 32,500
-------- -------- ------
$ 3,280,280 $ 2,084,996 $ 647,195
============= ============= ============
A reconciliation of income taxes computed using the U.S. federal statutory rate
to those reflected in operations follows:
1998 1997 1996
Amount Percent Amount Percent Amount Percent
Income taxes using
U.S. federal statutory rate $ 2,966,000 34% $ 1,974,600 34% $ 519,200 34%
State income taxes, net of federal benefit 286,600 3 166,100 3 31,700 2
U.S. tax on foreign income (203,400) (2) (66,900) (1) 39,100 2
Other- net 231,080 3 11,196 -- 57,195 4
------- - ------ ------ -
$ 3,280,280 38% $ 2,084,996 36% $ 647,195 42%
============= == ============ == ========== ==
Total income taxes paid were $2,911,595 in 1998, $1,872,699 in 1997 and $476,441
in 1996.
United States income taxes have not been provided on the undistributed earnings
of foreign subsidiaries ($2,496,776 at January 2, 1999) because such earnings
are intended to be reinvested abroad indefinitely or repatriated only when
substantially free of such taxes.
8. 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:
1999 $ 298,150
2000 298,345
2001 298,540
2002 298,735
2003 298,930
---- -------
$ 1,492,700
============
Rent expense for all operating leases was $290,892 in 1998, $288,178 in 1997 and
$274,066 in 1996.
9. 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 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.
PAGE 19 OF ANNUAL REPORT
-64-
9. RETIREMENT BENEFIT PLANS (continued)
Significant disclosures relating to these benefit plans follow:
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $ (25,004,296) $ (24,072,918) $ (2,829,786) $ (2,720,603)
Change due to availability of final
actual assets and census data 13,568 (195,062) 90,422 --
Plan amendment (a) (853,130) -- -- --
Service cost (707,063) (601,528) (89,536) (103,449)
Interest cost (1,860,284) (1,727,087) (202,790) (196,877)
Actuarial (loss) gain (3,091,609) (170,525) 368,756 --
Benefits paid 1,941,339 1,762,824 69,432 191,143
--------- --------- ------ -------
Benefit obligation at end of year $ (29,561,475) $ (25,004,296) $ (2,593,502) $ (2,829,786)
============== =============== =============== ==============
Change in Plan Assets
Fair value of plan assets at beginning
of year $ 32,528,335 $ 29,333,576 $ 819,179 $ 726,134
Change due to availability of final
actual assets and census data -- 93,797 (66,215) (9,638)
Actual return on plan assets 3,631,711 4,863,786 67,405 66,130
Employer contributions -- -- -- 36,553
Benefits paid (1,941,339) (1,762,824) (8,030) --
---------- ---------- ------ ----------
Fair value of plan assets at end of year $ 34,218,707 $ 32,528,335 $ 812,339 $ 819,179
============== =============== =============== ==============
Funded status - over (under) 4,657,232 7,524,039 (1,781,163) (2,010,607)
Unrecognized prior service cost 979,865 252,363 (185,589) (206,678)
Unrecognized net actuarial loss (gain) 476,975 (1,668,875) (906,497) (546,610)
Unrecognized net asset at transition (1,546,790) (1,889,923) -- --
---------- ---------- ---------- ----------
Prepaid (accrued) benefit costs $ 4,567,282 $ 4,217,604 $ (2,873,249) $ (2,763,895)
============== =============== =============== ==============
(a) A plan was amended to increase benefits for specified retired participants.
All of the plans' assets at January 2, 1999 and January 3, 1998 are invested in
listed stocks and bonds and pooled investment funds, including 287,250 shares of
the Common Stock of the Company having a market value of $7,288,969 and
$5,673,188 at those dates, respectively. Dividends received during 1998 and 1997
on the Common Stock of the Company were $166,603 and $136,444, respectively.
Pension Benefits
1998 1997 1996
Assumptions
Discount rate 7.0% 7.5% 7.5%
Expected return on plan assets 9.0% 8.5% 8.5%
Rate of compensation increase 4.25% 4.25% 4.25%
Components of Net Benefit Income
Service cost $ 707,063 $ 601,528 $ 611,268
Interest cost 1,860,284 1,735,777 1,681,527
Actual return on plan assets (3,614,036) (4,863,796) (2,331,708)
Net amortization and deferral 801,806 2,326,279 (91,356)
Defined contribution plans expense 125,399 61,128 54,877
------- ------ ------
Net benefit income $ (119,484) $ (139,084) $ (75,392)
============ ============ ============
PAGE 20 OF ANNUAL REPORT
-65-
Postretirement Benefits
1998 1997 1996
Assumptions
Discount rate 7% 7.5% 7.5%
Expected return on plan assets 9% 9% 9%
Components of Net Benefit Cost
Service cost $ 89,536 $ 103,449 $ 92,583
Interest cost 202,790 196,877 211,415
Actual return on plan assets (67,405) (66,130) (58,683)
Net amortization and deferral (54,065) (55,395) (21,089)
------- ------- -------
Net benefit cost $ 170,856 $ 178,801 $ 224,226
============= ============== =============
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 increase to 4.5% in the year 2000. 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 $ 34,231 $ (27,318)
Effect on postretirement benefit obligation $ 245,969 $ (204,120)
10. FINANCIAL INSTRUMENTS
The carrying values of financial instruments (cash and cash equivalents,
accounts receivable, accounts payable, and debt) as of January 2, 1999 and
January 3, 1998 approximate fair value. Fair value was based on expected cash
flows and current market conditions.
11. 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.
1998 1997 1996
Revenue:
Sales to unaffiliated customers:
Industrial Hardware $ 25,376,277 $ 21,932,971 $ 20,509,880
Custom Locks 22,988,887 23,053,175 19,180,972
Metal Products 22,384,365 22,345,276 18,162,817
---------- ---------- ----------
70,749,529 67,331,422 57,853,669
General corporate 181,466 139,116 88,191
------- ------- ------
$ 70,930,995 $ 67,470,538 $ 57,941,860
============== ============== ===============
PAGE 21 OF ANNUAL REPORT
-66-
11. REPORTABLE SEGMENTS (continued)
1998 1997 1996
Intersegment Revenue:
Industrial Hardware $ 217,981 $ 134,512 $ 75,075
Custom Locks 262,642 407,497 272,010
Metal Products -- -- --
--------- --------- ---------
$ 480,623 $ 542,009 $ 347,085
============== =============== ===============
Income Before Income Taxes:
Industrial Hardware $ 3,644,711 $ 3,159,121 $ 2,012,975
Custom Locks 3,435,259 2,976,220 1,593,522
Metal Products 3,462,808 3,099,724 542,493
--------- --------- -------
Operating Profit 10,542,778 9,235,065 4,148,990
General corporate expenses (1,270,240) (3,130,947) (2,406,552)
Interest expense (549,071) (296,592) (215,426)
-------- -------- --------
$ 8,723,467 $ 5,807,526 $ 1,527,012
=============== =============== ===============
Geographic Information:
Net Sales:
United States $ 63,505,315 $ 60,570,871 $ 52,420,026
Foreign 7,244,214 6,760,551 5,433,643
--------- --------- ---------
$ 70,749,529 $ 67,331,422 $ 57,853,669
============== =============== ===============
Identifiable Assets:
United States $ 45,340,817 $ 41,248,231 $ 38,708,553
Foreign 4,730,898 4,549,930 3,783,681
--------- --------- ---------
$ 50,071,715 $ 45,798,161 $ 42,492,234
============== =============== ===============
Identifiable Assets:
Industrial Hardware $ 11,426,221 $ 10,782,403 $ 9,930,140
Custom Locks 8,996,052 9,987,092 8,549,391
Metal Products 20,966,751 18,367,646 17,020,385
---------- ---------- ----------
41,389,024 39,137,141 35,499,916
General corporate 8,682,691 6,661,020 6,992,318
--------- --------- ---------
$ 50,071,715 $ 45,798,161 $ 42,492,23
============== =============== ===============
Depreciation and Amortization
Industrial Hardware $ 632,185 $ 710,109 $ 738,779
Custom Locks 417,115 444,571 552,656
Metal Products 1,837,000 1,805,135 1,642,468
--------- --------- ---------
2,886,300 2,959,815 2,933,903
General corporate 25,550 18,435 18,973
------ ------ ------
$ 2,911,850 $ 2,978,250 $ 2,952,876
============== =============== ===============
Capital Expenditures
Industrial Hardware $ 914,486 $ 481,512 $ 665,854
Custom Locks 366,036 315,246 502,256
Metal Products 3,094,435 1,374,172 1,744,335
--------- --------- ---------
4,374,957 2,170,930 2,912,445
Currency translation adjustment 16,640 3,771 922
General corporate 5,044 55,412 1,674
----- ------ -----
$ 4,396,641 $ 2,230,113 $ 2,915,041
============== ============== ===============
PAGE 22 OF ANNUAL REPORT
-67-
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
BOARD OF DIRECTORS
THE EASTERN COMPANY
We have audited the accompanying consolidated balance sheets of The Eastern
Company as of January 2, 1999 and January 3, 1998, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash flows
for each of the three years in the period ended January 2, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 January 2, 1999 and January 3, 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended January 2, 1999, in conformity with generally accepted accounting
principles.
/s/ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Hartford, Connecticut
January 25, 1999
THE EASTERN COMPANY 1998
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Net income in 1998 of $5.4 million or $2.24 per share (basic) on net sales of
$70.7 million was a record achievement for The Eastern Company. Earnings
increased 46% over 1997 earnings of $3.7 million or $1.40 per share (basic) on
net sales of $67.3 million. The improved earnings performance was the direct
result of reduced operating costs and improved product mix. The Company's
backlog remains strong having increased to $8.4 million or 13% above the 1997
year-end level.
The fourth quarter of 1998 marked the eighth consecutive quarter of increased
earnings to $1.4 million or $.60 per share (basic) on net sales of $17.0 million
versus fourth quarter 1997 net income of $1.2 million or $.47 per share (basic)
on net sales of $17.8 million.
Gross margin for the fourth quarter of 1998 represented 40% of net sales versus
30% of net sales for the fourth quarter of 1997. Product mix and lower
manufacturing costs account for the improvement.
Selling and administrative expenses in the fourth quarter 1998 were up 18% or
$617 thousand over the 1997 fourth quarter level of $3.5 million. This increase
was primarily the result of incentive compensation achievements based on
improved performance.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales for each line item presented on the consolidated
statements of income.
1998 1997 1996
Net sales 100.0% 100.0% 100.0%
Cost of products sold 69.9% 72.4% 78.1%
Gross profit 30.1% 27.6% 21.9%
Selling and administrative 17.2% 18.7% 19.1%
Other income 0.3% 0.2% 0.2%
Interest expense 0.8% 0.4% 0.4%
Income before
income taxes 12.3% 8.6% 2.6%
Income taxes 4.6% 3.1% 1.1%
Net income 7.7% 5.5% 1.5%
PAGE 23 OF ANNUAL REPORT
-68-
Fiscal 1998 Compared to Fiscal 1997
In 1998, the Company adopted FASB Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information". This statement requires companies to
group operations to be reported based on how management internally allocates
resources and evaluates performance of its business units. Pursuant to that
statement, the Company has three business segments. The Industrial Hardware
Group includes the Eberhard Manufacturing division, Eberhard Hardware Ltd, and
Sesamee Mexicana S.A. de C.V. The Industrial Hardware Group 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
equipment. The Custom Locks Group is made up of CCL Security Products division,
Illinois Lock division, World Lock Ltd. and World Security Ltd. The Custom Locks
Group manufactures and markets a broad range of locks for traditional general
purpose security applications. This segment also produces specialized locks for
firearms, soft luggage, coin-operated vending and gaming equipment and electric
and computer peripheral components. The Metal Products Group is the Frazer &
Jones division, a foundry that produces anchoring devices used in supporting the
roofs of underground mines. This segment also manufactures specialty products
which serve the construction, automotive and electrical industries.
Total net sales for 1998 increased 5% or $3.4 million to $70.7 million from 1997
total net sales of $67.3 million. Volume increased 1%, prices increased 2% and
new products increased 2%. The Industrial Hardware Group net sales were up
15% in 1998 as compared to 1997. Increased demand for heavy hardware, required
by the tractor trailer industry, was up 17% over 1997. Our Eberhard division
also experienced increased sales to the U.S. government and the auto accessories
and truck body markets. The Company's Canadian facility, Eberhard Hardware,
Ltd., increased its manufacturing capacity in 1998 to accommodate increased
business from the Canadian markets. The Company's Mexican operation, which
markets industrial hardware, continues to add sales growth.
The Custom Locks Group net sales were comparable to 1997. The sale of locks to
the computer industry remained strong in 1998 and is expected to remain strong
in 1999. The Illinois Lock division continues to develop new lock
applications for the computer industry as existing lock applications are phased
out. For 1999, new business is anticipated from a motorcycle manufacturer
using Illinois Lock's top-of-the-line Warlock` for locking the ignition and
steering column of its motorcycles. The PrestoLocks(R), offered by CCL Security
Products, continues to gain market share with the original equipment
manufacturers of soft luggage and in the premium / promotional markets,
where the customer can have their own company logo or trade mark placed on the
lock.
The Metal Products Group sales were comparable to 1997. Sales of expansion
shells, for use in securing roofs in underground mines, were down 5% from 1997
due to lower demand. Sales of contract castings were up 8% over 1997. The
Frazer and Jones division continues to supplement the decline in the mine roof
support business with other products. During the second quarter of 1998 a major
foundry competitor went out of business. As a result, new contract casting
customers were obtained and additional business is anticipated for 1999.
New products introduced in 1998 included vehicular products designed and
produced by the Eberhard Manufacturing division, a new keyed version gun
lock for securing firearms offered by the CCL Security Products division
and malleable casting products manufactured by the Frazer & Jones division.
Total gross profit for 1998 increased $2.7 million or 15% over 1997 levels.
Increased sales, more effective use of our operating facilities and ongoing cost
reduction programs resulted in the improved margin.
Total selling and administrative expenses were down $398 thousand or 3% from
1997. This decrease was due to the elimination of one-time costs associated
with a proxy contest in 1997 and expenses incurred in 1997 in connection
with environmental matters. The elimination of one-time costs incurred in 1997
more than offset the increased incentive compensation costs experienced in
1998, which were directly related to the improved level of profitability.
Interest expense was up $252 thousand or 85% from 1997 due to additional
borrowing required for corporate programs.
Earnings before taxes were up $2.9 million or 50% over 1997. Earnings increased
across all industry segments. The Industrial Hardware Group experienced a 15%
or $486 thousand increase over 1997. The increase was directly attributable
to sales volume and reduced material costs. The Custom Locks Group also
experienced a 15% or $459 thousand increase over 1997 due to cost reductions
and favorable product mix. The Metal Products Group earnings were up 12% or
$363 thousand due to more efficient use of the operating facilities. Corporate
expenses were down 59% or $1.9 million as the result of lower environmental
PAGE 24 OF ANNUAL REPORT
-69-
expenses, lower retiree medical insurance cost, a reduction in legal and
professional expenses and the elimination of the one-time charges incurred in
the 1997 proxy contest.
The effective tax rate in 1998 was 38% versus 36% in 1997. The increase in the
tax rate in 1998 was directly attributable to higher foreign taxes associated
with the repatriation of foreign earnings through a dividend distribution in the
fourth quarter of 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales for 1997 increased 16% or $9.5 million to $67.3 million from 1996
level of $57.9 million. Sales grew across all industry segments. The net sales
from the Industrial Hardware Group were up 7% from 1996. The majority of
this gain came from a 12% increase in demand for heavy hardware, servicing
the tractor trailer industry. A resurgence in this industry continued through
1998. Through aggressive marketing, the Custom Lock Group experienced a surg
in the lock business where net sales were up 20% versus the same period a year
ago. The majority of the increase came from new lock applications specifically
designed for leading computer manufacturers. The Company also experienced an
18% growth in its keyless line of PrestoLock's(R), where focus has been to
penetrate the premium/promotional and consumer retail markets. Sale of Gun
Bloks(R) doubled over the 1996 level. Net sales for the Metal Products Group
were up 23% over 1996. Sales of mine roof expansion shells, for use in
securing ceilings in underground coal mines, were up 27%. This was the direct
result of a long-term supply agreement entered into with the nation's largest
manufacturer of mine roof bolts. Sales of contract castings were up 17% over
1996 as the Company continued to supplement the mine roof support business with
alternate products. Gross profit for 1997 increased $5.9 million or 46%
from 1996 levels. This increase is the direct result of the increased sales
volume and more efficient utilization of production facilities.
Selling and administrative expenses were up $1.6 million or 14% over 1996.
This increase was due to selling commissions and incentive compensation which
were directly linked to increased sales and profitability, and expenses in
connection with environmental matters and other contingent liabilities arising
in the ordinary course of business.
Interest expense was up $81 thousand or 38% from 1996 due to additional
short-term borrowing during the third quarter of 1997 to help finance the
purchase of Common Stock for the treasury, as well as to accommodate additional
working capital requirements for our operating units.
Earnings before income taxes increased to $5.8 from the 1996 level of $1.5
million or up 281%. Earnings were up across all industry segments. The
Industrial Hardware Group was up $1.1 million or 57% over 1996. The increase was
directly attributable to the sale of higher margin new products and reduced
material costs. The Custom Locks Group was up $1.4 million or 87% over 1996.
Increased sales to the computer industry, cost reductions and favorable product
mix account for the increase in profitability over 1996. Gains in the Metal
Products Group earnings were $2.6 million over 1996 or a 471% increase. This
was all attributable to improved product mix and more efficient use of the
operating facilities. Corporate expenses were up 30% or $724 thousand over
1996 due to environmental matters and other contingent liabilities arising in
the ordinary course of business.
The effective tax rate in 1997 was 36% versus 42% in 1996. The lower tax rate
in 1997 was directly attributable to lower foreign taxes.
LIQUIDITY AND SOURCES OF CAPITAL
1998 1997 1996
---- ---- ----
Current ratio 3.8 2.3 2.9
Average days sales in
accounts receivables 46 47 48
Inventory turnover ratio 3.9 3.9 4.1
Ratio of net working
capital to net sales 29.9% 22.1% 25.5%
Total debt to market
capitalization 14.0% 7.3% 10.7%
Total debt to equity 30.3% 12.7% 13.1%
Cash provided by operating activities in 1998 was $8.3 million as compared
to $6.2 million in 1997 and $2.5 million in 1996. Cash generated internally in
1998 was sufficient to fund capital expenditures of $4.4 million and the payment
of $1.4 million in dividends. The Company borrowed $5 million to fund the
purchase of Common Stock for the treasury during the second quarter of 1998.
During the fourth quarter of 1998, the Company refinanced $8.5 million of
short-term debt to a seven year term note. Under the agreement quarterly
installments of $425 thousand are due beginning January 1, 2001. Interest is
payable in 30, 60 and 90 day periods at LIBOR plus 135 basis points. The Loan
Agreement also provides for a line of credit of $5,000,000 with a quarterly
commitment fee of 1/8% on the unused portion. The line of credit expires
July 1, 2001 but may be renewed annually thereafter. Interest on amounts
borrowed under the line of credit bear interest at either the "base rate", as
defined or LIBOR plus 125 basis points. There were no borrowings under the
line of credit portion of the Loan Agreement as of January 2, 1999.
The Company has a tentative agreement to borrow approximately $2,000,000 tO
assist in the financing of an expansion project at the Frazer & Jones
manufacturing facility. This project includes adding manufacturing floor space
and additional equipment to meet the increased demand for contract casting
products. The related note will be payable
PAGE 25 OF THE ANNUAL REPORT
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in equal monthly installments over ten years with interest at 4.99%. Collateral
consists of a security interest in the equipment and an irrevocable letter of
credit. The Company expects to close on this financing arrangement in the first
quarter of 1999.
The ratio of net working capital to net sales increased to 29.9% in 1998 versus
22.1% in 1997 and 25.5% in 1996. This increase in net working capital is due to
the higher cash balance in 1998 and the lower level of short-term debt as
compared to 1997. The Company on an ongoing basis monitors the collection of
accounts receivable, inventory turnover ratios, cash conversion efficiency
factors and the amount and number of days of working capital necessary to
maintain sales growth.
Accounts receivable decreased $376 thousand or 4.3% from 1997 levels. This
reduction in accounts receivable was the direct result of following-up on
accounts. The average day's sales in accounts receivable decreased to 46 days
in 1998 as compared to 47 days in 1997 and 48 days in 1996.
Inventories increased in 1998 by $548 thousand or 4% over 1997 while maintaining
comparable inventory turnover of approximately 4 times.
Capital expenditures in 1998, 1997 and 1996 were $4.4 million, $2.2 million and
$2.9 million respectively. The Company continuously upgrades and replaces
existing equipment to expand capacity, improve efficiency and satisfy safety and
environmental requirements. During 1998 the Company invested in expansion
projects at its Syracuse, N.Y. plant and at its Canadian subsidiary to provide
for additional productive capacity. For 1999 capital expenditures are expected
to approximate 1999 depreciation of $2.5 million. Capital expenditures in 1999
are expected to be partially financed from the previously mentioned loan and
funded from internally generated cash.
The present financial strength of the Company's balance sheet, with a current
ratio of 3.8 to 1, will enable the Company to meet its current obligations and
continue to grow in 1999 without financial constraints.
The Company's strong financial position, low debt to equity ratio of 30.3%,
coupled with its outside borrowing capacity will allow for further growth
through potential acquisitions or strategic alliances.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations has not been significant, as
the Company has been able to adjust its prices to reflect the inflationary
impact on the costs of manufacturing its products.
Historical data as presented in the financial statements reasonably reflect
current cost, except for depreciation, with 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 LIFO method of accounting for its U.S. inventories. Under
this method, the cost of products sold reported in the financial statements
approximates current cost and thus reduces distortion in reporting income due to
increasing costs.
OTHER MATTERS
Environmental
In 1996, the United States Court of Appeals reversed a 1995 District Court
ruling relating to environmental remediation complaints against the Company and
other potentially responsible parties. In 1997, the additional expenses
recognized, net of insurance proceeds, were not material to the Company's
operating results. In 1998, the Company entered into proposed consent decrees
with the State DEP and Federal EPA and paid all claims. The court has approved
the proposed consent decrees with the State DEP. The Company is waiting for
final approval on the agreement with the Federal EPA currently pending before
the United States District Court. All matters relating to claims made by the
United States are expected to be resolved during 1999 and are not expected have
any material adverse effect on the Company's financial condition, cash flows or
results of operations.
Year 2000 Compliance
The Company has completed the assessment phase of its Year 2000 compliance
program and is currently completing modifications and testing of its information
technology (IT) and other non-IT systems. Estimated costs for Year 2000
compliance are in the range of $150,000 to $200,000 of which approximately
$100,000 has been spent through 1998. The Company does not have any direct
interfaces with, and is currently reviewing responses from, third party vendors
to assess Year 2000 issues. The Company is not aware of any external sources
that will have a material impact on its operating results. The Company's goal
is to complete its Year 2000 compliance program and have contingency plans in
place by the end of the second quarter of 1999 to deal with any risks
associated with internal systems and third-party sources. The preceding
information is provided under the Year 2000 Information and Readiness Disclosure
Act and is deemed to be a Year 2000 disclosure statement.
PAGE 26 OF ANNUAL STATEMENT
-71-
Market Risk Disclosures
The Company maintains manufacturing facilities in foreign countries which
account for approximately 10% of total sales and total assets. The United
States operations buy and sell to the foreign affiliated companies and export
less than 10% of total sales to 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, Canadian dollar, Mexican peso, New Taiwan dollar and
the Hong Kong dollar. With the Company's limited exposure to foreign markets,
the currency exchange gains or loses are not material.
The Company's interest rate, under its term loan agreement, is closely tied to
the U.S. economy. To minimize significan interest rate exposure, the Company
can lock the interest rate on its term note to a fixed rate. A one percentage
point change in interest rates will not likely have a material effect on
operations.
Forward Looking Statements
This document contains forward looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements reflect the Company's current expectations regarding its future
operating performance, plans and expectations in the mining industry, various
industries requiring malleable contract castings, firearms accessories markets,
industrial hardware markets, tractor trailer industry, electronics industry,
gaming and vending industries, computer industry and the various security
product markets where the Company markets its products and services.
Forward-looking statements involve risks and uncertainties which may cause the
Company's actual results in future periods to differ materially from those
expressed. These uncertainties and risks include changing customer preferences,
lack of success of new products, loss of the Company's customers, competition,
potential increases in raw material prices, potential delays or production
problems associated with foreign sourcing of parts and products. Also,
potential delays or production problems may arise from third party vendors in
receiving or shipping of products as it relates to the Year 2000 problem 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.
QUARTERLY RESULTS OF OPERATIONS (unaudited)
1998 First Quarter Second Quarter Third Quarter Fourth Quarter Year
Net Sales $18,411,956 $17,353,207 $17,995,724 $16,988,642 $70,749,529
Gross Profit 4,930,389 4,766,891 4,825,422 6,756,983 21,279,685
Selling and Administrative Expenses 2,924,369 2,562,066 2,576,448 4,125,730 12,188,613
Net Income 1,290,097 1,304,509 1,407,304 1,441,277 5,443,187
Net Income Per Share:
Basic $0.50 $0.55 $0.59 $0.60 $2.24
Diluted $0.49 $0.52 $0.56 $0.58 $2.15
1997 First Quarter Second Quarter Third Quarter Fourth Quarter Year
Net Sales $15,934,598 $16,919,070 $16,663,855 $17,813,899 $67,331,422
Gross Profit 3,984,839 4,454,992 4,696,806 5,415,258 18,551,895
Selling and Administrative Expenses 2,981,969 3,112,386 2,984,304 3,508,234 12,586,893
Net Income 614,423 832,940 1,066,997 1,208,170 3,722,530
Net Income Per Share:
Basic $0.23 $0.30 $0.40 $0.47 $1.40
Diluted $0.22 $0.30 $0.40 $0.46 $1.38
PAGE 27 OF ANNUAL REPORT
-72-
1998-1994 SUMMARY OF OPERATIONS
INCOME STATEMENT ITEMS (in thousands) 1998 1997+ 1996 1995 1994o
Net Sales $70,750 $67,331 $57,854 $59,352 $58,381
Cost of Products Sold 49,470 48,780 45,173 45,237 44,740
Depreciation and Amortization 2,912 2,978 2,953 2,628 2,453
Interest Expense 549 297 215 72 97
Income Before IncomeTaxes 8,723 5,808 1,527 4,275 3,865
Income Taxes 3,280 2,085 647 1,528 1,428
Income (Loss):
Continuing Operations 5,443 3,723 880 2,747 2,437
Discontinued Operations -- -- -- (257) 206
Net Income 5,443 3,723 880 2,490 2,643
Dividends 1,429 1,268 1,241 1,276 1,276
BALANCE SHEET ITEMS (in thousands)
1998 1997+ 1996 1995 1994
Inventory $12,778 $12,415 $10,898 $11,793 $9,531
Working Capital 21,121 14,859 14,762 17,240 17,834
Plant Assets Net 15,033 13,437 13,887 13,686 12,954
Total Assets 50,072 45,798 42,492 41,090 41,883
Shareholders' Equity 28,486 29,243 29,355 29,807 29,843
Capital Expenditures 4,397 2,230 2,915 3,320 2,850
Long-Term Obligations 8,552 60 224 340 240
PER SHARE DATA
1998 1997+ 1996 1995 1994o
Basic Earnings (Loss) per Share:
Income from continuing operations $ 2.24 $ 1.40 $ .33 $ .99 $ .88
Discontinued operations -- -- -- (.09) .07
---- ---- ---- ---- ---
Net income $ 2.24 $ 1.40 $ .33 $ .90 $ .95
Diluted Earnings (Loss) per Share:
Income from continuing operations $ 2.15 $ 1.38 $ .32 $ .98 $ .86
Discontinued operations -- -- -- (.09) .07
---- ---- ---- ---- ---
Net income $ 2.15 $ 1.38 $ .32 $ .89 $ .93
Dividends .58 .475 .46 .46 .46
Shareholders' Equity 11.72 11.00 10.88 10.75 10.77
Average Shares Outstanding (basic) 2,430,240 2,658,181 2,698,191 2,771,840 2,771,842
+ Fiscal Year 1997 comprised 53 weeks--all other years were 52 weeks
o As reclassified to reflect discontinued operations--Thompson Materials 1994.
CORPORATE NOTES
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's Common Stock is traded on the American Stock Exchange (ticker
symbol EML). High and low stock prices and dividends for the last two years
were:
1998 1997
---- ----
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter High Low Declared High Low Declared
- ------- ---- --- -------- ---- --- --------
First $25 3/8 $18 3/4 $.13 $14 $12 3/8 $.11 1/2
Second 28 1/2 23 7/8 .15 15 1/4 12 1/4 .11 1/2
Third 28 3/8 20 3/16 .15 16 5/16 14 3/8 .11 1/2
Fourth 26 5/8 20 1/2 .15 20 15 5/8 .13
At the end of December 1998, 233 consecutive quarterly dividends had been paid.
10-K A copy of the Company's 10-K report is available free of charge to
stockholders of record upon written request.
CASH DIVIDEND RATES
AND STOCK SPLITS
1998 -- 15% increase
1997 -- 13% increase
1992 -- 9.5% increase
1991 -- 12.5% increase,
50% stock dividend
1988 -- 12% increase,+
2 for 1 split
INDEPENDENT AUDITORS
Ernst & Young LLP,
Hartford, Connecticut
TRANSFER AGENT
AND REGISTRAR
EquiServe, P.O. Box 8040,
Boston, MA 02266-8040
Phone: 1-800-633-3455
DIVIDEND REINVESTMENT & STOCK PURCHASE PLAN
The Eastern Company offers a Dividend Reinvestment Plan (DRP) which also
features a no-load stock purchase program. It is available to all interested
investors who would like to initiate or increase their holdings in Eastern
Company Stock. To receive a prospectus and application form for this plan,
contact The Eastern Company directly at (203) 729-2255, ext. 241, or phone the
program administrator, EquiServe at 1-800-633-3455.
PAGE 28 OF ANNUAL REPORT
-73-
[INSIDE BACK COVER]
Officers And Executives
Leonard F. Leganza
President and Chief Executive Officer
Donald E. Whitmore, Jr.
Executive Vice President, Chief Financial Officer
and Secretary
John L. Sullivan III
Treasurer and Corporate Controller
Amanda Gordon
Assistant Secretary
--------------------------------
Frank J. Breker
Vice President
Eberhard Manufacturing Division
Eberhard Hardware Manufacturing, Ltd.
Sesamee Mexicana, S.A. de C.V.
Steven G. Sanelli
Vice President
Illinois Lock Division
CCL Security Products Division
World Lock Co. Ltd.
World Security Industries Co. Ltd.
Raymond L. Wright
Vice President
Frazer & Jones Division
---------------------------------
Raymond G. Alexander
Managing Director
Eberhard Hardware Manufacturing, Ltd.
Roger Chang
Managing Director
World Lock Co. Ltd.
World Security Industries Co. Ltd.
Thomas D. Melkus
Managing Director
CCL Security Products Division
Brian D. Reed
Managing Director
Illinois Lock Division
Board of Directors
John W. Everets (2,3,4)
Chairman of H.P.S.C. Inc.
Boston, Massachusetts
Charles W. Henry (1,3,4)
Partner of Kernan & Henry
Waterbury, Connecticut
Leonard F. Leganza (1,4)
President and Chief Executive Officer
of the Company
Russell G. McMillen (2,4)
Retired Chairman of the Company
David C. Robinson (1,2)
President of The Robinson Co.
Waterbury, Connecticut
Donald S. Tuttle, III (1,3)
Vice President and Account Executive
Paine Webber
Middlebury, Connecticut
Donald E. Whitmore, Jr.
Executive Vice President,
Chief Financial Officer and Secretary
of the Company
1 Members of the Executive Committee
2 Members of the Compensation Committee
3 Members of the Audit Committee
4 Members of the Nominating Committee
-74-
[BACK COVER]
THE EASTERN COMPANY
P.O. Box 460
Naugatuck, CT 06770-0460
Phone: (203) 729-2255
Fax: (203) 723-8653
E-mail: ir@easterncompany.com
Homepage: www.easterncompany.com
INDUSTRIAL HARRDWARE GROUP
Eberhard Manufacturing Division
Cleveland, Ohio
Everhard Hardware Manufacturing, Ltd.
Tillsonburg, Ontario, Canada
Sesamee Mexicana, S.A.deC.V.
Lerma, Mexico
------------------------------------
CUSTOM LOCKS GROUP
CCL Security Products Division
New Britain, Connecticut
The Illinois Lock Company Division
Wheeling, Illinois
World Lock Co. Ltd.
World Security Industries Co. Ltd.
Taipei, Taiwan: Hong Kong
-------------------------------------
METAL PRODUCTS GROUP
Frazer & Jones Division
Syracuse, New York
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