SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended January 3, 1998 Commission File Number 0-599
THE EASTERN COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-0330020
- ------------------------------------------ -----------------------
State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
112 Bridge Street, Naugatuck, Connecticut 06770
- ------------------------------------------ -----------------------
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)729-2255
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
-------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1998.
Common Stock, No Par Value - $56,312,277
-----------
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at February 28, 1998
-------------------------- --------------------------------
Common Stock, No Par Value 2,603,434
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 annual report to shareholders (fiscal year ended January
3, 1998) are incorporated by reference into Parts I and II.
Portions of the annual proxy statement dated March 20, 1998 are incorporated by
reference into Part III.
-1-
<PAGE>
PART I
ITEM 1 BUSINESS
(a) General Development of Business
-----------------------------------
The Registrant was incorporated under the laws of the State of
Connecticut in October, 1912, succeeding a co-partnership established in
October, 1858.
The business of the Registrant is the manufacture and sale of
proprietary locks and other security products from four U.S. operations and four
wholly-owned foreign subsidiaries. The Registrant maintains seven physical
locations.
(b) Financial Information about Industry Segments
-------------------------------------------------
The Registrant's operations consist of a single business segment -
security products. Security products are used to close, lock, secure or fasten
end use applications used in the industrial, transportation, retail and mining
industries.
(c) Narrative Description of Business
--------------------------------------
The Registrant develops, manufacturers and sells a wide range of
security products used to lock, close and fasten end use applications, in the
electronic and industrial markets, retail, transportation, and mining
industries. Typical products include large locks, heavy-duty hinges,
multi-point latching devices, dial and keyless combination locks,
multi-circuit switch locks, padlocks, lock cylinders, keys, mine roof
fasteners and contract castings.
The Registrant is promoting growth by expanding present product lines,
and developing new products. In addition, desirable outside product lines
which complement present lines and/or companies, may be acquired if they
generally fit management's expertise in marketing or manufacturing.
Approximately one quarter of our 1997 capital expenditure was spent on
new tooling for the production of new products introduced throughout the year
and replacement tooling. The remaining expenditures were for normal
replacement of equipment, improvements in productive efficiency and the
expansion of existing capacity.
Products are sold to original equipment manufacturers or distributors
through a distribution channel consisting of in-house salesmen, outside sales
representatives and distributors. Sales efforts are concentrated on in-house
sales personnel where greater representation of our diverse product lines can
be promoted across a variety of markets.
The Registrant sells its products in specialized diverse security
markets. Although service, quality and price are major criteria for servicing
these markets, the continued introduction of new and improved products is
vital for maintaining and increasing market share. During 1997 re-engineered
large locks, rotary locks, recessed handles and multi-point paddle locks were
manufactured and sold to the transportation and industrial hardware
industries. The introduction of a tool box lock to the automotive accessories
market has expanded our customer base. The ability to design lock applications
to specific customer requirements and provide service at competitive prices
resulted in the increased business in both keyed and keyless lock applications
for the computer industry and premium luggage markets.
The decline for engineered fasteners used in the underground mining
industry is being replaced by new business being obtained in the contract
casting market. The long-term supply agreement entered into with one of the
nation's largest manufacturers of mine roof bolts has strengthened our position
as the primary supplier to this market.
-2-
<PAGE>
The Registrant's facilities have the ability to engineer new products for
existing and new customers to meet the ever changing requirements in the markets
in which it competes. The Registrant has worked with many customers to develop
products to meet specific applications. Examples of this are lock applications
for the computer industry, large locks for the tractor trailer industry and
malleable castings for the electrical, construction and automotive industries.
Raw materials and outside services were readily available from domestic
sources during 1997 and are expected to be readily available in 1998 and the
foreseeable future.
Patent protection for the various product lines is fairly limited, but
is sufficient to enhance competitive positions. Foreign sales and license
agreements are not significant.
The Registrant's business is not seasonal.
Customer lists for all operating locations are broad-based
geographically and by markets and sales are not highly concentrated by customer.
No customer accounted for 10% or more of the Registrant's consolidated revenue
for the year ended January 3, 1998.
The Registrant continues to maintain a strong balance sheet with working
capital at a stable level through strong management control on receivables and
inventories.
Quick response to customer orders is becoming more important.
Consequently investments in additional inventories are made on a selective basis
to meet the rapid delivery requirements of our customers.
The dollar amount of the levels of orders in the Registrant's backlog is
believed to be firm as of fiscal year ended January 3, 1998 at $7,364,000, as
against $5,317,000 at December 28, 1996.
The Registrant encounters competition in all of its product areas. The
Registrant has been successful in dealing with this competition by offering high
quality diversified products with the flexibility of meeting customer needs on a
timely basis. This is accomplished by effectively using its internal engineering
resources, cost effective manufacturing capabilities, expanding product lines,
national distributors and in house sales personnel targeted to niche markets.
Research and development expenditures in 1997 were $84,000 and
represented less than 1% of gross revenues. In 1996 and 1995 they were $142,000
and $353,000, respectively. The projects involved mine roof fasteners, and other
malleable iron products, transportation and industrial hardware, and locking
device hardware.
Total lease obligations of the Registrant, including buildings, autos
and trucks and miscellaneous office equipment, for each of the next five years
are $287,000, $291,000, $291,000, $291,000 and $291,000. In 1997, lease costs
were $288,000.
The average number of employees in 1997 was 492.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
-------------------------------------------------------------------
The Registrant includes four separate operating divisions located within
the United States, a wholly-owned Canadian subsidiary located in Tillsonburg,
Ontario, Canada, a wholly-owned Taiwanese subsidiary located in Taipei, Taiwan,
a wholly-owned subsidiary in Hong Kong and a wholly-owned subsidiary in Mexico.
The Canadian, Taiwanese, Hong Kong and Mexican subsidiaries' revenue and
assets are not significant. Substantially all other revenues are derived from
customers located in the United States.
-3-
<PAGE>
ITEM 2 PROPERTIES
The corporate office of the Registrant is located in Naugatuck,
Connecticut in a two story 8,000 square foot administrative building on 3.2
acres of land.
All of the Registrant's properties are owned or leased and while being
fully utilized are adequate to satisfy current requirements. All of the
Registrant's properties have the necessary flexibility to cover any long-term
expansion requirements.
The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6 acres
of land and a building containing 95,000 square feet, located in an industrial
park. The building is steel frame, one-story, having curtain walls of brick,
glass and insulated steel panel. The building has one high bay in which two
units of automated warehousing are located. This facility's plant capacity is
adequate to satisfy current requirements. However, the extensive acreage and
plant design provides for flexibility in expansion requirements.
The Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian
subsidiary in Tillsonburg, Ontario, owns land and a building containing 21,000
square feet in an industrial park. The building is steel frame, one-story,
having curtain walls of brick, glass and insulated steel panel. It is
particularly suited for light fabrication, assembly and warehousing and is
adequate for long-term expansion requirements.
The Frazer and Jones Division in Solvay, New York, owns 17.9 acres of
land and buildings containing 187,000 square feet constructed for foundry use.
These facilities are well adapted to handle the division's current and future
casting requirements.
The Illinois Lock Division leases land and a building containing 44,000
square feet in Wheeling, Illinois. The building is brick and located in an
industrial park. A five-year lease option was exercised under favorable terms,
effective July 1, 1995 and expiring June 30, 2000.
The CCL Security Products Division is located in New Britain,
Connecticut where 26,000 square feet of a building is leased. The four storied
building is of brick and stone construction. A monthly lease is in place.
The Sesamee Mexicana, subsidiary is leasing 1,950 square feet of a block
building located in an industrial park in Lerma, Mexico on an open-end basis.
The World Lock Co. Ltd., subsidiary leases a brick and concrete building
containing 7,870 square feet and is located in Taipei, Taiwan.
All owned properties are free and clear of any encumbrances.
-4-
<PAGE>
ITEM 3 LEGAL PROCEEDINGS
In April 1988, Murtha Enterprises Inc. and related parties (collectively
"Murtha"), as the result of a February 1987 suit (docket number N-87-52 PCD)
brought by the U. S. Environmental Protection Agency (the "EPA") and others,
concerning the Beacon Heights and Laurel Park landfills, instituted third-party
actions against approximately 200 companies or individuals including the
Registrant. The underlying suit against Murtha was settled with EPA and the
other parties and the Consent Decree has been approved by the Court.
On September 22, 1988, the EPA filed a complaint against the Registrant
and seven other defendants seeking recovery of present and future response costs
incurred by the United States in connection with the Beacon Heights landfill.
The complaint alleged total damages of approximately $1.8 million ($1.3 million
actual and $.5 million future). On October 31, 1988 the court consolidated the
EPA action against the Registrant with the other cases under docket number
N-87-52 (PCD).
By complaint dated September 6, 1990, the Beacon Heights Coalition (the
"Beacon Coalition"), a group of parties who have entered into a consent order
with EPA, instituted a direct action against the Registrant and approximately
400 other named parties concerning the Beacon Heights landfill. The Beacon
Coalition claimed that these defendants generated or transported hazardous
substances disposed of at the Beacon Heights landfill, and are therefore
responsible for a share of the Beacon Coalition's response costs.
The Registrant has filed answers to both the EPA Complaint and the
Beacon Coalition Complaint.
In March 1991, a Laurel Park Coalition which did not include the
Registrant entered into Consent Decree and Administrative Order by Consent with
the EPA and the State of Connecticut to remediate the Laurel Park landfill. The
Consent Decree has been approved by the Court.
In May 1991, EPA and the State of Connecticut ("State") each filed a
complaint against the Registrant and three other defendants seeking recovery of
present and future response costs incurred in connection with the Laurel Park
landfill. The EPA claims costs in excess of $1.8 million and the state claims
costs in excess of $2.5 million. On July 1, 1991, the court consolidated these
actions against the Registrant with the other cases under docket number N-87-52
(PCD). The Registrant filed answers to both of these complaints.
By order dated February 8, 1994, the court granted a motion filed by
Registrant for judgment on the pleadings against EPA and the state with respect
to each of their claims against Registrant. By motions dated February 22, 1994
and February 23, 1994, EPA and the state respectively moved for reconsideration
of the court's order, which motions were denied.
By order dated February 8, 1994, the court permitted the Laurel Park
Coalition to file a complaint against eight parties including the Registrant,
which claims were to be assigned for trial if the Coalition files a complaint.
On June 24, 1994 , the Registrant settled all claims with both the
Beacon Heights Coalition and the Laurel Park Coalition and the respective
complaints against the Registrant on behalf of the Coalitions were dismissed by
stipulation.
On March 17, 1995, the U.S. District Court entered a final judgement in
the consolidated proceedings (docket number N-87-52(PCD)) which included the
granting of Registrant's motion for judgement on the pleadings. As a result of
this judgement, no complaints were then pending in the U.S. District Court
involving the Registrant.
On April 17, 1995, the State filed its notice of appeal from this final
judgement with the U.S. District Court. On May 10, 1995, EPA filed its notice of
appeal from the judgement.
-5-
<PAGE>
On November 1, 1996 the U.S. Court of Appeals for the Second Circuit
reversed the District Court ruling dismissing EPA and State of Connecticut
environmental claims against the Registrant and environmental claims by the
Laurel Park and Beacon Heights Coalitions against numerous defendants. The Court
of Appeals remanded the case to the U.S. District Court in Connecticut for
further proceedings. The governmental lawsuits, brought after governmental
settlements with the Coalitions, seek to recover remediation costs of the
governments unreimbursed by the Coalition settlements or the settlement with the
owner/operator in connection with the Laurel Park and Beacon Heights landfills.
The EPA has claimed that the Registrant and two other corporate defendants are
responsible for an aggregate of $3.1 million in remediation costs with respect
to the Beacon Heights landfill and that the Registrant and one other corporate
defendant are responsible for an aggregate of $2.3 million in remediation costs
with respect to the Laurel Park landfill; Connecticut has claimed that the
Registrant and one other defendant are responsible for an aggregate of $.8
million in remediation costs with respect to the Laurel Park landfill. The
Registrant intends to continue to vigorously contest any liability relating to
these governmental claims. The Registrant would also pursue its rights of
contribution against the other defendants in the event of any liability, which
the Registrant expects would significantly reduce any liability imposed.
In addition, it would file claims against its insurance carriers.
In its decision, the Second Circuit also reversed the U.S. District
Court's dismissal of numerous actions brought by the Beacon Heights and Laurel
Park Coalitions against non-settling parties. These Coalitions assumed full
responsibility for cleaning up the two landfill sites and, as noted above, the
Registrant has settled with both Coalitions with respect to liability at these
sites in 1994. It is believed that many of the defendants in the pending
Coalition actions and certain other persons who have not been sued by the
governments have a responsibility for remediation cost and may be brought into
these actions as co-defendants with the Registrant. The Registrant intends to
resist the EPA claims and if necessary bring these other persons into the action
to share the costs of reimbursements to the government if ultimately imposed.
After rejecting motions for rehearing, the Court of Appeals returned the
cases to the US District Court. On July 21, 1997, the District Court issued an
order appointing a Special Master to mediate, find facts if necessary and report
back to the court within six months as to all remaining claims for contribution.
The Registrant is actively participating in this process as it pertains to the
EPA Claims against the Registrant and the Registrant's contribution rights
against the United States and third-party defendants. In January 1998, the
Registrant entered into a proposed consent decree with the State which would
settle the State's claims, if approved by the court.
The Registrant will continue to vigorously pursue its legal interest
in this matter. The Registrant believes that these actions will not have a
materially adverse impact on the Registrant's consolidated financial position,
operating results or liquidity.
There are no other material legal proceedings, other than ordinary
routine litigation incidental to the business, to which either the Registrant or
any of its subsidiaries is a party of or which any of their property is the
subject.
ITEM 4 SUBMISSION OF MATTERS TO SHAREHOLDERS
None
-6-
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The portion of the 1997 Annual Report to Shareholders appearing the
inside front cover under the heading "Financial Highlights" and on page 24 under
the heading "Common Stock Market Prices and Dividends" is incorporated herein
by reference.
ITEM 6 SELECTED FINANCIAL DATA
The financial data on page 21 of the 1997 Annual Report to Shareholders,
captioned "1997-1993 Summary of Operations" is incorporated herein by reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following portions of the 1997 Annual Report to Shareholders are
incorporated herein by reference:
(a) All of the material in the President's Letter found on pages 2 and
3 of the Annual Report.
(b) All of the material on pages 22 through 24 under the heading
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and its
subsidiaries and report of independent auditors included on pages 10 to 20 of
the Annual Report to Shareholders for the fiscal year ended January 3, 1998 are
incorporated herein by reference as follows:
(a) Consolidated Balance Sheets - January 3, 1998 and December 28, 1996.
(b) Consolidated Statements of Income -- Fiscal years ended January 3,
1998, December 28, 1996 and December 30, 1995.
(c) Consolidated Statements of Shareholders' Equity -- Fiscal years
ended January 3, 1998, December 28, 1996 and December 30, 1995.
(d) Consolidated Statements of Cash Flows -- Fiscal years ended January
3, 1998, December 28, 1996 and December 30, 1995.
(e) Notes to Consolidated Financial Statements -- January 3, 1998,
December 28, 1996 and December 30, 1995.
Quarterly Results of Operations are incorporated herein by reference
from the following portions of the 1997 Annual Report to Shareholders:
(a) The portion of the 1997 Annual Report to Shareholders appearing
on page 21 under the heading "Quarterly Results of Operations
(unaudited)" is incorporated herein by reference.
-7-
<PAGE>
(b) Paragraphs 2, 3 and 4 under the caption "General" on page 22.
(c) Paragraphs on page 23 and 24 under the caption "Impact of
Inflation and Changing Prices."
With respect to stock options, the Registrant notes that stock options
did not have a materially dilutive effect on net income per share for the fiscal
years ended January 3, 1998, December 28, 1996 and December 30, 1995
There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve Stock Options,
the information appearing on page 7, and pages 9 through 14.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-8-
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
regulation 14A since the close of its fiscal year, which involve the election of
Directors, the information appearing on pages 3 through 4 of said proxy
statement, being the portion captioned "Item No. 1. Election of Directors" and
the information appearing on page 8 of said proxy statement , being the
portion captioned "Section 16(A) Beneficial Ownership reporting compliance."
The Registrant's only Executive Officers are Leonard F. Leganza, President and
Chief Executive Officer and Donald E. Whitmore, Jr., Executive Vice President,
Chief Financial Officer and Secretary.
ITEM 11 EXECUTIVE COMPENSATION
There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve executive
compensation, the information appearing on pages 9 through 14 of said proxy
statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve the security
ownership of certain beneficial shareholders, the information appearing on pages
6 through 7 of said proxy statement.
(b) There are incorporated herein by reference the portions of the
Registrant's definitive proxy statement filed with the Commission pursuant to
Regulation 14A since the close of its fiscal year, which involve the security
ownership of management, the information appearing on pages 6 through 7, and 9
through 13 of said proxy statement.
(c) Changes in Control
Not Applicable.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Not applicable
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
-9-
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
1 and 2. The response to this portion of Item 14 is submitted as a
separate section of this report appearing on page 13 and 14.
3. Exhibits
(3) Restated Certificate of Incorporation dated August
1991 is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 28, 1991 and the Registrant's Form 8-K filed on
February 13, 1991. Amended and restated bylaws dated
July 29, 1996 is incorporated by reference to the
Registrant's Form 8-K filed on July 29, 1996.
(4) (a) Letter to all shareholders of the Registrant,
dated September 20, 1991 describing the Registrant's
redemption of shareholders Purchase Rights dated August
29, 1986 and the issuance of a new Purchase Rights
dividend distribution; "Summary of Rights to Purchase
Common Stock," as enclosed with said letter to
shareholders are incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 28, 1991.
(b) Rights Agreement entered into between the Registrant
and The First National Bank of Boston, dated as of
September 16, 1991 incorporated by reference to the
Registrant's Form 8-K filed on September 16, 1991.
(c) The First Amendment dated as of November 11, 1992 to
the Rights Agreement dated as of September 16, 1991
between The Eastern Company and The First National
Bank of Boston is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended January 2, 1993.
(10) (a) Employment Agreement dated May 1, 1996 with
Donald E. Whitmore, Jr. is incorporated by reference to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 1996.
(b) Amendment to the Deferred Compensation Agreement with
Russell G. McMillen dated May 1, 1988 is incorporated by
reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988. The Deferred
Compensation Agreement with Russell G. McMillen dated
October 28, 1980 and amended on March 27, 1986 is
incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended
January 3, 1987.
(c) Deferred Compensation Agreement dated May 30, 1996
with Stedman G.Sweet is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 28, 1996.
-10-
<PAGE>
(d) Supplemental Retirement Plan dated August 16, 1994
with Stedman G. Sweet is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
(e) The Eastern Company 1989 Executive Stock Incentive
Plan effective as of April 26, 1989 incorporated by
reference to the Registrant's Form S-8 filed on June
21, 1989.
(f) The Eastern Company 1995 Executive Stock Incentive
Plan effective as of April 26, 1995 incorporated by
reference to the Registrant's Form S-8 filed on February
7, 1997.
(g) The Eastern Company Directors Fee program effective
as of October 1, 1996 incorporated by reference to the
Registrant's Form S-8 filed on February 7, 1997.
(h) The Eastern Company 1997 Directors Stock Option Plan
effective as of September 17, 1997 incorporated by
reference to the Registrant's Form S-8 filed on January
30, 1998.
(11) Statements re computation of per share earnings is
incorporated by reference on pages 11 and 15 of the 1997
Annual Report to Shareholders.
(13) 1997 Annual Report to Shareholders attached hereto
on page 28.
(21) List of subsidiaries as follows:
Eberhard Hardware Mfg. Ltd., a private corporation
organized under the laws of the Province of Ontario,
Canada.
World Lock Co. Ltd., a private corporation organized
under the laws of Taiwan (The Republic of China).
Sesamee Mexicana, Subsidiary, a private corporation
organized under the laws of Mexico.
World Security Industries Co. Ltd., a private
corporation organized under the laws of Hong Kong.
(23) Consents of independent auditors attached hereto
beginning on page 15 (a) and (b).
(27) Financial Data Schedule attached hereto beginning on
page 56
(99) Financial Statements and Supplemental Schedules and
report of independent auditors for the period ended
December 31, 1997, 1996 and 1995 of The Eastern Company
Savings and Investment Plan is attached beginning on
page 17.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last
quarter of the fiscal year ended January 3, 1998.
(c) The required Exhibits are listed in (a) 3. above.
(d) Financial statement schedules.
The response to this portion of Item 14 is submitted as a
separate section of this report beginning on page 14.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of The
Securities Exchange Act of 1934, The Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated March 27, 1998 THE EASTERN COMPANY
By /s/ Donald E. Whitmore, Jr.
---------------------------
Donald E. Whitmore, Jr.
Director, Executive Vice President, Chief
Financial Officer and Secretary and
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Leonard F. Leganza March 27, 1998
- ---------------------------------------------
Leonard F. Leganza
Director, President
and Chief Executive Officer
/s/ Donald E. Whitmore, Jr. March 27, 1998
- ---------------------------------------------
Donald E. Whitmore, Jr.
Director, Executive Vice President, Chief
Financial Officer and Secretary and
Principal Accounting Officer
/s/ John W. Everets March 27, 1998
- ---------------------------------------------
John W. Everets
Director
/s/ Charles W. Henry March 27, 1998
- ---------------------------------------------
Charles W. Henry
Director
/s/ Russell G. McMillen March 27, 1998
- ---------------------------------------------
Russell G. McMillen
Director
/s/ David C. Robinson March 27, 1998
- ---------------------------------------------
David C. Robinson
Director
/s/ Donald S. Tuttle III March 27, 1998
- ---------------------------------------------
Donald S. Tuttle III
Director
-12-
<PAGE>
The Eastern Company and Subsidiaries
Form 10-K-Item 14 (a) (1) and (2)
Index to Financial Statements and Financial Statement Schedule
The following consolidated financial statements of The Eastern Company and
subsidiaries and report of independent auditors, included in the annual report
of the registrant to its shareholders for the fiscal year ended January 3, 1998
are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets - January 3, 1998 and December 28, 1996
Consolidated Statements of Income - Fiscal years ended January 3, 1998,
December 28, 1996, and December 30, 1995.
Consolidated Statements of Shareholders' Equity - Fiscal years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Consolidated Statements of Cash Flows - Fiscal years ended January 3, 1998,
December 28, 1996, and December 30,1995
Notes to Consolidated Financial Statements
The following financial statement schedule of The Eastern Company and
subsidiaries is included in Item 14 (d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
-13-
<PAGE>
The Eastern Company and Subsidiaries
Schedule II - Valuation and Qualifying accounts
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
(1) (2)
Balance at Beginning Charged to Costs Charged to Other Deductions Balance at End
of Period and Expenses Accounts-Describe Describe of Period
Description
<S> <C> <C> <C> <C> <C>
Fiscal year ended January 3, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $567,000 $370,755 $698,755 (a) $329,000
======== ======== ======== ========
Fiscal year ended December 28, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $501,000 $251,881 $185,881 (a) $567,000
======== ======== ======== ========
Fiscal year ended December 30, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $330,000 $261,687 $ 90,687 (a) $501,000
======== ======== ======== ========
<FN>
(a) Uncollectible accounts written off, net of recoveries
</FN>
</TABLE>
-14-
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Eastern Company of our report dated January 30, 1998, included in the
1997 Annual Report to Shareholders of The Eastern Company.
Our audits also included the financial statement schedule of The Eastern
Company listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-29452) pertaining to The Eastern Company 1983 Stock Option
Plan, the Registration Statement (Form S-8 No. 2-86285) pertaining to The
Eastern Company 1989 Stock Option Plan, the Registration Statement (Form S-8 No.
33-79324) pertaining to The Eastern Company Savings and Investment Plan, the
Registration Statement (Form S-8 No. 333-21349) pertaining to The Eastern
Company 1995 Executive Stock Incentive Plan, the Registration Statement (Form
S-8 No. 333-21351) pertaining to The Eastern Company Directors Fee Program, and
the Registration Statement (Form S-8 No. 333-45315) pertaining to The Eastern
Company 1997 Directors Stock Option Plan of our report dated January 30, 1998,
with respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K) of
The Eastern Company.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Hartford, Connecticut
March 26, 1998
-15-
<PAGE>
Exhibit 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-79324) pertaining to The Eastern Company Savings and Investment
Plan of our report dated March 10, 1998 with respect to the financial statements
and schedule of The Eastern Company Savings and Investment Plan included in this
Annual Report (Form 10-K) as Exhibit 99 for the fiscal year ended January 3,
1998.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Hartford, Connecticut
March 26, 1998
-16-
<PAGE>
Financial Statements
and Supplemental Schedule
The Eastern Company Savings
and Investment Plan
(Exhibit (99) to Form 10-K)
Years ended December 31, 1997, 1996 and 1995
with Report of Independent Auditors
Contents
Report of Independent Auditors........................................18
Financial Statements
Statements of Assets Available for Benefits...........................19
Statements of Changes in Assets Available for Benefits................20
Notes to Financial Statements.........................................22
Supplemental Schedule
Schedule of Investments...............................................26
-17-
<PAGE>
Report of Independent Auditors
Plan Administrator of
The Eastern Company Savings and Investment Plan
We have audited the accompanying statements of assets available for benefits of
The Eastern Company Savings and Investment Plan (the "Plan") as of December 31,
1997 and 1996, and the related statements of changes in assets available for
benefits for each of the three years in the period ended December 31, 1997. Our
audits also included the supplemental schedule of investments as of December 31,
1997 and 1996. These financial statements and supplemental schedule are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets available for benefits of the Plan at December
31, 1997 and 1996, and the changes in assets available for benefits for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
supplemental schedule of investments, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects,
the information set forth therein.
The fund information in the financial statements is presented for purposes of
additional analysis rather than to present the assets available for benefits and
changes in assets available for benefits of each fund. The fund information has
been subjected to the auditing procedures applied in our audits of the financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the financial statements taken as a whole.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Hartford, Connecticut
March 10, 1998
-18-
<PAGE>
<TABLE>
<CAPTION>
The Eastern Company Savings and Investment Plan
Statements of Assets Available for Benefits
Fund Information
--------------------------------------------------------------------------------
Daily Growth and Eastern
Participant Dividend Income Income Common
Loan Fund Trust Fund Fund Fund Stock Fund Total
----------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Assets
Investments:
Mutual funds $ 315,520 $ 219,692 $1,030,823 $1,566,035
Participant loans
receivable $ 26,978 26,978
Total investments 26,978 315,520 219,692 1,030,823 1,593,013
---------- ---------- ---------- ---------- ----------
Funds in transit 26,145 26,145
Dividends receivable 91 620 4,276 4,987
Contribution receivable
from (payable to)
other funds (260,306) 5,887 254,419 -
---------- ---------- ---------- ---------- ----------
Assets available for
benefits $ 26,978 $ 81,450 $ 226,199 $1,289,518 $1,624,145
========== ========== ========== ========== ==========
December 31, 1996
Assets
Investments:
The Eastern Company
Common Stock $ 128,817 $ 128,817
Mutual funds $ 71,530 $ 134,105 $ 710,784 1,133 917,552
Participant loans
receivable $ 3,099 3,099
---------- ---------- ---------- ---------- ---------- ----------
Total investments 3,099 71,530 134,105 710,784 129,950 1,049,468
Contributions receivable:
Employee 482 1,325 5,731 1,061 8,599
Employer 276 751 3,250 603 4,880
Contribution receivable
from (payable to)
other funds (23,970) 4,423 14,368 5,179 -
---------- ---------- ---------- ---------- ---------- ----------
Assets available for
benefits $ 3,099 $ 48,318 $ 140,604 $ 734,133 $ 136,793 $1,062,947
========== ========== ========== ========== ========== ==========
See accompanying notes.
</TABLE>
-19-
<PAGE>
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
<TABLE>
<CAPTION>
Fund Information
--------------------------------------------------------------------------------
Daily Growth and Eastern
Participant Dividend Income Income Common
Loan Fund Trust Fund Fund Fund Stock Fund Total
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1997
Investment income:
Dividends $ 3,831 $ 8,397 $ 18,235 $ 5,449 $ 35,912
Net realized and
unrealized appreciation
in fair value of
investments 2,706 170,008 54,200 226,914
----------- ----------- ----------- ----------- -----------
3,831 11,103 188,243 59,649 262,826
Contributions:
Employee 17,988 46,605 258,247 23,404 346,244
Employer 3,333 8,086 38,901 4,481 54,801
----------- ----------- ----------- ----------- -----------
21,321 54,691 297,148 27,885 401,045
Benefits paid to
participants (11,095) (6,011) (84,152) (1,415) (102,673)
Interfund transfers 23,879 19,075 25,812 154,146 (222,912) -
-------- ----------- ----------- ----------- ----------- -----------
Net increase 23,879 33,132 85,595 555,385 (136,793) 561,198
Assets available for
benefits
Beginning of year 3,099 48,318 140,604 734,133 136,793 1,062,947
-------- ----------- ----------- ----------- ----------- -----------
End of year $ 26,978 $ 81,450 $ 226,199 $ 1,289,518 $ - $ 1,624,145
======== =========== =========== =========== =========== ===========
Year ended
December 31, 1996
Investment income:
Dividends $ 3,130 $ 7,266 $ 54,469 $ 4,104 $ 68,969
Net realized and
unrealized appreciation
(depreciation) in fair
value of investments (2,271) 46,662 7,923 52,314
----------- ----------- ----------- ----------- -----------
3,130 4,995 101,131 12,027 121,283
Contributions:
Employee 13,622 44,187 201,676 33,187 292,672
Employer 2,413 7,354 30,460 5,750 45,977
----------- ----------- ----------- ----------- -----------
16,035 51,541 232,136 38,937 338,649
Benefits paid to
participants (1,010) (14,140) (22,480) (3,595) (41,225)
Loan default $ (732) (732)
Interfund transfers (1,506) (3,125) (420) 7,904 (2,853) -
-------- ----------- ------------ ----------- ----------- -----------
Net increase (2,238) 15,030 41,976 318,691 44,516 417,975
Assets available for
benefits
Beginning of year 5,337 33,288 98,628 415,442 92,277 644,972
-------- ----------- ------------ ----------- ----------- -----------
End of year $ 3,099 $ 48,318 $ 140,604 $ 734,133 $ 136,793 $ 1,062,947
======== =========== ============ =========== =========== ===========
See accompanying notes.
</TABLE>
-20-
<PAGE>
The Eastern Company Savings and Investment Plan
Statements of Changes in Assets Available for Benefits
<TABLE>
<CAPTION>
Fund Information
-------------------------------------------------------------------------------
Daily Growth and Eastern
Participant Dividend Income Income Common
Loans Fund Trust Fund Fund Fund Stock Fund Total
------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1995
Investment income:
Dividends $ 1,860 $ 4,003 $ 20,890 $ 1,547 $ 28,300
Net realized and
unrealized appreciation
(depreciation) in fair
value of investments 6,291 50,196 (6,811) 49,676
1,860 10,294 71,086 (5,264) 77,976
----------- ----------- ---------- ----------- -----------
Contributions:
Employee 16,789 56,564 187,704 57,441 318,498
Employer 3,237 8,147 29,655 8,704 49,743
----------- ----------- ----------- ----------- -----------
20,026 64,711 217,359 66,145 368,241
Benefits paid to
participants (3,528) (7,621) (11,616) (1,362) (24,127)
Interfund transfers $ 5,337 857 (6,187) 5,208 (5,215) -
----------- ----------- ----------- ----------- ----------- -----------
Net increase 5,337 19,215 61,197 282,037 54,304 422,090
Assets available for
benefits
Beginning of year - 14,073 37,431 133,405 37,973 222,882
----------- ----------- ----------- ----------- ----------- -----------
End of year $ 5,337 $ 33,288 $ 98,628 $ 415,442 $ 92,277 $ 644,972
=========== =========== =========== ========== =========== ===========
</TABLE>
-21-
<PAGE>
The Eastern Company Savings and Investment Plan
Notes to Financial Statements
December 31, 1997
1. Description of Plan
The Eastern Company Savings and Investment Plan (the "Plan") is a defined
contribution plan of The Eastern Company (the "Company"). The following
description of the Plan provides only general information. Participants should
refer to the Plan document for a more complete description of the Plan's
provisions.
General
The Plan covers all full-time United States salaried employees of the Company
who have worked at least 35 hours per week during a consecutive six-month
period. The Plan is subject to the provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA").
Contributions
Participants may contribute between 1% and 18% of their compensation up to the
maximum allowed by the Internal Revenue Code. The Company makes matching
contributions on a formula basis on the first 4% of participant contributions.
The Company's match was 25% in 1997, 1996, and 1995.
Participant Accounts
Each participant's account is credited with the participant's contributions and
allocations of (a) the Company's contributions and (b) Plan earnings.
Allocations are based on participant earnings or account balances, as defined.
Forfeited balances of terminated participants' nonvested accounts are used to
reduce future Company contributions ($1,327 and $4,783 at December 31, 1997 and
1996, respectively).
Vesting
Participants are immediately vested in their voluntary contributions. Vesting
in the Company contribution portion of their accounts plus actual earnings
thereon is based on years of continuous service. A participant is 20% vested
after three years of service, 40% vested after four years and 100% vested after
five years of credited service.
-22-
<PAGE>
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
Investment Options
Upon enrollment in the Plan, a participant may direct contributions in 10%
increments to any of four investment options
as follows:
<TABLE>
<CAPTION>
Number of Participants
December 31
Name of Fund Description of Fund 1997 1996 1995
- --------------------- -------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Daily Dividend Trust Funds are invested in money
Fund market instruments 57 39 42
Income Fund Funds are invested in a diversified
portfolio of fixed-income securities 85 66 71
Growth and Income Funds are invested primarily in
Fund common stocks 151 132 135
Eastern Common Stock Funds are invested in Common
Fund Stock of The Eastern Company -- 64 71
</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 published in the Wall Street Journal) plus
one percent, or such other rate as may be determined by the Plan Administrator
to be a reasonable rate of interest.
Payment of Benefits
On termination of service, a participant may receive a lump-sum amount equal to
the vested value of his or her account, or upon death, the participant's
beneficiary may elect to receive annual installments over a two-year period.
-23-
<PAGE>
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
1. Description of Plan (continued)
As of December 31, 1997 and 1996, there were no assets allocated but not yet
paid to participants who had withdrawn from
the Plan.
Plan Termination
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100 percent vested in their accounts.
2.Accounting Policies
The preparation of the accompanying financial statements requires the use of
estimates. Actual results could differ from those estimates.
Investments in mutual funds and, in 1996, the Company's Common Stock are stated
at fair value as estimated by reference to quoted market prices.
Administrative expenses of the Plan are paid by the Company.
3. Investments
Plan investments that represent 5 percent or more of the Plan's assets follow:
December 31
1997 1996
----------------------------
Mutual funds:
Putnam Daily Dividend Trust Fund $ 315,520 $ 71,530
Putnam Income Fund 219,692 134,105
Putnam Growth and Income Fund 1,030,823 710,784
The Eastern Company Common Stock - 128,817
------------ ------------
$ 1,566,035 $ 1,045,236
============ ============
-24-
<PAGE>
The Eastern Company Savings and Investment Plan
Notes to Financial Statements (continued)
3. Investments (continued)
The Plan's investments appreciated (depreciated) in value as follows:
December 31
1997 1996 1995
Mutual funds $ 172,714 $ 44,391 $ 56,487
The Eastern Company Common Stock $ 54,200 7,923 (6,811)
---------- ---------- -----------
$ 226,914 $ 52,314 $ 49,676
========== ========== ===========
4. Income Tax Status
The Plan is qualified under the applicable section of the Internal Revenue Code
and, as such, is not subject to income tax under present tax laws. The Plan
Administrator is not aware of any course of action or series of events that have
occurred which might adversely affect the Plan's qualified status.
5. Transactions with Parties-in-Interest
The Eastern Common Stock Fund fund which invested in the Common Stock of the
Company was an available investment option within the Plan. At December 31,
1996, the Plan owned 9,722 shares of the Company's Common Stock valued at
$128,817. During 1997, the Plan sold such shares as directed by the Plan's
participants in connection with a change in investment service provider
effective January 1, 1998. The Eastern Common Stock Fund is no longer an
available investment option within the Plan. The proceeds from the
aforementioned sale were reinvested as directed by the Plan's participants.
-25-
<PAGE>
The Eastern Company Savings and Investment Plan
Schedule of Investments
Balance Held at Close of Value of Each
Period. Number of Each Item
Name of Issuer and Shares-Principal Amount at Close of
Title of Issue of Bonds and Notes Period
- -------------------------------------------------------------------------------
December 31, 1997
Putnam-Daily Dividend Trust Fund 315,519.800 Units $ 315,520
Putnam-Income Fund Cl. A 8,388.438 Units 59,642
Putnam-Income Fund Cl. B 22,637.885 Units 160,050
Putnam-Growth and Income Fund Cl. A 2,653.058 Units 51,841
Putnam-Growth and Income Fund Cl. B 50,698.213 Units 978,982
Participant Loans 26,978
-----------
$ 1,593,013
December 31, 1996
Putnam-Daily Dividend Trust Fund 71,529.530 Units $ 71,530
Putnam-Income Fund Cl. B 19,212.765 Units 134,105
Putnam-Growth and Income Fund Cl. B 39,842.172 Units 710,784
New England Securities-Money Market Fund 1,132.770 Units 1,133
The Eastern Company-Common Stock 9,722 Shares 128,817
Participant Loans 3,099
-----------
$ 1,049,468
===========
-26-
<PAGE>
(This Page Intentionally Left Blank)
-27-
<PAGE>
THE EASTERN COMPANY is a 140 year-old manufacturer of proprietary locks and
other security devices with seven operating locations in the USA, Canada, Mexico
and The Pacific Rim.
ANNUAL REPORT 1997
[FRONT COVER]
-28-
<PAGE>
[INSIDE FRONT COVER]
<TABLE>
<CAPTION>
Financial Highlights
1997 1996
<S> <C> <C>
Sales $67,331,422 $57,853,669
Income Before Income Taxes 5,807,526 1,527,012
Net Income 3,722,530 879,817
Income Per Share (basic) 1.40 .33
Dividends Per Share 47 1/2 .46
Book Value Per Share 11.00 10.88
Working Capital Per Share 5.59 5.47
Current Ratio 2.32 to 1 2.91 to 1
Capital Expenditures 2,230,113 2,915,041
Depreciation and Amortization 2,978,250 2,952,876
Return on Shareholders' Equity 13% 3%
Number of Employees 492 494
Number of Stockholders 848 881
Per Share data based on the weighted average number of outstanding shares
(basic) during each year.
</TABLE>
-29-
<PAGE>
[GRAPH IN TABULAR FORM]
SALES
(in millions of dollars)
1993* 1994* 1995 1996 1997
- -------- -------- -------- -------- --------
$52,546 $58,381 $59,352 $57,854 $67,331
*As reclassified to reflect discontinued operation
[GRAPH IN TABULAR FORM]
EARNING
(per share, basic)
1993 1994 1995 1996 1997
- -------- -------- -------- -------- --------
$ 1.01 $ .95 $ .90 $ .33 $ 1.40
[GRAPH IN TABULAR FORM]
SHAREHOLDERS' EQUITY
(per share)
1993 1994 1995 1996 1997
- -------- -------- -------- -------- --------
$10.33 $10.77 $10.75 $10.88 $11.00
[GRAPH IN TABULAR FORM]
MARKET CAPITALIZATION
(millions of dollars)
1995 1996 1997 1998
-------- -------- -------- --------
1st QTR $41,279 $32,355 $36,625
2nd QTR $38,175 $30,704 $39,688
3rd QTR $33,664 $35,428 $40,210
4th QTR $33,029 $35,990 $51,214
JAN 98 $55,751
Cash Dividend Rates
and Stock Splits
1997-1967
1997 - 13% increase
1992 - 9.5% increase
1991 - 12.5% increase,
50% stock dividend
1988 - 12% increase,
2 for 1 split
1987 - $1.00 year-end extra
1984 - 43% increase
1982 - 50% decrease
1979 - 11% increase
1977 - 14% increase,
3 for 2 split
1976 - 27% increase, plus
20 cent year-end extra
1975 - 30 cent year-end extra
1974 - 25% increase, plus
11 cent year-end extra
1973 - 10% increase,
5 for 4 split
1972 - 4% increase
1970 - 3% increase,
3 for 2 split
1967 - 17% increase
PAGE 1 OF ANNUAL REPORT
-30-
<PAGE>
To Our Shareholders:
The year 1997 was an outstanding one for The Eastern Company. After several
years of lackluster performance, sales and earnings were brought dramatically
back on track. Net sales grew 16% to $67.3 million while net income increased to
$3.7 million, or $1.40 per share (basic), compared to $880 thousand, or $0.33
per share (basic), in the previous year. We followed through on our commitment
to improve shareholder value. At the end of 1997, the Company's market
capitalization increased to $51.2 million compared to $36.0 million on December
31, 1996.
The strength of the overall economy was a contributing factor to the Company's
strong performance last year. Other factors also had a positive impact.
Noteworthy was the strong contribution at our Frazer & Jones division, as it
continues to modify its production operations in order to increase its
specialized contract casting business. In addition, new management initiatives
were put in place to inspire greater productivity.
Our divisions have implemented several product and marketing programs
reaffirming our optimism for growth in 1998 and beyond. These undertakings
include the growth of Frazer & Jones' contract casting business. We are also
searching out and concentrating on certain specialty end-use markets which will
result in new business on some recently designed products such as safety locks
for firearms and new latching devices for the sport pick-up truck accessory
after-market.
Eastern's management is committed to achieving financial goals that will enable
us to continue enhancing shareholder value. In addition to increasing sales and
earnings, other key ingredients will include improved return on investment and
cash flow. We will also seek acquisitions that strengthen our position in the
markets we serve.
[LINE GRAPH]
GROWTH IN SHAREHOLDER VALUE
(millions of dollars)
1993 1994 1995 1996 1997
- -------- -------- -------- -------- --------
$33,008 $36,076 $33,029 $35,990 $51,214
[LINE GRAPH]
QUARTERLY EPS
1995 1996 1997
-------- -------- --------
1st QTR $0.35 ($0.07) $0.23
2nd QTR $0.21 $0.13 $0.30
3rd QTR $0.16 $0.18 $0.40
4th QTR $0.18 $0.09 $0.47
PAGE 2 OF ANNUAL REPORT
-31-
<PAGE>
Eastern is a strong, competitive company with quality products, a growing base
of satisfied customers, dedicated employees, positive cash flow and a sound
balance sheet. We feel these basic ingredients act as a strong foundation for us
to maintain our growth and prosperity. The vision and activities implemented in
1997 will be continued as we work to reward our shareholders by building greater
value in The Eastern Company.
I thank all our employees at our seven operating locations as well as our
corporate management team who all have been enthusiastic and supportive in
making 1997 a successful year. I am confident that their efforts will reap
rewards for our shareholders and our entire corporate family.
Ole Imset, a dedicated Eastern Director for seven years, passed away in November
of 1997. He will be missed by all of us who knew him.
/s/Leonard F. Leganza
- ---------------------
Leonard F. Leganza
President and Chief Executive Officer
Q u e s t i o n s & A n s w e r s
Q You have expressed optimism for Eastern's performance in 1998 and beyond. What
are your main reasons for this?
A There are several factors involved here beyond just the prediction of a
continuing good economy. Our optimism is based on a combination of having a
strong position in our selected markets as well as the introduction of new
products. Another key ingredient is a new management style that emphasizes the
achievement of fundamental financial goals, such as earnings per share, cash
flow and return on investment, all of which help maximize shareholders value.
Q Eastern has consistently expressed an interest in pursuing acquisitions or
other strategic moves. Is this still the case? Why?
A Yes, we are still very interested and involved here. We believe that
acquisitions are a faster way to enter into or expand in a certain targeted
marketplace.
Q Eastern's various product lines seem to serve three different market areas. Do
you feel that all three have sound growth potential? Also, is there one that has
greater potential for Eastern?
A All three are equally desirable. Our product lines are tied by the common
thread of high quality manufacturing and marketing. Each of our businesses
compete in healthy, growing niche markets. As a result, we are not overly
dependent on one product area.
Q You increased the dividend in 1997. If earnings continue to increase, might
you consider increasing it again?
A For years it has been Eastern's policy to have our shareholders participate in
the success of the company when earnings and other cash needs permit. We will
continue to re-evaluate our dividend policy.
Q Was your good earnings performance in 1997 tied to the strong economy?
Conversely, do you foresee a downturn in your earnings when the economy cools
off?
A As is the case with most companies, a good economy is very important to our
financial well being. However, we feel that with our very diverse mix of
products Eastern is somewhat more resistant to cyclical downturns. In addition,
some of our security products, such as our Presto(R) and Sesamee(R) brand
locks are marketed through locksmith channels rather than to consumers who might
be more directly effected by a weak economy.
PAGE 3 OF ANNUAL REPORT
-32-
<PAGE>
Custom Locks
Eastern produces locks at four of its seven operating facilities. Most of the
Company's keyed locks are custom-engineered to meet specific security
applications. Eastern's custom-engineered locks are used for gaming and vending
equipment, all types of enclosures and coin boxes where cash is being stored,
for cabinets, drawers, instrumentation, and computer peripheral equipment.
Today's lock customers have diverse requirements. In addition to varying levels
of security, customers seek durability and ruggedness, as well as master and
grand-master keying functions. Other important criteria in the customer's
purchasing decision are the ability to re-key without having to remove the
entire lock
PAGE 4 OF ANNUAL REPORT
-33-
<PAGE>
itself, and the ability to thwart the unauthorized duplication of
keys.
Eastern also produces the Sesamee(R)and Prestolock(R) brand of combination
padlocks - an increasingly important product in the security field because these
locks provide a logical solution to the problem of lost or stolen keys. A
popular niche, end-use application for Prestolocks is the growing soft luggage
industry. Another application for a combination lock is the Gun Blok(R) which
is designed for the firearms industry to help prevent unauthorized access to
rifles and handguns.
Q u e s t i o n s & A n s w e r s
Q Are you concerned that new state-of-the-art electronic security devices on the
market might reduce the demand for conventional locks like Eastern's?
A No. Although electronic devices may trigger a mechanism, it is the mechanical
lock that is required to perform the actual locking function.
Q It seems that lock manufacturers are introducing an ever-growing selection of
specialized locks. How does this effect Eastern?
A We have chosen to serve only certain niches of the multi-million-dollar lock
market - namely areas where we have expertise. We design and produce locks for
specific end-uses, such as gaming and vending machines, coin boxes, and various
electronic equipment. We believe these markets present us with the best
opportunities for future growth.
Q Why is The Eastern Company placing an emphasis on advertising its combination
locks?
A At Eastern we produce both keyed and combination locks. We believe both types
are needed in today's security environment. Although key-type locks are more
prevalent, we foresee substantial growth potential for combination locks in many
end-use applications, because these keyless locks offer an alternative to the
age-old problem of lost, stolen, or unauthorized duplication of keys. As a
result, much of Eastern's marketing initiatives are focused on our keyless or
combination locks.
PAGE 5 OF ANNUAL REPORT
-34-
<PAGE>
Security Hardware
Security hardware is a term which describes the various types of closure devices
used in a wide variety of industrial end-use applications. Typical products are
latches, handles, hinges and multi-point latching mechanisms that often must
provide a closing and locking function. Eastern's two operating facilities in
Cleveland, Ohio and Ontario, Canada design and manufacture products which serve
these diverse market areas. Eastern's security hardware offerings can typically
be found in the electrical, telecommunications, food service equipment and
machinery
PAGE 6 OF ANNUAL REPORT
-35-
<PAGE>
industries, as well as medical and test instrumentation fields. In addition, for
decades Eastern has been a leading producer of latches and locks for the truck
body industry. The end-uses range from commonly seen vertical locking bars on
the rear door of tractor trailers to custom handles and flush locks used on the
tool compartments of utility trucks.
Q u e s t i o n s & A n s w e r s
Q Are your latches and locks mainly proprietary catalog items or are they
designed for a single customer's individual needs?
A The answer is both. Although the hundreds of security devices presented
in our catalogs are available to all customers, a large percentage of our annual
sales are products that are custom-engineered to solve a specific customer's
security need. In many instances, other customers may later purchase the same
product or a modification of it.
Q What are the markets for all your security hardware products?
A Our latches and other security devices are targeted at two basic markets. They
are the truck body and other vehicle manufacturers as well as general
industrial and electronic equipment producers.
Q What new product lines do you feel might be natural adjuncts in order to
provide future growth? Do you plan to develop these internally or obtain them
via acquisition?
A There are a number of extremely nteresting specialty products that we feel
would be excellent building blocks for growth while augmenting or complementing
our core product line. Some could be developed internally while others would
most practically be added by means of an acquisition. Among the new product
lines we might be interested in are marine hardware, specialty fasteners, hinges
and rollup doors.
PAGE 7 OF ANNUAL REPORT
-36-
<PAGE>
Metal Products
Two different product lines are manufactured at Eastern's production facility in
Syracuse, New York. Our Frazer & Jones division is the dominant producer of
anchoring devices which are used to support the roofs of underground mines.
These devices provide the rugged reliability and sturdiness needed to reduce
potential and costly mining accidents.
PAGE 8 OF ANNUAL REPORT
-37-
<PAGE>
Recognizing that new mining techniques are reducing the need for conventional
roof support systems in the mining industry, Frazer & Jones has modified its
production operations in order to enter the market for contract castings. Frazer
& Jones is one of the most automated and efficient producers of high-volume,
small-size, complex metal castings that are used in the electrical, construction
and automotive industries.
Q u e s t i o n s & A n s w e r s
Q Why did the demand for your traditional product lines of mine roof support
fasteners diminish?
A We saw a downturn in our core mining business primarily because new
technological advances in mining reduced the need for mine roof support systems.
However, the anticipated need for mine roof systems will not totally disappear
in the near-term. This trend triggered our decision to convert our production
operations to produce specialized contract castings. This has proven to be a
very wise decision.
Q What do you mean by contract casting business? Who uses these products?
A This means that we contract to produce specialty castings for other customers'
specific requirements. The majority of this output is for the construction,
electrical and automotive industries.
Q How do you envision your future success in this specialized contract casting
business?
A Not only are we pleased with the sales and earnings growth that we have
already experienced, but we are optimistic about the future of serving these
markets. The reason for this optimism is that our Frazer & Jones division is one
of the most efficient, mechanized foundries of its kind in the country this
makes it very suited to excel in this business.
PAGE 9 OF ANNUAL REPORT
-38-
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Consolidated Balance Sheets
January 3, 1998 and December 28, 1996
1997 1996
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 2,111,289 $ 2,269,031
Accounts receivable, less allowances of $329,000 in 1997 and $567,000 in 1996 8,725,167 7,018,961
Inventories:
Raw materials and component parts 5,502,526 5,034,184
Work in process 3,736,500 2,564,546
Finished goods 3,175,840 3,299,097
------------ ------------
12,414,866 10,897,827
Prepaid expenses and other 1,819,857 1,469,155
Deferred income taxes 1,026,700 818,000
------------ ------------
Total Current Assets 26,097,879 22,472,974
Property, Plant and Equipment
Land 227,622 228,064
Buildings 3,936,441 3,761,466
Machinery and equipment 21,270,361 21,971,513
Accumulated depreciation (11,997,894) (12,074,420)
------------ ------------
13,436,530 13,886,623
Other Assets
Goodwill, less accumulated amortization of $51,411 in 1997 and $43,583 in 1996 13,701 21,530
Patents, technology, licenses and trademarks, less accumulated
amortization of $1,034,253 in 1997 and $682,773 in 1996 1,989,410 2,023,034
Prepaid pension cost 4,217,604 4,017,397
Other Assets 43,037 70,676
------------ ------------
6,263,752 6,132,637
------------ ------------
$ 45,798,161 $ 42,492,234
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,499,857 $ 2,396,582
Accrued compensation 1,413,418 859,701
Other accrued expenses 2,662,088 823,560
Short-term borrowings 3,500,000 3,500,000
Current portion of long-term debt 163,662 130,980
------------ ------------
Total Current Liabilities 11,239,025 7,710,823
Deferred income taxes 2,492,200 2,389,800
Long-term debt 60,000 224,415
Accrued postretirement benefits 2,763,795 2,812,690
Shareholders' Equity
Voting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares
Common Stock, no par value:
Authorized: 25,000,000 shares
Issued: 2,593,089 shares in 1997 and 2,716,214 shares in 1996;
excluding shares held in treasury of 831,780 in 1997 and 610,987 in 1996 6,078,427 8,272,614
Retained earnings 24,220,894 21,765,893
Unearned compensation (492,969) (200,938)
Accumulated translation adjustments (563,211) (483,063)
------------ ------------
Total Shareholders' Equity 29,243,141 29,354,506
------------ ------------
$ 45,798,161 $ 42,492,234
============ ============
See notes to consolidated financial statements.
</TABLE>
PAGE 10 OF ANNUAL REPORT
-39-
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Consolidated Statements of Income
Fiscal Years Ended January 3,1998, December 28, 1996 and December 30, 1995
1997 1996 1995
<S> <C> <C> <C>
Net sales $67,331,422 $57,853,669 $59,351,783
Other income 139,116 88,191 274,054
----------- ----------- -----------
67,470,538 57,941,860 59,625,837
Costs and expenses
Cost of products sold 48,779,527 45,173,447 45,236,910
Selling and administrative 12,586,893 11,025,975 10,041,833
Interest 296,592 215,426 72,471
----------- ----------- -----------
61,663,012 56,414,848 55,351,214
----------- ----------- -----------
Income before income taxes from
continuing operations 5,807,526 1,527,012 4,274,623
Income taxes 2,084,996 647,195 1,527,481
----------- ----------- -----------
Income from continuing operations 3,722,530 879,817 2,747,142
Discontinued operations:
Loss from operations of discontinued segment, net of
income tax credit of $63,300 - - (173,582)
Loss on disposal of discontinued segment,
net of income tax credit of $1,400 - - (83,062)
Net Income $ 3,722,530 $ 879,817 $ 2,490,498
=========== =========== ===========
Basic Earnings per Share:
Income from continuing operations $ 1.40 $ .33 $ .99
Discontinued operations - - (.09)
----------- ----------- -----------
Net Income $ 1.40 $ .33 $ .90
=========== =========== ===========
Diluted Earnings per Share:
Income from continuing operations $ 1.38 $ .32 $ .98
Discontinued operations - - (.09)
----------- ----------- -----------
Net Income $ 1.38 $ .32 $ .89
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
PAGE 11 OF ANNUAL REPORT
-40-
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Consolidated Statements of Shareholders' Equity
Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Accumulated
Common Retained Unearned Translation
Stock Earnings Compensation Adjustments
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ 9,009,392 $20,912,486 - $ (78,421)
Net income - 2,490,498 - -
Cash dividends declared, $.46 per share - (1,275,577) - -
Purchase of 90,051 shares of Common Stock
for treasury (1,096,164) - - -
Issuance of 11,250 shares of Common Stock
upon the exercise of stock options 104,510 - - -
Currency translation adjustment - - - (260,040)
----------- ----------- ------------ -----------
Balances at December 30, 1995 8,017,738 22,127,407 - (338,461)
Net income - 879,817 - -
Cash dividends declared, $.46 per share - (1,241,331) - -
Issuance of 3,000 shares of Common Stock
upon the exercise of stock options 28,125 - - -
Issuance of 1,930 shares of Common Stock
for director fees 25,813 - - -
Issuance of 15,000 shares of Common Stock
for restricted stock awards 200,938 - $ (200,938) -
Currency translation adjustment - - - (144,602)
----------- ----------- ----------- -----------
Balances at December 28, 1996 8,272,614 21,765,893 (200,938) (483,063)
Net income - 3,722,530 - -
Cash dividends declared, $.475 per share - (1,267,529) - -
Purchase of 220,793 shares of Common Stock
for treasury (3,421,825) - - -
Issuance of 70,293 shares of Common Stock
upon the exercise of stock options 721,656 - - -
Issuance of 4,875 shares of Common Stock
for director fees 75,201 - - -
Issuance of 22,500 shares of Common Stock
for restricted stock awards 405,469 - (405,469) -
7,500 shares of Common Stock earned
under restricted stock award program 25,312 - 113,438 -
Currency translation adjustment - - - (80,148)
----------- ----------- ----------- -----------
Balances at January 3, 1998 $ 6,078,427 $24,220,894 $ (492,969) $ (563,211)
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
PAGE 12 OF ANNUAL REPORT
-41-
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Consolidated Statements of Cash Flows
Fiscal Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
Operating Activities
<S> <C> <C> <C>
Net Income $ 3,722,530 $ 879,817 $ 2,490,498
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,978,250 2,952,876 2,628,319
(Gain) loss on sales of equipment and other assets 4,618) 9,780 5,580
Provision for doubtful accounts 370,755 251,881 261,687
Deferred income taxes (106,300) 32,500 264,700
Issuance of Common Stock for directors' fees 75,201 25,813 -
Compensation related to earned contingent
shares of Common Stock 138,750 - -
Changes in operating assets and liabilities:
Accounts receivable (2,181,557) 534,741 1,573,707
Inventories (1,612,166) 882,531 (2,280,056)
Prepaid expenses and other (358,019) (159,412) 1,059,465
Prepaid pension cost (200,206) (948,332) (110,704)
Other assets (313,827) (1,178,406) (217,508)
Accounts payable 1,557,083 (854,183) (208,235)
Accrued compensation 576,064 (47,719) (24,457)
Other accrued expenses 1,546,392 88,706 261,577
----------- ----------- -----------
Net cash provided by operating activities 6,188,332 2,470,593 5,704,573
Investing Activities
Purchases of property, plant and equipment (2,230,113) (2,915,041) (3,319,663)
Proceeds from sales of equipment and other assets 54,497 13,600 69,559
----------- ----------- -----------
Net cash used by investing activities (2,175,616) (2,901,441) (3,250,104)
Financing Activities
Proceeds from line of credit 2,000,000 2,500,000 1,000,000
Payments on line of credit (2,000,000) - (1,400,000)
Proceeds from issuance of long-term debt - - 210,468
Principal payments on long-term debt (116,831) (102,373) (1,060,000)
Proceeds from sales of Common Stock 721,656 28,125 104,510
Purchases of Common Stock for treasury (3,421,825) - (1,096,164)
Dividends paid (1,267,529) (1,241,331) (1,275,577)
Net cash (used) provided by financing activities (4,084,529) 1,184,421 (3,516,763)
Effect of exchange rate changes on cash (85,929) (5,903) (26,589)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (157,742) 747,670 (1,088,883)
Cash and cash equivalents at beginning of year 2,269,031 1,521,361 2,610,244
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,111,289 $ 2,269,031 $ 1,521,361
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
PAGE 13 OF ANNUAL REPORT
-42-
<PAGE>
Financial Statements
Notes of Consolidated Financial Statements January 3, 1998, December 28, 1996
and December 30, 1995
1. OPERATIONS
The operations of The Eastern Company (the Company) consist of a single business
segment -- security products. Security products are used to close, lock or
support equipment used in the industrial, transportation or mining industries.
Sales are made to customers primarily in North America. Ongoing credit
evaluations are made of customers for which collateral is generally not
required. Allowances for credit losses are provided; such losses have been
within management's expectations. During fiscal 1998, the Company will be
required to adopt Financial Accounting Standards Board (FASB) Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information.
2. DISCONTINUED OPERATIONS
In 1995, the Company sold the business and substantially all assets (customer
list, property and inventories) of its construction segment; the Company
retained accounts receivable. At January 3, 1998, there were no recorded
balances related to the discontinued construction segment. At December 28, 1996
accounts receivable before allowances included $329,152 related to the
discontinued construction segment and adequate allowances had been provided for
potential losses. Statements of income reflect the discontinuance of this
segment.
3. ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal Year
The Company's year ends on the Saturday nearest to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All intercompany accounts and
transactions are eliminated.
Foreign Currency Translation
For foreign operations, balance sheet accounts are translated at the current
year-end exchange rate; income statement accounts are translated at the average
exchange rate for the year. Resulting translation adjustments are made directly
to a separate component of shareholders' equity -- "accumulated translation
adjustments". Foreign currency exchange gains and losses are not material in any
year.
Cash Equivalents
Highly liquid investments purchased with a maturity of three months or less are
considered cash equivalents.
Inventories
Inventories are valued generally at the lower of cost, determined by the
last-in, first-out (LIFO) method, or market. Current cost exceeded the LIFO
carrying value by approximately $2,854,000 at January 3, 1998 and $2,894,000 at
December 28, 1996.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment are stated on the basis of cost. Depreciation
($2,597,806 in 1997, $2,688,305 in 1996 and $2,358,722 in 1995) is computed
generally using the straight-line method based on the estimated useful lives of
the assets. Intangibles Patents are amortized using the straight-line method
over the lives of the patents. Technology and licenses are generally amortized
on a straight-line basis over periods ranging from five to 17 years. Goodwill is
being amortized over periods ranging from five to 20 years.
Product Development Costs
Product development costs, charged to expense as incurred, were $84,290 in 1997,
$142,358 in 1996 and $353,425 in 1995.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$442,965 in 1997, $597,877 in 1996 and $525,850 in 1995.
PAGE 14 OF ANNUAL REPORT
-43-
<PAGE>
<TABLE>
<CAPTION>
Earnings Per Share
The denominators used in the earnings per share computations follow:
1997 1996 1995
<S> <C> <C> <C>
Basic:
Weighted average shares outstanding 2,688,181 2,713,191 2,771,840
Contingent shares outstanding (30,000) (15,000) -
--------- --------- ---------
Denominator for basic earnings per share 2,658,181 2,698,191 2,771,840
========= ========= =========
Diluted:
Weighted average shares outstanding 2,688,181 2,713,191 2,771,840
Contingent shares outstanding (30,000) (15,000) -
Dilutive stock options 39,820 35,381 45,033
--------- --------- ---------
Denominator for diluted earnings per share 2,698,001 2,733,572 2,816,873
========= ========= =========
</TABLE>
4. CONTINGENCIES
In 1996, the United States Court of Appeals reversed a 1995 District Court
ruling relating to environmental remediation complaints against the Company and
other potentially responsible parties (PRPs). In 1997, additional expenses
recognized, net of insurance recoveries, relating to these complaints were
immaterial to the Company's operating results. The contingency for these
environmental complaints is expected to be resolved within the next year. All of
the involved PRPs are expected to fund their share of the ultimate expenses
relating to these matters. In 1997, the Company also provided for other
contingencies arising in the ordinary course of business. The aggregate
liability for all contingencies is approximately $1,200,000 as of January 3,
1998 and is included in current liabilities under the caption, "other accrued
expenses". A substantial portion of this liability will be funded by insurance
proceeds. Although possible, no significant change in the estimated liability is
contemplated.
<TABLE>
<CAPTION>
5. DEBT
Debt consists of: 1997 1996
<S> <C> <C>
Non-interest bearing note due in yearly installments of
$60,000 through January 7, 1999 $ 120,000 $ 180,000
Non-interest bearing note due in 1998 68,562 95,621
Note payable due in 1998 with interest at 11% 35,100 79,774
-------- --------
223,662 355,395
Less current portion 163,662 130,980
-------- --------
$ 60,000 $ 224,415
========= =========
</TABLE>
Interest paid was $248,314 in 1997, $174,325 in 1996 and $107,466 in 1995. The
Company has available a $7,000,000 line of credit. Borrowings against the line
were $3,500,000 at January 3, 1998; such borrowings bear interest at rates
ranging from 7.01% to 7.15%. In connection with the Company's cash management
program, compensating balances (approximately $450,000 at January 3, 1998) are
required to be maintained.
6. STOCK RIGHTS
At January 3, 1998 there were 2,593,089 stock rights outstanding. Each right may
be exercised to purchase one share of the Company's Common Stock at an exercise
price of $35, subject to adjustment to prevent dilution. The rights generally
become exercisable ten days after an individual or group acquires 10% of the
Company's outstanding common shares or after commencement or announcement of an
offer for 10% or more of the Company's Common Stock. The stock rights, which do
not have voting privileges, expire on October 15, 2001, and may be redeemed by
the Company at a price of $.01 per right at any time prior to their expiration
or the acquisition of 10% of the Company's Common Stock. In the event that the
Company were acquired in a merger or other business combination transaction,
provision shall be made so that each holder of a right shall have the right to
receive, upon exercise thereof at the then current exercise price, that number
of shares of common stock of the surviving company which at the time of such
transaction would have a market value of two times the exercise price of the
right.
PAGE 15 OF ANNUAL REPORT
-44-
<PAGE>
Financial Statements
Notes to Consolidated Financial Statements
7. STOCK OPTIONS AND AWARDS
The Company has four incentive stock option plans for officers, other key
employees, and nonemployee directors: 1983, 1989, 1995, and 1997. Under the
1983, 1989, and 1995 plans, options may be granted to the participants to
purchase shares of Common Stock at prices not less than 100% of the fair market
value of the stock on the dates the options are granted. Restricted stock awards
may also be granted to participants under the 1995 plan with restrictions
determined by the Incentive Compensation Committee of the Company's Board of
Directors. Under the 1997 plan, options may be granted to the participants to
purchase shares of Common Stock at prices determined by the Compensation
Committee of the Company's Board of Directors. All options under the 1997 plan
were granted at prices equal to the fair market value of the stock on those
dates. At January 3, 1998, 22,500 shares of the Company's unissued Common Stock
were reserved for options under its 1983 Incentive Stock Option Plan. Changes in
stock options under this plan follow:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 29,640 $9.34 40,590 $9.27 59,840 $9.29
Exercised (7,140) $9.25 - - (11,250) $9.29
Forfeited - - (10,950) $9.08 (8,000) $9.375
------ ------- -------
Outstanding, end of year 22,500 $9.375 29,640 $9.34 40,590 $9.27
====== ======= =======
Exercisable, end of year:
At $9.08 - 3,000 13,950
At $9.375 22,500 26,640 26,640
</TABLE>
At January 3, 1998, 114,650 shares of the Company's unissued Common Stock were
reserved for options under its 1989 Incentive Stock Option Plan. Changes in
stock options under this plan follow:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
----------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 121,203 $10.00 124,203 $ 9.99 124,203 $9.99
Granted 35,000 $16.16 - - - -
Exercised (63,153) $10.19 (3,000) $ 9.375 - -
------- ------- -------
Outstanding, end of year 93,050 $12.19 121,203 $10.00 124,203 $9.99
====== ======= =======
Exercisable, end of year:
At $9.08 31,550 33,750 33,750
At $9.375 10,000 53,703 56,703
At $11.00 11,250 11,250 11,250
At $12.25 5,250 11,250 11,250
At $12.50 - 11,250 11,250
At $14.875 20,000 - -
At $17.875 15,000 - -
</TABLE>
PAGE 16 OF ANNUAL REPORT
-45-
<PAGE>
At January 3, 1998, 242,500 shares of the Company's unissued Common Stock were
reserved for options and awards under its 1995 Incentive Stock Option Plan.
Changes in stock options and restricted stock awards under this plan follows:
<TABLE>
<CAPTION>
Stock Options Stock Awards
1997 1997 1996
------------------------- -------------------------------------------
Weighted Weighted
Weighted Average Average
Average Fair Value Fair Value
Exercise at Date of at Date of
Options Price Awards Grant Awards Grant
------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year - - 15,000 $13.40 - -
Granted 25,000 $17.875 22,500 $18.02 15,000 $13.40
Earned - - (7,500) $15.13 - -
------ ------ ------
Outstanding, end of year 25,000 $17.875 30,000 $16.43 15,000 $13.40
====== ====== ======
Exercisable, end of year:
At $17.875 25,000
</TABLE>
At January 3, 1998, 150,000 shares of the Company's unissued Common Stock were
reserved for options under its 1997 Incentive Stock Option Plan. Changes in
stock options under this plan follow:
1997
-------------------
Weighted
Average
Exercise
Options Price
-------------------
Granted 90,000 $14.875
Outstanding, end of year 90,000 $14.875
Exercisable, end of year:
At $14.875 90,000
Compensation expense for stock options is recognized under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Compensation expense for restricted stock awards granted is
recognized when earned based on the achievement of targeted annual operating
results through December 31, 2000. Compensation expense of $138,750 related to
stock awards was required to be recognized in 1997. If stock options were
accounted for using the fair value method under FASB Statement No. 123,
Accounting for Stock Based Compensation, net income, basic earnings per share
and diluted earnings per share would have been $3,454,430, $1.30, and $1.28,
respectively in 1997. In connection therewith, fair value was estimated using
the "Black Scholes" method referred to in FASB Statement No. 123 with the
following weighted-average assumptions: a risk free interest rate of 5.62%;
expected volatility of 0.164; an expected option life of 5 years; and a
weighted-average dividend yield of 3.34%.
8. INCOME TAXES
Deferred income taxes are provided on temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and those for
income tax reporting purposes. Deferred income tax liabilities (assets) relate
to:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Property, plant and equipment $ 2,054,700 $ 1,949,000 $ 1,883,200
Pension accruals 1,640,600 1,571,300 1,470,400
Other 275,100 129,800 146,500
----------- ----------- -----------
Total deferred income tax liabilities 3,970,400 3,650,100 3,500,100
Other postretirement benefits (1,075,100) (1,099,700) (1,104,300)
Inventories (288,800) (291,000) (208,400)
Allowance for doubtful accounts (120,000) (179,600) (229,700)
Accrued compensation (304,700) (271,700) (253,100)
Accrual for contingencies (408,500) - -
Other (307,800) (236,300) (165,300)
----------- ----------- -----------
Total deferred income tax assets (2,504,900) (2,078,300) (1,960,800)
----------- ----------- -----------
Net deferred income tax liabilities $ 1,465,500 $ 1,571,800 $ 1,539,300
=========== =========== ===========
</TABLE>
PAGE 17 OF ANNUAL REPORT
-46-
<PAGE>
Financial Statements
Notes to Consolidated Financial Statements
8. INCOME TAXES (continued)
Income before income taxes from continuing operations consists of:
1997 1996 1995
Domestic $ 5,107,701 $ 1,476,346 $ 4,089,932
Foreign 699,825 50,666 184,691
----------- ----------- -----------
$ 5,807,526 $ 1,527,012 $ 4,274,623
=========== =========== ===========
Income taxes follow:
1997 1996 1995
Current:
Federal $ 1,749,800 $ 525,000 $ 1,011,900
Foreign 170,996 35,795 49,681
State 270,500 53,900 122,600
Deferred (106,300) 32,500 343,300
----------- ---------- -----------
$ 2,084,996 $ 647,195 $ 1,527,481
=========== ========== ===========
A reconciliation of income taxes computed using the U.S. federal statutory rate
to those reflected in continuing operations follows:
<TABLE>
<CAPTION>
1997 1996 1995
Amount Percent Amount Percent Amount Percent
---------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Income taxes using
U.S. federal statutory rate $ 1,974,600 34% $ 519,200 34% $ 1,453,400 34%
State income taxes, net of federal benefit 166,100 3 31,700 2 75,500 2
U.S. tax on foreign income (66,900) (1) 39,100 2 (13,100) --
Other - net 11,196 -- 57,195 4 11,681 --
---------------------- ------------------- ---------------------
$ 2,084,996 36% $ 647,195 42% $ 1,527,481 36%
====================== =================== =====================
</TABLE>
Total income taxes paid were $1,872,699 in 1997, $476,441 in 1996 and $955,398
in 1995. United States income taxes have not been provided on the undistributed
earnings of foreign subsidiaries ($2,016,892 at January 3, 1998) because such
earnings are intended to be reinvested abroad indefinitely or repatriated only
when substantially free of such taxes.
9. LEASES
The Company leases certain equipment and buildings under operating lease
arrangements. Certain leases contain renewal options for periods ranging from
one to ten years. Future minimum payments under operating leases with initial or
remaining terms in excess of one year during each of the next five years follow:
1998 $ 287,464
1999 291,375
2000 291,415
2001 291,435
2002 291,455
$ 1,453,144
Rent expense for all operating leases was $288,178 in 1997, $274,066 in 1996 and
$259,379 in 1995.
PAGE 18 OF ANNUAL REPORT
-47-
<PAGE>
10. EMPLOYEE RETIREMENT BENEFITS
The Company has noncontributory defined benefit pension plans covering most U.S.
employees. Plan benefits are generally based upon age at retirement, years of
service and, for its salaried plan, the level of compensation. The Company funds
the annual contributions required by applicable regulations. The Company also
sponsors an unfunded nonqualified supplemental retirement plan that provides a
former officer with benefits in excess of limits imposed by federal tax law.
U.S. salaried employees and most employees of the Company's Canadian subsidiary
are covered by defined contribution plans. A summary of the components of income
under the Company's employee retirement benefit plans follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 601,528 $ 611,268 $ 548,618
Interest cost on projected benefit obligation 1,735,777 1,681,527 1,603,636
Actual return on plan assets (4,863,796) (2,331,708) (2,206,195)
Net amortization and deferral 2,326,279 (91,356) (106,343)
Defined contribution plans expense 61,128 54,877 58,421
----------- ----------- ----------
$ (139,084) $ (75,392) $ (101,863)
</TABLE>
Assumptions used in accounting for pensions were:
1997 1996 1995
---- ---- ----
Weighted average discount rates 7.5% 7.5% 7.5%
Rates of increase in compensation levels 4.25% 4.25% 4.25%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
Based on the latest actuarial information available, the following table sets
forth the funded status of the Company's defined benefit plans at September 30:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 24,173,695 $ 23,273,991
============= =============
Accumulated benefit obligation $ 24,329,083 $ 23,516,362
============= =============
Projected benefit obligation $ 25,004,296 $ 24,072,918
============= =============
Plan assets at fair value $ 32,528,335 $ 29,333,576
============= =============
Excess of plan assets over projected benefit obligation $ 7,524,039 $ 5,260,658
Unrecognized prior service cost 252,363 100,044
Unrecognized net (gain) loss (1,668,875) 700,920
Unrecognized transition asset (1,889,923) (2,042,974)
Adjustment required to recognize intangible pension asset - (1,251)
------------- -------------
Prepaid pension cost $ 4,217,604 $ 4,017,397
============= =============
</TABLE>
All of the plans' assets at January 3, 1998 are invested in listed stocks and
bonds and pooled investment funds, including Common Stock of the Company having
a market value of $5,673,188 at that date.
11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides health care and life insurance for substantially all
retired salaried employees in the United States. The status of the Company's
postretirement health care and life insurance benefit plans at year-end follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 1,526,958 $ 1,604,781
Fully eligible active plan participants 1,302,828 1,115,822
------------- --------------
2,829,786 2,720,603
Plan assets at fair value 819,179 726,134
------------- --------------
Excess of accumulated postretirement benefit obligation over plan assets 2,010,607 1,994,469
Unrecognized prior service cost 206,678 227,767
Unrecognized net gain 546,510 590,454
------------- --------------
Accrued postretirement benefits $ 2,763,795 $ 2,812,690
============= ==============
Plan assets are invested in a pooled insurance fund.
</TABLE>
PAGE 19 OF ANNUAL REPORT
-48-
<PAGE>
Financial Statements
Notes to Consolidated Financial Statements
11. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (continued)
A summary of the components of postretirement health care and life insurance
benefit cost follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 103,449 $ 92,583 $ 85,932
Interest cost 196,877 211,415 217,668
Actual return on plan assets (66,130) (58,683) (50,907)
Net amortization and deferral (55,395) (21,089) (21,089)
----------- ----------- ----------
Net postretirement benefit cost $ 178,801 $ 224,226 $ 231,604
=========== =========== ==========
</TABLE>
The life insurance cost trend rate is expected to remain at 4.5%. The health
care cost trend rate for participants retiring after January 1, 1991 is nil; no
increase in that rate is expected because of caps placed on benefits. The health
care cost trend rate for participants who retired prior to January 1, 1991 is
also nil; that rate is expected to increase to 4.5% in the year 2000. A one
percentage point increase in the assumed health care cost trend rate would have
increased the accumulated benefit obligation by $210,572 at January 3, 1998 and
increased the net periodic postretirement benefit cost for 1997 by $33,086. A
weighted average discount rate of 7.5% was used to determine the accumulated
benefit obligation at the end of both 1997 and 1996. A return of 9% on plan
assets was used for 1997, 1996, and 1995.
12. FINANCIAL INSTRUMENTS
The carrying values of financial instruments (cash and cash equivalents,
accounts receivable, accounts payable, and debt) as of January 3, 1998
approximate fair value. Market value was based on expected cash flows and
current market conditions.
Report of Ernest & Young LLP, Independent Auditors
BOARD OF DIRECTORS
THE EASTERN COMPANY
We have audited the accompanying consolidated balance sheets of The Eastern
Company as of January 3, 1998 and December 28, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended January 3, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Eastern Company at January 3, 1998 and December 28, 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended January 3, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Hartford, Connecticut
January 30, 1998
PAGE 20 OF ANNUAL REPORT
-49-
<PAGE>
Financial Statements
<TABLE>
<CAPTION>
1997-1993 Summary of Operations
INCOME STATEMENT ITEMS (in thousands)
1997+ 1996 1995 1994* 1993*
<S> <C> <C> <C> <C> <C>
Net Sales $67,331 $57,854 $59,352 $58,381 $52,546
Cost of Products Sold 48,780 45,173 45,237 44,740 39,242
Depreciation and Amortization 2,978 2,953 2,628 2,453 2,322
Interest Expense 297 215 72 97 144
Income Before Income Taxes 5,808 1,527 4,275 3,865 4,464
Income Taxes 2,085 647 1,528 1,428 1,634
Income (Loss):
Continuing Operations 3,723 880 2,747 2,437 2,830
Discontinued Operations - - (257) 206 (64)
Net Income 3,723 880 2,490 2,643 2,766
Dividends 1,268 1,241 1,276 1,276 1,265
BALANCE SHEET ITEMS (in thousands)
1997+ 1996 1995 1994 1993
Inventory $12,415 $10,898 $11,793 $9,531 $11,193
Working Capital 14,859 14,762 17,240 17,834 17,708
Plant Assets Net 13,437 13,887 13,686 12,954 12,416
Total Assets 45,798 42,492 41,090 41,883 40,459
Shareholders' Equity 29,243 29,355 29,807 29,843 28,383
Capital Expenditures 2,230 2,915 3,320 2,850 1,446
Long-Term Obligations 60 224 340 240 1,300
PER SHARE DATA
1997+ 1996 1995 1994* 1993*
Basic Earnings per Share:
Income from continuing operations $ 1.40 $ .33 $ .99 $ .88 $ 1.03
Discontinued operations - - (.09) .07 (.02)
------- ------- ------- ------ -------
Net income $ 1.40 $ .33 $ .90 $ .95 $ 1.01
Diluted Earnings per Share:
Income from continuing operations $ 1.38 $ .32 $ .98 $ .86 $ 1.01
Discontinued operations - - (.09) .07 (.02)
------- ------- ------- ------ -------
Net income $ 1.38 $ .32 $ .89 $ .93 $ .99
Dividends .475 .46 .46 .46 .46
Shareholders' Equity 11.00 10.88 10.75 10.77 10.33
Average Shares Outstanding (basic) 2,658,181 2,698,191 2,771,840 2,771,842 2,748,312
<FN>
+ Fiscal Year 1997 comprised 53 weeks - all other years were 52 weeks
* As reclassified to reflect discontinued operations - Thompson Materials 1994 and 1993.
</FN>
</TABLE>
Quarterly Results of Operations (unaudited)
<TABLE>
<CAPTION>
1997 First Quarter Second Quarter Third Quarter Fourth Quarter Year
<S> <C> <C> <C> <C> <C>
Net Sales $15,934,598 $16,919,070 $16,663,855 $17,813,899 $67,331,422
Gross Profit 3,984,839 4,454,992 4,696,806 5,415,258 18,551,895
Selling and Administrative Expenses 2,981,969 3,112,386 2,984,304 3,508,234 12,586,893
Net Income 614,423 832,940 1,066,997 1,208,170 3,722,530
Net Income Per Share:
Basic .23 .30 .40 .47 1.40
Diluted .22 .30 .40 .46 1.38
1996
Net Sales 14,541,552 15,351,036 13,715,095 14,245,986 57,853,669
Gross Profit 2,424,003 3,234,595 3,557,046 3,464,578 12,680,222
Selling and Administrative Expenses 2,691,835 2,658,140 2,800,803 2,875,197 11,025,975
Net (Loss) Income (202,161) 376,703 479,429 225,846 879,817
Net (Loss) Income Per Share:
Basic (.07) .13 .18 .09 .33
Diluted (.07) .13 .18 .08 .32
</TABLE>
PAGE 21 OF ANNUAL REPORT
-50-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
In 1997, The Eastern Company experienced a 323% increase in net income over the
prior year. Net income was $3.7 million or $1.40 per share (basic) on $67.3
million in sales. A large portion of this increase can be attributed to a 16%
increase in net sales coupled with a significant reduction in operating costs
from 1996. Sales were up across all product lines with the Company's backlog
increasing 17% for custom locks, transportation and industrial hardware as
compared to 1996.
Net income in the fourth quarter was $1.2 million or 47(cent)per share (basic)
on sales of $17.8 million versus fourth quarter 1996 net income of $226
thousand or 9(cent) per share (basic) on sales of $14.2 million.
Gross profits for the fourth quarter 1997 represented 30% of net sales versus
24% of net sales for the fourth quarter of 1996. Increased volume and lower
manufacturing costs account for the improvement.
Selling and administrative expenses in the fourth quarter 1997 were up 22% or
$633 thousand over the 1996 fourth quarter level of $2.9 million. This increase
was the result of higher selling commissions, and increased incentive
compensation associated with increased sales and profitability.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percent
relationship to sales for each line item represented on the consolidated
statements of income.
1997 1996 1995
------------------------------------
Net sales 100.0% 100.0% 100.0%
Other income 0.2% 0.2% 0.5%
Cost of products sold 72.4% 78.1% 76.2%
Gross profit 27.6% 21.9% 23.8%
Selling and administrative 18.7% 19.1% 16.9%
Interest expense 0.4% 0.4% 0.1%
Income from continuing
operations before taxes 8.6% 2.6% 7.2%
Income taxes 3.1% 1.1% 2.6%
Income from
continuing operations 5.5% 1.5% 4.6%
Discontinued operations - - -0.4%
Net income 5.5% 1.5% 4.2%
Fiscal 1997 Compared to Fiscal 1996 Continuing Operations
Net sales for 1997 increased 16% or $9.5 million to $67.3 million from 1996
level of $57.9 million. Volume increased 11%, prices increased 3% and new
products increased 2%. Sales grew across all markets with a major increase from
a surge in the Company's lock business where sales were up 20% versus the same
period a year ago. The majority of the increase came from new lock applications
specifically designed for leading computer manufacturers. The Company also
experienced an 18% growth in its keyless line of PrestoLock's(R), where focus
has been to penetrate the premium luggage markets and consumer retail markets.
Sale of Gun Bloks(R) doubled over 1996 and is expected to further increase in
1998 as the Company begins distribution through a major retail chain. Sales of
mine roof expansion shells, for use in securing ceilings in underground coal
mines, were up 27%. This was the direct result of a long-term supply agreement
entered into with the nation's largest manufacturer of mine roof bolts. Sales of
contract castings were up 17% over 1996 as the Company continues to supplement
the mine roof support business with alternate products. Demand for heavy
hardware, servicing the tractor trailer industry, was up 12% over 1996. A
resurgence in this industry is expected to continue through 1998.
New products introduced in 1997 include vehicular products designed and
produced by the Eberhard Manufacturing division and malleable casting products
manufactured by the Frazer & Jones division. CCL Security Products division
recently introduced two new PrestoLocks(R) to the soft luggage markets to
further enhance our position in that market. A new keyless, three wheel
padlock features a convenient snap-action locking method as opposed to the
conventional padlock type of shackle motion. A new keyless, two wheel padlock
is targeted for the lower priced segment of the lock market. CCL Security also
produces the keyless Gun Blok(R) lock, a patented combination trigger lock that
fits virtually all firearms and helps prevent their unauthorized use. Recent
developments in the firearms industry indicate several large gun manufacturers
will be including a tamper proof child safety lock with firearms in
contemplation of possible stringent legislative standards. Either of these
activities could lead to a significant increase in the potential size of the
gunlock market if manufacturers decide to buy the product from outside vendors.
New gun locking mechanisms are currently being developed to further enhance our
position in this market.
Gross profit for 1997 increased $5.9 million or 46% from 1996 levels.
The gross profit margin percentage increased from 21.9% in 1996 to 27.6% in
1997. This increase is the direct result of the increased sales volume and more
efficient utilization of production facilities.
PAGE 22 OF ANNUAL REPORT
-51-
<PAGE>
Selling and administrative expenses were up $1.6 million or 14% over 1996. This
increase was due to selling commissions and incentive compensation which are
directly linked to increased sales and profitability, and expenses in connection
with environmental matters and other contingent liabilities.
Interest expense was up $81 thousand or 38% from 1996 due to additional short-
term borrowing during the third quarter of 1997 to help fund the purchase of
common stock for the treasury as well as accommodate additional working capital
requirements for our operating units.
The effective tax rate in 1997 was 36% versus 42% in 1996. The reduced tax rate
in 1997 was directly attributable to lower foreign taxes.
Fiscal 1996 Compared to Fiscal 1995 Continuing Operations
Sales for 1996 were $57.9 million versus $59.4 million in 1995 a decrease of
2.5% or $1.5 million. Gains made in the contract casting business, utility body
hardware, industrial hardware, custom locks and specialty products for the
appliance industry could not offset a decline in demand for heavy hardware,
servicing the tractor trailer industry, coupled with a drop in sales of mine
roof supports, servicing the underground coal mining industry.
Gross profit for 1996 decreased $1.4 million or 10% from 1995 levels. The gross
profit margin percentage decreased from 23.8% in 1995 to 21.9% in 1996. Lower
sales volume, product mix and production problems experienced in the contract
casting business in the first quarter of 1996 were all contributing factors.
Selling and administrative expenses for 1996 increased $984 thousand or 10%
over 1995. Higher marketing expenses for new product introductions and costs
associated with an unsuccessful leveraged buyout attempt by Millbrook Capital
Management Inc. accounted for the increase.
Interest costs in 1996 were $215 thousand versus $72 thousand in 1995 due to
additional short-term borrowings in order to maintain working capital
requirements.
The effective tax rate in 1996 was 42% versus 36% in 1995, the result of higher
foreign taxes.
Liquidity and Sources of Capital
1997 1996 1995
Current ratio 2.3 2.9 3.9
Average days sales in
accounts receivables 47 48 53
Inventory turnover ratio 3.9 4.1 3.8
Ratio of net working
capital to sales 22.1% 25.5% 29.0%
Total debt to market
capitalization 7.3% 10.7% 4.4%
Total debt to equity 12.7% 13.1% 4.9%
Cash provided by operating activities for 1997 was $6.2 million as compared to
$2.5 million in 1996 and $5.7 million in 1995. Cash generated internally in 1997
was sufficient to fund capital expenditures of $2.2 million; the payment of $1.3
million in dividends; and the purchase of $3.4 million in common stock for the
treasury. In the third quarter of 1997 the Company borrowed $2 million on its
short-term line of credit for working capital purposes and to fund in part, the
additional purchase of common stock for the treasury, the majority of which was
repaid in the fourth quarter. In addition, the Company increased its unsecured
line of credit from $5 million to $7 million to provide greater flexibility in
maintaining working capital requirements during interim periods.
The ratio of working capital to sales improved to 22.1% in 1997 versus 25.5% in
1996 and 29.0% in 1995. This improvement is the direct result of the Company's
commitment to monitor the collection of accounts receivable, inventory turnover
ratios, cash conversion efficiency factors and the amount and number of days of
working capital necessary to maintain sales growth without tying up excess
cash in working capital.
Accounts receivable increased $2.2 million or 29% over 1996 levels. This
increase in accounts receivables was the direct result of increased sales
volume. The average day's sales in receivables remained comparable to
1997, down slightly to 47 days versus 48 days in 1996.
Inventories increased in 1997 by $1.6 million or 14% over 1996 while maintaining
comparable inventory turnover of approximately 4 times.
Capital expenditures in 1997, 1996 and 1995 were $2.2 million, $2.9 million
and $3.3 million respectively. The Company continuously upgrades and replaces
existing equipment to expand capacity, improve efficiency and satisfy safety
and environmental requirements. During 1997 the Company invested $290
thousand in its Syracuse plant to move its staking and assembly operation in
house to gain greater efficiency and lower production costs in its mine
roof fastener business. For 1998 capital expenditures are expected to
approximate 1998 depreciation of $2.5 million. Capital expenditures in 1998
are expected to be funded from cash internally generated.
The current financial strength of the Company's balance sheet, with a current
ratio of 2.3 to 1 will enable the Company to meet its current
obligations and continue to grow in 1998 without financial constraints.
The Company's strong financial position, low debt to equity ratio of 12.7%,
coupled with its outside borrowing capacity will allow for further growth
through potential acquisitions.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations has not been significant, as
the Company has been able to adjust its prices to reflect the inflationary
impact on the cost of manufacturing its products.
PAGE 23 OF ANNUAL REPORT
-52-
<PAGE>
Historical data as presented in the financial statements reasonably reflect
current cost, except for depreciation, with revenues generated in the period.
Depreciation expense based on the current replacement cost of plant and
equipment would be higher than depreciation expense reported in historical
financial statements.
The Company uses the LIFO method of accounting for its U.S. inventories. Under
this method, the cost of products sold reported in the financial statements
approximates current cost and thus reduces distortion in reporting income due
to increasing costs.
Other Matters
Environmental
In 1996, the United States Court of Appeals reversed a 1995 District Court
ruling relating to environmental remediation complaints against the Company and
other potentially responsible parties. In 1997, the additional expenses
recognized, net of insurance proceeds, were immaterial to the Company's
operating results. All matters relating to claims made by the United States are
expected to be resolved during 1998 and are not expected have a material adverse
effect on the Company's financial condition or cash flows or results of
operations.
Year 2000 Compliance
The Company uses numerous computer software programs and operating systems in
its manufacturing, engineering, financial and administrative business systems.
To the extent some of these software applications contain source code that is
unable to interpret the upcoming calendar year "2000", some level of software
modification or possible replacement may be necessary. The Company is in the
preliminary stages of identifying software applications which are not "Year
2000" compliant, however given the information known at this time and the extent
of hardware and software upgrades, in the normal course of business, it is
currently not anticipated that these "Year 2000" costs will have any material
adverse impact on the Company's business, financial condition or results of
operations.
Forward Looking Statements
This document contains forward looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, which reflect the Company's
current expectations regarding its future operating performance in the mining
industries, contract casting business, firearms accessories markets, industrial
hardware markets, tractor trailer industry, security product markets where the
Company markets its products and services, including statements about plans and
expectations regarding products and future financial results. Forward-looking
statements involve risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from those expressed. These
uncertainties and risks include changing customer preferences, lack of success
of new products, loss of the Company's customers, competition, potential
increases in raw material prices, potential delays or production problems
associated with foreign sourcing of production and other factors discussed from
time to time in the Company's filings with the Securities and Exchange
Commission. The Company is not obligated to update or revise the aforementioned
statements for those new developments.
Corporate Notes
COMMON STOCK MARKET
PRICES AND DIVIDENDS
The Company's Common Stock is traded on the American Stock Exchange (ticker
symbol EML). High and low stock prices and dividends for the last two years
were:
1997 1996
------------------------------- -------------------------------
Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter High Low Declared High Low Declared
- ------- ------------------------------- -------------------------------
First $14 $12 3/8 $.11 1/2 $13 $11 5/8 $.11 1/2
Second 15 1/4 12 1/4 .11 1/2 13 1/2 11 .11 1/2
Third 16 5/16 14 3/8 .11 1/2 14 1/2 11 1/4 .11 1/2
Fourth 20 15 5/8 .13 13 7/8 12 7/8 .11 1/2
At the end of December 1997, 229 consecutive quarterly dividends had been paid.
10-K
A copy of the Company's 10-K report is available free of charge to stockholders
of record upon written request.
INDEPENDENT AUDITORS
Ernst & Young LLP, Hartford, Connecticut
TRANSFER AGENT AND REGISTRAR
Boston EquiServe, P.O. Box 8040, Boston, MA 02266-8040
Phone: 1-800-633-3455
DIVIDEND REINVESTMENT & STOCK
PURCHASE PLAN
The Eastern Company offers a Dividend Reinvestment Plan (DRP) which also
features a no-load stock purchase program. It is available to all interested
investors who would like to initiate or increase their holdings in Eastern
Company Stock. To receive a prospectus and application form for this plan,
contact The Eastern Company directly at (203) 729-2255, ext. 241, or phone the
program administrator, Boston EquiServe at 1-800-633-3455.
PAGE 24 OF ANNUAL REPORT
-53-
<PAGE>
[INSIDE BACK COVER]
Officers and Executives
LEONARD F. LEGANZA
President and Chief Executive Officer
DONALD E. WHITMORE, JR.
Executive Vice President, Chief Financial Officer
and Secretary
JOHN L. SULLIVAN III
Treasurer and Corporate Controller
AMANDA GORDON
Assistant Secretary
FRANK J. BREKER
Vice President of
Eberhard Manufacturing Division
Eberhard Hardware Manufacturing, Ltd., Subsidiary
Sesamee Mexicana, Subsidiary
STEVEN G. SANELLI
Vice President of
Illinois Lock Co., Division
CCL Security Products Division
World Lock Co. Ltd.
World Security Industries Co. Ltd., Subsidiaries
RAYMOND L. WRIGHT
Vice President of
Frazer & Jones Division
ROBERT G. ALEXANDER
Managing Director of Eberhard Hardware
Manufacturing, Ltd., Subsidiary
ROGER CHANG
Managing Director of World Lock Co. Ltd.
World Security Industries Co. Ltd., Subsidiaries
THOMAS D. MELKUS
Managing Director of CCL
Security Products Division
BRIAN D. REED
Managing Director of
Illinois Lock Co., Division
Board of Directors
JOHN W. EVERETS (1)
Chairman of H.P.S.C. Inc.
Boston, Massachusetts
CHARLES W. HENRY*(1),(2),(3)
Partner of Kernan & Henry
Waterbury, Connecticut
LEONARD F. LEGANZA*(3)
President and Chief Executive Officer
of the Company
RUSSELL G. MCMILLEN*(1)(3)
Retired Chairman of the Company
DAVID C. ROBINSON*(1)(3)
President of The Robinson Co.
Waterbury, Connecticut
DONALD S. TUTTLE, III (2)
Vice President and Account Executive
Paine Webber
Middlebury, Connecticut
DONALD E. WHITMORE, JR.
Executive Vice President,
Chief Financial Officer and Secretary
of the Company
* Members of the Executive Committee
(1) Members of the Compensation Committee
(2) Members of the Audit Committee
(3) Members of the Nominating Committee
-54-
<PAGE>
[BACK COVER]
THE EASTERN COMPANY
P.O. Box 460
Naugatuck, CT 06770-0460
Phone: (203) 729-2255
Fax: (203) 723-8653
E-mail: [email protected]
Homepage: http://www.easterncompany.com
--------------------------------------------------
CCL Security Products Division
New Britain, Connecticut
Custom locks
Eberhard Manufacturing Division
Cleveland, Ohio
Transportation and industrial hardware
Eberhard Hardware
Manufacturing, Ltd., Subsidiary
Tillsonburg, Ontario, Canada
Transportation and industrial hardware
Frazer & Jones Division
Syracuse, New York
Mine roof fasteners; Contract castings
The Illinois Lock Company Division
Wheeling, Illinois
Custom locks
Sesamee Mexicana, Subsidiary
Lerma, Mexico
Industrial hardware
World Lock Co. Ltd., Subsidiary
WORLD SECURITY INDUSTRIES CO. LTD.,
SUBSIDIARY
Taipei, Taiwan; Hong Kong
Custom locks
-55-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-3-1998
<PERIOD-END> JAN-3-1998
<CASH> 2111289
<SECURITIES> 0
<RECEIVABLES> 8725167
<ALLOWANCES> 329000
<INVENTORY> 12414866
<CURRENT-ASSETS> 26097879
<PP&E> 25434424
<DEPRECIATION> 11997894
<TOTAL-ASSETS> 45798161
<CURRENT-LIABILITIES> 11239025
<BONDS> 0
0
0
<COMMON> 6078427
<OTHER-SE> 23164714
<TOTAL-LIABILITY-AND-EQUITY> 45798161
<SALES> 67331422
<TOTAL-REVENUES> 67470538
<CGS> 48779527
<TOTAL-COSTS> 48779527
<OTHER-EXPENSES> 12216138
<LOSS-PROVISION> 370755
<INTEREST-EXPENSE> 296592
<INCOME-PRETAX> 5807526
<INCOME-TAX> 2084996
<INCOME-CONTINUING> 3722530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3722530
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.38
</TABLE>
