-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SijyoXw2jotFmB8otaXYI1e0Bi8JTigJWWhBlGpK6BpawyL8IKXiXM++bJjZkZ/W Vy9KqIdLazvT9Tv0HeQekg== 0000031107-98-000003.txt : 19980330 0000031107-98-000003.hdr.sgml : 19980330 ACCESSION NUMBER: 0000031107-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN CO CENTRAL INDEX KEY: 0000031107 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 060330020 STATE OF INCORPORATION: CT FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00599 FILM NUMBER: 98575198 BUSINESS ADDRESS: STREET 1: 112 BRIDGE ST STREET 2: P O BOX 460 CITY: NAUGATUCK STATE: CT ZIP: 06770 BUSINESS PHONE: 2037292255 MAIL ADDRESS: STREET 1: 112 BRIDGE STREET STREET 2: P O BOX 460 CITY: NAUGATUCK STATE: CT ZIP: 06770 10-K 1 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 3, 1998 Commission File Number 0-599 THE EASTERN COMPANY - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Connecticut 06-0330020 - ------------------------------------------ ----------------------- State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 112 Bridge Street, Naugatuck, Connecticut 06770 - ------------------------------------------ ----------------------- (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203)729-2255 ----------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------- ------------------------------------ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock No Par Value ------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1998. Common Stock, No Par Value - $56,312,277 ----------- 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 28, 1998 -------------------------- -------------------------------- Common Stock, No Par Value 2,603,434 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 annual report to shareholders (fiscal year ended January 3, 1998) are incorporated by reference into Parts I and II. Portions of the annual proxy statement dated March 20, 1998 are incorporated by reference into Part III. -1- PART I ITEM 1 BUSINESS (a) General Development of Business ----------------------------------- The Registrant 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 Registrant is the manufacture and sale of proprietary locks and other security products from four U.S. operations and four wholly-owned foreign subsidiaries. The Registrant maintains seven physical locations. (b) Financial Information about Industry Segments ------------------------------------------------- The Registrant's operations consist of a single business segment - security products. Security products are used to close, lock, secure or fasten end use applications used in the industrial, transportation, retail and mining industries. (c) Narrative Description of Business -------------------------------------- The Registrant develops, manufacturers and sells a wide range of security products used to lock, close and fasten end use applications, in the electronic and industrial markets, retail, transportation, and mining industries. Typical products include large locks, heavy-duty hinges, multi-point latching devices, dial and keyless combination locks, multi-circuit switch locks, padlocks, lock cylinders, keys, mine roof fasteners and contract castings. The Registrant is promoting growth by expanding present product lines, and developing new products. In addition, desirable outside product lines which complement present lines and/or companies, may be acquired if they generally fit management's expertise in marketing or manufacturing. Approximately one quarter of our 1997 capital expenditure was spent on new tooling for the production of new products introduced throughout the year and replacement tooling. The remaining expenditures were for normal replacement of equipment, improvements in productive efficiency and the expansion of existing capacity. Products are sold to original equipment manufacturers or distributors through a distribution channel consisting of in-house salesmen, outside sales representatives and distributors. Sales efforts are concentrated on in-house sales personnel where greater representation of our diverse product lines can be promoted across a variety of markets. The Registrant sells its products in specialized diverse security markets. Although service, quality and price are major criteria for servicing these markets, the continued introduction of new and improved products is vital for maintaining and increasing market share. During 1997 re-engineered large locks, rotary locks, recessed handles and multi-point paddle locks were manufactured and sold to the transportation and industrial hardware industries. The introduction of a tool box lock to the automotive accessories market has expanded our customer base. The ability to design lock applications to specific customer requirements and provide service at competitive prices resulted in the increased business in both keyed and keyless lock applications for the computer industry and premium luggage markets. The decline for engineered fasteners used in the underground mining industry is being replaced by new business being obtained in the contract casting market. The long-term supply agreement entered into with one of the nation's largest manufacturers of mine roof bolts has strengthened our position as the primary supplier to this market. -2- The Registrant's facilities have the ability to engineer new products for existing and new customers to meet the ever changing requirements in the markets in which it competes. The Registrant has worked with many customers to develop products to meet specific applications. Examples of this are lock applications for the computer industry, large locks for the tractor trailer industry and malleable castings for the electrical, construction and automotive industries. Raw materials and outside services were readily available from domestic sources during 1997 and are expected to be readily available in 1998 and the foreseeable future. Patent protection for the various product lines is fairly limited, but is sufficient to enhance competitive positions. Foreign sales and license agreements are not significant. The Registrant's business is not seasonal. Customer lists for all operating locations are broad-based geographically and by markets and sales are not highly concentrated by customer. No customer accounted for 10% or more of the Registrant's consolidated revenue for the year ended January 3, 1998. The Registrant continues to maintain a strong balance sheet with working capital at a stable level through strong management control on receivables and inventories. Quick response to customer orders is becoming more important. Consequently investments in additional inventories are made on a selective basis to meet the rapid delivery requirements of our customers. The dollar amount of the levels of orders in the Registrant's backlog is believed to be firm as of fiscal year ended January 3, 1998 at $7,364,000, as against $5,317,000 at December 28, 1996. The Registrant encounters competition in all of its product areas. The Registrant 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 its 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 1997 were $84,000 and represented less than 1% of gross revenues. In 1996 and 1995 they were $142,000 and $353,000, respectively. The projects involved mine roof fasteners, and other malleable iron products, transportation and industrial hardware, and locking device hardware. Total lease obligations of the Registrant, including buildings, autos and trucks and miscellaneous office equipment, for each of the next five years are $287,000, $291,000, $291,000, $291,000 and $291,000. In 1997, lease costs were $288,000. The average number of employees in 1997 was 492. (d) Financial Information about Foreign and Domestic Operations and Export Sales ------------------------------------------------------------------- The Registrant 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. -3- 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 Registrant's properties are owned or leased and while being fully utilized are adequate to satisfy current requirements. All of the Registrant's properties have the necessary flexibility to cover any long-term expansion requirements. 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 land and a building containing 21,000 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 Frazer and Jones Division in Solvay, New York, owns 17.9 acres of land and buildings containing 187,000 square feet constructed for foundry use. These facilities are well adapted to handle the division's current and future casting requirements. 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 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 World Lock Co. Ltd., subsidiary leases a brick and concrete building containing 7,870 square feet and is located in Taipei, Taiwan. All owned properties are free and clear of any encumbrances. -4- 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 has 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 of $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. -5- 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 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. It is believed that many of the defendants in the pending Coalition actions and certain other persons who have not been sued by the governments have a responsibility for remediation cost and may be brought into these actions as co-defendants with the Registrant. The Registrant intends to resist the EPA claims and if necessary bring these other persons into the action to share the costs of reimbursements to the government if ultimately imposed. 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 would settle the State's claims, if approved by the 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 material legal proceedings, other than ordinary routine litigation incidental to the business, to which either the Registrant or any of its subsidiaries is a party of or which any of their property is the subject. ITEM 4 SUBMISSION OF MATTERS TO SHAREHOLDERS None -6- PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The portion of the 1997 Annual Report to Shareholders appearing the inside front cover under the heading "Financial Highlights" and on page 24 under the heading "Common Stock Market Prices and Dividends" is incorporated herein by reference. ITEM 6 SELECTED FINANCIAL DATA The financial data on page 21 of the 1997 Annual Report to Shareholders, captioned "1997-1993 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 1997 Annual Report to Shareholders are incorporated herein by reference: (a) All of the material in the President's Letter found on pages 2 and 3 of the Annual Report. (b) All of the material on pages 22 through 24 under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations". 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 20 of the Annual Report to Shareholders for the fiscal year ended January 3, 1998 are incorporated herein by reference as follows: (a) Consolidated Balance Sheets - January 3, 1998 and December 28, 1996. (b) Consolidated Statements of Income -- Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995. (c) Consolidated Statements of Shareholders' Equity -- Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995. (d) Consolidated Statements of Cash Flows -- Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995. (e) Notes to Consolidated Financial Statements -- January 3, 1998, December 28, 1996 and December 30, 1995. Quarterly Results of Operations are incorporated herein by reference from the following portions of the 1997 Annual Report to Shareholders: (a) The portion of the 1997 Annual Report to Shareholders appearing on page 21 under the heading "Quarterly Results of Operations (unaudited)" is incorporated herein by reference. -7- (b) Paragraphs 2, 3 and 4 under the caption "General" on page 22. (c) Paragraphs on page 23 and 24 under the caption "Impact of Inflation and Changing Prices." With respect to stock options, the Registrant notes that stock options did not have a materially dilutive effect on net income per share for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995 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, the information appearing on page 7, and pages 9 through 14. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -8- PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There are incorporated herein by reference the portions of the Registrant's definitive proxy statement filed with the Commission pursuant to regulation 14A since the close of its fiscal year, which involve the election of Directors, the information appearing on pages 3 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 14 of said proxy statement. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) There are incorporated herein by reference the portions of the Registrant's definitive proxy statement filed with the Commission pursuant to Regulation 14A since the close of its fiscal year, which involve the security ownership of certain beneficial shareholders, the information appearing on pages 6 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, and 9 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. -9- PART IV 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 13 and 14. 3. Exhibits (3) Restated Certificate of Incorporation dated August 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) (a) Letter to all shareholders of the Registrant, dated September 20, 1991 describing the Registrant's redemption of shareholders Purchase Rights dated August 29, 1986 and the issuance of a new Purchase Rights dividend distribution; "Summary of Rights to Purchase Common Stock," as enclosed with said letter to shareholders are incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. (b) Rights Agreement entered into between the Registrant and The First National Bank of Boston, dated as of September 16, 1991 incorporated by reference to the Registrant's Form 8-K filed on September 16, 1991. (c) The First Amendment dated as of November 11, 1992 to the Rights Agreement dated as of September 16, 1991 between The Eastern Company and The First National Bank of Boston is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 2, 1993. (10) (a) Employment Agreement dated May 1, 1996 with Donald E. Whitmore, Jr. is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. (b) 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. (c) Deferred Compensation Agreement dated May 30, 1996 with Stedman G.Sweet is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. -10- (d) Supplemental Retirement Plan dated August 16, 1994 with Stedman G. Sweet is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (e) 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. (f) 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. (g) 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. (h) 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. (11) Statements re computation of per share earnings is incorporated by reference on pages 11 and 15 of the 1997 Annual Report to Shareholders. (13) 1997 Annual Report to Shareholders attached hereto on page 28. (21) List of subsidiaries as follows: Eberhard Hardware Mfg. Ltd., a private corporation organized under the laws of the Province of Ontario, Canada. World Lock Co. Ltd., a private corporation organized under the laws of Taiwan (The Republic of China). Sesamee Mexicana, Subsidiary, a private corporation organized under the laws of Mexico. World Security Industries Co. Ltd., a private corporation organized under the laws of Hong Kong. (23) Consents of independent auditors attached hereto beginning on page 15 (a) and (b). (27) Financial Data Schedule attached hereto beginning on page 56 (99) Financial Statements and Supplemental Schedules and report of independent auditors for the period ended December 31, 1997, 1996 and 1995 of The Eastern Company Savings and Investment Plan is attached beginning on page 17. (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 3, 1998. (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 14. -11- 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 27, 1998 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 27, 1998 - --------------------------------------------- Leonard F. Leganza Director, President and Chief Executive Officer /s/ Donald E. Whitmore, Jr. March 27, 1998 - --------------------------------------------- Donald E. Whitmore, Jr. Director, Executive Vice President, Chief Financial Officer and Secretary and Principal Accounting Officer /s/ John W. Everets March 27, 1998 - --------------------------------------------- John W. Everets Director /s/ Charles W. Henry March 27, 1998 - --------------------------------------------- Charles W. Henry Director /s/ Russell G. McMillen March 27, 1998 - --------------------------------------------- Russell G. McMillen Director /s/ David C. Robinson March 27, 1998 - --------------------------------------------- David C. Robinson Director /s/ Donald S. Tuttle III March 27, 1998 - --------------------------------------------- Donald S. Tuttle III Director -12- 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 3, 1998 are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets - January 3, 1998 and December 28, 1996 Consolidated Statements of Income - Fiscal years ended January 3, 1998, December 28, 1996, and December 30, 1995. Consolidated Statements of Shareholders' Equity - Fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995 Consolidated Statements of Cash Flows - Fiscal years ended January 3, 1998, December 28, 1996, and December 30,1995 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. -13- The Eastern Company and Subsidiaries Schedule II - Valuation and Qualifying accounts
COL. A COL. B COL. C COL. D COL. E ADDITIONS (1) (2) Balance at Beginning Charged to Costs Charged to Other Deductions Balance at End of Period and Expenses Accounts-Describe Describe of Period Description 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 ======== ======== ======== ======== Fiscal year ended December 30, 1995: Deducted from asset accounts: Allowance for doubtful accounts $330,000 $261,687 $ 90,687 (a) $501,000 ======== ======== ======== ======== (a) Uncollectible accounts written off, net of recoveries
-14- 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 30, 1998, included in the 1997 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 30, 1998, 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 26, 1998 -15- 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, 1998 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 3, 1998. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Hartford, Connecticut March 26, 1998 -16- Financial Statements and Supplemental Schedule The Eastern Company Savings and Investment Plan (Exhibit (99) to Form 10-K) Years ended December 31, 1997, 1996 and 1995 with Report of Independent Auditors Contents Report of Independent Auditors........................................18 Financial Statements Statements of Assets Available for Benefits...........................19 Statements of Changes in Assets Available for Benefits................20 Notes to Financial Statements.........................................22 Supplemental Schedule Schedule of Investments...............................................26 -17- 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, 1997 and 1996, and the related statements of changes in assets available for benefits for each of the three years in the period ended December 31, 1997. Our audits also included the supplemental schedule of investments as of December 31, 1997 and 1996. 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, 1997 and 1996, and the changes in assets available for benefits for each of the three years in the period ended December 31, 1997, 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, 1998 -18-
The Eastern Company Savings and Investment Plan Statements of Assets Available for Benefits Fund Information -------------------------------------------------------------------------------- Daily Growth and Eastern Participant Dividend Income Income Common Loan Fund Trust Fund Fund Fund Stock Fund Total ----------- ----------- ---------- ---------- ----------- ---------- December 31, 1997 Assets Investments: Mutual funds $ 315,520 $ 219,692 $1,030,823 $1,566,035 Participant loans receivable $ 26,978 26,978 Total investments 26,978 315,520 219,692 1,030,823 1,593,013 ---------- ---------- ---------- ---------- ---------- Funds in transit 26,145 26,145 Dividends receivable 91 620 4,276 4,987 Contribution receivable from (payable to) other funds (260,306) 5,887 254,419 - ---------- ---------- ---------- ---------- ---------- Assets available for benefits $ 26,978 $ 81,450 $ 226,199 $1,289,518 $1,624,145 ========== ========== ========== ========== ========== December 31, 1996 Assets Investments: The Eastern Company Common Stock $ 128,817 $ 128,817 Mutual funds $ 71,530 $ 134,105 $ 710,784 1,133 917,552 Participant loans receivable $ 3,099 3,099 ---------- ---------- ---------- ---------- ---------- ---------- Total investments 3,099 71,530 134,105 710,784 129,950 1,049,468 Contributions receivable: Employee 482 1,325 5,731 1,061 8,599 Employer 276 751 3,250 603 4,880 Contribution receivable from (payable to) other funds (23,970) 4,423 14,368 5,179 - ---------- ---------- ---------- ---------- ---------- ---------- Assets available for benefits $ 3,099 $ 48,318 $ 140,604 $ 734,133 $ 136,793 $1,062,947 ========== ========== ========== ========== ========== ========== See accompanying notes.
-19- The Eastern Company Savings and Investment Plan Statements of Changes in Assets Available for Benefits
Fund Information -------------------------------------------------------------------------------- Daily Growth and Eastern Participant Dividend Income Income Common Loan Fund Trust Fund Fund Fund Stock Fund Total ------------ ----------- ----------- ----------- ------------ ----------- Year ended December 31, 1997 Investment income: Dividends $ 3,831 $ 8,397 $ 18,235 $ 5,449 $ 35,912 Net realized and unrealized appreciation in fair value of investments 2,706 170,008 54,200 226,914 ----------- ----------- ----------- ----------- ----------- 3,831 11,103 188,243 59,649 262,826 Contributions: Employee 17,988 46,605 258,247 23,404 346,244 Employer 3,333 8,086 38,901 4,481 54,801 ----------- ----------- ----------- ----------- ----------- 21,321 54,691 297,148 27,885 401,045 Benefits paid to participants (11,095) (6,011) (84,152) (1,415) (102,673) Interfund transfers 23,879 19,075 25,812 154,146 (222,912) - -------- ----------- ----------- ----------- ----------- ----------- Net increase 23,879 33,132 85,595 555,385 (136,793) 561,198 Assets available for benefits Beginning of year 3,099 48,318 140,604 734,133 136,793 1,062,947 -------- ----------- ----------- ----------- ----------- ----------- End of year $ 26,978 $ 81,450 $ 226,199 $ 1,289,518 $ - $ 1,624,145 ======== =========== =========== =========== =========== =========== Year ended December 31, 1996 Investment income: Dividends $ 3,130 $ 7,266 $ 54,469 $ 4,104 $ 68,969 Net realized and unrealized appreciation (depreciation) in fair value of investments (2,271) 46,662 7,923 52,314 ----------- ----------- ----------- ----------- ----------- 3,130 4,995 101,131 12,027 121,283 Contributions: Employee 13,622 44,187 201,676 33,187 292,672 Employer 2,413 7,354 30,460 5,750 45,977 ----------- ----------- ----------- ----------- ----------- 16,035 51,541 232,136 38,937 338,649 Benefits paid to participants (1,010) (14,140) (22,480) (3,595) (41,225) Loan default $ (732) (732) Interfund transfers (1,506) (3,125) (420) 7,904 (2,853) - -------- ----------- ------------ ----------- ----------- ----------- Net increase (2,238) 15,030 41,976 318,691 44,516 417,975 Assets available for benefits Beginning of year 5,337 33,288 98,628 415,442 92,277 644,972 -------- ----------- ------------ ----------- ----------- ----------- End of year $ 3,099 $ 48,318 $ 140,604 $ 734,133 $ 136,793 $ 1,062,947 ======== =========== ============ =========== =========== =========== See accompanying notes.
-20- The Eastern Company Savings and Investment Plan Statements of Changes in Assets Available for Benefits
Fund Information ------------------------------------------------------------------------------- Daily Growth and Eastern Participant Dividend Income Income Common Loans Fund Trust Fund Fund Fund Stock Fund Total ------------ ----------- ----------- ----------- ------------ ----------- Year ended December 31, 1995 Investment income: Dividends $ 1,860 $ 4,003 $ 20,890 $ 1,547 $ 28,300 Net realized and unrealized appreciation (depreciation) in fair value of investments 6,291 50,196 (6,811) 49,676 1,860 10,294 71,086 (5,264) 77,976 ----------- ----------- ---------- ----------- ----------- Contributions: Employee 16,789 56,564 187,704 57,441 318,498 Employer 3,237 8,147 29,655 8,704 49,743 ----------- ----------- ----------- ----------- ----------- 20,026 64,711 217,359 66,145 368,241 Benefits paid to participants (3,528) (7,621) (11,616) (1,362) (24,127) Interfund transfers $ 5,337 857 (6,187) 5,208 (5,215) - ----------- ----------- ----------- ----------- ----------- ----------- Net increase 5,337 19,215 61,197 282,037 54,304 422,090 Assets available for benefits Beginning of year - 14,073 37,431 133,405 37,973 222,882 ----------- ----------- ----------- ----------- ----------- ----------- End of year $ 5,337 $ 33,288 $ 98,628 $ 415,442 $ 92,277 $ 644,972 =========== =========== =========== ========== =========== ===========
-21- The Eastern Company Savings and Investment Plan Notes to Financial Statements December 31, 1997 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 25% in 1997, 1996, and 1995. 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 ($1,327 and $4,783 at December 31, 1997 and 1996, 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. -22- 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 four investment options as follows:
Number of Participants December 31 Name of Fund Description of Fund 1997 1996 1995 - --------------------- -------------------------------------- ---- ---- ---- Daily Dividend Trust Funds are invested in money Fund market instruments 57 39 42 Income Fund Funds are invested in a diversified portfolio of fixed-income securities 85 66 71 Growth and Income Funds are invested primarily in Fund common stocks 151 132 135 Eastern Common Stock Funds are invested in Common Fund Stock of The Eastern Company -- 64 71
Participants may elect to change their investment options quarterly. 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. -23- The Eastern Company Savings and Investment Plan Notes to Financial Statements (continued) 1. Description of Plan (continued) As of December 31, 1997 and 1996, 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 and, in 1996, the Company's Common Stock are stated at fair value as estimated by reference to quoted market prices. Administrative expenses of the Plan are paid by the Company. 3. Investments Plan investments that represent 5 percent or more of the Plan's assets follow: December 31 1997 1996 ---------------------------- Mutual funds: Putnam Daily Dividend Trust Fund $ 315,520 $ 71,530 Putnam Income Fund 219,692 134,105 Putnam Growth and Income Fund 1,030,823 710,784 The Eastern Company Common Stock - 128,817 ------------ ------------ $ 1,566,035 $ 1,045,236 ============ ============ -24- The Eastern Company Savings and Investment Plan Notes to Financial Statements (continued) 3. Investments (continued) The Plan's investments appreciated (depreciated) in value as follows: December 31 1997 1996 1995 Mutual funds $ 172,714 $ 44,391 $ 56,487 The Eastern Company Common Stock $ 54,200 7,923 (6,811) ---------- ---------- ----------- $ 226,914 $ 52,314 $ 49,676 ========== ========== =========== 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 The Eastern Common Stock Fund fund which invested in the Common Stock of the Company was an available investment option within the Plan. At December 31, 1996, the Plan owned 9,722 shares of the Company's Common Stock valued at $128,817. During 1997, the Plan sold such shares as directed by the Plan's participants in connection with a change in investment service provider effective January 1, 1998. 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. -25- The Eastern Company Savings and Investment Plan Schedule of Investments Balance Held at Close of Value of Each Period. Number of Each Item Name of Issuer and Shares-Principal Amount at Close of Title of Issue of Bonds and Notes Period - ------------------------------------------------------------------------------- December 31, 1997 Putnam-Daily Dividend Trust 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 26,978 ----------- $ 1,593,013 December 31, 1996 Putnam-Daily Dividend Trust Fund 71,529.530 Units $ 71,530 Putnam-Income Fund Cl. B 19,212.765 Units 134,105 Putnam-Growth and Income Fund Cl. B 39,842.172 Units 710,784 New England Securities-Money Market Fund 1,132.770 Units 1,133 The Eastern Company-Common Stock 9,722 Shares 128,817 Participant Loans 3,099 ----------- $ 1,049,468 =========== -26- (This Page Intentionally Left Blank) -27- THE EASTERN COMPANY is a 140 year-old manufacturer of proprietary locks and other security devices with seven operating locations in the USA, Canada, Mexico and The Pacific Rim. ANNUAL REPORT 1997 [FRONT COVER] -28- [INSIDE FRONT COVER]
Financial Highlights 1997 1996 Sales $67,331,422 $57,853,669 Income Before Income Taxes 5,807,526 1,527,012 Net Income 3,722,530 879,817 Income Per Share (basic) 1.40 .33 Dividends Per Share 47 1/2 .46 Book Value Per Share 11.00 10.88 Working Capital Per Share 5.59 5.47 Current Ratio 2.32 to 1 2.91 to 1 Capital Expenditures 2,230,113 2,915,041 Depreciation and Amortization 2,978,250 2,952,876 Return on Shareholders' Equity 13% 3% Number of Employees 492 494 Number of Stockholders 848 881 Per Share data based on the weighted average number of outstanding shares (basic) during each year.
-29- [GRAPH IN TABULAR FORM] SALES (in millions of dollars) 1993* 1994* 1995 1996 1997 - -------- -------- -------- -------- -------- $52,546 $58,381 $59,352 $57,854 $67,331 *As reclassified to reflect discontinued operation [GRAPH IN TABULAR FORM] EARNING (per share, basic) 1993 1994 1995 1996 1997 - -------- -------- -------- -------- -------- $ 1.01 $ .95 $ .90 $ .33 $ 1.40 [GRAPH IN TABULAR FORM] SHAREHOLDERS' EQUITY (per share) 1993 1994 1995 1996 1997 - -------- -------- -------- -------- -------- $10.33 $10.77 $10.75 $10.88 $11.00 [GRAPH IN TABULAR FORM] MARKET CAPITALIZATION (millions of dollars) 1995 1996 1997 1998 -------- -------- -------- -------- 1st QTR $41,279 $32,355 $36,625 2nd QTR $38,175 $30,704 $39,688 3rd QTR $33,664 $35,428 $40,210 4th QTR $33,029 $35,990 $51,214 JAN 98 $55,751 Cash Dividend Rates and Stock Splits 1997-1967 1997 - 13% increase 1992 - 9.5% increase 1991 - 12.5% increase, 50% stock dividend 1988 - 12% increase, 2 for 1 split 1987 - $1.00 year-end extra 1984 - 43% increase 1982 - 50% decrease 1979 - 11% increase 1977 - 14% increase, 3 for 2 split 1976 - 27% increase, plus 20 cent year-end extra 1975 - 30 cent year-end extra 1974 - 25% increase, plus 11 cent year-end extra 1973 - 10% increase, 5 for 4 split 1972 - 4% increase 1970 - 3% increase, 3 for 2 split 1967 - 17% increase PAGE 1 OF ANNUAL REPORT -30- To Our Shareholders: The year 1997 was an outstanding one for The Eastern Company. After several years of lackluster performance, sales and earnings were brought dramatically back on track. Net sales grew 16% to $67.3 million while net income increased to $3.7 million, or $1.40 per share (basic), compared to $880 thousand, or $0.33 per share (basic), in the previous year. We followed through on our commitment to improve shareholder value. At the end of 1997, the Company's market capitalization increased to $51.2 million compared to $36.0 million on December 31, 1996. The strength of the overall economy was a contributing factor to the Company's strong performance last year. Other factors also had a positive impact. Noteworthy was the strong contribution at our Frazer & Jones division, as it continues to modify its production operations in order to increase its specialized contract casting business. In addition, new management initiatives were put in place to inspire greater productivity. Our divisions have implemented several product and marketing programs reaffirming our optimism for growth in 1998 and beyond. These undertakings include the growth of Frazer & Jones' contract casting business. We are also searching out and concentrating on certain specialty end-use markets which will result in new business on some recently designed products such as safety locks for firearms and new latching devices for the sport pick-up truck accessory after-market. Eastern's management is committed to achieving financial goals that will enable us to continue enhancing shareholder value. In addition to increasing sales and earnings, other key ingredients will include improved return on investment and cash flow. We will also seek acquisitions that strengthen our position in the markets we serve. [LINE GRAPH] GROWTH IN SHAREHOLDER VALUE (millions of dollars) 1993 1994 1995 1996 1997 - -------- -------- -------- -------- -------- $33,008 $36,076 $33,029 $35,990 $51,214 [LINE GRAPH] QUARTERLY EPS 1995 1996 1997 -------- -------- -------- 1st QTR $0.35 ($0.07) $0.23 2nd QTR $0.21 $0.13 $0.30 3rd QTR $0.16 $0.18 $0.40 4th QTR $0.18 $0.09 $0.47 PAGE 2 OF ANNUAL REPORT -31- Eastern is a strong, competitive company with quality products, a growing base of satisfied customers, dedicated employees, positive cash flow and a sound balance sheet. We feel these basic ingredients act as a strong foundation for us to maintain our growth and prosperity. The vision and activities implemented in 1997 will be continued as we work to reward our shareholders by building greater value in The Eastern Company. I thank all our employees at our seven operating locations as well as our corporate management team who all have been enthusiastic and supportive in making 1997 a successful year. I am confident that their efforts will reap rewards for our shareholders and our entire corporate family. Ole Imset, a dedicated Eastern Director for seven years, passed away in November of 1997. He will be missed by all of us who knew him. /s/Leonard F. Leganza - --------------------- Leonard F. Leganza President and Chief Executive Officer Q u e s t i o n s & A n s w e r s Q You have expressed optimism for Eastern's performance in 1998 and beyond. What are your main reasons for this? A There are several factors involved here beyond just the prediction of a continuing good economy. Our optimism is based on a combination of having a strong position in our selected markets as well as the introduction of new products. Another key ingredient is a new management style that emphasizes the achievement of fundamental financial goals, such as earnings per share, cash flow and return on investment, all of which help maximize shareholders value. Q Eastern has consistently expressed an interest in pursuing acquisitions or other strategic moves. Is this still the case? Why? A Yes, we are still very interested and involved here. We believe that acquisitions are a faster way to enter into or expand in a certain targeted marketplace. Q Eastern's various product lines seem to serve three different market areas. Do you feel that all three have sound growth potential? Also, is there one that has greater potential for Eastern? A All three are equally desirable. Our product lines are tied by the common thread of high quality manufacturing and marketing. Each of our businesses compete in healthy, growing niche markets. As a result, we are not overly dependent on one product area. Q You increased the dividend in 1997. If earnings continue to increase, might you consider increasing it again? A For years it has been Eastern's policy to have our shareholders participate in the success of the company when earnings and other cash needs permit. We will continue to re-evaluate our dividend policy. Q Was your good earnings performance in 1997 tied to the strong economy? Conversely, do you foresee a downturn in your earnings when the economy cools off? A As is the case with most companies, a good economy is very important to our financial well being. However, we feel that with our very diverse mix of products Eastern is somewhat more resistant to cyclical downturns. In addition, some of our security products, such as our Presto(R) and Sesamee(R) brand locks are marketed through locksmith channels rather than to consumers who might be more directly effected by a weak economy. PAGE 3 OF ANNUAL REPORT -32- Custom Locks Eastern produces locks at four of its seven operating facilities. Most of the Company's keyed locks are custom-engineered to meet specific security applications. Eastern's custom-engineered locks are used for gaming and vending equipment, all types of enclosures and coin boxes where cash is being stored, for cabinets, drawers, instrumentation, and computer peripheral equipment. Today's lock customers have diverse requirements. In addition to varying levels of security, customers seek durability and ruggedness, as well as master and grand-master keying functions. Other important criteria in the customer's purchasing decision are the ability to re-key without having to remove the entire lock PAGE 4 OF ANNUAL REPORT -33- itself, and the ability to thwart the unauthorized duplication of keys. Eastern also produces the Sesamee(R)and Prestolock(R) brand of combination padlocks - an increasingly important product in the security field because these locks provide a logical solution to the problem of lost or stolen keys. A popular niche, end-use application for Prestolocks is the growing soft luggage industry. Another application for a combination lock is the Gun Blok(R) which is designed for the firearms industry to help prevent unauthorized access to rifles and handguns. Q u e s t i o n s & A n s w e r s Q Are you concerned that new state-of-the-art electronic security devices on the market might reduce the demand for conventional locks like Eastern's? A No. Although electronic devices may trigger a mechanism, it is the mechanical lock that is required to perform the actual locking function. Q It seems that lock manufacturers are introducing an ever-growing selection of specialized locks. How does this effect Eastern? A We have chosen to serve only certain niches of the multi-million-dollar lock market - namely areas where we have expertise. We design and produce locks for specific end-uses, such as gaming and vending machines, coin boxes, and various electronic equipment. We believe these markets present us with the best opportunities for future growth. Q Why is The Eastern Company placing an emphasis on advertising its combination locks? A At Eastern we produce both keyed and combination locks. We believe both types are needed in today's security environment. Although key-type locks are more prevalent, we foresee substantial growth potential for combination locks in many end-use applications, because these keyless locks offer an alternative to the age-old problem of lost, stolen, or unauthorized duplication of keys. As a result, much of Eastern's marketing initiatives are focused on our keyless or combination locks. PAGE 5 OF ANNUAL REPORT -34- Security Hardware Security hardware is a term which describes the various types of closure devices used in a wide variety of industrial end-use applications. Typical products are latches, handles, hinges and multi-point latching mechanisms that often must provide a closing and locking function. Eastern's two operating facilities in Cleveland, Ohio and Ontario, Canada design and manufacture products which serve these diverse market areas. Eastern's security hardware offerings can typically be found in the electrical, telecommunications, food service equipment and machinery PAGE 6 OF ANNUAL REPORT -35- industries, as well as medical and test instrumentation fields. In addition, for decades Eastern has been a leading producer of latches and locks for the truck body industry. The end-uses range from commonly seen vertical locking bars on the rear door of tractor trailers to custom handles and flush locks used on the tool compartments of utility trucks. Q u e s t i o n s & A n s w e r s Q Are your latches and locks mainly proprietary catalog items or are they designed for a single customer's individual needs? A The answer is both. Although the hundreds of security devices presented in our catalogs are available to all customers, a large percentage of our annual sales are products that are custom-engineered to solve a specific customer's security need. In many instances, other customers may later purchase the same product or a modification of it. Q What are the markets for all your security hardware products? A Our latches and other security devices are targeted at two basic markets. They are the truck body and other vehicle manufacturers as well as general industrial and electronic equipment producers. Q What new product lines do you feel might be natural adjuncts in order to provide future growth? Do you plan to develop these internally or obtain them via acquisition? A There are a number of extremely nteresting specialty products that we feel would be excellent building blocks for growth while augmenting or complementing our core product line. Some could be developed internally while others would most practically be added by means of an acquisition. Among the new product lines we might be interested in are marine hardware, specialty fasteners, hinges and rollup doors. PAGE 7 OF ANNUAL REPORT -36- Metal Products Two different product lines are manufactured at Eastern's production facility in Syracuse, New York. Our Frazer & Jones division is the dominant producer of anchoring devices which are used to support the roofs of underground mines. These devices provide the rugged reliability and sturdiness needed to reduce potential and costly mining accidents. PAGE 8 OF ANNUAL REPORT -37- Recognizing that new mining techniques are reducing the need for conventional roof support systems in the mining industry, Frazer & Jones has modified its production operations in order to enter the market for contract castings. Frazer & Jones is one of the most automated and efficient producers of high-volume, small-size, complex metal castings that are used in the electrical, construction and automotive industries. Q u e s t i o n s & A n s w e r s Q Why did the demand for your traditional product lines of mine roof support fasteners diminish? A We saw a downturn in our core mining business primarily because new technological advances in mining reduced the need for mine roof support systems. However, the anticipated need for mine roof systems will not totally disappear in the near-term. This trend triggered our decision to convert our production operations to produce specialized contract castings. This has proven to be a very wise decision. Q What do you mean by contract casting business? Who uses these products? A This means that we contract to produce specialty castings for other customers' specific requirements. The majority of this output is for the construction, electrical and automotive industries. Q How do you envision your future success in this specialized contract casting business? A Not only are we pleased with the sales and earnings growth that we have already experienced, but we are optimistic about the future of serving these markets. The reason for this optimism is that our Frazer & Jones division is one of the most efficient, mechanized foundries of its kind in the country this makes it very suited to excel in this business. PAGE 9 OF ANNUAL REPORT -38-
Financial Statements Consolidated Balance Sheets January 3, 1998 and December 28, 1996 1997 1996 ASSETS Current Assets Cash and cash equivalents $ 2,111,289 $ 2,269,031 Accounts receivable, less allowances of $329,000 in 1997 and $567,000 in 1996 8,725,167 7,018,961 Inventories: Raw materials and component parts 5,502,526 5,034,184 Work in process 3,736,500 2,564,546 Finished goods 3,175,840 3,299,097 ------------ ------------ 12,414,866 10,897,827 Prepaid expenses and other 1,819,857 1,469,155 Deferred income taxes 1,026,700 818,000 ------------ ------------ Total Current Assets 26,097,879 22,472,974 Property, Plant and Equipment Land 227,622 228,064 Buildings 3,936,441 3,761,466 Machinery and equipment 21,270,361 21,971,513 Accumulated depreciation (11,997,894) (12,074,420) ------------ ------------ 13,436,530 13,886,623 Other Assets Goodwill, less accumulated amortization of $51,411 in 1997 and $43,583 in 1996 13,701 21,530 Patents, technology, licenses and trademarks, less accumulated amortization of $1,034,253 in 1997 and $682,773 in 1996 1,989,410 2,023,034 Prepaid pension cost 4,217,604 4,017,397 Other Assets 43,037 70,676 ------------ ------------ 6,263,752 6,132,637 ------------ ------------ $ 45,798,161 $ 42,492,234 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 3,499,857 $ 2,396,582 Accrued compensation 1,413,418 859,701 Other accrued expenses 2,662,088 823,560 Short-term borrowings 3,500,000 3,500,000 Current portion of long-term debt 163,662 130,980 ------------ ------------ Total Current Liabilities 11,239,025 7,710,823 Deferred income taxes 2,492,200 2,389,800 Long-term debt 60,000 224,415 Accrued postretirement benefits 2,763,795 2,812,690 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: 2,593,089 shares in 1997 and 2,716,214 shares in 1996; excluding shares held in treasury of 831,780 in 1997 and 610,987 in 1996 6,078,427 8,272,614 Retained earnings 24,220,894 21,765,893 Unearned compensation (492,969) (200,938) Accumulated translation adjustments (563,211) (483,063) ------------ ------------ Total Shareholders' Equity 29,243,141 29,354,506 ------------ ------------ $ 45,798,161 $ 42,492,234 ============ ============ See notes to consolidated financial statements.
PAGE 10 OF ANNUAL REPORT -39-
Financial Statements Consolidated Statements of Income Fiscal Years Ended January 3,1998, December 28, 1996 and December 30, 1995 1997 1996 1995 Net sales $67,331,422 $57,853,669 $59,351,783 Other income 139,116 88,191 274,054 ----------- ----------- ----------- 67,470,538 57,941,860 59,625,837 Costs and expenses Cost of products sold 48,779,527 45,173,447 45,236,910 Selling and administrative 12,586,893 11,025,975 10,041,833 Interest 296,592 215,426 72,471 ----------- ----------- ----------- 61,663,012 56,414,848 55,351,214 ----------- ----------- ----------- Income before income taxes from continuing operations 5,807,526 1,527,012 4,274,623 Income taxes 2,084,996 647,195 1,527,481 ----------- ----------- ----------- Income from continuing operations 3,722,530 879,817 2,747,142 Discontinued operations: Loss from operations of discontinued segment, net of income tax credit of $63,300 - - (173,582) Loss on disposal of discontinued segment, net of income tax credit of $1,400 - - (83,062) Net Income $ 3,722,530 $ 879,817 $ 2,490,498 =========== =========== =========== Basic Earnings per Share: Income from continuing operations $ 1.40 $ .33 $ .99 Discontinued operations - - (.09) ----------- ----------- ----------- Net Income $ 1.40 $ .33 $ .90 =========== =========== =========== Diluted Earnings per Share: Income from continuing operations $ 1.38 $ .32 $ .98 Discontinued operations - - (.09) ----------- ----------- ----------- Net Income $ 1.38 $ .32 $ .89 =========== =========== =========== See notes to consolidated financial statements.
PAGE 11 OF ANNUAL REPORT -40-
Financial Statements Consolidated Statements of Shareholders' Equity Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 Accumulated Common Retained Unearned Translation Stock Earnings Compensation Adjustments Balances at December 31, 1994 $ 9,009,392 $20,912,486 - $ (78,421) Net income - 2,490,498 - - Cash dividends declared, $.46 per share - (1,275,577) - - Purchase of 90,051 shares of Common Stock for treasury (1,096,164) - - - Issuance of 11,250 shares of Common Stock upon the exercise of stock options 104,510 - - - Currency translation adjustment - - - (260,040) ----------- ----------- ------------ ----------- 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) =========== =========== =========== =========== See notes to consolidated financial statements.
PAGE 12 OF ANNUAL REPORT -41-
Financial Statements Consolidated Statements of Cash Flows Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 1997 1996 1995 Operating Activities Net Income $ 3,722,530 $ 879,817 $ 2,490,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,978,250 2,952,876 2,628,319 (Gain) loss on sales of equipment and other assets 4,618) 9,780 5,580 Provision for doubtful accounts 370,755 251,881 261,687 Deferred income taxes (106,300) 32,500 264,700 Issuance of Common Stock for directors' fees 75,201 25,813 - Compensation related to earned contingent shares of Common Stock 138,750 - - Changes in operating assets and liabilities: Accounts receivable (2,181,557) 534,741 1,573,707 Inventories (1,612,166) 882,531 (2,280,056) Prepaid expenses and other (358,019) (159,412) 1,059,465 Prepaid pension cost (200,206) (948,332) (110,704) Other assets (313,827) (1,178,406) (217,508) Accounts payable 1,557,083 (854,183) (208,235) Accrued compensation 576,064 (47,719) (24,457) Other accrued expenses 1,546,392 88,706 261,577 ----------- ----------- ----------- Net cash provided by operating activities 6,188,332 2,470,593 5,704,573 Investing Activities Purchases of property, plant and equipment (2,230,113) (2,915,041) (3,319,663) Proceeds from sales of equipment and other assets 54,497 13,600 69,559 ----------- ----------- ----------- Net cash used by investing activities (2,175,616) (2,901,441) (3,250,104) Financing Activities Proceeds from line of credit 2,000,000 2,500,000 1,000,000 Payments on line of credit (2,000,000) - (1,400,000) Proceeds from issuance of long-term debt - - 210,468 Principal payments on long-term debt (116,831) (102,373) (1,060,000) Proceeds from sales of Common Stock 721,656 28,125 104,510 Purchases of Common Stock for treasury (3,421,825) - (1,096,164) Dividends paid (1,267,529) (1,241,331) (1,275,577) Net cash (used) provided by financing activities (4,084,529) 1,184,421 (3,516,763) Effect of exchange rate changes on cash (85,929) (5,903) (26,589) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (157,742) 747,670 (1,088,883) Cash and cash equivalents at beginning of year 2,269,031 1,521,361 2,610,244 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 2,111,289 $ 2,269,031 $ 1,521,361 =========== =========== =========== See notes to consolidated financial statements.
PAGE 13 OF ANNUAL REPORT -42- Financial Statements Notes of Consolidated Financial Statements January 3, 1998, December 28, 1996 and December 30, 1995 1. OPERATIONS The operations of The Eastern Company (the Company) consist of a single business segment -- security products. Security products are used to close, lock or support equipment used in the industrial, transportation or mining industries. Sales are made to customers primarily in North America. 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. During fiscal 1998, the Company will be required to adopt Financial Accounting Standards Board (FASB) Statement No. 131, Disclosures About Segments of An Enterprise and Related Information. 2. DISCONTINUED OPERATIONS In 1995, the Company sold the business and substantially all assets (customer list, property and inventories) of its construction segment; the Company retained accounts receivable. At January 3, 1998, there were no recorded balances related to the discontinued construction segment. At December 28, 1996 accounts receivable before allowances included $329,152 related to the discontinued construction segment and adequate allowances had been provided for potential losses. Statements of income reflect the discontinuance of this segment. 3. 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 translation adjustments". 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 $2,854,000 at January 3, 1998 and $2,894,000 at December 28, 1996. Property, Plant and Equipment and Related Depreciation Property, plant and equipment are stated on the basis of cost. Depreciation ($2,597,806 in 1997, $2,688,305 in 1996 and $2,358,722 in 1995) 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. Product Development Costs Product development costs, charged to expense as incurred, were $84,290 in 1997, $142,358 in 1996 and $353,425 in 1995. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs were $442,965 in 1997, $597,877 in 1996 and $525,850 in 1995. PAGE 14 OF ANNUAL REPORT -43-
Earnings Per Share The denominators used in the earnings per share computations follow: 1997 1996 1995 Basic: Weighted average shares outstanding 2,688,181 2,713,191 2,771,840 Contingent shares outstanding (30,000) (15,000) - --------- --------- --------- Denominator for basic earnings per share 2,658,181 2,698,191 2,771,840 ========= ========= ========= Diluted: Weighted average shares outstanding 2,688,181 2,713,191 2,771,840 Contingent shares outstanding (30,000) (15,000) - Dilutive stock options 39,820 35,381 45,033 --------- --------- --------- Denominator for diluted earnings per share 2,698,001 2,733,572 2,816,873 ========= ========= =========
4. 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 (PRPs). In 1997, additional expenses recognized, net of insurance recoveries, relating to these complaints were immaterial to the Company's operating results. The contingency for these environmental complaints is expected to be resolved within the next year. All of the involved PRPs are expected to fund their share of the ultimate expenses relating to these matters. In 1997, the Company also provided for other contingencies arising in the ordinary course of business. The aggregate liability for all contingencies is approximately $1,200,000 as of January 3, 1998 and is included in current liabilities under the caption, "other accrued expenses". A substantial portion of this liability will be funded by insurance proceeds. Although possible, no significant change in the estimated liability is contemplated.
5. DEBT Debt consists of: 1997 1996 Non-interest bearing note due in yearly installments of $60,000 through January 7, 1999 $ 120,000 $ 180,000 Non-interest bearing note due in 1998 68,562 95,621 Note payable due in 1998 with interest at 11% 35,100 79,774 -------- -------- 223,662 355,395 Less current portion 163,662 130,980 -------- -------- $ 60,000 $ 224,415 ========= =========
Interest paid was $248,314 in 1997, $174,325 in 1996 and $107,466 in 1995. The Company has available a $7,000,000 line of credit. Borrowings against the line were $3,500,000 at January 3, 1998; such borrowings bear interest at rates ranging from 7.01% to 7.15%. In connection with the Company's cash management program, compensating balances (approximately $450,000 at January 3, 1998) are required to be maintained. 6. STOCK RIGHTS At January 3, 1998 there were 2,593,089 stock rights outstanding. Each right may be exercised to purchase one share of the Company's Common Stock at an exercise price of $35, 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 October 15, 2001, and may be redeemed by the Company at a price of $.01 per right at any time prior to their expiration or the acquisition of 10% of the Company's Common Stock. 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. PAGE 15 OF ANNUAL REPORT -44- Financial Statements Notes to Consolidated Financial Statements 7. 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 3, 1998, 22,500 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:
1997 1996 1995 ------------------------ ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------ ------------------------- ------------------------ Outstanding, beginning of year 29,640 $9.34 40,590 $9.27 59,840 $9.29 Exercised (7,140) $9.25 - - (11,250) $9.29 Forfeited - - (10,950) $9.08 (8,000) $9.375 ------ ------- ------- Outstanding, end of year 22,500 $9.375 29,640 $9.34 40,590 $9.27 ====== ======= ======= Exercisable, end of year: At $9.08 - 3,000 13,950 At $9.375 22,500 26,640 26,640
At January 3, 1998, 114,650 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:
1997 1996 1995 ----------------------- ------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------------------- ------------------------- ------------------------ Outstanding, beginning of year 121,203 $10.00 124,203 $ 9.99 124,203 $9.99 Granted 35,000 $16.16 - - - - Exercised (63,153) $10.19 (3,000) $ 9.375 - - ------- ------- ------- Outstanding, end of year 93,050 $12.19 121,203 $10.00 124,203 $9.99 ====== ======= ======= Exercisable, end of year: At $9.08 31,550 33,750 33,750 At $9.375 10,000 53,703 56,703 At $11.00 11,250 11,250 11,250 At $12.25 5,250 11,250 11,250 At $12.50 - 11,250 11,250 At $14.875 20,000 - - At $17.875 15,000 - -
PAGE 16 OF ANNUAL REPORT -45- At January 3, 1998, 242,500 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 follows:
Stock Options Stock Awards 1997 1997 1996 ------------------------- ------------------------------------------- Weighted Weighted Weighted Average Average Average Fair Value Fair Value Exercise at Date of at Date of Options Price Awards Grant Awards Grant ------------------------- ------------------------------------------- Outstanding, beginning of year - - 15,000 $13.40 - - Granted 25,000 $17.875 22,500 $18.02 15,000 $13.40 Earned - - (7,500) $15.13 - - ------ ------ ------ Outstanding, end of year 25,000 $17.875 30,000 $16.43 15,000 $13.40 ====== ====== ====== Exercisable, end of year: At $17.875 25,000
At January 3, 1998, 150,000 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: 1997 ------------------- Weighted Average Exercise Options Price ------------------- Granted 90,000 $14.875 Outstanding, end of year 90,000 $14.875 Exercisable, end of year: At $14.875 90,000 Compensation expense for stock options is recognized under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. 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 of $138,750 related to stock awards was required to be recognized in 1997. If stock options were accounted for using the fair value method under FASB Statement No. 123, Accounting for Stock Based Compensation, net income, basic earnings per share and diluted earnings per share would have been $3,454,430, $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: a risk free interest rate of 5.62%; expected volatility of 0.164; an expected option life of 5 years; and a weighted-average dividend yield of 3.34%. 8. INCOME TAXES Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for income tax reporting purposes. Deferred income tax liabilities (assets) relate to:
1997 1996 1995 Property, plant and equipment $ 2,054,700 $ 1,949,000 $ 1,883,200 Pension accruals 1,640,600 1,571,300 1,470,400 Other 275,100 129,800 146,500 ----------- ----------- ----------- Total deferred income tax liabilities 3,970,400 3,650,100 3,500,100 Other postretirement benefits (1,075,100) (1,099,700) (1,104,300) Inventories (288,800) (291,000) (208,400) Allowance for doubtful accounts (120,000) (179,600) (229,700) Accrued compensation (304,700) (271,700) (253,100) Accrual for contingencies (408,500) - - Other (307,800) (236,300) (165,300) ----------- ----------- ----------- Total deferred income tax assets (2,504,900) (2,078,300) (1,960,800) ----------- ----------- ----------- Net deferred income tax liabilities $ 1,465,500 $ 1,571,800 $ 1,539,300 =========== =========== ===========
PAGE 17 OF ANNUAL REPORT -46- Financial Statements Notes to Consolidated Financial Statements 8. INCOME TAXES (continued) Income before income taxes from continuing operations consists of: 1997 1996 1995 Domestic $ 5,107,701 $ 1,476,346 $ 4,089,932 Foreign 699,825 50,666 184,691 ----------- ----------- ----------- $ 5,807,526 $ 1,527,012 $ 4,274,623 =========== =========== =========== Income taxes follow: 1997 1996 1995 Current: Federal $ 1,749,800 $ 525,000 $ 1,011,900 Foreign 170,996 35,795 49,681 State 270,500 53,900 122,600 Deferred (106,300) 32,500 343,300 ----------- ---------- ----------- $ 2,084,996 $ 647,195 $ 1,527,481 =========== ========== =========== A reconciliation of income taxes computed using the U.S. federal statutory rate to those reflected in continuing operations follows:
1997 1996 1995 Amount Percent Amount Percent Amount Percent ---------------------- ------------------- --------------------- Income taxes using U.S. federal statutory rate $ 1,974,600 34% $ 519,200 34% $ 1,453,400 34% State income taxes, net of federal benefit 166,100 3 31,700 2 75,500 2 U.S. tax on foreign income (66,900) (1) 39,100 2 (13,100) -- Other - net 11,196 -- 57,195 4 11,681 -- ---------------------- ------------------- --------------------- $ 2,084,996 36% $ 647,195 42% $ 1,527,481 36% ====================== =================== =====================
Total income taxes paid were $1,872,699 in 1997, $476,441 in 1996 and $955,398 in 1995. United States income taxes have not been provided on the undistributed earnings of foreign subsidiaries ($2,016,892 at January 3, 1998) because such earnings are intended to be reinvested abroad indefinitely or repatriated only when substantially free of such taxes. 9. LEASES The Company leases certain equipment and buildings under operating lease arrangements. Certain leases contain renewal options for periods ranging from one to ten years. Future minimum payments under operating leases with initial or remaining terms in excess of one year during each of the next five years follow: 1998 $ 287,464 1999 291,375 2000 291,415 2001 291,435 2002 291,455 $ 1,453,144 Rent expense for all operating leases was $288,178 in 1997, $274,066 in 1996 and $259,379 in 1995. PAGE 18 OF ANNUAL REPORT -47- 10. EMPLOYEE RETIREMENT BENEFITS 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 funds the annual contributions required by applicable regulations. The Company also sponsors an unfunded nonqualified supplemental retirement plan that provides a former officer 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. A summary of the components of income under the Company's employee retirement benefit plans follows:
1997 1996 1995 Service cost - benefits earned during the period $ 601,528 $ 611,268 $ 548,618 Interest cost on projected benefit obligation 1,735,777 1,681,527 1,603,636 Actual return on plan assets (4,863,796) (2,331,708) (2,206,195) Net amortization and deferral 2,326,279 (91,356) (106,343) Defined contribution plans expense 61,128 54,877 58,421 ----------- ----------- ---------- $ (139,084) $ (75,392) $ (101,863)
Assumptions used in accounting for pensions were: 1997 1996 1995 ---- ---- ---- Weighted average discount rates 7.5% 7.5% 7.5% Rates of increase in compensation levels 4.25% 4.25% 4.25% Expected long-term rate of return on assets 8.5% 8.5% 8.5% Based on the latest actuarial information available, the following table sets forth the funded status of the Company's defined benefit plans at September 30:
1997 1996 Actuarial present value of benefit obligations: Vested benefit obligation $ 24,173,695 $ 23,273,991 ============= ============= Accumulated benefit obligation $ 24,329,083 $ 23,516,362 ============= ============= Projected benefit obligation $ 25,004,296 $ 24,072,918 ============= ============= Plan assets at fair value $ 32,528,335 $ 29,333,576 ============= ============= Excess of plan assets over projected benefit obligation $ 7,524,039 $ 5,260,658 Unrecognized prior service cost 252,363 100,044 Unrecognized net (gain) loss (1,668,875) 700,920 Unrecognized transition asset (1,889,923) (2,042,974) Adjustment required to recognize intangible pension asset - (1,251) ------------- ------------- Prepaid pension cost $ 4,217,604 $ 4,017,397 ============= =============
All of the plans' assets at January 3, 1998 are invested in listed stocks and bonds and pooled investment funds, including Common Stock of the Company having a market value of $5,673,188 at that date. 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides health care and life insurance for substantially all retired salaried employees in the United States. The status of the Company's postretirement health care and life insurance benefit plans at year-end follows:
1997 1996 Accumulated postretirement benefit obligation: Retirees $ 1,526,958 $ 1,604,781 Fully eligible active plan participants 1,302,828 1,115,822 ------------- -------------- 2,829,786 2,720,603 Plan assets at fair value 819,179 726,134 ------------- -------------- Excess of accumulated postretirement benefit obligation over plan assets 2,010,607 1,994,469 Unrecognized prior service cost 206,678 227,767 Unrecognized net gain 546,510 590,454 ------------- -------------- Accrued postretirement benefits $ 2,763,795 $ 2,812,690 ============= ============== Plan assets are invested in a pooled insurance fund.
PAGE 19 OF ANNUAL REPORT -48- Financial Statements Notes to Consolidated Financial Statements 11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (continued) A summary of the components of postretirement health care and life insurance benefit cost follows:
1997 1996 1995 Service cost - benefits earned during the period $ 103,449 $ 92,583 $ 85,932 Interest cost 196,877 211,415 217,668 Actual return on plan assets (66,130) (58,683) (50,907) Net amortization and deferral (55,395) (21,089) (21,089) ----------- ----------- ---------- Net postretirement benefit cost $ 178,801 $ 224,226 $ 231,604 =========== =========== ==========
The life insurance cost trend rate is expected to remain at 4.5%. 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 increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $210,572 at January 3, 1998 and increased the net periodic postretirement benefit cost for 1997 by $33,086. A weighted average discount rate of 7.5% was used to determine the accumulated benefit obligation at the end of both 1997 and 1996. A return of 9% on plan assets was used for 1997, 1996, and 1995. 12. FINANCIAL INSTRUMENTS The carrying values of financial instruments (cash and cash equivalents, accounts receivable, accounts payable, and debt) as of January 3, 1998 approximate fair value. Market value was based on expected cash flows and current market conditions. Report of Ernest & 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 3, 1998 and December 28, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended January 3, 1998. 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 3, 1998 and December 28, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Hartford, Connecticut January 30, 1998 PAGE 20 OF ANNUAL REPORT -49- Financial Statements
1997-1993 Summary of Operations INCOME STATEMENT ITEMS (in thousands) 1997+ 1996 1995 1994* 1993* Net Sales $67,331 $57,854 $59,352 $58,381 $52,546 Cost of Products Sold 48,780 45,173 45,237 44,740 39,242 Depreciation and Amortization 2,978 2,953 2,628 2,453 2,322 Interest Expense 297 215 72 97 144 Income Before Income Taxes 5,808 1,527 4,275 3,865 4,464 Income Taxes 2,085 647 1,528 1,428 1,634 Income (Loss): Continuing Operations 3,723 880 2,747 2,437 2,830 Discontinued Operations - - (257) 206 (64) Net Income 3,723 880 2,490 2,643 2,766 Dividends 1,268 1,241 1,276 1,276 1,265 BALANCE SHEET ITEMS (in thousands) 1997+ 1996 1995 1994 1993 Inventory $12,415 $10,898 $11,793 $9,531 $11,193 Working Capital 14,859 14,762 17,240 17,834 17,708 Plant Assets Net 13,437 13,887 13,686 12,954 12,416 Total Assets 45,798 42,492 41,090 41,883 40,459 Shareholders' Equity 29,243 29,355 29,807 29,843 28,383 Capital Expenditures 2,230 2,915 3,320 2,850 1,446 Long-Term Obligations 60 224 340 240 1,300 PER SHARE DATA 1997+ 1996 1995 1994* 1993* Basic Earnings per Share: Income from continuing operations $ 1.40 $ .33 $ .99 $ .88 $ 1.03 Discontinued operations - - (.09) .07 (.02) ------- ------- ------- ------ ------- Net income $ 1.40 $ .33 $ .90 $ .95 $ 1.01 Diluted Earnings per Share: Income from continuing operations $ 1.38 $ .32 $ .98 $ .86 $ 1.01 Discontinued operations - - (.09) .07 (.02) ------- ------- ------- ------ ------- Net income $ 1.38 $ .32 $ .89 $ .93 $ .99 Dividends .475 .46 .46 .46 .46 Shareholders' Equity 11.00 10.88 10.75 10.77 10.33 Average Shares Outstanding (basic) 2,658,181 2,698,191 2,771,840 2,771,842 2,748,312 + Fiscal Year 1997 comprised 53 weeks - all other years were 52 weeks * As reclassified to reflect discontinued operations - Thompson Materials 1994 and 1993.
Quarterly Results of Operations (unaudited)
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 .23 .30 .40 .47 1.40 Diluted .22 .30 .40 .46 1.38 1996 Net Sales 14,541,552 15,351,036 13,715,095 14,245,986 57,853,669 Gross Profit 2,424,003 3,234,595 3,557,046 3,464,578 12,680,222 Selling and Administrative Expenses 2,691,835 2,658,140 2,800,803 2,875,197 11,025,975 Net (Loss) Income (202,161) 376,703 479,429 225,846 879,817 Net (Loss) Income Per Share: Basic (.07) .13 .18 .09 .33 Diluted (.07) .13 .18 .08 .32
PAGE 21 OF ANNUAL REPORT -50- Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL In 1997, The Eastern Company experienced a 323% increase in net income over the prior year. Net income was $3.7 million or $1.40 per share (basic) on $67.3 million in sales. A large portion of this increase can be attributed to a 16% increase in net sales coupled with a significant reduction in operating costs from 1996. Sales were up across all product lines with the Company's backlog increasing 17% for custom locks, transportation and industrial hardware as compared to 1996. Net income in the fourth quarter was $1.2 million or 47(cent)per share (basic) on sales of $17.8 million versus fourth quarter 1996 net income of $226 thousand or 9(cent) per share (basic) on sales of $14.2 million. Gross profits for the fourth quarter 1997 represented 30% of net sales versus 24% of net sales for the fourth quarter of 1996. Increased volume and lower manufacturing costs account for the improvement. Selling and administrative expenses in the fourth quarter 1997 were up 22% or $633 thousand over the 1996 fourth quarter level of $2.9 million. This increase was the result of higher selling commissions, and increased incentive compensation associated with increased sales and profitability. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percent relationship to sales for each line item represented on the consolidated statements of income. 1997 1996 1995 ------------------------------------ Net sales 100.0% 100.0% 100.0% Other income 0.2% 0.2% 0.5% Cost of products sold 72.4% 78.1% 76.2% Gross profit 27.6% 21.9% 23.8% Selling and administrative 18.7% 19.1% 16.9% Interest expense 0.4% 0.4% 0.1% Income from continuing operations before taxes 8.6% 2.6% 7.2% Income taxes 3.1% 1.1% 2.6% Income from continuing operations 5.5% 1.5% 4.6% Discontinued operations - - -0.4% Net income 5.5% 1.5% 4.2% Fiscal 1997 Compared to Fiscal 1996 Continuing Operations Net sales for 1997 increased 16% or $9.5 million to $67.3 million from 1996 level of $57.9 million. Volume increased 11%, prices increased 3% and new products increased 2%. Sales grew across all markets with a major increase from a surge in the Company's lock business where 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 luggage markets and consumer retail markets. Sale of Gun Bloks(R) doubled over 1996 and is expected to further increase in 1998 as the Company begins distribution through a major retail chain. 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 continues to supplement the mine roof support business with alternate products. Demand for heavy hardware, servicing the tractor trailer industry, was up 12% over 1996. A resurgence in this industry is expected to continue through 1998. New products introduced in 1997 include vehicular products designed and produced by the Eberhard Manufacturing division and malleable casting products manufactured by the Frazer & Jones division. CCL Security Products division recently introduced two new PrestoLocks(R) to the soft luggage markets to further enhance our position in that market. A new keyless, three wheel padlock features a convenient snap-action locking method as opposed to the conventional padlock type of shackle motion. A new keyless, two wheel padlock is targeted for the lower priced segment of the lock market. CCL Security also produces the keyless Gun Blok(R) lock, a patented combination trigger lock that fits virtually all firearms and helps prevent their unauthorized use. Recent developments in the firearms industry indicate several large gun manufacturers will be including a tamper proof child safety lock with firearms in contemplation of possible stringent legislative standards. Either of these activities could lead to a significant increase in the potential size of the gunlock market if manufacturers decide to buy the product from outside vendors. New gun locking mechanisms are currently being developed to further enhance our position in this market. Gross profit for 1997 increased $5.9 million or 46% from 1996 levels. The gross profit margin percentage increased from 21.9% in 1996 to 27.6% in 1997. This increase is the direct result of the increased sales volume and more efficient utilization of production facilities. PAGE 22 OF ANNUAL REPORT -51- Selling and administrative expenses were up $1.6 million or 14% over 1996. This increase was due to selling commissions and incentive compensation which are directly linked to increased sales and profitability, and expenses in connection with environmental matters and other contingent liabilities. Interest expense was up $81 thousand or 38% from 1996 due to additional short- term borrowing during the third quarter of 1997 to help fund the purchase of common stock for the treasury as well as accommodate additional working capital requirements for our operating units. The effective tax rate in 1997 was 36% versus 42% in 1996. The reduced tax rate in 1997 was directly attributable to lower foreign taxes. Fiscal 1996 Compared to Fiscal 1995 Continuing Operations Sales for 1996 were $57.9 million versus $59.4 million in 1995 a decrease of 2.5% or $1.5 million. Gains made in the contract casting business, utility body hardware, industrial hardware, custom locks and specialty products for the appliance industry could not offset a decline in demand for heavy hardware, servicing the tractor trailer industry, coupled with a drop in sales of mine roof supports, servicing the underground coal mining industry. Gross profit for 1996 decreased $1.4 million or 10% from 1995 levels. The gross profit margin percentage decreased from 23.8% in 1995 to 21.9% in 1996. Lower sales volume, product mix and production problems experienced in the contract casting business in the first quarter of 1996 were all contributing factors. Selling and administrative expenses for 1996 increased $984 thousand or 10% over 1995. Higher marketing expenses for new product introductions and costs associated with an unsuccessful leveraged buyout attempt by Millbrook Capital Management Inc. accounted for the increase. Interest costs in 1996 were $215 thousand versus $72 thousand in 1995 due to additional short-term borrowings in order to maintain working capital requirements. The effective tax rate in 1996 was 42% versus 36% in 1995, the result of higher foreign taxes. Liquidity and Sources of Capital 1997 1996 1995 Current ratio 2.3 2.9 3.9 Average days sales in accounts receivables 47 48 53 Inventory turnover ratio 3.9 4.1 3.8 Ratio of net working capital to sales 22.1% 25.5% 29.0% Total debt to market capitalization 7.3% 10.7% 4.4% Total debt to equity 12.7% 13.1% 4.9% Cash provided by operating activities for 1997 was $6.2 million as compared to $2.5 million in 1996 and $5.7 million in 1995. Cash generated internally in 1997 was sufficient to fund capital expenditures of $2.2 million; the payment of $1.3 million in dividends; and the purchase of $3.4 million in common stock for the treasury. In the third quarter of 1997 the Company borrowed $2 million on its short-term line of credit for working capital purposes and to fund in part, the additional purchase of common stock for the treasury, the majority of which was repaid in the fourth quarter. In addition, the Company increased its unsecured line of credit from $5 million to $7 million to provide greater flexibility in maintaining working capital requirements during interim periods. The ratio of working capital to sales improved to 22.1% in 1997 versus 25.5% in 1996 and 29.0% in 1995. This improvement is the direct result of the Company's commitment to monitor 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 without tying up excess cash in working capital. Accounts receivable increased $2.2 million or 29% over 1996 levels. This increase in accounts receivables was the direct result of increased sales volume. The average day's sales in receivables remained comparable to 1997, down slightly to 47 days versus 48 days in 1996. Inventories increased in 1997 by $1.6 million or 14% over 1996 while maintaining comparable inventory turnover of approximately 4 times. Capital expenditures in 1997, 1996 and 1995 were $2.2 million, $2.9 million and $3.3 million respectively. The Company continuously upgrades and replaces existing equipment to expand capacity, improve efficiency and satisfy safety and environmental requirements. During 1997 the Company invested $290 thousand in its Syracuse plant to move its staking and assembly operation in house to gain greater efficiency and lower production costs in its mine roof fastener business. For 1998 capital expenditures are expected to approximate 1998 depreciation of $2.5 million. Capital expenditures in 1998 are expected to be funded from cash internally generated. The current financial strength of the Company's balance sheet, with a current ratio of 2.3 to 1 will enable the Company to meet its current obligations and continue to grow in 1998 without financial constraints. The Company's strong financial position, low debt to equity ratio of 12.7%, coupled with its outside borrowing capacity will allow for further growth through potential acquisitions. 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 cost of manufacturing its products. PAGE 23 OF ANNUAL REPORT -52- 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 immaterial to the Company's operating results. All matters relating to claims made by the United States are expected to be resolved during 1998 and are not expected have a material adverse effect on the Company's financial condition or cash flows or results of operations. Year 2000 Compliance The Company uses numerous computer software programs and operating systems in its manufacturing, engineering, financial and administrative business systems. To the extent some of these software applications contain source code that is unable to interpret the upcoming calendar year "2000", some level of software modification or possible replacement may be necessary. The Company is in the preliminary stages of identifying software applications which are not "Year 2000" compliant, however given the information known at this time and the extent of hardware and software upgrades, in the normal course of business, it is currently not anticipated that these "Year 2000" costs will have any material adverse impact on the Company's business, financial condition or results of operations. Forward Looking Statements This document contains forward looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the Company's current expectations regarding its future operating performance in the mining industries, contract casting business, firearms accessories markets, industrial hardware markets, tractor trailer industry, security product markets where the Company markets its products and services, including statements about plans and expectations regarding products and future financial results. 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 production 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. 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: 1997 1996 ------------------------------- ------------------------------- Cash Cash Sales Price Dividends Sales Price Dividends Quarter High Low Declared High Low Declared - ------- ------------------------------- ------------------------------- First $14 $12 3/8 $.11 1/2 $13 $11 5/8 $.11 1/2 Second 15 1/4 12 1/4 .11 1/2 13 1/2 11 .11 1/2 Third 16 5/16 14 3/8 .11 1/2 14 1/2 11 1/4 .11 1/2 Fourth 20 15 5/8 .13 13 7/8 12 7/8 .11 1/2 At the end of December 1997, 229 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. INDEPENDENT AUDITORS Ernst & Young LLP, Hartford, Connecticut TRANSFER AGENT AND REGISTRAR Boston 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, Boston EquiServe at 1-800-633-3455. PAGE 24 OF ANNUAL REPORT -53- [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 of Eberhard Manufacturing Division Eberhard Hardware Manufacturing, Ltd., Subsidiary Sesamee Mexicana, Subsidiary STEVEN G. SANELLI Vice President of Illinois Lock Co., Division CCL Security Products Division World Lock Co. Ltd. World Security Industries Co. Ltd., Subsidiaries RAYMOND L. WRIGHT Vice President of Frazer & Jones Division ROBERT G. ALEXANDER Managing Director of Eberhard Hardware Manufacturing, Ltd., Subsidiary ROGER CHANG Managing Director of World Lock Co. Ltd. World Security Industries Co. Ltd., Subsidiaries THOMAS D. MELKUS Managing Director of CCL Security Products Division BRIAN D. REED Managing Director of Illinois Lock Co., Division Board of Directors JOHN W. EVERETS (1) Chairman of H.P.S.C. Inc. Boston, Massachusetts CHARLES W. HENRY*(1),(2),(3) Partner of Kernan & Henry Waterbury, Connecticut LEONARD F. LEGANZA*(3) President and Chief Executive Officer of the Company RUSSELL G. MCMILLEN*(1)(3) Retired Chairman of the Company DAVID C. ROBINSON*(1)(3) President of The Robinson Co. Waterbury, Connecticut DONALD S. TUTTLE, III (2) Vice President and Account Executive Paine Webber Middlebury, Connecticut DONALD E. WHITMORE, JR. Executive Vice President, Chief Financial Officer and Secretary of the Company * Members of the Executive Committee (1) Members of the Compensation Committee (2) Members of the Audit Committee (3) Members of the Nominating Committee -54- [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: http://www.easterncompany.com -------------------------------------------------- CCL Security Products Division New Britain, Connecticut Custom locks Eberhard Manufacturing Division Cleveland, Ohio Transportation and industrial hardware Eberhard Hardware Manufacturing, Ltd., Subsidiary Tillsonburg, Ontario, Canada Transportation and industrial hardware Frazer & Jones Division Syracuse, New York Mine roof fasteners; Contract castings The Illinois Lock Company Division Wheeling, Illinois Custom locks Sesamee Mexicana, Subsidiary Lerma, Mexico Industrial hardware World Lock Co. Ltd., Subsidiary WORLD SECURITY INDUSTRIES CO. LTD., SUBSIDIARY Taipei, Taiwan; Hong Kong Custom locks -55- EX-27 2 ARTICLE 5 FIN. DATA SCHEDULE FOR FORM 10-K
5 12-MOS JAN-3-1998 JAN-3-1998 2111289 0 8725167 329000 12414866 26097879 25434424 11997894 45798161 11239025 0 0 0 6078427 23164714 45798161 67331422 67470538 48779527 48779527 12216138 370755 296592 5807526 2084996 3722530 0 0 0 3722530 1.40 1.38
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