<PAGE> 1
SEC File No. 0-599
The Eastern Company
Naugatuck, Connecticut
United States
Securities and Exchange Commission
Form 10-K
Annual Report
December 31, 1994
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, and (2) has been subject to such
filings requirements for the last days.
Yes X No
---- ----
The exhibit index appears on pages 16 and 17.
Page 1 of 99
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1994 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 24, 1995.
Common Stock, No Par Value - $37,116,762
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 24, 1995
Common Stock, No Par Value 2,775,085
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1994 annual report to shareholders (fiscal year ended
December 31, 1994) are incorporated by reference into Parts I and II.
Portions of the annual proxy statement dated March 20, 1995 are incorporated
by reference into Part III.
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<PAGE> 3
PART I
ITEM 1 BUSINESS
(a) General Development of Business
The business of the Registrant is the manufacturing and/or purchasing
and sale of a diversified line of products from five operations and three
wholly-owned subsidiaries. The Registrant maintains eight physical
locations.
The product lines are grouped into two segments namely, Security
Products and Construction.
The Security Products Group has a wide range of products or items used
to close and fasten, in the electronic and industrial markets, retail,
transportation, and mining industries. Typical items include heavy-duty
hinges, multi-point latching devices, dial combination locks, multi-circuit
switch locks, padlocks, lock cylinders, mine roof fasteners, miscellaneous
castings and keys.
The Construction Group covers the warehousing and distribution of
materials and fabrication of reinforcing bars for the commercial, industrial,
and road building industries. Typical items are rebar, wire mesh, expansion
joints and sealers.
The Registrant is promoting growth by expanding present product lines,
and developing new products. In addition, desirable outside product lines,
similar to those recently purchased, which complement present lines and/or
companies, may be acquired if they generally fit management's expertise in
marketing or manufacturing.
During the year, capital expenditures included the $1 million expansion
program at the Registrant's Frazer and Jones Division as well as the normal
replacement of equipment. Since the Registrant's facilities remain in
excellent condition and no major capital expenditures are anticipated, the
1995 capital expenditures will be primarily for normal equipment replacement.
Planned capital programs have been and will continue to be focused on
increased productivity, improved product quality and quicker response time
through upgraded tools and equipment.
The sales and distribution channels for all groups are by in-house
salesmen, outside representatives, and from the manufacturing plant or
centralized warehousing. However, the Registrant continues to place more
emphasis on in-house salesmen since they better represent the Registrant's
diversified product lines in a variety of markets. Sales are to original
equipment manufacturers or to distributors.
(b) Financial Information About Industry Segments
The following portions of the 1994 Annual Report to Shareholders are
incorporated herein by reference:
1. Note 9 on page 19 entitled "Industry Segments"
2. The discussion and table on page 20 entitled "Industry Segments"
(c) Narrative Description of Business
The Registrant operates in two principal industry segments. The
Security Products Group has a wide range of products used to close, lock or
secure equipment used in the industrial, transportation, and mining
industries. The Construction Group is involved in fabricating and
warehousing materials used in the commercial, industrial, and road building
industries.
3
<PAGE> 4
Competitive conditions in the Security Products Group and the
Construction Group are very different. Each group has its own peculiarities,
but somewhat follows the national economic trend.
In the Security Products Group, the product lines or items are generally
in specialized but diverse markets. While service and quality are the major
criteria, the Registrant has developed new products to increase market share,
as well as continuing to become more cost efficient and enter new markets.
Volume increases at the Registrant's Eberhard Manufacturing division that
produces a variety of locks and latching mechanisms, continued throughout
1994. New product introductions including various industrial latching
devices and a new more economical lock rod for the truck trailer market
contributed to their success. Continued emphasis and success in engineering
latching mechanisms at this location is expected. While the underground coal
mining market served by the Registrant's Frazer and Jones division was
relatively flat in 1994, that location has developed through its engineering
resources stronger and more economical expansion fasteners that should
improve their activity levels. In addition, with increased capacity now in
place Frazer and Jones now has more flexibility in accommodating
significantly more contract casting business. The Registrant's Illinois Lock
division, while down in some security lock markets, was successful in
securing new business in 1994 and has a number of products in the final
development stages in its engineering department that are expected to provide
opportunities in 1995. The Registrant's CCL Security Products division is
expected to increase activity in 1995 as a result of the 1994 purchase of the
"Prestolock" brand of combination locks that command a dominant position in
the luggage industry. The Registrant's Pacific Rim facilities continue to
support the efforts of the Registrant's other locations as well as serving
international markets. The Registrant's Canadian subsidiary, Eberhard
Hardware Manufacturing Ltd., in spite of the lagging Canadian economy, showed
significant improvement.
The Registrant's Thompson Materials division showed significant
improvement over a year ago as the result of improved margins and sales.
The Registrant's products are sold to distributors, original equipment
manufacturers and consumers through direct sales, salesmen and sales
representative organizations. In the areas involving mine roof fasteners,
locks and hardware, engineering works with sales personnel to provide
technical assistance on the sale.
Raw materials and outside services were readily available from domestic
sources during 1994 and are expected to be readily available in 1995 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 groups 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 December 31, 1994.
The Registrant continues to maintain a strong balance sheet with working
capital at a stable level through strong management control on receivables
and inventories.
While the Registrant generally does not offer extended payment terms to
customers, the aging of receivables in the construction materials segment is
higher than the Registrant's other operations because of the market practice
or custom. The higher aging is normal for the industry and the hold back of
payments to contractors and consequently suppliers until construction
projects receive final approval is not abnormal. This takes place on bonded
(insured) as well as publicly funded jobs and increases the aging of
receivables.
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Extra collection effort with greater emphasis on follow up takes place
at the Registrant's construction materials operation as well as financial
screening of potential and existing customers. In spite of all of the
additional collection efforts greater credit risks are involved in the
construction industry. Consequently reserves are established to adequately
provide for potential uncollectable accounts.
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.
Inventories decreased $1,662,020 and inventory turned 7.4 in 1994 versus
5.8 in 1993. Of this decrease, $1,425,140 or 86% was in work in process or
finished goods inventory. The largest portion of this reduction was at the
Registrant's Frazer and Jones Division and was part of the 1994 strategy to
provide the flexibility of devoting a portion of the manufacturing facility's
capacity to products serving other markets.
Accounts receivable increased $1,336,922 and was primarily due to
increased sales. While collection is more difficult in today's environment
it is under good control. Average days sales in accounts receivable were 54
days for both 1994 and 1993. The allowance for doubtful accounts decreased
$33,296 due to the write off of the balance of a problem account which had
been previously provided for. The present $330,024 reserve balance
adequately provides for potential uncollectable accounts and is in line with
prior years.
The dollar amount of the levels of orders in the Registrant's backlog
is believed to be firm as of fiscal year ended December 31, 1994 at
$6,592,000 as against $6,507,000 at January 1, 1994. It is expected that
backlog will remain strong throughout 1995.
The Registrant encounters competition in all of its product areas. The
Registrant's security segment 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.
The Registrant's construction material segment faces regional
competition frequently based on price. It competes on the basis of offering,
on a timely basis, a wide variety of products, including custom fabricating
rebars to satisfy customers individual needs, used on concrete construction.
Research and development expenditures in 1994 were $371,575 and
represented less than 1% of gross revenues. In 1993 and 1992 they were
$495,914 and $505,284, respectively. The 1994 projects involved mine roof
fasteners, the conversion of a portion of Frazer and Jones production
capacity to other markets, 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 $381,223, $387,511, $391,422, $395,333 and $399,103. In 1994,
lease costs were $387,609.
The average number of employees in 1994 was 485.
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(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Registrant includes five separate operating divisions located within
the United States and a wholly-owned Canadian subsidiary located in
Tillsonburg, Ontario, Canada, and a wholly-owned Taiwanese subsidiary located
in Taipei, Taiwan and a wholly-owned subsidiary in Hong Kong.
The Canadian, Taiwanese and Hong Kong subsidiaries' revenue and assets
are not significant and are included under industry segment "Security
Products Group". Substantially all other revenues are derived from customers
located in the United States.
ITEM 2 PROPERTIES
The executive offices of the Registrant are located in Naugatuck,
Connecticut in the two story 8,000 square foot administrative building. The
Registrant's former 204,000 square foot Alloy Foundry operation buildings
were demolished in 1993. In mid February 1995, the Registrant sold the
former Alloy Foundries' plant property for $1,000,000 representing the
approximate carrying value (classified as land held for sale on the Balance
Sheet).
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.
Security Products Group
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 land and
buildings containing 179,000 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. The five year option was exercised and the lease was
extended five years from July 1, 1995 to June 30, 2000 under favorable terms.
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. The lease expires on
April 30, 1995. It is expected to be renewed with favorable terms.
The World Lock Co. Ltd., subsidiary leases a brick and concrete building
containing 7,870 square feet and is located in Taipei, Taiwan. The lease
expires April 15, 1995 and is expected to be renewed with favorable terms.
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Construction Materials Group
Thompson Materials Division is located in Whippany, New Jersey. This
operation warehouses and fabricates materials sold to industrial, commercial,
and road building contractors. Its 18,000 square foot facility located in
Whippany, New Jersey is leased. The lease expires on December 31, 1996 with
a five year option.
All owned properties are free and clear of any encumbrances.
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 conjunction 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 5, 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. As of this date, the court has not
taken any action on the motions for reconsideration.
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 will be assigned for trial if the Coalition files a complaint.
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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. No complaints are now pending in the U.S. District Court
involving the Registrant. It is likely, however that the EPA and the state
will appeal the dismissal of their complaints against the Registrant and
other parties.
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 to or by which any of their property is
the subject.
ITEM 4 SUBMISSION OF MATTERS TO SHAREHOLDERS
None
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PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The portion of the 1994 Annual Report to Shareholders appearing 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 1994 Annual Report to Shareholders,
captioned "1994 - 1985 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 1994 Annual Report to Shareholders are
incorporated herein by reference:
(a) All of the material in the Chairman's and President's Letter and
the Highlights of Operations found on pages 2 and 3 of the Annual
Report.
(b) All of the material on pages 22 and 23 under the heading
Management's Discussion and Analysis of Financial Condition and
Results of Operations" and three subheadings appearing thereafter.
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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 December 31, 1994
are incorporated herein by reference as follows:
(a) Consolidated Balance Sheets -- December 31, 1994 and January 1,
1994.
(b) Consolidated Statements of Income -- Fiscal years ended December
31, 1994, January 1, 1993 and January 2, 1993.
(c) Consolidated Statements of Shareholders' Equity -- Fiscal years
ended December 31, 1994, January 1, 1994 and January 2, 1993.
(d) Consolidated Statements of Cash Flows -- Fiscal years ended
December 31, 1994, January 1, 1994 and January 2, 1993.
(e) Notes to Consolidated Financial Statements -- December 31, 1994,
January 1, 1994 and January 2, 1993.
With respect to Quarterly Results of Operations there are incorporated
herein by reference the following additional portions of the 1994 Annual
Report to Shareholders:
(a) The portion of the 1994 Annual Report to shareholders appearing on
page 24 under the heading "Quarterly Results of Operations" is
incorporated herein by reference.
(b) Paragraphs 4, and 13 under the caption "Results of Operations" on
pages 22 and 23.
(c) Five paragraphs on page 23 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 December 31, 1994, January 1, 1994 and January 2, 1993.
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 pages 4, 6, 7, 10, 11 and 12.
10
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
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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 "2. Election of Two Directors." The
Registrant's only Executive Officers are Russell G. McMillen, Chairman,
Stedman G. Sweet, President and Chief Executive Officer, and Donald E.
Whitmore, Jr., Vice President, Secretary, Treasurer and Principal Financial
Officer.
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 the election
of Directors, the information appearing on pages 5 through 7 and pages 9
through 11 of said proxy statement.
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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
(a) Security ownership of certain beneficial owners - The following
table sets forth, as of February 24, 1995, certain information with
respect to any person who is known to the Registrant to be
the beneficial owner of more than five percent of the Registrant's
outstanding securities.
<CAPTION>
Amount/Nature Percent
Name/Address of of Beneficial of
Title of Class Beneficial Owner Ownership Class
<S> <C> <C> <C>
Common, No Bank of Boston Connecticut 287,250 <F1> 9.9%
par value or one of its nominees
81 West Main Street,
Waterbury, CT 06702
Common, No Dimensional Fund 203,400 <F2> 7.0%
par value Advisors, Inc.
1299 Ocean Avenue
Suite 650
Santa Monica, CA 90401
Common, No The First National Bank 178,726 6.2%
par value of Boston or one of its
nominees
100 Federal Street
Boston, MA 02110
<FN>
<F1>
Bank of Boston Connecticut holds 287,250 of these shares as Trustee
under The Eastern Company pension plans for salaried and for hourly
employees. The Trustee has exclusive authority and discretion to manage and
control the assets of these respective funds and to exercise the right to
vote shares of the Company's common stock held in these funds.
<F2>
Dimensional Funds Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 203,400 shares of Eastern
Company stock as of February 24, 1995, all of which are held in portfolios of
DFA Investment Dimensions Group Inc., a registered open-end investment
company, or the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, all of which Dimensional
serves as investment manager. Dimensional disclaims beneficial ownership of
all such shares.
</FN>
</TABLE>
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<TABLE>
(b) Security ownership of management:
<CAPTION>
Name of Beneficial Amount and Nature of Percent
Title of Class Owner Beneficial Ownership of Class
<S> <C> <C> <C>
Common, No par value John Everets, Jr. 11,250 .4%
Common, No par value Charles W. Henry 13,750 .5%
Common, No par value Ole K. Imset 11,550 .4%
Common, No par value Leonard F. Leganza 14,250 .5%
Common, No par value Russell G. McMillen 119,256 4.1%
Common, No par value David C. Robinson 22,050 .8%
Common, No par value Michael G. Sendzimir 26,859 .9%
Common, No par value Stedman G. Sweet 74,994 2.4%
Common, No par value Donald S. Tuttle III 11,850 .4%
Common, No par value Donald E. Whitmore, Jr. 35,376 1.2%
Common, No par value Directors and Officers 390,614 13.5%
of the Registrant as a
group
</TABLE>
(c) Changes in Control
Not Applicable.
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ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Not applicable
(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 Election of Directors, the
information appearing on pages 3 and 4 of said proxy Statement,
being the portion captioned "1. Election of Two Directors".
(c) Not applicable.
(d) Not applicable.
15
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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 19.
3. Exhibits
3) Restated Certificate of Incorporation dated August 14,
1991 and Amended and Restated By-Laws dated February 13,
1991, are incorporated by reference to the Registrant's
Annual Report on 10-K for the fiscal year ended December 28,
1991 and the Registrant's Form 8-K filed on February 13,
1991.
(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 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 10-K for the fiscal year ended January 2, 1993.
(10) (a) Employment Agreement dated May 1, 1993 with
Stedman G. Sweet is incorporated by reference to
Registrant's Annual Reports on 10-K for the fiscal year
ended December 31, 1994.
(b) Employment Agreement dated May 1, 1994 with Donald E.
Whitmore, Jr. is attached beginning on page 23.
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(c) Amendment to the Deferred Compensation Agreement dated
May 1, 1988 is incorporated by reference to Registrant's
Annual Report on 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.
(d) Deferred compensation Agreement dated August 16, 1994
with Stedman G. Sweet is attached beginning on page 36.
(e) Supplemental Retirement Pan dated August 16, 1994 with
Stedman G. Sweet is attached beginning on page 46.
(11) Statement Re: Computation of Per Share Earnings is
attached on page 71.
(13) 1994 Annual Report to Shareholders attached hereto on
page 72.
(22) 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).
World Security Industries Co. Ltd., a private corporation
organized under the laws of Hong Kong.
(23) Consent of independent auditors attached hereto
beginning on page 20.
(99) Financial Statements and Supplemental Schedules and
report of independent auditors for the period from May 1,
1994 to December 31, 1994 of The Eastern Company Savings and
Investments Plan is attached beginning on page 60.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year ended December 31, 1994.
(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 22.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated March 23, 1995 THE EASTERN COMPANY
By
Donald E. Whitmore, Jr.
-----------------------
Donald E. Whitmore, Jr.
Director, Vice President, Treasurer,
Secretary and Principal Financial
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.
Russell G. McMillen
-------------------
Russell G. McMillen March 23, 1994
Director and Chairman
Stedman G. Sweet
----------------
Stedman G. Sweet March 23, 1994
Director, President
and Chief Executive Officer
Donald E. Whitmore, Jr.
-----------------------
Donald E. Whitmore, Jr. March 23, 1994
Director, Vice President, Treasurer,
Secretary and Principal Financial Officer
John Everets
------------
John Everets March 23, 1994
Director
Charles W. Henry
----------------
Charles W. Henry March 23, 1994
Director
Ole K. Imset
------------
Ole K. Imset March 23, 1994
Director
Leonard F. Leganza
------------------
Leonard F. Leganza March 23, 1994
Director
David C. Robinson
-----------------
David C. Robinson March 23, 1994
Director
Donald S. Tuttle III
--------------------
Donald S. Tuttle III March 23, 1994
Director
18
<PAGE> 19
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
December 31, 1994 are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated balance sheets - December 31, 1994 and January 1, 1994.
Consolidated statements of income-Fiscal years ended December 31, 1994,
January 1, 1994 and January 2, 1993.
Consolidated statements of shareholders' equity -Fiscal years ended
December 31, 1994, January 1, 1994 and January 2, 1993.
Consolidated statements of cash flows- Fiscal years ended
December 31, 1994, January 1, 1994 and January 2, 1993.
Notes to consolidated financial statements
The following consolidated 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.
19
<PAGE> 20
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 31, 1995,
included in the 1994 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, Registration Statement (Form S-8 No.2-86285)
pertaining to The Eastern Company 1989 Stock Option Plan and
Registration Statement (Form S-8 No.33-79324) pertaining to The Eastern
Company Savings and Investment Plan of our report dated January 31,
1995, 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.
Hartford, Connecticut Ernst & Young LLP
March 27, 1995 Ernst & Young LLP
20
<PAGE> 21
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 February 24, 1995, with respect
to the financial statements and schedules of The Eastern Company Savings
and Investment Plan for the year ended December 31, 1994 included in
this Annual Report(Form 10-K)as Exhibit 99 for the fiscal year ended
December 31, 1994.
Hartford, Connecticut Ernst & Young LLP
March 27, 1995 Ernst & Young LLP
21
<PAGE> 22
<TABLE>
The Eastern Company and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Description Balance at (1) (2) Balance
Beginning Charged to Costs Charged to Other Deductions- at End of
of Period and Expenses Accounts-Describe Describe Period
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful $363,320 $120,000 $153,296 <F1> $330,024
Fiscal year ended January 1, 1994:
Deducted from asset accounts:
Allowance for doubtful $829,900 $114,988 $581,568 <F2> $363,320
Fiscal year ended January 2, 1993:
Deducted from asset accounts:
Allowance for doubtful $314,607 $632,102 $116,809 <F3> $829,900
<FN>
<F1>
Uncollectible accounts written off, net of recoveries
<F2>
Uncollectible accounts written off, net of recoveries
<F3>
Uncollectible accounts written off, net of recoveries
</FN>
</TABLE>
22
<PAGE> 23
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of May, 1994, between
THE EASTERN COMPANY, a Connecticut corporation with its principal place of
business located in Naugatuck, Connecticut, (hereinafter the "Company") and
DONALD E. WHITMORE, JR., an individual residing at 151 Roseanna Road,
Plantsville, Connecticut 06479, (hereinafter the "Employee").
1. Employment. The Company hereby employs the Employee, and the
Employee hereby accepts employment, on the terms and conditions hereinafter
set forth.
2. Term. The term of this Agreement shall begin on May 1, 1994, and
shall terminate on May 1, 1996 unless renewed by the parties as hereinafter
provided.
3. Compensation. The Company will pay to the Employee as
compensation for Employee's services hereunder an annual salary of not less
than One Hundred Twenty-Two Thousand Five Hundred Dollars ($122,500.00)
payable in equal installments on each pay date for full time employees of the
Company. In addition, the Company shall also reimburse the Employee for all
reasonable expenses necessarily incurred by Employee in the performance of
Employee's duties hereunder. The Employee's salary shall be reviewed by the
appropriate committee of the Board of Directors of the Company at the same
time as salaries of other executives are reviewed and nothing in this
Agreement shall be deemed to prohibit an increase in the annual salary of the
Employee if such committee so recommends and the Board of Directors approves.
23
<PAGE> 24
During the term of this Agreement, including any renewal period, for each
fiscal year of the Company, the Employee shall have the opportunity to earn
and receive bonus incentive compensation as he may become entitled to receive
under The Eastern Company Executive Bonus Plan adopted February 14, 1968, and
currently in effect (the "Bonus Plan"). It is expressly understood and
agreed, however, that the Company shall have the right to modify, substitute
or terminate said Bonus Plan, provided that the Employee will be entitled to
receive bonus incentive compensation under any modified or substituted plan
(or under a new plan solely for his benefit if such Bonus Plan is terminated)
which is at least as beneficial to the Employee as the Bonus Plan in effect on
the commencement date of this Agreement. The Employee shall likewise have the
benefit of any future improvements in said Bonus Plan.
In the event that the Company breaches its obligations under this
Agreement, including, without limitation, the obligation to continue the
employment of the Employee until the termination date, then the Company shall
pay to the Employee, as liquidated damages: (a) a sum equal to his annual
salary at the then current annual rate; (b) a sum equal to his total
compensation for the prior fiscal year of the Company and (c) any compensation
which would have been payable to the Employee under the Company's Bonus Plan
(or any substitute plan) had he continued in the employment of the Company
until after the close of the then current fiscal year. All payments under
this paragraph, however, will be subject to the limitations set forth in
Schedule A attached hereto and made a part hereof.
24
<PAGE> 25
4. Duties. The Employee is engaged as the Vice President and Chief
Financial Officer of the Company and to perform such other duties as may from
time to time be required of Employee by the Board of Directors of the Company,
subject to Section 5. The Employee agrees to serve as a member of the Board
of Directors if elected by the shareholders and as a member of the Board of
Directors of any subsidiary or affiliated corporation if appointed, all
without any additional compensation.
5. Extent of Services. During the continuation of Employee's
employment pursuant to this Agreement the Employee shall devote his full time
during regular business hours to the business of the Company, and shall use
his best endeavors to promote its interests and welfare. The Employee shall
report to the Board of Directors of the Company and he will carry out such
duties consistent with his position as may be reasonably assigned or delegated
to him by the Directors. The Company will not change the Employee's place of
employment from its main office in Naugatuck, Connecticut, nor change his
duties so as to necessitate a change in residence to another state, without
his consent.
6. Additional Benefits. In addition to the compensation provided
25
<PAGE> 26
for in Section 3 hereof, the Company will provide the Employee with the
benefits of all its employee benefit programs for full time executive officers
of the Company including, without limitation, any pension, profit sharing,
401(k), stock options, medical and life insurance coverages provided to active
and retired employees, together with such additions thereto as may from time
to time be made, participation to be upon the same terms and conditions as
generally relate to such full time executive officers. It is expressly
understood and agreed, however, that the Company shall have the right to
terminate, modify or substitute for any or all of such programs, provided that
the Employee will be entitled to benefits under any modified or substituted
programs (or a program established for him) which are at least as beneficial
to the Employee as the programs in effect on the commencement date of the term
hereof. The Employee shall also be entitled to a vacation each year in
accordance with existing Company policy (but in no event less than four (4)
weeks) and such other holiday and similar rights and privileges as are enjoyed
generally by such full time executive officers.
7. Consent to Insurance Procedures. The Employee agrees that the
Company may from time to time apply for and take out in its own name and at
its own expense such life, health, accident or other insurance upon the
Employee as the Company may deem necessary or advisable to protect its
interests hereunder. The Employee agrees to submit to any medical or other
26
<PAGE> 27
examination necessary for such purpose and to assist and cooperate with the
Company in procuring such insurance. The Employee agrees that Employee shall
have no right, title or interest in and to such insurance whether presently
existing or hereafter procured.
8. Nondisclosure. Employee will not, during Employee's employment
or thereafter: (i) disclose to any person, or permit any person to have access
to, any information or knowledge (including, without limitation, customer
lists, price data, marketing information, and, in addition, any information of
any present or prospective customer or consultant of the Company for whom the
Company holds information in confidence), whether patentable or not, relating
to the Company's business, manufacturing methods, tooling, processes,
techniques, products, software, access codes, or research obtained by Employee
while in the employ of the Company, and whether prepared by the Employee or
others, to the extent such information or knowledge constitutes Confidential
Information as defined below; (ii) use any such Confidential Information
except for the Company's benefit; or (iii) copy any papers or other records or
remove them from the Company property, except as may be necessary in the
performance of Employee's duties hereunder. The Employee agrees that
information and knowledge shall be deemed Confidential Information, unless it:
27
<PAGE> 28
(i) is already known to the Employee at the time of Employee's receipt thereof
and the Employee can demonstrate such knowledge by Employee's written records;
(ii) is or becomes publicly known through no wrongful act of the Employee;
(iii) is approved for release by written authorization of the Company; or (iv)
is not proprietary in nature, or sensitive with respect to the Company's
business or likely to aid and assist a competitor.
9. Covenant Not to Compete. Employee agrees that: (a) during the
term of Employee's employment by the Company, and (b) in the event a Change in
Control has not occurred, for the two (2) year period immediately following
the termination of such employment (such period not to include any period of
violation or period of time required for litigation to enforce this
convenant), Employee will not, without the prior written consent of the
Company, render services directly or indirectly (whether as an officer,
director, consultant, Partner or otherwise) to any Conflicting Organization in
any portion of the United States or any other country in which the products of
the Company are actively marketed or where one or more offices of the Company
is now or hereafter located (the "Territory"), except that the Employee may
accept employment with a Conflicting Organization whose business is
diversified and which, as to part of its business, is not a Conflicting
Organization, Provided that the Company, prior to the Employee's accepting
such employment, shall receive from such Conflicting Organization and from the
28
<PAGE> 29
Employee written assurances satisfactory to the Company that the Employee will
not render services directly or indirectly in connection with any Conflicting
Product. The two (2) year post-termination non-competition period set forth
herein shall not apply in the event a Change in Control has occurred.
(a) The term "Change in Control" shall mean a change in ownership or
effective control of the Company or a change in ownership of a substantial
portion of the assets of the Company. Whether or not a Change in Control has
occurred will be determined in conformity with the requirements of Section
280G(b)(2)(A)(i) of the Internal Revenue Code of 1986, as amended and the
regulations promulgated pursuant thereto.
(b) The term "Conflicting Organization," as used herein means any
individual or organization who or which is engaged in research on, or
development, production, assembly, processing, marketing or selling of, a
Conflicting Product. The term "Conflicting Product", as used herein, means
any product, process or service of any individual or organization, other than
the Company and any parent corporation which competes, or would compete, with
a significant product with respect to which the Employee, in the course or as
a result of Employee's employment by the Company, acquires or has access to
Confidential Information, as defined in Section 8 above.
(c) It is understood that in any new employment, the Employee may use
29
<PAGE> 30
his ordinary skill and non-confidential knowledge, even though said skill and
non-confidential knowledge may have been gained at the Company,
(d) In addition, the Employee shall not, during the term of his
employment and (in the event a Change in Control has not occurred) for two (2)
years thereafter, hold directly or indirectly an interest in any business
which is competitive with the business of the Company without the Permission
of the Board of Directors. A stock ownership of five percent (5%) or less of
a business shall not be such an "interest" contemplated hereunder.
(e) As used in this Section 9, the term "Company" includes the
Company, its affiliated and subsidiary corporations.
10. Assignment of Inventions. Employee assigns, and will promptly
disclose and assign, to the Company exclusively, all inventions, discoveries,
improvements, devices, tools, machines, apparatus, appliances, designs,
software, practices, processes, methods, formulae, products, trade secrets and
the like (hereinafter collectively called "inventions"), whether or not
patentable, directly or indirectly useful in or related to the Company's
business, which Employee shall make, originate, conceive or reduce to
practice, either solely or jointly with others, during the term of Employee's
employment by the Company; and Employee further agrees that during and after
the term of Employee's employment, without charge to the Company but at the
30
<PAGE> 31
Company's expense, Employee will execute, acknowledge and deliver any and all
papers and take any other reasonable actions necessary or helpful for the
Company to obtain patents for its own benefit on said inventions in any and
all countries or to otherwise protect and secure the Company's interests in
said inventions; said patents, applications for patents and inventions to
remain the property of the Company whether patented or not.
11. Company Property. Employee recognizes, further, that all tools,
equipment and parts and all drawings, blueprints, software, access codes,
data, records, reports, notes, compilations, other recorded matter, and copies
or reproductions thereof, relating to the Company's operations, activities or
business, made or received by Employee during any period of Employee's
employment with the Company are and shall be the property of the Company
exclusively, and Employee will keep the same at all times subject to its
control and, unless the Company otherwise consents in writing, will surrender
the same at the termination of Employee's employment, if not before.
12. Remedies for Breach. In the event of Employee's breach or
threatened breach of any provision of Sections 8 through 11 hereof, the
Company shall be entitled to an injunction restraining Employee from such
breach. Nothing herein shall be construed as prohibiting the Company from
31
<PAGE> 32
pursuing any other remedies available to it, including the recovery of damages
from Employee.
13. Severance Provision. In case any one or more of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision or provisions had never been contained herein. If, moreover, any
one or more of the provisions contained in this Agreement shall, for any
reason, be held to be excessively broad as to time, duration, geographical
scope, activity or subject, it shall be construed, by limiting and reducing
it, so as to be enforceable to the fullest extent compatible with the
applicable law as it shall then appear.
14. Disability Termination. If the Employee shall at any time be
incapacitated by illness from rendering services of the character contemplated
hereby for six (6) consecutive calendar months the Company may terminate this
Agreement thereafter upon giving not less than sixty (60) days prior written
notice to the Employee of its intention to do so and specifying said
termination date. If the Employee shall have resumed his duties hereunder
prior to the expiration of such sixty (60) day period, such notice of
termination shall be deemed of no force or effect and this Agreement shall
32
<PAGE> 33
continue in full force as though such notice of termination had not been
given. Upon termination of this Agreement under this Section l4, all of the
respective obligations of the Company and the Employee under this Agreement
shall terminate except those obligations which would continue after expiration
of the term of this Agreement had it continued until such date.
15. Non-Waiver. This Agreement may be amended, modified,
superseded or terminated, and any of the terms, covenants, representations,
warranties or conditions hereof may be waived, only by a written instrument
executed by the Employee and the Company, or, in the case of a waiver, by or
on behalf of the party or parties waiving compliance. The failure of any
party at any time or times to require performance of any provision hereof
shall in no manner affect the right at a later time to enforce the same. No
waiver by any party of any conditions, or of any breach of any term, covenant,
representation or warranty contained in this Agreement, in any one or more
instances, shall be deemed to be construed as a further or continuing waiver
of any such condition or breach or a waiver of any other condition or of any
breach of any other term, covenant, representation or warranty.
l6. Binding Effect. This Agreement and the rights and obligations
hereunder shall inure to the benefit of, and be binding upon, the heirs,
executors, administrators and assigns of the Employee and the Company's
successors and assigns.
33
<PAGE> 34
17. Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by national courier
service or by registered, certified, or express mail to Employee's residence
in the case of the Employee or to its principal office in the case of the
Company.
18. Entire Agreement. This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or
written, except as herein contained. This Agreement may not be modified or
amended other than by an agreement in writing and signed by the parties
hereto.
19. Applicable Law. This Agreement shall be interpreted in
accordance with the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
this 27th day of April, 1994.
THE EASTERN COMPANY
By
Stedman G. Sweet
----------------
Stedman G. Sweet
President & Chief Executive Officer
Donald E. Whitmore, Jr.
-----------------------
Donald E. Whitmore, Jr.
34
<PAGE> 35
SCHEDULE A
In the event that payments become due under Section 3 hereof because of
termination which is the result of a "change in control" as used for purposes
of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
then the present value of all payments to be made to the Employee following
such change in control (after taking into account other payments included
within said Section 280G) shall not exceed 2.99 times the average of the
annual compensation which was payable to the Employee by the Company (or any
corporation affiliated with the Company ("Affiliate") within the meaning of
Section 1504 of the Code) and includible in his gross income for Federal
income tax purposes for the five calendar years (the "Base Period") preceding
the calendar year in which a change in control of the Company occurred. Such
average shall be determined in accordance with any temporary or final
regulations promulgated under Section 280G(d) of the Code. Compensation
payable to the Employee by the Company (or an Affiliate) shall include every
type and form of compensation includible in his gross income in respect of his
employment by the Company (or an Affiliate), including compensation income
recognized as a result of the exercise of stock options or sale of the stock
so acquired, except to the extent otherwise provided in temporary or final
regulations promulgated under Section 280G(d) of the Code.
35
<PAGE> 36
DEFERRED COMPENSATION AGREEMENT
FOR THE CHIEF EXECUTIVE OFFICER OF
THE EASTERN COMPANY
Table of Contents
Page
ARTICLE 1 DESIGNATION AND PURPOSE
1.1 Designation.......................... 38
1.2 Purpose.............................. 38
ARTICLE 2 DEFINITIONS....................... 38
ARTICLE 3 DEFERRED BENEFITS
3.1 Amount of Deferred Benefits.......... 39
3.2 Payment of Deferred Benefits......... 39
ARTICLE 4 EARLY DEFERRED BENEFITS
4.1 Amount of Early Deferred Benefits.... 39
4.2 Payment of Early Deferred Benefits... 39
ARTICLE 5 DEATH BENEFITS
5.1 Amount of Death Benefits............. 39
ARTICLE 6 TERMINATION OF EMPLOYMENT
6.1 Vested Benefits...................... 40
ARTICLE 7 OTHER PROVISIONS
7.1 Funding.............................. 40
7.2 Other Plan Benefits.................. 41
7.3 Consent to Insurance Procedures...... 41
7.4 Benefits Not Assignable.............. 41
7.5 Assumption of Agreement by Successor. 41
ARTICLE 8 TERMINATION OF BENEFIT PAYMENTS
8.1 Termination of Benefit Payments...... 42
ARTICLE 9 ADMINISTRATION
9.1 Administrator........................ 42
9.2 Powers of Administrator.............. 43
9.3 Facility of Payment.................. 43
36
<PAGE> 37
ARTICLE 10 BENEFIT CLAIMS PROCEDURE
10.1 Claims for Benefits.................. 43
10.2 Request for Review of Denial......... 44
10.3 Decision on Review of Denial......... 44
ARTICLE 11 AMENDMENT AND TERMINATION
11.1 Right to Amend...................... 44
11.2 Right to Terminate.................. 44
ARTICLE 12 MISCELLANEOUS
12.1 Titles are for Reference Only....... 44
12.2 Construction........................ 44
12.3 No Contract......................... 44
12.4 Spouse's Rights..................... 45
37
<PAGE> 38
DEFERRED COMPENSATION AGREEMENT
FOR THE CHIEF EXECUTIVE OFFICER OF
THE EASTERN COMPANY
The Eastern Company, a Connecticut corporation having its principal
office at 112 Bridge Street, Naugatuck, CT 06770 (hereinafter "Company"),
does hereby make a deferred compensation agreement with its chief executive
officer on the terms and conditions hereinafter set forth:
ARTICLE 1
DESIGNATION AND PURPOSE
1.1 Designation. The Agreement is designated the "Deferred
Compensation Agreement for the Chief Executive Officer of The Eastern
Company".
1.2 Purpose. Under the direction and leadership of its chief
executive officer, the Company has shown substantial growth in size and
earnings. The purpose of this Agreement is to assure the Company that its
chief executive officer will remain with the Company and continue his
direction and leadership by providing him with deferred compensation benefits.
ARTICLE 2
DEFINITIONS
When used herein, each of the words and phrases defined hereinafter
shall have the following meaning unless a different meaning is clearly
required by the context of the Agreement.
2.1 "Agreement" shall mean the Deferred Compensation Agreement for the
Chief Executive Officer of The Eastern Company set forth herein and in all
subsequent amendments hereto.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Company" shall mean The Eastern Company and any successor to any
such entity which assumes the obligations of this Agreement by execution of a
written agreement adopting this Agreement.
2.4 "Deferred Benefit" shall mean a monthly benefit of five thousand
dollars ($5,000), payable for a period of one hundred eighty (180) consecutive
months.
2.5 "Executive" shall mean Stedman G. Sweet, the chief executive
officer of the Company.
38
<PAGE> 39
2.6 "Spouse" shall mean the person who is legally married to the
Executive on the earlier of his date of death or the date of his Termination
of Employment.
2.7 "Termination of Employment" shall mean termination of employment
with the Company and all affiliates of the Company, whether voluntarily or
involuntarily.
ARTICLE 3
DEFERRED BENEFITS
3.1 Amount of Deferred Benefits. If the Executive retires upon
reaching age sixty-five (65) or (with the consent of the Company) after
reaching age sixty-five (65), he shall be entitled to receive the Deferred
Benefit hereunder.
3.2 Payment of Deferred Benefits. Upon the Executive's retirement at
or (with the consent of the Company) after reaching age sixty-five (65), the
Company shall commence payment of the Deferred Benefit described in Section
3.1 as of the date of his Termination of Employment. Such benefit shall be
payable in monthly payments for a period of one hundred eighty (180)
consecutive months.
ARTICLE 4
EARLY DEFERRED BENEFITS
4.1 Amount of Early Deferred Benefits. If the Company and the
Executive mutually agree, the Executive may retire on a date prior to the date
on which he reaches age sixty-five (65). If the Executive and the Company so
agree, the Executive shall be entitled to receive the Deferred Benefit
hereunder.
4.2 Payment of Early Deferred Benefits. Upon the Executive's early
retirement pursuant to Section 4.1, the Company shall commence payment of the
Deferred Benefit described in Section 4.1 as of the date of his Termination of
Employment. Such benefit shall be payable in monthly installments for a
period of one hundred eighty (180) consecutive months.
ARTICLE 5
DEATH BENEFITS
5.1 Amount of Death Benefits.
(a) In the event of the death of the Executive prior to his
Termination of Employment, the Executive's surviving Spouse shall receive the
Deferred Benefit. The Deferred Benefit shall commence on the first day of the
month following the Executive's death and shall be payable for a period of one
hundred eighty (180) consecutive months. If the Executive's surviving Spouse
39
<PAGE> 40
dies prior to the payment of one hundred eighty (180) consecutive monthly
payments, all further payments shall cease.
(b) In the event the Executive dies after the payment of the Deferred
Benefit has commenced pursuant to Section 3.2 or Section 4.2 but before the
receipt of one hundred eighty (180) consecutive monthly payments, the balance
of said payments shall be paid to the Executive's surviving Spouse. If the
Executive's surviving Spouse dies prior to the payment of an aggregate of one
hundred eighty (180) monthly payments to the Executive and his surviving
Spouse, all further payments shall cease.
ARTICLE 6
TERMINATION OF EMPLOYMENT
6.1 Vested Benefits. The Executive shall not be eligible to receive
any Deferred Benefit under this Agreement if he incurs a Termination of
Employment before he reaches age sixty-five (65), unless such Termination of
Employment is due to his death or the Company consents to his retirement prior
to age sixty-five (65).
ARTICLE 7
OTHER PROVISIONS
7.1 Funding.
(a) It is the intention of the Company, the Executive, his surviving
Spouse, and each other party to the Agreement that the arrangements hereunder
be unfunded for tax purposes and for purposes of Title I of ERISA. The rights
of the Executive and his surviving Spouse shall be solely those of a general
unsecured creditor of the Company. The Agreement constitutes a mere promise
by the Company to make benefit payments in the future.
(b) Any trust which may be created by the Company and any assets which
may be held by the trust to assist the Company in meeting its obligations
under the Agreement will conform to the terms of the model trust described in
Revenue Procedure 92-64 issued by the Internal Revenue Service (or any
successor thereto).
(c) The Company may direct that payments be made before they would
otherwise be due if, based on a change in the Federal tax or revenue laws, a
published ruling or similar announcement issued by the Internal Revenue
Service, a regulation issued by the Secretary of the Treasury, a decision by a
court of competent jurisdiction involving the Executive or his Spouse or a
closing agreement made under Section 7121 of the Code that is approved by the
40
<PAGE> 41
Internal Revenue Service and involved the Executive or his Spouse, the Company
determines that the Executive or his Spouse has or will recognize income for
Federal income tax purposes with respect to amounts that are or will be
payable under the Agreement before they are to be paid. Amounts so paid shall
then be used as an offset to the benefits, if any, thereafter payable
hereunder.
7.2 Other Plan Benefits. Nothing in this Agreement shall prevent the
Executive from receiving, in addition to any amounts he may be entitled to
receive under this Agreement, any amounts which may be distributable to him at
any time under the terms of any qualified employee benefit plan or any other
non-qualified or incentive plan or arrangement of the Company which is now in
effect or which may hereafter be adopted.
7.3 Consent to Insurance Procedures. In order to be eligible for
benefits hereunder, the Executive must agree that the Company may from time to
time apply for and take out in its own name and at its own expense such life,
health, accident or other insurance upon the Executive as the Company may deem
necessary or advisable to protect its interests hereunder. The Executive must
also agree to submit to any medical or other examination necessary for such
purpose and to assist and cooperate with the Company in procuring such
insurance. The Executive and his surviving Spouse must also agree that they
shall have no right, title or interest in and to such insurance whether
presently existing or hereafter procured.
7.4 Benefits Not Assignable. Except as required by law, the right of
the Executive or his surviving Spouse to any benefit or payment under the
Agreement: (a) shall not be subject to voluntary or involuntary anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors of the Executive or his surviving Spouse; (b) shall
not be considered an asset of the Executive or his surviving Spouse in the
event of any divorce, insolvency or bankruptcy; and (c) shall not be subject
to attachment, execution, garnishment, sequestration or other legal or
equitable process. In the event that the Executive or his surviving Spouse
who is receiving or is entitled to receive benefits under the Agreement
attempts to assign, transfer or dispose of such right, or if an attempt is
made to subject said right to such process, such assignment, transfer,
disposition or process shall, unless otherwise required by law, be null and
void.
7.5 Assumption of Agreement by Successor. The Company shall not merge
or consolidate with any other corporation or sell substantially all of its
assets to another entity unless and until such corporation or entity shall
expressly assume the duties of the Company set forth herein. In the event
that a single person or entity or group of persons acting in concert acquires
more than fifty percent (50%) of the shares of capital stock of the Company
entitled to vote at all meetings of shareholders, then (unless the Executive
is a member of such group, or a participant in such entity) the total
remaining future benefits payable under this Agreement shall immediately
become due and payable in full on demand by the Executive or, if he is not
then living, by his surviving Spouse if she is then living.
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ARTICLE 8
TERMINATION OF BENEFIT PAYMENTS
8.1 Termination of Benefit Payments. In the event that the Executive
engages, either directly or indirectly in any manner or capacity, as advisor,
principal, agent, partner, officer, director, employee or otherwise, in any
business which is competitive with the business of the Company (except with
the written consent of the Company), then the Executive's right to future
benefit payments under this Agreement shall terminate. The failure of the
Executive to satisfy this condition within ninety (90) days after receipt of
written notification by the Company of any such failure shall result in the
forfeiture of all rights to subsequent benefit payments under this Agreement,
but shall not give rise to any claim for the return of, or result in the
forfeiture of, any such payments theretofore made or accrued.
Notwithstanding the above, however, the foregoing shall not prohibit the
Executive from owning stock or other securities of any such competitive
business, provided such ownership interest constitutes a relatively
insubstantial percentage of the total outstanding stock or securities of such
competitor, the Executive in fact does not have the power to control or direct
the management or policies of such competitor, and the Executive does not
serve in any of the capacities recited in this Section 8.1 with respect to
such competitor, except with the written consent of the Company.
ARTICLE 9
ADMINISTRATION
9.1 Administrator. The board of directors of the Company shall have
the responsibility for the administration of the Agreement. The board of
directors may, by written instruction, designate one or more persons to carry
out any specified responsibilities under the Agreement and may, in the same
manner, revoke such delegation of responsibilities; provided, however, that in
no event may the board of directors appoint the Executive to carry out any
administrative responsibilities under the Agreement. Upon the designation of
such a person or persons and the delegation of such responsibilities to him or
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them, all references in this Agreement to "Administrator" shall be deemed to
refer to such person or persons.
9.2 Powers of Administrator. The Administrator shall have such
authority and powers as may be necessary to discharge its duties hereunder,
including, but not by way of limitation, the following:
(a) to construe and interpret the Agreement, decide all
questions of eligibility for and determine the amount and time of payment of
any benefits hereunder;
(b) to prescribe procedures to be followed by the Executive and
his surviving Spouse for filing applications for benefits;
(c) to prepare and distribute information explaining the
Agreement; and
(d) to appoint or employ individuals to assist in the
administration of the Agreement and any other agents it deems advisable,
including legal counsel (who may be counsel for the Company).
9.3 Facility of Payment. Whenever, in the Administrator's opinion, a
person entitled to receive any payment of a benefit or installment thereof
hereunder is under a legal disability or is incapacitated in any way so as to
be unable to manage his financial affairs, the Administrator may issue
directions that payments shall be made to another person for his benefit, or
the Administrator may direct that payments be applied for the benefit of such
person in such manner as the Administrator considers advisable. Any payment
of a benefit or installment thereof in accordance with the provisions of this
Section 9.3 shall be a complete discharge of any liability for the making of
such payment under the provisions of the Agreement.
ARTICLE 10
BENEFIT CLAIMS PROCEDURE
10.1 Claims for Benefits. Any claim for benefits under the Agreement
shall be made in writing to the Administrator. If such claim for benefits is
wholly or partially denied, the Administrator shall, within thirty (30) days
after receipt of the claim, notify the claimant of the denial of the claim.
Such notice of denial: (a) shall be in writing; (b) shall be written in a
manner calculated to be understood by the claimant; and (c) shall contain (i)
the specific reason or reasons for denial of the claim, (ii) a specific
reference to the pertinent provisions of the Agreement upon which the denial
is based, (iii) a description of any additional material or information
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necessary to perfect the claim, along with an explanation of why such material
or information is necessary, and (iv) an explanation of the claim review
procedure.
10.2 Request for Review of Denial. Within sixty (60) days after the
receipt by the claimant of a written notice of denial of the claim, or such
later time as shall be deemed reasonable taking into account the nature of the
benefit subject to the claim and any other attendant circumstances, the
claimant may file a written request with the Administrator that it conduct a
full and fair review of the denial of the claim for benefits.
10.3 Decision on Review of Denial. The Administrator shall deliver to
the claimant a written decision on the claim within thirty (30) days after
receipt of the aforesaid request for review, except that if there are special
circumstances (such as the need to hold a hearing) which require an extension
of time for processing, the aforesaid thirty (30) day period shall be extended
to sixty (60) days. Such decision shall: (a) be written in a manner
calculated to be understood by the claimant; (b) include the specific reason
or reasons for the decision; and (c) contain a specific reference to the
pertinent provisions of the Agreement upon which the decision is based.
ARTICLE 11
AMENDMENT AND TERMINATION
11.1 Right to Amend. This Agreement may be altered, changed or amended
only by a writing signed by the Executive and the Company.
11.2 Right to Terminate. This Agreement may be terminated only by a
writing signed by the Executive and the Company.
ARTICLE 12
MISCELLANEOUS
12.1 Titles are for Reference Only. The titles in this Agreement are
for reference only. In the event of a conflict between a title and the
content of a section, the content of the section shall control.
12.2 Construction. The provisions of the Agreement shall be
interpreted, construed and administered in accordance with the laws of the
State of Connecticut.
12.3 No Contract. This Agreement shall not be deemed a contract of
employment with the Executive, nor shall any provision hereof restrict the
right of the Company or any of its subsidiaries to terminate the Executive's
employment.
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12.4 Spouse's Rights. Wherever the rights of the Executive are stated
or limited in the Agreement, his Spouse shall be bound thereby.
IN WITNESS WHEREOF, the undersigned has executed this Agreement at
Naugatuck, Connecticut on the 10th day of August, 1994.
ATTEST:
THE EASTERN COMPANY
By
Donald. E. Whitmore, Jr. Russell G. McMillen
------------------------ -------------------
Donald. E. Whitmore, Jr. Russell G. McMillen
Its Secretary Its Chairman
........ACCEPTED AND AGREED TO:
Stedman G. Sweet
-----------------
Stedman G. Sweet
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SUPPLEMENTAL RETIREMENT PLAN
FOR THE CHIEF EXECUTIVE OFFICER OF
THE EASTERN COMPANY
Table of Contents
Page
ARTICLE 1 DESIGNATION AND PURPOSE
1.1 Designation................................... 48
1.2 Purpose....................................... 48
ARTICLE 2 DEFINITIONS................................ 48
ARTICLE 3 ELIGIBILITY................................ 51
ARTICLE 4 RETIREMENT BENEFITS
4.1 Amount of Retirement Benefits................. 51
4.2 Payment of Retirement Benefits................ 51
ARTICLE 5 EARLY RETIREMENT BENEFITS
5.1 Amount of Early Retirement Benefits........... 51
5.2 Payment of Early Retirement Benefits.......... 52
ARTICLE 6 DEATH AND DISABILITY BENEFITS
6.1 Amount of Death Benefits...................... 52
6.2 Amount of Disability Benefits................. 53
ARTICLE 7 TERMINATION OF EMPLOYMENT
7.1 Vested Benefits............................... 54
ARTICLE 8 OTHER PLAN PROVISIONS
8.1 Funding....................................... 54
8.2 Qualified Plan Benefits....................... 54
8.3 Consent to Insurance Procedures............... 55
8.4 Benefits Not Assignable....................... 55
8.5 Beneficiaries................................. 55
ARTICLE 9 SUSPENSION AND TERMINATION OF BENEFIT
PAYMENTS
9.1 Suspension of Benefit Payments................ 56
9.2 Termination of Benefit Payments............... 56
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ARTICLE 10 ADMINISTRATION
10.1 Plan Administrator........................... 56
10.2 Powers of Administrator...................... 56
10.3 Facility of Payment.......................... 57
ARTICLE 11 BENEFIT CLAIMS PROCEDURE
11.1 Claims for Benefits.......................... 57
11.2 Request for Review of Denial................. 57
11.3 Decision on Review of Denial................. 57
ARTICLE 12 AMENDMENT
12.1 Right to Amend.............................. 58
12.2 Right to Terminate Plan..................... 58
12.3 Effect of Termination....................... 58
ARTICLE 13 MISCELLANEOUS
13.1 Titles are for Reference Only............... 58
13.2 Construction................................ 58
13.3 No Contract................................. 59
13.4 Spouses' and Beneficiaries' Rights.......... 59
13.5 Gender and Number........................... 59
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<PAGE> 48
SUPPLEMENTAL RETIREMENT PLAN
FOR THE CHIEF EXECUTIVE OFFICER OF
THE EASTERN COMPANY
The Eastern Company, a Connecticut corporation having its principal
office at 112 Bridge Street, Naugatuck, CT 06770 (hereinafter "Company"),
does hereby create and adopt a supplemental retirement plan for the benefit
of its chief executive officer on the terms and conditions hereinafter set
forth:
ARTICLE 1
DESIGNATION AND PURPOSE
1.1 Designation. The Plan is designated the "Supplemental
Retirement Plan for the Chief Executive Officer of The Eastern Company".
1.2 Purpose. Under the direction and leadership of its chief
executive officer, the Company has shown substantial growth in size and
earnings. The purpose of this Plan is to assure the Company that its chief
executive officer will remain with the Company and continue his direction
and leadership by providing him with supplemental retirement benefits.
ARTICLE 2
DEFINITIONS
When used herein, each of the words and phrases defined hereinafter
shall have the following meaning unless a different meaning is clearly
required by the context of the Plan.
2.1 "Actuarial Equivalence" shall be determined using the actuarial
assumptions which are set forth in the Salaried Plan.
2.2 "Adjusted Annual Retirement Benefit" shall mean the annual
retirement benefit computed by using the retirement benefit formula set
forth in the Salaried Plan, except that: (a) such formula shall be applied
without regard to the limitations on benefits set forth in Section 415 of
the Code; and (b) such formula shall be applied without regard to the
limitations on compensation set forth in Section 401(a)(17) of the Code.
For purposes of determining the Participant's Adjusted Annual Retirement
Benefit, all amounts which are received by the Participant and are
includible in his gross income for Federal income tax purposes shall be
taken into account.
The Adjusted Annual Retirement Benefit shall be calculated as if it is
payable as a Five Year Certain Annuity commencing when the Participant
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reaches age sixty-five (65) or incurs a Termination of Employment (whichever
occurs later).
2.3 "Adjusted Insured Death Benefit" shall mean the lump sum insured
death benefit set forth in the Salaried Plan, except that: (a) in
calculating such insured death benefit, the portion of the benefit formula
set forth in Section 5.2(b)(ii) of the Salaried Plan shall be applied
without regard to the limitations on benefits set forth in Section 415 of
the Code and without regard to the limitations on compensation set forth in
Section 401(a)(17) of the Code; and (b) the lump sum insured death benefit
shall be determined without regard to any reduction which may be required
under the terms of the Salaried Plan as a result of the payment of a
Qualified Pre-retirement Survivor Annuity.
2.4 "Adjusted Pre-retirement Survivor Annuity" shall mean the fifty
percent (50%) survivor benefit payable under the terms of a 100/50 Joint and
Survivor Annuity, based on the following assumptions: (a) the 100/50 Joint
and Survivor Annuity is Actuarially Equivalent to the Adjusted Annual
Retirement Benefit of the Participant, determined as of the date immediately
preceding his date of death; and (b) the 100/50 Joint and Survivor Annuity
commenced immediately prior to the Participant's date of death, reduced in
accordance with Section 5.2(a)(i) to reflect commencement prior to age
sixty-five (65).
2.5 "Beneficiary" shall mean the person or persons named by the
Participant as his beneficiary pursuant to the provisions of Section 8.6.
2.6 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.7 "Company" shall mean The Eastern Company, any affiliate of The
Eastern Company (within the meaning of Section 414(b) or Section 414(c) of
the Code) which adopts this Plan, and any successor to said entity which
assumes the obligations of this Plan by execution of a written agreement
adopting this Plan.
2.8 "Five Year Certain Annuity" shall mean an annuity for the life
of the Participant with the provision that, if the Participant dies prior to
the receipt of sixty (60) monthly payments, the balance of said sixty (60)
monthly payments shall then be paid to the Participant's Beneficiary.
2.9 "Insured Death Benefit" shall mean the lump sum insured death
benefit payable in accordance with the terms of the Salaried Plan.
2.10 "100/50 Joint and Survivor Annuity" shall mean an annuity
payable for the life of the Participant with the provision that, after his
death, fifty percent (50%) of the benefit payable during the life of the
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<PAGE> 50
Participant shall then be paid to and during the lifetime of his surviving
Spouse.
2.11 "100/100 Joint and Survivor Annuity" shall mean an annuity
payable for the life of the Participant with the provision that, after his
death, the same benefit shall then be paid to and during the lifetime of his
surviving Spouse.
2.12 "Participant" shall mean Stedman G. Sweet, the chief executive
officer of the Company.
2.13 "Plan" shall mean the Supplemental Retirement Plan for the Chief
Executive Officer of The Eastern Company set forth herein and in all
subsequent amendments hereto.
2.14 "Qualified Plan Benefits" shall mean the annual retirement
benefits payable to the Participant from the Salaried Plan, computed by
using the retirement benefit formula set forth in the Salaried Plan.
The Qualified Plan Benefits shall be calculated as if they are payable
as a Five Year Certain Annuity commencing when the Participant reaches age
sixty-five (65) or incurs a Termination of Employment (whichever occurs
later). If the retirement benefits under the Salaried Plan are payable to
the Participant in a form other than a Five Year Certain Annuity, such
retirement benefits shall be adjusted to be an Actuarially Equivalent
benefit payable as a Five Year Certain Annuity commencing when the
Participant reaches age sixty-five (65) or incurs a Termination of
Employment (whichever occurs later).
2.15 "Qualified Pre-retirement Survivor Annuity" shall mean the
qualified pre-retirement survivor annuity payable to the surviving Spouse of
the Participant pursuant to the terms of the Salaried Plan.
2.16 "Salaried Plan" shall mean the Salaried Employees' Retirement
Plan of The Eastern Company, as it may be amended from time to time, or any
other defined benefit pension plan adopted by the Company for the benefit of
its salaried employees.
2.17 "Spouse" shall mean the person who is legally married to the
Participant on the earlier of his date of death or the date of his
Termination of Employment.
2.18 "Termination of Employment" shall mean termination of employment
with the Company and all affiliates of the Company, whether voluntarily or
involuntarily.
2.19 "Total and Permanent Disability" shall have the same meaning for
purposes of the Plan as it has for purposes of the Salaried Plan.
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2.20 "Years of Service" shall mean the years of service which are
credited to the Participant for purposes of the Salaried Plan.
ARTICLE 3
ELIGIBILITY
Stedman G. Sweet, the chief executive officer of the Company, shall be
the sole Participant in the Plan so long as he continues to serve as the
president and the chief executive officer of the Company.
ARTICLE 4
RETIREMENT BENEFITS
4.1 Amount of Retirement Benefits. If the Participant retires at or
after reaching age sixty-five (65), he shall be entitled to receive
retirement benefits hereunder. The retirement benefits payable to the
Participant during a calendar year shall be determined as follows:
(a) First, calculate the excess of: (i) the Participant's Adjusted
Annual Retirement Benefit, as determined under Section 2.2 at the time of
his Termination of Employment; over (ii) the Participant's Qualified Plan
Benefits, as determined under Section 2.14 at the time of his Termination of
Employment.
(b) Second, if the Participant is married at the time of his
Termination of Employment, the benefit calculated pursuant to Section 4.1(a)
shall be adjusted to an Actuarially Equivalent 100/100 Joint and Survivor
Annuity.
4.2 Payment of Retirement Benefits. Upon a Participant's retirement
at or after reaching age sixty-five (65), the Company shall commence payment
of the benefit described in Section 4.1 as of the date of his Termination of
Employment. Such benefit shall be payable in monthly installments as a Five
Year Certain Annuity if the Participant is not married at the time of his
Termination of Employment or as an Actuarially Equivalent 100/100 Joint and
Survivor Annuity if the Participant is married at the time of his
Termination of Employment.
ARTICLE 5
EARLY RETIREMENT BENEFITS
5.1 Amount of Early Retirement Benefits. If the Participant retires
at or after reaching age fifty-five (55) and after completing twenty (20)
Years of Service, he shall be entitled to receive early retirement benefits
hereunder. The early retirement benefits payable to the Participant during
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<PAGE> 52
a calendar year shall be determined as follows:
(a) First, calculate the excess of: (i) the Participant's Adjusted
Annual Retirement Benefit, as determined under Section 2.2 at the time of
his Termination of Employment, with the portion of the benefit calculated
pursuant to Section 5.2(b)(ii)(B) of the Salaried Plan being reduced by one-
fifteenth (1/15th) for each of the first five years and by one-thirtieth
(1/30th) for each of the next five years by which the starting date of the
early retirement benefit precedes the Participant's sixty-fifth (65th)
birthday; over (ii) the Participant's Qualified Plan Benefits, as determined
under Section 2.14 at the time of his Termination of Employment, with the
portion of the benefit calculated pursuant to Section 5.2(b)(ii)(B) of the
Salaried Plan being reduced by one-fifteenth (1/15th) for each of the first
five years and by one-thirtieth (1/30th) for each of the next five years by
which the starting date of the early retirement benefit precedes the
Participant's sixty-fifth (65th) birthday.
(b) Second, if the Participant is married at the time of his
Termination of Employment, the benefit calculated pursuant to Section 5.1(a)
shall be adjusted to an Actuarially Equivalent 100/100 Joint and Survivor
Annuity.
5.2 Payment of Early Retirement Benefits. Upon a Participant's
retirement at or after reaching age fifty-five (55) and completing twenty
(20) Years of Service, the Company shall commence payment of the benefit
described in Section 5.1 above as of the date of his Termination of
Employment. Such benefit shall be payable in monthly installments as a Five
Year Certain Annuity if the Participant is not married at the time of his
Termination of Employment or as an Actuarially Equivalent 100/100 Joint and
Survivor Annuity if the Participant is married at the time of his
Termination of Employment.
ARTICLE 6
DEATH AND DISABILITY BENEFITS
6.1 Amount of Death Benefits.
(a) In the event of the death of the Participant after reaching age
fifty-five (55) and completing twenty (20) Years of Service but prior to his
Termination of Employment, the following death benefits shall be paid:
(i) The Participant's surviving Beneficiary (who may be his
surviving Spouse) shall receive a lump sum death benefit equal to the excess
of: (A) the Adjusted Insured Death Benefit, as determined under Section
2.3; over (B) the Insured Death Benefit, as determined under Section 2.9.
Such lump sum death benefit shall be payable as soon as practicable after
the death of the Participant.
(ii) The Participant's surviving Spouse shall receive a pre-
retirement survivor annuity equal to the excess of: (A) the Adjusted Pre-
retirement Survivor Annuity, as determined under Section 2.4; over (B) the
Qualified Pre-retirement Survivor Annuity, as determined under Section 2.15.
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Such pre-retirement survivor annuity shall commence as of the first day of
the month following the Participant's death and shall be payable for and
during the lifetime of his surviving Spouse.
(b) In the event of the death of a married Participant after
commencing to receive his retirement benefits under Section 4.1, his early
retirement benefits under Section 5.1, or his disability retirement benefits
under Section 6.2, his surviving Spouse shall receive the survivor benefit
payable under the 100/100 Joint and Survivor Annuity for the remainder of
her life. In the event of the death of an unmarried Participant after
commencing to receive his retirement benefits under Section 4.1, his early
retirement benefits under Section 5.1, or his disability retirement benefits
under Section 6.2, but prior to the receipt of sixty (60) monthly payments,
the balance of said sixty (60) monthly payments shall then be paid to the
Participant's Beneficiary.
6.2 Amount of Disability Benefits. In the event the Participant has
reached age fifty-five (55), has completed twenty (20) Years of Service,
incurs a Total and Permanent Disability prior to his Termination of
Employment, and is eligible to receive disability benefits under Title II of
the Social Security Act, then he shall be entitled to receive disability
retirement benefits under the Plan. Such benefits shall be equal to the
following:
(a) If the Participant incurs a Total and Permanent Disability at or
after reaching age sixty-five (65), such benefits shall equal the monthly
retirement benefit determined in accordance with Section 4.1 which the
Participant would have been entitled to receive if he had incurred a
Termination of Employment immediately prior to the date of his Total and
Permanent Disability; and
(b) If the Participant incurs a Total and Permanent Disability prior
to reaching age sixty-five (65), such benefits shall equal the monthly
retirement benefit determined in accordance with Section 5.1 which the
Participant would have been entitled to receive if he had incurred a
Termination of Employment immediately prior to the date of his Total and
Permanent Disability, but without any reduction to reflect the commencement
of benefits prior to age sixty-five (65).
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ARTICLE 7
TERMINATION OF EMPLOYMENT
7.1 Vested Benefits. Neither the Participant nor his surviving
Spouse or Beneficiary shall be eligible to receive any benefits under this
Plan if the Participant incurs a Termination of Employment before he reaches
age fifty-five (55) and completes twenty (20) Years of Service.
ARTICLE 8
OTHER PLAN PROVISIONS
8.1 Funding.
(a) It is the intention of the Company, the Participants, their
surviving Spouses and Beneficiaries, and each other party to the Plan that
the arrangements hereunder be unfunded for tax purposes and for purposes of
Title I of ERISA. The rights of Participants and their surviving Spouses
and Beneficiaries shall be solely those of a general unsecured creditor of
the Company. The Plan constitutes a mere promise by the Company to make
benefit payments in the future.
(b) Any trust which may be created by the Company and any assets
which may be held by the trust to assist the Company in meeting its
obligations under the Plan will conform to the terms of the model trust
described in Revenue Procedure 92-64 issued by the Internal Revenue Service
(or any successor thereto).
(c) The Administrator may direct that payments be made before they
would otherwise be due if, based on a change in the Federal tax or revenue
laws, a published ruling or similar announcement issued by the Internal
Revenue Service, a regulation issued by the Secretary of the Treasury, a
decision by a court of competent jurisdiction involving a Participant or his
Spouse or Beneficiary or a closing agreement made under Section 7121 of the
Code that is approved by the Internal Revenue Service and involved a
Participant or his Spouse or Beneficiary, the Administrator determines that
a Participant or his Spouse or Beneficiary has or will recognize income for
Federal income tax purposes with respect to amounts that are or will be
payable under the Plan before they are to be paid. Amounts so paid shall
then be used as an offset to the benefits, if any, thereafter payable
hereunder.
8.2 Qualified Plan Benefits. The benefits payable under the Plan
shall be based on the benefits which the Participant (or his surviving
Spouse or Beneficiary) are entitled to receive under the Salaried Plan,
whether or not payment of such amounts is delayed, suspended, reduced or
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forfeited because of failure to apply, other employment or any other
reasons.
8.3 Consent to Insurance Procedures. In order to be eligible for
benefits hereunder, a Participant must agree that the Company may from time
to time apply for and take out in its own name and at its own expense such
life, health, accident or other insurance upon the Participant as the
Company may deem necessary or advisable to protect its interests hereunder.
The Participant must also agree to submit to any medical or other
examination necessary for such purpose and to assist and cooperate with the
Company in procuring such insurance. The Participant and his surviving
Spouse and Beneficiary must also agree that they shall have no right, title
or interest in and to such insurance whether presently existing or hereafter
procured.
8.4 Benefits Not Assignable. Except as required by law, the right
of any Participant or his surviving Spouse or Beneficiary to any benefit or
payment under the Plan: (a) shall not be subject to voluntary or
involuntary anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by creditors of the Participant or
his surviving Spouse or Beneficiary; (b) shall not be considered an asset of
the Participant or his surviving Spouse or Beneficiary in the event of any
divorce, insolvency or bankruptcy; and (c) shall not be subject to
attachment, execution, garnishment, sequestration or other legal or
equitable process. In the event that a Participant or his surviving Spouse
or Beneficiary who is receiving or is entitled to receive benefits under the
Plan attempts to assign, transfer or dispose of such right, or if an attempt
is made to subject said right to such process, such assignment, transfer,
disposition or process shall, unless otherwise required by law, be null and
void.
8.5 Beneficiaries. A Participant may designate one or more
Beneficiaries and contingent Beneficiaries to receive any benefits payable
under the Plan after his death by delivering a written designation thereof
over his signature to the Administrator. A Participant may designate
different Beneficiaries at any time by delivering a new written designation
over his signature to the Administrator. Any such designation shall become
effective only upon its receipt by the Administrator. The last effective
designation received by the Administrator shall supersede all prior
designations. If a Participant fails to designate a Beneficiary, or if no
designated Beneficiary survives the Participant, the Participant shall be
deemed to have designated the following Beneficiaries (if then living) in
the following order of priority: (a) his Spouse; (b) his children, in equal
shares; (c) his parents, in equal shares; and (d) his estate.
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ARTICLE 9
SUSPENSION AND TERMINATION OF BENEFIT PAYMENTS
9.1 Suspension of Benefit Payments. In the event that a Participant
commences receiving benefits hereunder and is subsequently re-employed on a
full-time basis by the Company or any of its affiliates, the payment of
benefits under this Plan shall be suspended during the period of such
re-employment and shall recommence on the date on which he again incurs a
Termination of Employment.
9.2 Termination of Benefit Payments. In the event that a
Participant who is receiving benefits hereunder violates any agreement with
the Company or any of its affiliates (including, without limitation, any
agreement relating to the nondisclosure of secret or confidential
information or knowledge, noncompetition, or the assignment of inventions),
then all rights to future benefit payments with respect to such Participant
shall terminate.
ARTICLE 10
ADMINISTRATION
10.1 Plan Administrator. The board of directors of the Company shall
have the responsibility for the administration of the Plan. The board of
directors may, by written instruction, designate one or more persons to
carry out any specified responsibilities under the Plan and may, in the same
manner, revoke such delegation of responsibilities; provided, however, that
in no event may the board of directors appoint the Participant to carry out
any administrative responsibilities under the Plan. Upon the designation of
such a person or persons and the delegation of such responsibilities to him
or them, all references in this Plan to "Administrator" shall be deemed to
refer to such person or persons.
10.2 Powers of Administrator. The Administrator shall have such
authority and powers as may be necessary to discharge its duties hereunder,
including, but not by way of limitation, the following:
(a) to construe and interpret the Plan, decide all questions
of eligibility for and determine the amount and time of payment of any
benefits hereunder;
(b) to prescribe procedures to be followed by Participants and
their surviving spouses for filing applications for benefits;
(c) to prepare and distribute information explaining the Plan;
and
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(d) to appoint or employ individuals to assist in the
administration of the Plan and any other agents it deems advisable,
including legal counsel (who may be counsel for the Company).
10.3 Facility of Payment. Whenever, in the Administrator's opinion,
a person entitled to receive any payment of a benefit or installment thereof
hereunder is under a legal disability or is incapacitated in any way so as
to be unable to manage his financial affairs, the Administrator may issue
directions that payments shall be made to another person for his benefit, or
the Administrator may direct that payments be applied for the benefit of
such person in such manner as the Administrator considers advisable. Any
payment of a benefit or installment thereof in accordance with the
provisions of this Section 10.3 shall be a complete discharge of any
liability for the making of such payment under the provisions of the Plan.
ARTICLE 11
BENEFIT CLAIMS PROCEDURE
11.1 Claims for Benefits. Any claim for benefits under the Plan shall
be made in writing to the Administrator. If such claim for benefits is
wholly or partially denied, the Administrator shall, within thirty (30) days
after receipt of the claim, notify the claimant of the denial of the claim.
Such notice of denial: (a) shall be in writing; (b) shall be written in a
manner calculated to be understood by the claimant; and (c) shall contain
(i) the specific reason or reasons for denial of the claim, (ii) a specific
reference to the pertinent Plan provisions upon which the denial is based,
(iii) a description of any additional material or information necessary to
perfect the claim, along with an explanation of why such material or
information is necessary, and (iv) an explanation of the claim review
procedure.
11.2 Request for Review of Denial. Within sixty (60) days after the
receipt by the claimant of a written notice of denial of the claim, or such
later time as shall be deemed reasonable taking into account the nature of
the benefit subject to the claim and any other attendant circumstances, the
claimant may file a written request with the Administrator that it conduct a
full and fair review of the denial of the claim for benefits.
11.3 Decision on Review of Denial. The Administrator shall deliver to
the claimant a written decision on the claim within thirty (30) days after
receipt of the aforesaid request for review, except that if there are
special circumstances (such as the need to hold a hearing) which require an
extension of time for processing, the aforesaid thirty (30) day period shall
be extended to sixty (60) days. Such decision shall: (a) be written in a
57
<PAGE> 58
manner calculated to be understood by the claimant; (b) include the specific
reason or reasons for the decision; and (c) contain a specific reference to
the pertinent Plan provisions upon which the decision is based.
ARTICLE 12
AMENDMENT AND TERMINATION
12.1 Right to Amend. At any time, and from time to time, the board of
directors of the Company, by resolutions adopted by it, may amend the Plan
or change the designation of eligible Participants under the Plan. However,
no such amendment shall have the effect of reducing the accrued benefit of
any Participant who has reached age fifty-five (55) and has completed twenty
(20) Years of Service as of the effective date of the amendment.
12.2 Right to Terminate Plan. It is the intention of the Company to
continue the Plan indefinitely. However, the Company expressly reserves the
right, subject to its contractual obligations, to terminate the Plan, in
whole or in part, at any time if the board of directors of the Company shall
determine, in its sole and absolute discretion, that business, financial, or
other good cause makes it necessary or desirable to do so.
12.3 Effect of Termination. Upon termination or partial termination
of the Plan, the rights of each Participant who has reached age fifty-five
(55) and has completed twenty (20) Years of Service as of the date of such
termination or partial termination (and the rights of his surviving Spouse
and Beneficiaries) shall be fully vested with respect to those benefits
accrued as of such date. Upon a termination or partial termination of the
Plan, the benefits payable to a Participant, his surviving Spouse or
Beneficiaries shall not commence prior to the date on which they are
otherwise payable in accordance with the terms of the Plan.
ARTICLE 13
MISCELLANEOUS
13.1 Titles are for Reference Only. The titles in this Plan are for
reference only. In the event of a conflict between a title and the content
of a section, the content of the section shall control.
13.2 Construction. The provisions of the Plan shall be interpreted,
construed and administered in accordance with the laws of the State of
Connecticut.
58
<PAGE> 59
13.3 No Contract. This Plan shall not be deemed a contract of
employment with the Participant, nor shall any provision hereof restrict the
right of the Company or any of its subsidiaries to terminate the
Participant's employment.
13.4 Spouses' and Beneficiaries' Rights. Wherever the rights of a
Participant are stated or limited in the Plan, his Spouse and Beneficiaries
shall be bound thereby.
13.5 Gender and Number. Where appearing in the Plan, the masculine
gender shall be deemed to include the feminine gender and the singular
number shall include the plural, unless the context clearly indicates to the
contrary.
IN WITNESS WHEREOF, the undersigned has executed this Plan at
Naugatuck, Connecticut on the 10th day of August, 1994.
ATTEST: THE EASTERN COMPANY
By
Donald E. Whitmore, Jr. Russell G. McMillen
------------------------- -------------------
Donald E. Whitmore, Jr. Russell G. McMillen
Its Secretary Its Chairman
59
<PAGE> 60
Financial Statements
and Supplemental Schedules
The Eastern Company Savings
and Investment Plan
Period from May 1, 1994 (inception
of operations) to December 31, 1994
60
<PAGE> 61
The Eastern Company Savings and Investment Plan
Financial Statements
and Supplemental Schedules
Period from May 1, 1994 (inception of operations) to December 31, 1994
Contents
Report of Independent Auditors 62
Financial Statements
Statement of Financial Condition 63
Statement of Income and Changes in Plan Equity 64
Notes to Financial Statements 65
Supplemental Schedules
Assets Held For Investment 69
Transactions or Series of Transactions in Excess of 5% of the Current Value
of Plan Assets 70
61
<PAGE> 62
Report of Independent Auditors
Plan Administrator
The Eastern Company
We have audited the accompanying statement of financial condition of The
Eastern Company Savings and Investment Plan as of December 31, 1994, and the
related statement of income and changes in plan equity for the period from May
1, 1994 (inception of operations) to December 31, 1994. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of The Eastern Company Savings
and Investment Plan at December 31, 1994, and its income and changes in plan
equity for the period from May 1, 1994 (inception of operations) to December
31, 1994, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment as of December 31, 1994, and transactions or series of
transactions in excess of 5% of the current value of plan assets for the
period from May 1, 1994 (inception of operations) to December 31, 1994, are
presented for the purpose of complying with the Department of Labor's Rules
and Regulations for Reporting and Disclosure under the Employee Retirement
Income Security Act of 1974, and are not a required part of the basic
financial statements. The supplemental schedules have been subjected to the
auditing procedures applied in the audit of the financial statements and, in
our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
Ernst & Young LLP
-----------------
February 24, 1995 Ernst & Young LLP
62
<PAGE> 63
<TABLE>
The Eastern Company Savings and Investment Plan
Statement of Financial Condition
December 31, 1994
<CAPTION>
Daily Growth and Eastern
Dividend Income Income Common Total
Trust Fund Fund Fund Stock Fund All Funds
---------- ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Investments, at fair
value:
The Eastern Company
common stock $31,179 $ 31,179
Mutual funds $26,626 $30,902 $110,674 168,202
------- ------- -------- ------- -------
Total investments 26,626 30,902 110,674 31,179 199,381
Contributions
receivable:
Employee 1,736 3,228 11,552 3,698 20,214
Employer 330 525 1,880 552 3,287
Contribution
receivable from
(payable to) other
funds (14,619) 2,776 9,299 2,544 -
------- ------- -------- ------- --------
Plan equity $14,073 $37,431 $133,405 $37,973 $222,882
======= ======= ======== ======= ========
</TABLE>
See notes to financial statements.
63
<PAGE> 64
<TABLE>
The Eastern Company Savings and Investment Plan
Statement of Income and Changes in Plan Equity
Period from May 1, 1994 (inception of operations) to December 31, 1994
<CAPTION>
Daily Growth and Eastern
Dividend Income Income Common Total
Trust Fund Fund Fund Stock Fund All Funds
---------- ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $181 $545 $3,873 $265 $4,864
------- ------- -------- ------- --------
Net investment income 181 545 3,873 265 4,864
Net realized and unrealized
depreciation in fair value
of investments (563) (5,690) (2,710) (8,963)
------- ------- -------- ------- --------
181 (18) (1,817) (2,445) (4,099)
Interfund transfers, net 1,235 - (635) (600) -
Contributions:
Employee 10,920 32,100 117,788 35,764 196,572
Employer 1,737 5,349 18,069 5,254 30,409
------- ------- -------- ------- --------
Total contributions 12,657 37,449 135,857 41,018 226,981
------- ------- -------- ------- --------
Net increase 14,073 37,431 133,405 37,973 222,882
Plan equity at beginning of
period - - - - -
------- ------- -------- ------- --------
Plan equity at end of
period $14,073 $37,431 $133,405 $37,973 $222,882
======= ======= ======== ======= ========
</TABLE>
See notes to financial statements.
64
<PAGE> 65
The Eastern Company Savings and Investment Plan
Notes to Financial Statements
December 31, 1994
1. Summary of Significant Accounting Policies
Plan assets invested in mutual funds and common stock are valued at fair value
as determined by quoted market prices.
Administrative expenses of the Eastern Company Savings and Investment Plan
(the "Plan") are paid by The Eastern Company (the "Company").
2. Description of Plan
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 was established by the Company effective May 1, 1994. The Plan is a
defined contribution plan covering 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 the first 4% of participant contributions based on the
published annual report after-tax return on investment. In 1994, the Company's
match was 25%.
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.
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.
65
<PAGE> 66
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
2. Description of Plan (continued)
Investment Options
Upon enrollment in the Plan, a participant may direct employer and employee
contributions in 10% increments in any of four investment options as follows:
<TABLE>
<CAPTION>
Number of
Participants
Name of Fund Description of Fund December 31, 1994
<S> <C> <C>
Daily Dividend Trust Fund Funds are invested in
money market instruments 41
Income Fund Funds are invested in
a diversified portfolio
of fixed-income securities 72
Growth and Income Fund Funds are invested primarily
in common stocks 132
Eastern Common Stock Fund Funds are invested in common
stock of The Eastern Company 69
</TABLE>
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 defined 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.
The amount of assets that have been allocated but not yet paid to participants
who have withdrawn from the Plan as of December 31, 1994 is $4,826.
66
<PAGE> 67
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
2. Description of Plan (continued)
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.
3. Investments
Plan investments that represent 5 percent or more of the Plan's net assets are
as follows:
<TABLE>
<S> <C>
Mutual funds:
Daily Dividend Trust Fund $ 26,626
Income Fund 30,902
Growth and Income Fund 110,674
Eastern Company common stock 31,179
--------
$199,381
========
</TABLE>
During 1994, the Plan's investments (including investments bought, sold, and
held during the year) depreciated in value as follows:
<TABLE>
<S> <C>
Mutual funds $(6,253)
Common stock (2,710)
--------
Net change in fair value $(8,963)
========
</TABLE>
4. Income Tax Status
The Internal Revenue Service ("IRS") has qualified the Plan under Sections
401(a) and 401(k) of the Internal Revenue Code, and, therefore, it is not
subject to tax under present income 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 is one of the investment options within the
Plan. This fund invests in the common stock of The Eastern Company. At
December 31, 1994, the Plan owned 2,398 shares valued at $31,179.
67
<PAGE> 68
Supplemental Schedules
68
<PAGE> 69
The Eastern Company Savings and Investment Plan
<TABLE>
Assets Held for Investment
December 31, 1994
Current
<CAPTION>
Description Units Cost Value
----------- ----- ---- -------
<S> <C> <C> <C>
Mutual funds:
Daily Dividend Trust Fund 26,626.01 $ 26,626 $26,626
Income Fund 4,791.081 31,465 30,902
Growth and Income Fund 8,762.786 116,364 110,674
Common stock:
The Eastern Company 2,398 shares 33,889 31,179
</TABLE>
69
<PAGE> 70
The Eastern Company Savings and Investment Plan
<TABLE>
Transactions or Series of Transactions in Excess of 5% of the Current Value of
Plan Assets
Period from May 1, 1994 (inception of operations) to December 31, 1994
<CAPTION>
Identity of Description Number of Purchase Selling Net Gain
Party Involved of Assets Transactions Price Price (Loss)
<S> <C> <C> <C>
Putnam Daily Dividend
Trust Fund 13 $ 26,626
Putnam Income Fund 11 31,465
Putnam Growth and
Income Fund 9 116,364
New England Eastern Common
Securities Stock Fund 6 33,889
</TABLE>
70
<PAGE> 71
<TABLE>
Exhibit 11 -- Statement Re: Computation of Per Share Earnings
<CAPTION>
Fiscal Year Ended
December 31 January 1 January 2
1994 1994 1993
----------- ----------- -----------
PRIMARY
<S> <C> <C> <C>
Average shares outstanding 2,771,842 2,748,312 2,755,507
Net effect of dilutive stock options--
based on the treasury stock method
using average market price 59,985 44,958 40,102
----------- ----------- -----------
Total 2,831,827 2,793,270 2,795,609
=========== =========== ===========
Income Before Cumulative Effect
Of Accounting Changes $ 2,642,740 $ 2,766,449 $ 3,036,527
=========== =========== ===========
Net Income $ 2,642,740 $ 2,766,449 $ 1,561,516
=========== =========== ===========
Income Before Cumulative Effect
Of Accounting Changes per Share $0.93 $0.99 $1.09
===== ===== =====
Net Income per Share $0.93 $0.99 $0.56
===== ===== =====
Fully Diluted
Average shares outstanding 2,771,842 2,748,312 2,755,507
Net effect of dilutive stock options--
based on the treasury stock method
using the year-end market price, if
higher than average market price 56,985 44,958 40,102
---------- ---------- -----------
Total 2,828,827 2,793,270 2,795,609
========== ========== ===========
Income Before Cumulative Effect
Of Accounting Changes per Share $ 2,642,740 $ 2,766,449 $ 3,036,527
=========== =========== ===========
Net Income $ 2,642,740 $ 2,766,449 $ 1,561,516
=========== =========== ===========
Income Before Cumulative Effect
Of Accounting Changes per Share $0.93 $0.99 $1.09
===== ===== =====
Net Income per Share $0.93 $0.99 $0.56
===== ===== =====
</TABLE>
71
<PAGE> 72
The Eastern Company
1994
Annual Report
Locks,
Latches
and other
Security
Devices
72
<PAGE> 73
The Eastern Company is a 137-year-old manufacturer of locks and security
hardware engineered for use in industry, underground mining, and commercial
construction.
In 1994, The Eastern Company completed its fifty-fourth year of
uninterrupted dividend payments.
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
1994 1993
<S> <C> <C>
Sales $ 66,021,123 $ 59,717,424
Income Before Tax 4,179,422 4,386,834
Income 2,642,740 2,766,449
Income Per Share .95 1.01
Dividends Per Share .46 .46
Book Value Per Share 10.77 10.33
Working Capital Per Share 6.43 6.44
Current Ratio 3.54 to 1 4.12 to 1
Capital Expenditures 2,849,926 1,445,765
Depreciation and Amortization 2,452,598 2,322,396
Return on Shareholders' Equity 9% 10%
Number of Employees 485 476
Number of Stockholders 765 806
<FN>
Per share data based on the weighted average number of outstanding shares
during the year.
</TABLE>
73
<PAGE> 74
Cash Dividend Rates and Stock Splits
1994 - 1967
1992 - 9.5% cash rate increase
1991 - 12.5% cash rate increase, 50% stock dividend
1988 - 12% cash rate increase, 2 for 1 split
1987 - $1.00 year-end extra
1984 - 43% cash rate increase
1982 - 50% cash rate decrease
1979 - 11% cash rate increase
1977 - 14% cash rate increase, 3 for 2 split
1976 - 27% cash rate increase, plus 20 cent year-end extra
1975 - 30 cent year-end extra
1974 - 25% cash rate increase, plus 11 cent year-end extra
1973 - 10% cash rate increase, 5 for 4 split
1972 - 4% cash rate increase
1970 - 3% cash rate increase, 3 for 2 split
1967 - 17% cash rate increase
74
<PAGE> 75
To Our Shareholders
Although our earnings for the year were in line with our forecasts, they are
not indicative of our potential. We are well positioned to achieve future
growth.
Increased capacity is now in place at our Frazer & Jones division, giving us
more flexibility in accommodating a substantial increase in the contract
casting business which we entered into a few years ago. The significant cost
of repositioning this division to handle this new business is now behind us.
This fact, coupled with a favorable near-term outlook for our other security
product businesses, contributes to our optimism for this coming year.
Earnings for 1994 of $2,643,000 or $.95 per share on sales of $66,000,000
compare to 1993 earnings of $2,766,000 or $1.01 per share on sales of
$59,700,000.
Our capital expenditures of $2,850,000 exceeded our budget. With our strong
balance sheet, we have the flexibility to further increase shareholder value
by investing in projects with sound long-term potential. We also continue
our acquisition search for businesses or product lines that would complement
our focus on mechanical security products.
With a total dividend pay-out during the year of $1,276,000, your Board of
Directors continued to support our long-standing policy of paying dividends
commensurate with earnings and business conditions.
75
<PAGE> 76
Highlights of Operations
The underground coal mining market, served by our Frazer & Jones division,
has over the last few years undergone some change from mechanical anchoring
to alternate methods of bolting. Although we expect mechanical anchors to
continue to play an important role in future roof control, we have responded
to this challenge by engineering and introducing stronger and more
economical expansion fasteners. The previously mentioned addition of
contract casting business at this division will also enhance overall levels
of production.
Our three lock companies, CCL, World Lock and Illinois Lock did not live up
to our expectations. Illinois Lock in particular, although successful in
securing some new business, was not able to adjust quickly enough to the
ever-changing needs of the diverse markets which it services. To this end,
we have a number of products in final development stages in our engineering
and prototype department, which makes us optimistic for this year's
prospects for recovery. We anticipate CCL's activity levels in 1995 will be
raised by the purchase of the Presto Lock brand of combination locks, which
command a dominant position in the luggage industry. The tooling and
equipment for this product line are now fully integrated into CCL's
operation. We intend to use
this keyless technology to develop products for other applications. Our
Pacific Rim facilities continue to support the efforts of our other
operations, as well as to serve international markets.
Demand for truck trailers, for which our Eberhard Manufacturing Company
supplies a number of security products, was sustained at a high level. This
was a key factor in this division achieving a record year. A number of
products were successfully re-engineered; including a new, stronger and more
economical lock rod for the truck trailer market. With continued emphasis
and success in engineering latching mechanisms for a number of diverse
markets, the outlook remains positive for this division.
Finally, we managed to show significant year-to-year improvement at both our
Eberhard, Ltd. subsidiary and our TMC division. We continue to explore
strategic options at both of these locations to enhance long-term value.
We are most fortunate to have a group of competent and dedicated men and
women working on your behalf. Two deserve special mention -- We want to
thank Michael Sendzimir, who is completing his duties as a board member, for
his valuable contributions. On a sad note, we report the unfortunate death
of CCL's Managing Director, Gary Mlynarski.
Your company has a strong position in its selected markets. The forecast for
each of these markets is good, and we expect growth in sales and earnings in
1995.
Russell G. McMillen
Chairman
Stedman G. Sweet
President and Chief Executive Officer
76
<PAGE> 77
Photographs of products omitted.
77
<PAGE> 78
THE EASTERN COMPANY'S security products business has undergone changes and
growth in recent years. We have developed and marketed new designs of locks
and fasteners, and we are selling more of our products to the world market.
To meet this new demand, and to take advantage of manufacturing
efficiencies, we continue to utilize our two production facilities on the
Pacific Rim.
Our lock products are also evolving -- becoming more sophisticated in their
function, being more user-friendly and versatile, and meeting new,
specialized needs. Keyless locks, which require combinations for access, are
becoming an increasingly important alternative within the O.E.M. and
consumer markets.
The Sesamee(R) all-brass combination padlock remains the flagship product of
our keyless security lines. In 1994, several new combination lock devices
were introduced. The "Prestolock" line was purchased for our CCL SECURITY
PRODUCTS, adding a wide selection of consumer-oriented, resettable locks to
our product mix. Another newly developed combination lock is our "Plug Blok"
-- a device that inhibits the unauthorized electrical hookup of any three-
prong piece of equipment. Soon to be introduced is a combination gun lock
which clamps over the trigger guard of a firearm. In some states such locks
are required at the time of purchase.
Small cam locks, using a dial-type combination, represent another example of
keyless security becoming an alternative to standard key-locking mechanisms.
In order to meet diverse end-use needs, these combination cam locks are
marketed by three Eastern Company divisions.
78
<PAGE> 79
Photographs of products omitted.
79
<PAGE> 80
Sharing of technical and marketing resources has become increasingly
important in The Eastern Company's collective effort to increase marketshare
worldwide. Our WORLD LOCK COMPANY, Ltd. subsidiary in Taiwan, has enabled us
to quickly and cost-effectively bring new designs to international markets.
Most locks still require keys -- but their shapes and uses are evolving.
"DUO(TM)" locks, made by our Illinois Lock Company division, have a long-
standing and well-deserved reputation for reliable security, based on its
unique triple-bitted design with serrations on both edges and the surface.
The newly introduced "WARLOCK" is even more difficult to copy or defeat. Its
key features incorporate a series of conically machined depressions or
"dimples" in varying sizes and angles. This unusual concept and design has
made Warlock a popular choice to meet the ultra-strict requirements of the
casino and gaming industry.
Tubular keys are yet another design variation that offer an alternative to
the conventional key mechanism. These are commonly used on the lock-boxes of
vending machines, cash registers and other medium-security applications.
Special key-operated switchlocks are another category of Eastern's ever-
expanding array of locking mechanisms. A familiar example is the modern cash
register where various positions of the key select specific functions.
Computers, gas station dispensing equipment, and a variety of industrial
equipment also use electric switchlocks.
80
<PAGE> 81
Photographs of products omitted.
81
<PAGE> 82
The entire spectrum of security hardware includes more than just locks. The
transportation industry -- from long-haul trailers to overseas shipping
containers -- requires custom latching and locking devices that must
withstand both tampering and the rigors of highway wear and tear. Our
EBERHARD MANUFACTURING COMPANY division and our Canadian subsidiary,
EBERHARD HARDWARE MANUFACTURING, Ltd., design and produce new products to
meet the expanding needs for this heavy-duty specialty hardware. Recent
product innovations have further enhanced our leadership position in this
industry.
These two divisions also produce a diverse line of security hardware for
industrial markets -- such as locks, latches, and handles for securing
access doors and compartments of machinery and other electro/mechanical
equipment.
Security of a different but equally critical kind is provided by the
products of our FRAZER & JONES division. Mine roof fasteners are the most
important component in the prevention of underground roof falls. Inserted
into holes bored in the roof of an underground coal mine, these assemblies
expand when torqued, providing solid anchoring for the supports that secure
the overhead rock strata.
Different coal producing areas have greatly varying mine roof conditions.
This has led to this division developing over 50 different versions of these
anchoring devices. Testing of these security devices is performed by F&J on
an ongoing basis, both in its laboratories and in the mines themselves. This
R&D on product design has recently led to new customers in Australia and
South Africa, as well as Canada. After a year of adding capacity, this
division has now diversified into the contract casting business -- malleable
castings produced to customers' specifications.
The strength and structural integrity of poured concrete depends on the
steel reinforcing bars that are embedded in its structure. Our THOMPSON
MATERIALS COMPANY (TMC) division is a fabricator of these bars as well as a
resource for other concrete construction supplies for projects throughout
the Northeast. Contractors rely on TMC to meet each site's special needs --
such as bending and shearing rebar to custom shapes or lengths.
82
<PAGE> 83
Consolidated Balance Sheets
December 31, 1994 and January 1, 1994
ASSETS
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Current Assets
Cash and cash equivalents............................................ $ 2,610,244 $ 2,479,998
Accounts receivable, less allowances
($330,024 in 1994 and $363,320 in 1993).............................. 9,665,164 8,294,946
Land held for sale................................................... 1,018,111 --
Inventories:
Raw materials and component parts................................. 4,286,546 4,523,426
Work in process................................................... 1,670,603 2,764,785
Finished goods.................................................... 3,573,397 3,904,355
----------- -----------
..................................................................... 9,530,546 11,192,566
Prepaid expenses..................................................... 1,357,262 699,687
Deferred income taxes................................................ 664,600 713,900
----------- -----------
Total Current Assets................................................. 24,845,927 23,381,097
Property, Plant and Equipment
Land.............................................................. 227,787 228,432
Buildings......................................................... 3,700,951 3,652,407
Machinery and equipment........................................... 20,021,797 18,539,400
Accumulated depreciation (deduction).............................. (10,996,773) (10,004,451)
----------- -----------
12,953,762 12,415,788
Other Assets
Goodwill, less accumulated amortization
($80,680 in 1994 and $69,334 in 1993)................................ 79,630 80,976
Patents, licenses and trademarks, less accumulated amortization
($354,396 in 1994 and $267,387 in 1993).............................. 1,045,106 1,045,429
Prepaid pension cost................................................. 2,958,362 2,576,654
Noncurrent assets of discontinued operations......................... -- 958,999
----------- -----------
4,083,098 4,662,058
----------- -----------
$41,882,787 $40,458,943
=========== ===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Current Liabilities
Accounts payable.................................................... $ 3,239,241 $ 2,593,852
Accrued compensation and withholdings............................... 935,417 922,624
Accrued expenses.................................................... 377,322 1,096,406
Short-term borrowings............................................... 1,400,000 --
Current portion of long-term debt................................... 1,060,000 1,060,000
Total Current Liabilities........................................... 7,011,980 5,672,882
Deferred Income Taxes............................................... 1,939,200 1,278,500
Long-Term Debt, less current portion................................ 240,000 1,300,000
Other Liabilities................................................... -- 1,000,000
Accrued postretirement benefits..................................... 2,848,150 2,824,504
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: 2,775,085 shares in 1994 and 2,750,668 shares in 1993
(excluding 520,936 shares in 1994 and
508,316 shares in 1993 held in treasury)...................... 9,009,392 8,873,121
Retained earnings................................................. 20,912,486 19,545,655
Accumulated foreign currency translation adjustments.............. (78,421) (35,719)
----------- -----------
Total Shareholders' Equity.......................................... 29,843,457 28,383,057
----------- -----------
$41,882,787 $40,458,943
=========== ===========
</TABLE>
See notes to consolidated financial statements.
83
<PAGE> 84
Consolidated Statements of Income
Fiscal years ended December 31, 1994, January 1, 1994 and January 2, 1993
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Net Sales........................................................... $66,021,123 $59,717,424 $60,059,998
Other income........................................................ 242,472 487,572 1,190,667
----------- ----------- -----------
66,263,595 60,204,996 61,250,665
Costs and expenses:
Cost of products sold............................................. 1,507,796 45,854,997 46,078,867
Selling and administrative........................................ 10,479,204 9,818,687 9,996,563
Interest.......................................................... 97,173 144,478 220,308
----------- ----------- -----------
62,084,173 55,818,162 56,295,738
----------- ----------- -----------
Income before income taxes and
cumulative effect of accounting changes........................... 4,179,422 4,386,834 4,954,927
Income taxes........................................................ 1,536,682 1,620,385 1,918,400
Income before cumulative effect
of accounting changes............................................. $ 2,642,740 $ 2,766,449 $ 3,036,527
Cumulative effect of
accounting changes................................................ -- -- (1,475,011)
----------- ----------- -----------
NET INCOME.......................................................... $ 2,642,740 $ 2,766,449 $ 1,561,516
=========== =========== ===========
PER SHARE DATA:
Income before cumulative effect of
accounting changes.............................................. $ .95 $ 1.01 $ 1.10
Cumulative effect of accounting changes........................... -- -- (.53)
----------- ----------- -----------
Net income.......................................................... $ .95 $ 1.01 $ .57
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
84
<PAGE> 85
Consolidated Statements of Shareholders' Equity
Fiscal years ended December 31, 1994, January 1, 1994 and January 2, 1993
<TABLE>
<CAPTION>
Common Retained Translation
Stock Earnings Adjustments
<S> <C> <C> <C>
Balances at December 28, 1991............................................. $9,002,070 $17,724,135 $ 139,507
Net income................................................................ -- 1,561,516 --
Cash dividends declared, $.45 per share................................... -- (1,239,994) --
Purchase of 32,015 shares of Common Stock for treasury.................... (327,806) -- --
Issuance of 16,800 shares of Common Stock upon the
exercise of stock options............................................... 153,429 -- --
Currency translation adjustment........................................... -- -- (95,596)
Other..................................................................... 10,802 (1,913) --
Balances at January 2, 1993............................................... 8,838,495 18,043,744 43,911
---------- ----------- ---------
Net income................................................................ -- 2,766,449 --
Cash dividends declared, $.46 per share................................... -- (1,264,538) --
Purchase of 5,272 shares of Common Stock for treasury..................... (70,172) -- --
Issuance of 11,320 shares of Common Stock upon the
exercise of stock options............................................... 104,798 -- --
Currency translation adjustment........................................... -- -- (79,630)
Balances at January 1, 1994............................................... 8,873,121 19,545,655 (35,719)
---------- ----------- ---------
Net income................................................................ -- 2,642,740 --
Cash dividends declared, $.46 per share................................... -- (1,275,909) --
Purchase of 12,620 shares of Common Stock for treasury.................... (202,042) -- --
Issuance of 37,037 shares of Common Stock upon the
exercise of stock options............................................... 338,313 -- --
Currency translation adjustment........................................... -- -- (42,702)
---------- ----------- ---------
Balances at December 31, 1994............................................. $9,009,392 $20,912,486 $ (78,421)
========== =========== =========
<FN>
( ) Indicates deduction.
</TABLE>
See notes to consolidated financial statements.
85
<PAGE> 86
Consolidated Statements of Cash Flows
Fiscal years ended December 31, 1994, January 1, 1994 and January 2, 1993
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 2,642,740 $ 2,766,449 $ 1,561,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................. 2,452,598 2,322,396 2,237,085
Pension plan income........................................................... (233,984) (340,657) (227,421)
Loss (gain) on sales of equipment and other assets............................ 21,688 218 (875,748)
Provision for doubtful accounts............................................... 120,000 114,988 632,102
Cumulative effect of accounting changes....................................... -- -- 2,520,411
Provision for deferred income taxes........................................... 710,000 472,200 (845,800)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,504,405) (242,542) (1,528,612)
Inventories................................................................. 1,623,872 (558,764) 212,930
Prepaid expenses........................................................... (717,224) (162,198) 48,062
Other assets............................................................... (167,758) (213,273) (624,644)
Accounts payable........................................................... 652,333 (763,065) 364,017
Accrued expenses........................................................... (1,671,133) 177,036 (415,864)
Pension plan contributions................................................. (147,720) (388,719) --
----------- --------- -----------
Net cash provided from operating activities.................................... 3,781,007 3,184,069 3,058,034
INVESTING ACTIVITIES
Purchases of property, plant and equipment..................................... (2,849,926) (1,445,765) (1,584,714)
Proceeds from sale of equipment and other assets............................... 3,600 2,504 1,016,472
----------- ---------- -----------
Net cash used in investing activities.......................................... (2,846,326) (1,443,261) (568,242)
FINANCING ACTIVITIES
Proceeds from line of credit................................................... 2,000,000 -- --
Payments on line of credit..................................................... (600,000) -- --
Principal payments on long-term debt........................................... (1,060,000) (1,000,000) (1,000,000)
Proceeds from sales of Common Stock............................................ 338,313 104,798 164,231
Purchases of Common Stock for treasury......................................... (202,042) (70,172) (327,806)
Dividends paid................................................................. (1,275,909) (1,264,538) (1,239,994)
----------- ---------- -----------
Net cash used in financing activities.......................................... (799,638) (2,229,912) (2,403,569)
Effect of exchange rate changes on cash........................................ (4,797) (15,635) (4,485)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents........................... 130,246 (504,739) 81,738
Cash and cash equivalents at beginning of year................................. 2,479,998 2,984,737 2,902,999
----------- ---------- -----------
Cash and cash equivalents at end of year....................................... $ 2,610,244 $ 2,479,998 $ 2,984,737
</TABLE>
See notes to consolidated financial statements.
86
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
December 31, 1994, January 1, 1994 and January 2, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to December 31. Fiscal
years 1994 and 1993 were comprised of 52 weeks; fiscal year 1992 was
comprised of 53 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all wholly owned, after elimination of intercompany
accounts and transactions.
Foreign Currency Translation
For foreign operations, the balance sheet accounts are translated at the
current year-end exchange rate, and income statement items are translated at
the average exchange rate for the year. Resulting translation adjustments are
made directly to a separate component of shareholders' equity. 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.
Concentrations of Credit Risk
The Company sells its products to customers in diversified industries
primarily in North America. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations.
The Company invests its cash on a daily basis through repurchase agreements
in U.S. Government securities bearing a minimal risk. The Company has not
experienced any loss on its cash investments.
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 of inventories by approximately $2,783,772 and $2,635,118
at December 31, 1994 and January 1, 1994, respectively. During 1994,
decreased inventory levels caused a liquidation of certain LIFO inventory
quantities carried at lower costs prevailing in prior years. The liquidation
of these layers increased net income by $82,000 ($.03 per share).
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment are stated on the basis of cost. Depreciation
is computed generally using the straight-line method based upon the estimated
useful lives of the assets. The annual provisions charged to continuing
operations amounted to $2,270,712 in 1994, $2,170,706 in 1993 and $2,185,449
in 1992.
Intangibles
Patents are amortized using the straight-line method over the lives of the
patents. Licenses are generally amortized on a straight-line basis over
periods of five to 17 years. Goodwill is being amortized over periods from
five to 20 years.
Pension Plans
The Company has defined benefit pension plans in effect generally covering
all eligible employees. The Company measures its pension cost and funding
status based upon actuarial evaluations performed as of September 30. For
additional disclosure see Note 8.
Product Development Costs
Such costs (1994--$371,575; 1993--$495,914; 1992--$505,284) are expensed as
incurred.
Per Share Data
Per share data of Common Stock is based on the weighted average number of
shares outstanding during each year. Common Stock equivalents (stock options)
did not have a materially dilutive effect on net income per share for any
year presented.
Commitments and Contingencies
Classified in other liabilities at January 1, 1994 is an amount for
environmental claims arising with respect to any of the Company's various
operations. During June 1994, the Company settled certain outstanding claims.
The United States Environmental Protection Agency can appeal the dismissal of
its complaints against the Company. Management believes that based on the
facts available to them and the advice of legal counsel, the future cost of
existing environmental claims will not have a material effect on the Company.
2. DISCONTINUED OPERATIONS
In December 1991, the Board of Directors approved a plan to discontinue the
Company's high-alloy stainless steel castings business. In January 1992, the
Company sold the remaining machinery and equipment for $200,000. The
remaining asset (classified as land held for sale in 1994) is stated at its
approximate net realizable value and will be disposed of in 1995.
87
<PAGE> 88
3. Debt
Debt consists of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Note payable to bank, principal payable in
quarterly installments of $250,000 through
October 1, 1995. Interest at prime rate
(8.5% at December 31, 1994)is payable and
adjusted quarterly................................ $1,000,000 $2,000,000
Non-interest bearing note payable, principal
payable in yearly installments of $60,000
through January 7, 1999............................ 300,000 360,000
---------- ----------
1,300,000 2,360,000
Less current maturities............................ 1,060,000 1,060,000
---------- ----------
Long-term debt.................................... $ 240,000 $1,300,000
========== ==========
</TABLE>
Interest paid was $136,128 in 1994, $160,520 in 1993 and $248,275 in 1992.
The Company has available a $5,000,000 line of credit. Borrowings against the
line were $1,400,000 at December 31, 1994 with interest payable at 7.437%
(weighted average interest rate). In connection with this line of credit
arrangement and the Company's cash management program, compensating bank
balances (approximately $500,000 at December 31, 1994) are required to be
maintained.
4. SHAREHOLDERS' EQUITY
On September 16, 1991, pursuant to a Rights Agreement (the "Agreement") of
the same date, the Company declared a dividend of one stock purchase right on
each outstanding share of Common Stock. As provided in the Agreement, as
amended effective November 11, 1992, under certain conditions, 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
rights, which do not have voting rights, 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. At December 31, 1994,
there were 2,775,085 outstanding rights.
5. STOCK OPTIONS
At December 31, 1994, 59,840 shares (87,610 shares at January 1, 1994 and
99,750 shares at January 2, 1993) of the Company's unissued Common Stock were
reserved for options under the 1983 Incentive Stock Option Plan to officers
and key employees. Under the plan, 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.
Changes in stock options under the 1983 Incentive Stock Option Plan are as
follows:
<TABLE>
<CAPTION>
Options Purchase
---------------------- ---------------
1994 1993 1992 Price Per Share
------------------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 87,610 99,750 113,550
Exercised.......................... (19,770) (6,140) (13,800) $9.08-$9.375
Forfeited.......................... (8,000) (6,000) --
-------- ------- --------
Outstanding at end of year.......... 124,203 141,470 135,400
Exercisable at end of year:
At $9.08............................ 17,200 36,150 40,650
At $9.375........................... 34,820 31,820 23,650
Unexercisable at end of year:
At $9.375............................ 7,820 19,640 35,460
88
<PAGE> 89
</TABLE>
<TABLE>
<CAPTION>
Options Purchase
1994 1993 1992 Price Per Share
------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 87,610 99,750 113,550
Exercised.......................... (19,770) (6,140) (13,800) $9.08-$9.375
Forfeited........................... (8,000) (6,000) --
------- ------ -------
Outstanding at end of year.......... 59,840 87,610 99,750
Exercisable at end of year:
At $9.08............................ 17,200 36,150 40,650
At $9.375........................... 34,820 31,820 23,640
Unexercisable at end of year:
At $9.375............................ 7,820 19,640 35,460
</TABLE>
Effective April 26, 1989 the Company's shareholders approved the 1989
Executive Stock Incentive Plan. Under the plan, incentive stock options may
be granted to salaried officers and other key employees; for 1991 options
granted, 20% per year of the total 70,900 options granted for such
participants were exercisable on a cumulative basis. The plan also provides
for the grant of non-qualified stock options to each non-employee director of
the Company. The Company reserved 240,000 shares of Common Stock for issuance
under the plan. The purchase price of the shares may not be less than the
fair market value of the shares at the date of the grant. At December 31,
1994, 180,803 shares (198,070 shares at January 1, 1994 and 203,250 shares at
January 2, 1993) of the Company's unissued Common Stock were reserved for
options under the 1989 Incentive Stock Option Plan.
Changes in stock options under the 1989 Incentive Stock Option Plan are as
follows:
<TABLE>
<CAPTION>
Options Purchase
---------------------- ---------------
1994 1993 1992 Price Per Share
------------------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 141,470 135,400 138,400
Granted............................ -- 11,250 -- $12.50
Exercised........................... (17,267) (5,180) (3,000) $9.08-$9.375
-------- ------- --------
Outstanding at end of year.......... 124,203 141,470 135,400
Exercisable at end of year:
At $9.08............................ 33,750 45,000 45,000
At $9.375........................... 42,523 34,360 25,360
At $11.00........................... 11,250 11,250 11,250
At $12.25........................... 11,250 11,250 11,250
At $12.50........................... 11,250 11,250 --
Unexercisable at end of year:
At $9.375............................ 14,180 28,360 42,540
</TABLE>
An option totaling 11,250 shares in 1993 was granted to a non-employee
director at a price of $12.50 per share in 1993.
6. INCOME TAXES
Effective December 29, 1991, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The cumulative effect of this accounting change increased 1992 net
income by $186,900 or $.07 per share.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Depreciation................................... $ 1,901,900 $ 1,865,300
Pension plans.................................. 1,192,100 1,028,100
Other.......................................... 199,800 58,200
----------- -----------
Total deferred tax liabilities................. 3,293,800 2,951,600
Other postretirement benefits................... (1,147,800) (1,126,900)
Inventories..................................... (308,100) (348,200)
Allowance for doubtful accounts................. (121,700) (133,900)
Accrued compensation............................. (217,400) (209,700)
Other............................................ (224,200) (568,300)
----------- -----------
Total deferred tax assets....................... (2,019,200) (2,387,000)
----------- -----------
Net deferred tax liabilities $ 1,274,600 $ 564,600
</TABLE>
89
<PAGE> 90
For financial reporting purposes, income before income taxes and cumulative
effect of accounting changes includes the following:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Domestic................. $3,950,218 $4,117,572 $5,194,888
Foreign.................. 229,204 269,262 (239,961)
---------- ---------- ----------
Total................... $4,179,422 $4,386,834 $4,954,927
</TABLE>
Income taxes (benefits) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal.............. $ 687,600 $ 981,700 $1,512,900
Foreign............... 5,182 92,385 (56,400)
State................. 133,900 150,300 335,000
Deferred................. 710,000 396,000 126,900
---------- ---------- -----------
$1,536,682 $1,620,385 $1,918,400
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense
follows:
<TABLE>
<CAPTION>
1994 1993 1992
Amount % Amount % Amount %
--------- --- --------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $1,421,000 34% $1,491,500 34% $1,684,700 34%
State income taxes,
net of federal tax benefit. 169,200 4 146,100 3 233,200 5
Other -- net.............. (53,518) (1) (17,215) - 500 -
----------- --- ----------- --- ----------- ---
$1,536,682 37% $1,620,385 37% $1,918,400 39%
</TABLE>
Total income taxes paid were $1,556,664 in 1994, $987,029 in 1993 and
$1,883,165 in 1992. Federal and foreign income taxes prepaid at December 31,
1994 and accrued at January 1, 1994 were $391,377 and $266,000, respectively.
United States income taxes have not been provided on the undistributed
earnings of foreign subsidiaries ($1,567,760 at December 31, 1994) because
such earnings are intended to be reinvested abroad indefinitely or
repatriated only when substantially free of additional tax.
7. 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 payments under noncancelable operating leases with initial or
remaining terms in excess of one year during each of the next five fiscal
years are as follows:
<TABLE>
<S> <C>
1995.................. $ 381,223
1996.................. 387,511
1997.................. 391,422
1998.................. 395,333
1999.................. 399,103
----------
$1,954,592
</TABLE>
Rent expense for all operating leases amounted to $387,609 in 1994, $400,912
in 1993 and $375,162 in 1992.
90
<PAGE> 91
8. EMPLOYEE RETIREMENT BENEFITS
The Company has noncontributory defined benefit plans covering most U.S.
employees. Plan benefits are generally based upon age at retirement, years of
service and, for the salaried plan, level of compensation. The Company's
funding policy for all plans is to make the annual contributions required by
applicable regulations. Certain U.S. employees and most employees of the
Canadian subsidiary are covered by defined contribution plans based on
salaries and wages.
A summary of the components of net pension income for 1994, 1993 and 1992
follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Service cost -- benefits earned
during the period................... $ 574,369 $ 488,836 $ 460,981
Interest cost on projected benefit
obligation........................... 1,599,953 1,517,379 1,411,634
Actual return on plan assets......... (1,966,649) (1,684,987) (1,587,148)
Net amortization and deferral........ (486,695) (661,885) (512,888)
Defined contribution plans........... 1,366 1,822 2,741
Supplemental retirement plan
expense.............................. 45,038 -- --
---------- ---------- ----------
Net pension income................... $ (232,618) $ (338,835) $ (224,680)
</TABLE>
Assumptions used in the accounting for pensions were:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Weighted average discount rates...... 7.5% 7.5% 8%
Rates of increase in compensation
levels............................... 4.25% 4.25% 5%
Expected long-term rate of return
on assets............................ 8.5% 8.5% 8.5%
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation..................... $(21,285,834) $(20,551,709)
----------- -----------
Accumulated benefit obligation................ $(21,477,759) $(20,671,948)
----------- -----------
Projected benefit obligation.................. $(22,024,713) $(21,290,530)
Plan assets at fair value..................... 26,856,298 26,512,275
----------- -----------
Excess of plan assets over projected
benefit obligation............................ 4,831,585 5,221,745
Prior service cost not yet recognized
in net periodic pension cost.................. 171,920 98,209
Unrecognized net loss......................... 657,867 205,289
Unrecognized net assets in excess of
obligations.................................. (2,657,972) (2,948,589)
----------- -----------
Net asset.................................... 3,003,400 2,576,654
Supplemental retirement plan accrual......... (45,038) --
----------- -----------
Net pension asset............................ $ 2,958,362 $ 2,576,654
</TABLE>
All of the plans' assets at December 31, 1994 were invested in listed stocks,
bonds, and pooled investment funds, including Common Stock of the Company
having a market value of $3,734,250 at that date.
The Salaried Employees' Retirement Plan provides that the Board of Directors
may increase retirement benefits upon certain changes in control of the
Company.
The Company also sponsors an unfunded Supplemental Executive Retirement Plan,
which is a nonqualified plan that provides an officer defined pension
benefits in excess of limits imposed by federal tax law. At December 31,
1994, the projected benefit obligation for this plan totaled $199,489, of
which $154,451 is subject to later amortization. The remaining $45,038 is
included in prepaid pension cost.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain medical and life insurance for substantially all
retired salaried employees in the United States. Effective in January 1991,
such benefits were subject to years of service and early retirement actuarial
considerations. Effective December 29, 1991, the Company adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The standard requires companies
to recognize the estimated future cost of providing health and other
postretirement benefits on an accrual basis. These benefits had previously
been recognized as an expense when paid. The cumulative effect of this
accounting change reduced 1992 net income by $1,661,911 ($2,707,311 less
related deferred income taxes of $1,045,400) or $.60 per share. The effect of
this change on 1992 continuing operations was not material.
91
<PAGE> 92
Based on the latest actuarial information available, the status of the
Company's plans at the end of each fiscal year was as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees....................................... $(2,145,845) $(2,653,649)
Fully eligible active plan participants........ (1,174,875) (805,631)
----------- -----------
(3,320,720) (3,459,280)
Plan assets at fair value....................... 500,300 352,735
---------- -----------
Excess of accumulated postretirement benefit
obligation over plan assets................... (2,820,420) (3,106,545)
Unrecognized net loss......................... (27,730) 282,041
Accumulated postretirement benefit obligations
accrued....................................... $(2,848,150) $(2,824,504)
</TABLE>
Plan assets are invested in a pooled insurance continuance fund where excess
assets over actual costs are used to offset future costs of the plan.
A summary of the components of net postretirement benefit expense for 1994,
1993 and 1992 follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Service cost - benefits earned during
the period............................. $ 79,442 $ 52,135 $ 47,348
Interest cost.......................... 206,627 224,153 243,658
-------- -------- --------
Net postretirement benefit expense..... $286,069 $276,288 $291,006
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) taking into
consideration the significant cost reduction steps taken is assumed to be
4.25%. In view of there being no rate increases over the past three years for
retiree health insurance, as well as the cap placed on yearly dollar cost
contributions for employees retiring after January 1, 1991, the 4.25% is
indicative of the rate increases expected over the next five years. A one
percentage point increase in the assumed health care cost trend rate would
have increased the accumulated benefit obligation by $275,044 at December 31,
1994 and $172,091 at January 1, 1994; and increased the net periodic
postretirement benefit cost for 1994 by $34,802, for 1993 by $19,324 and for
1992 by $13,736.
Weighted average discount rates of 7.5% were used in determining the
accumulated benefit obligation for 1994 and 1993.
The Company has taken significant steps to reduce the effects of
postretirement life and health insurance benefits through the introduction of
maximum yearly dollar contributions for employees retiring after January 1,
1991.
401(K) SAVINGS PLAN
Effective May 1, 1994 the Company sponsors a 401(k) savings and investment
plan for its full-time U.S. salaried employees. Eligible employees may choose
to contribute between 1% and 18% of their salary, a portion of which the
Company may match. Participants are vested in the matching contribution after
5 years of service.
Participants can direct the investment of the funds to different investment
options, one of which is the Company's Common Stock (2,398 shares at December
31, 1994).
9. INDUSTRY SEGMENTS
The Company operates in two principal segments: Security Products and
Construction. The Security Products group has a wide range of products used
to close, lock or support equipment used in the industrial, transportation or
mining industries. The Construction group is involved in warehousing and
distribution of materials for the commercial, industrial and road building
industries.
Operating profit is total revenue less operating expenses, excluding interest
and general corporate expenses. Identifiable assets by industry segment are
assets directly identified with those operations. Corporate assets consist
primarily of cash and cash equivalents, notes and other investments.
92
<PAGE> 93
9. Industry Segments (continued)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
REVENUE:
Sales to unaffiliated customers:
Security products............. $58,380,983 $52,545,780 $51,761,865
Construction.................. 7,640,141 7,171,644 8,298,113
General corporate............. 242,471 487,572 1,190,687
------------ ----------- -----------
TOTAL REVENUE..................... $66,263,595 $60,204,996 $61,250,665
OPERATING PROFIT (LOSS):
Security products............. $ 5,754,267 $ 6,218,607 $ 5,553,580
Construction.................. 309,027 (75,128) (84,113)
------------ ----------- -----------
OPERATING PROFIT.................. 6,063,294 6,143,479 5,469,467
General corporate
expenses...................... (1,792,699) (1,612,167) (294,232)
Interest expense.............. (91,173) (144,478) (220,308)
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGES............. $ 4,179,422 $ 4,386,834 $ 4,954,927
IDENTIFIABLE ASSETS:
Security products............. $32,159,679 $32,324,441 $31,892,169
Construction.................. 2,900,947 2,303,100 2,363,070
---------- ----------- -----------
35,060,626 34,627,541 34,255,239
General corporate............. 5,804,050 4,872,403 5,208,856
----------- ----------- -----------
Discontinued operations....... 1,018,111 958,999 739,127
Total Assets...................... $41,882,787 $40,458,943 $40,203,222
DEPRECIATION AND AMORTIZATION:
Security products............. $ 2,366,705 $ 2,237,992 $ 2,169,994
Construction.................. 63,911 62,353 48,756
CAPITAL EXPENDITURES:
Security products............. $ 2,795,957 $ 1,425,285 $ 1,483,486
Construction...................... 20,557 17,260 51,540
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Eastern Company
We have audited the accompanying consolidated balance sheets of The Eastern
Company and subsidiaries as of December 31, 1994 and January 1, 1994, and
the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three fiscal years in the period ended December
31, 1994. 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 and subsidiaries at December 31, 1994 and January 1, 1994,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 6 and 8 to the consolidated financial statements, in
1992 the Company changed its methods of accounting for income taxes and
for postretirement benefits other than pensions.
Hartford, Connecticut Ernst & Young LLP
January 30, 1995 Ernst & Young LLP
93
<PAGE> 94
<TABLE>
1994-1985 Summary of Operations
INCOME STATEMENT ITEMS (in thousands)
<CAPTION>
Year 1994 1993 1992bc 1991 1990a 1989a 1988a 1987 1986ab 1985a
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............... $66,021 $59,717 $60,060 $56,642 $61,967 $63,638 $67,016 $63,012 $52,617 $55,720
Cost of Products Sold... 51,508 45,855 46,079 41,354 46,500 49,366 52,847 47,783 40,978 43,477
Depreciation and
Amortization............ 2,453 2,322 2,237 2,208 2,526 2,713 2,549 2,390 2,380 2,113
Interest Expense........ 97 144 220 358 485 614 566 577 459 587
Income Before Taxes..... 4,179 4,387 4,955 6,560 6,213 4,624 5,158 6,019 3,674 4,206
Taxes on Income......... 1,536 1,621 1,918 2,533 2,539 1,837 1,890 2,678 1,777 1,577
Income (Loss):
Continuing
Operations.............. 2,643 2,766 3,037 4,027 3,674 2,787 3,268 3,341 1,897 2,629
Discontinued
Operations.............. -- -- -- (1,205) (1,958) (1,162) (646) (450) (74) (32)
Total................... 2,643 2,766 3,037 2,822 1,716 1,625 2,622 2,891 1,823 2,597
Dividends............... 1,276 1,265 1,240 1,178 1,038 1,037 1,035 1,940 1,028 1,095
BALANCE SHEET ITEMS (in thousands)
<CAPTION>
Year 1994 1993 1992b 1991 1990a 1989a 1988a 1987 1986ab 1985a
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory............... $ 9,531 $ 11,193 $ 10,680 $ 10,648 $ 9,744 $ 9,704 $ 11,264 $ 10,935 $ 7,017 $ 7,653
Working Capital......... 17,834 17,708 17,126 15,729 15,723 16,542 15,184 15,317 13,315 14,800
Plant Assets Net........ 12,954 12,416 13,164 13,838 12,439 11,171 13,079 13,029 11,471 11,682
Total Assets............ 41,883 40,459 40,203 38,965 38,730 38,311 38,610 36,313 34,397 36,084
Shareholders' Equity.... 29,843 28,383 26,926 26,866 25,477 24,855 24,270 23,302 23,424 24,800
Capital Expenditures.... 2,850 1,446 1,585 3,647 3,889 1,788 3,745 3,852 2,196 3,285
Long-Term Obligations... 240 1,300 2,000 3,000 4,000 5,108 5,206 5,315 4,233 4,904
PER SHARE DATA
<CAPTION>
Year.................... 1994 1993 1992bc 1991 1990a 1989a 1988a 1987 1986ab 1985a
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (Loss):
Continuing
Operations.............. $ .95 $ 1.01 $ 1.10 $ 1.44 $ 1.32 $ 1.01 $ 1.15 $ 1.13 $ .61 $ .80
Discontinued
Operations.............. -- -- -- (.43) (.70) (.42) (.23) (.15) (.02) (.01)
Total................... $ .95 $ 1.01 $ 1.10 $ 1.01 $ .62 $ .59 $ .92 $ .98 $ .59 $ .79
Dividends............... .46 .46 .45 .42 .37 .37 .36 .66 .33 .33
Shareholders' Equity.... 10.77 10.33 9.77 9.59 9.16 8.94 8.51 7.87 7.59 7.54
Average shares
Outstanding............. 2,771,842 2,748,312 2,755,507 2,800,635 2,780,036 2,778,644 2,851,302 2,960,037 3,087,378 3,287,550
<FN>
a Reclassified to reflect discontinued operations -- Alloy Foundries Steel 1990
and 1989; Alloy Foundries Malleable Iron 1988; Pattin 1986 and 1985.
b Fiscal Years 1992 and 1986 comprised 53 weeks -- all other years
were 52 weeks.
c 1992 excludes the cumulative effect of accounting changes for
postretirement benefits and income taxes of $1,475,000 or $.53 per share.
</FN>
</TABLE>
94
<PAGE> 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total 1994 net income of $2,642,740 or $.95 per share represented a decrease
of 4.5% versus 1993 net income of $2,766,449 or $1.01 per share.
In 1992 income before cumulative effect of accounting changes was
$3,036,527 or $1.10 per share. The 1992 one-time charge to earnings of
$1,475,011 or $.53 per share due to the adoption of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits" and
No. 109, "Employers' Accounting for Income Taxes" resulted in net income of
$1,561,516 or $.57 per share.
Other income in 1994 was $242,472 versus $487,572 in 1993 and $1,190,667
in 1992. Other income was lower in 1994 because 1993 was the final year of a
six year agreement where the Company received commissions as a result of the
1987 sale of the Pattin Manufacturing Division. In 1993 those commissions
were $263,843 versus $353,864 in 1992. The 1992 amount also included the one-
time gain of approximately $700,000 from the sale of the Company's minority
interest investment in a Korean Company.
Cash from operating activities totaling $3,781,007 and a $1,400,000 net
borrowing under the Company's short-term line of credit for the year ended
December 31, 1994 was used to fund dividends, capital expenditures and other
financing activities.
In mid-February 1995, the company sold the former Alloy Foundries' plant
property for $1,000,000 representing the approximate carrying value
(classified as land held for sale on the Balance Sheet.)
RESULTS OF OPERATIONS
The 1994 net sales of $66,021,123 increased $6,303,699 or 10.6% from the
$59,717,424 1993 level. The 1992 sales were $60,059,998. Fiscal years 1994
and 1993 were comprised of 52 weeks while fiscal year 1992 was comprised of
53 weeks.
Unit sales volume increased 3.8% from the 1993 sales level. Volume
increases in the vehicular and industrial products, construction and contract
casting business more than offset relatively flat underground mining and
certain security lock market declines. New products and price increases
contributed 4.3% and 2.4%, respectively, to the increase in sales. New
products included the recently acquired "Prestolock" line of keyless locks,
being offered by the Company's CCL Security Products division, various
industrial latching devices, produced by the Company's Eberhard division, new
malleable casting products, manufactured by the Company's Frazer & Jones
division and the "Warlock" (a high-security lock for both the gaming and
vending machine industries), offered by the Company's Illinois Lock division.
Demand for the Company's transportation and industrial hardware product
lines, served by the Company's Eberhard Manufacturing Division and the
Company's Canadian Eberhard Hardware Manufacturing, Ltd. subsidiary, remains
strong. The Company's construction segment consisting of the Thompson
Materials division experienced improved margins and sales versus a year ago.
The Company's 1994 income decreased $123,709 or 4.5% from the 1993 level
in spite of increased sales. This was due to the higher cost of products
sold, higher selling and administrative costs and decreased other income. The
1993 income before accounting changes decreased $270,078 or 8.9% from the
1992 level of $3,036,527. This was primarily because the 1992 earnings were
favorably effected by a onetime $700,000 gain in other income.
Fourth quarter 1994 earnings were $787,783 on net sales of $16,724,099
or $.28 per share versus $1,297,053 on net sales of $14,490,390 or $.48 per
share in the fourth quarter of 1993 and $776,303 on net sales of $14,037,401
or $.28 per share in the fourth quarter 1992. The reduced fourth quarter
earnings were affected by the higher cost of products sold that were 78% in
the fourth quarter of 1994 versus 72% in the fourth quarter 1993. This was
due to product mix with a greater portion of both lower margin contract
malleable castings and construction material sales. Also affecting fourth
quarter earnings was the pre-planned lower levels of production resulting in
higher than normal reduction in inventory to better position the Company for
1995. As a result, overall gross margins for comparable periods were reduced
by $282,425. Higher fourth quarter selling and administrative expenses and
lower other income also affected 1994 fourth quarter earnings. This was due
to higher advertising and marketing expenses, payroll charges as well as some
favorable accrual adjustments made in 1993. Fourth quarter 1993 income
improved over 1992 because of product mix and lower selling and
administrative expenses.
The cost of products sold were 78.0% of 1994 net sales; 76.8% of 1993
sales and 76.7% of 1992 sales. The increase in the 1994 cost of products sold
was due to product mix especially with a greater portion of lower margin
sales. Also affecting margins were the costs experienced by the Company's
Frazer & Jones division to handle the contract casting business. The costs of
products sold in both 1993 and 1992 were affected by lower margins due to
product mix and competitive pricing in the Company's construction segment;
and the security segment's transportation hardware, industrial hardware and
certain custom lock lines.
The Company continues to seek methods of improving margins through the
concentration on profitable products, improvement in operating efficiencies
and the broadening of product lines to increase sales volume. The improved
activity in the Company's transportation hardware and industrial hardware is
expected to continue. The Illinois Lock division was successful in securing
new business in 1994 and has a number of products in the final developmental
stages in their engineering department that are expected to provide
opportunities in 1995. The CCL Security Products division is expected to
increase activity in 1995 as a result of the purchase of the "Prestolock"
brand of combination locks that command a dominant position in the luggage
industry. Due to increased plant capacity, the Frazer & Jones division has
the flexibility of accommodating the significant increase in contract casting
business that resulted from their aggressive marketing efforts throughout
1994, as well as continuing to successfully serve their mine roof fastener
market. In addition, the significant start up costs associated with the new
contract casting business experienced in 1994 are now behind them.
The Thompson Materials division is expected to continue their
improvement by concentrating on more profitable product and market areas.
95
<PAGE> 96
Overall company profitability improvement is expected for 1995 in view
of expected increased utilization of plant capacity, improved operating
margin and expanded product lines and markets.
In 1994, research and development costs were $371,575 versus $495,914 in
1993 and $505,284 in 1992. The Company continues to recognize the importance
of worthwhile research and development projects. The 1994 expenditures were
on projects involving mine roof fasteners, the conversion of a portion of
Frazer & Jones production capacity to other markets, transportation and
industrial hardware and locking device hardware.
The 1994 selling and administrative costs increased $660,517 or 7% from
the 1993 level. This increase included higher marketing expenses associated
with new products and normal cost increases. The 1994 selling and
administrative costs increased $482,641 or 5% from the 1992 level. These
increases were also due to increased marketing expenses and normal costs
increases.
Interest costs in 1994 were $97,173 versus $144,478 in 1993 and $220,308
in 1992 representing 33% and 56% decreases, respectively, because of reduced
interest rates and principal payments made during 1994 and 1993. The 1994
level of interest was affected by the draw down of between $1.4 and $2.0
million on the short-term line of credit during the year.
The effective income tax rates in 1994, 1993 and 1992 were 36.8%, 36.9%
and 38.7%, respectively.
Each year's fourth quarter earnings are affected by year-end adjustments
to bring estimated accruals to actual. In 1994 such adjustments for
continuing operations had the effect of increasing income by $.12 per share
versus $.11 per share in 1993 and $.15 in 1992.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's balance sheet continues to be strong with a ratio of current
assets to current liabilities of 3.5 at the end of 1994 compared to 4.1 at
the end of 1993. The slight reduction in current ratio is the result of the
$1.4 million in short-term line of credit borrowings on the Company's books
as of December 31, 1994. Working capital continues at a healthy level.
Accounts receivable increased $1,336,922. This was primarily due to increased
sales. While collection is more difficult in today's environment, it is under
good control. Average days sales in accounts receivable were 54 days for both
1994 and 1993. The allowance for doubtful accounts decreased $33,296 due to
the write-off of the balance of a problem account which had been previously
provided for. The present $330,024 reserve balance adequately provides for
potential uncollectable accounts and is in line with prior years. Inventories
decreased $1,662,020 and inventory turns in 1994 were 7.4 versus 5.8 in 1993.
Of this inventory decrease $1,425,140 or 86% was in work in process and
finished goods inventory. The largest portion of this reduction was at the
Company's Frazer & Jones Division and was part of the 1994 strategy to
provide the flexibility of devoting a portion of that manufacturing
facility's capacity to products serving other markets. Continued efforts are
being made to control inventory levels and improve collection of accounts
receivable.
During 1994 the Company drew down $2 million on its short-term line of
credit to provide for the Company's Frazer & Jones division's $1 million
expansion project, the funding of additional accounts receivable resulting
from the increased sales activity, the purchase of the assets of a small
keyless padlock line along with the right to use the "Prestolock" trademark
and the settlement with the coalitions involving the two superfund sites.
Shortly before year-end the Company was able to reduce this short-term
borrowing to $1.4 million.
Current financial resources including the proceeds from the recently
sold Alloy Foundries' plant property and anticipated funds from operations
are expected to be adequate to service operating needs, capital additions,
debt service and dividends for the year and beyond.
Additions to property, plant and equipment totaled $2,849,926 in 1994
versus $1,445,765 in 1993. The 1994 capital expenditures included a $1
million expansion program as well as the normal replacement of equipment.
Since our facilities remain in excellent condition and no major capital
expenditures are anticipated, 1995 capital expenditures are expected to be
below the $2.3 million level of depreciation. Expenditures will primarily be
for normal equipment replacement. The Company feels that funds generated
internally should be sufficient to finance the capital expenditure program.
In addition, the Company expects to realize benefits from their deferred
tax assets based on expectations of future income.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation continues to be not quite the factor that it was in previous years
due to world wide competition, excess capacity, as well as other
considerations. Nevertheless the Company is continually seeking ways to cope
with its impact. To the extent permitted by competition, the Company passes
on increased costs by increasing sales prices over time. Price increases were
2% for both 1994 and 1993.
The Company uses the LIFO method of accounting for its U.S. inventories.
Under this method, the cost of products reported in the financial statements
approximates current costs and thus reduces distortion in reporting income
due to increasing costs.
The charges to operations for depreciation represent the allocation of
historical costs incurred over past years, and are significantly less than if
they were based on the current cost of productive capacity being consumed.
Provision for depreciation is generally computed using the straight-line
method based upon estimated useful lives of the assets.
Approximately 61% of the Company's properties have been acquired over
the last five years and have a remaining useful life ranging from two years
for equipment to twenty-five years for buildings.
Assets acquired in prior years will be replaced at higher costs, but
this will take place over many years. While these new assets will result in
higher depreciation charges, in many cases there will be operating savings
due to technological improvements, improved efficiency and increased
productivity. The Company considers these matters in setting its pricing
policies.
96
<PAGE> 97
<TABLE>
Quarterly Results of Operations (unaudited)
<CAPTION>
Quarter
---------------------------------------------------------------
1994 First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net Sales........................... $ 15,684,271 $ 16,611,948 $ 17,000,805 $ 16,724,099 $66,021,123
Gross Profit........................ 3,821,506 3,631,962 3,329,152 3,730,707 $14,513,327
Selling and administrative expenses. 2,747,480 2,772,902 2,483,579 2,475,243 10,479,204
Net Income ......................... $ 724,387 $ 550,029 $ 580,541 $ 787,783 $ 2,642,740
Net Income Per Share................ $ 0.26 $ 0.20 $ 0.21 $ 0.28 $ .95
<CAPTION>
1993 First Second Third Fourth Year
<S> <C> <C> <C> <C> <C>
Net Sales........................... $ 14,518,193 $ 15,581,098 $ 15,127,743 $ 14,490,390 $ 59,717,424
Gross Profit........................ 3,165,069 3,111,688 3,572,538 4,013,132 13,862,427
Selling and administrative expenses. 2,773,970 2,583,314 2,361,968 2,099,435 9,818,687
Net Income.......................... $ 308,886 $ 351,725 $ 808,785 $ 1,297,053 $ 2,766,449
Net Income Per Share................ $ 0.11 $ 0.13 $ 0.29 $ 0.48 $ 1.01
</TABLE>
CORPORATE NOTES
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's Common Stock is traded on the American Stock Exchange (ticker
symbol EML). The approximate number of record holders of the Company's
Common Stock at December 31, 1994 was 765.
<TABLE>
High and low stock prices and dividends for the last two years were:
<CAPTION>
1994 1993
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
First $17 5/8 $11 5/8 $.11 1/2 $12 3/8 $10 1/4 $.11 1/2
Second 16 5/8 14 3/8 .11 1/2 12 5/8 11 7/8 .11 1/2
Third 16 13 3/4 .11 1/2 12 1/4 11 1/8 .11 1/2
Fourth 14 1/4 12 5/8 .11 1/2 13 5/8 11 1/4 .11 1/2
</TABLE>
The Company expects to continue its policy of paying regular cash dividends,
although there is no assurance of future dividends, because they are
dependent on future earnings, capital requirements, and financial
conditions.
At the end of December, 1994, 217 consecutive quarterly dividends had been
paid. A dividend reinvesting plan enables shareholders to purchase
additional shares with no brokerage commission or service charge.
ANNUAL MEETING
The annual meeting of the stockholders of the Company will be held on April
26, 1995 at 11:00 a.m. local time, in the Company offices in Naugatuck,
Connecticut. Proxies for this meeting will be solicited by the management on
or about March 20, 1995 when a notice of the meeting, a proxy statement, and
a proxy form will be mailed to each holder of Common Stock.
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
The First National Bank of Boston
Boston, Massachusetts
GENERAL OFFICE
112 Bridge Street
P.O. Box 460
Naugatuck, Connecticut 06770
For financial inquiries, call (203) 729-2255, ext. 241
The Common Stock of The Eastern Company is traded on the American Stock
Exchange.
Trading Symbol EML
97
<PAGE> 98
OFFICERS & EXECUTIVES
Russell G. McMillen
Chairman
Stedman G. Sweet
President and Chief Executive Officer
Donald E. Whitmore, Jr.
Vice President, Treasurer and Secretary
Steven G. Sanelli
Vice President,
Managing Director of CCL Security Products Division
Raymond L. Wright
Vice President,
Managing Director of Frazer & Jones Division
Barbara A. Petti
Assistant Secretary
Robert G. Alexander
Managing Director of Eberhard Hardware Manufacturing, Ltd., Subsidiary
Frank J. Breker
Managing Director of Eberhard Manufacturing Division
Roger Chang
Managing Director of World Lock Co. Ltd.; World Security Industries, Co.
Ltd.; Subsidiaries
Brian D. Reed
Managing Director of Illinois Lock Co. Division
Edward J. Ries
Managing Director of Thompson Materials Division
BOARD OF DIRECTORS
John Everets, Jr.
Chairman of H.P.S.C. Inc.
Boston, Massachusetts
(Financial Services)
Charles W. Henry #
Partner of Kernan & Henry
Waterbury, Connecticut, attorneys
Ole K. Imset
Director of Manufacturing
Allen Bradley, Rockwell International
Manchester, New Hampshire
(Manufacturing Electronics)
Leonard F. Leganza * & #
Financial and Business Consultant
Farmington, Connecticut
Russell G. McMillen * &
Chairman of the Company
David C. Robinson * &
President of The Robinson Co. Waterbury, Connecticut
(Employee Benefits Consultants)
Michael G. Sendzimir * &
Chairman of T. Sendzimir Inc. Waterbury, Connecticut
(Designer and builder of cold and hot multi-roll strip mills)
Stedman G. Sweet *
President and Chief Executive Officer of the Company
Donald S. Tuttle, III #
Account Executive and Vice President
Paine Webber
Middlebury, Connecticut
(Stock Broker)
Donald E. Whitmore, Jr.
Vice President, Treasurer and Secretary of the
Company
* Members of the Executive Committee
& Members of the Compensation Committee
# Members of the Audit Committee
98
<PAGE> 99
The Eastern Company
Naugatuck, CT 06770
CONSTRUCTION MATERIALS
Thompson Materials Division
Whippany, New Jersey
Materials for concrete construction
SECURITY PRODUCTS GROUP
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
World Lock Co. Ltd., Subsidiary
Taipei, Taiwan
Custom locks
99
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,610,244
<SECURITIES> 0
<RECEIVABLES> 9,665,164
<ALLOWANCES> 330,024
<INVENTORY> 9,530,546
<CURRENT-ASSETS> 24,845,927
<PP&E> 23,950,535
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