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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 0-599
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THE EASTERN COMPANY
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(Exact name of registrant as specified in its carter)
Connecticut 06-0330020
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
112 Bridge Street, Naugatuck, Connecticut 06770
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)729-2255
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value
-------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [__]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 23, 2001.
Common Stock, No Par Value - $55,491,044
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 23, 2001
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Common Stock, No Par Value 3,638,757
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement dated March 23, 2001 are incorporated
by reference into Part III.
The Eastern Company
Form 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
TABLE OF CONTENTS
Page
Table of Contents 2.
Safe Harbor Statement 3.
PART I
Item 1. Business 4.
Item 2. Properties 8.
Item 3. Legal Proceedings 9.
Item 4. Submission of Matters to a Vote of Security Holders 9.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9.
Item 6. Selected Financial Data 10.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 16.
Item 8. Financial Statements and Supplementary Data 17.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 41.
PART III
Item 10. Directors and Executive Officers of the Registrant 42.
Item 11. Executive Compensation 42.
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42.
Item 13. Certain Relationships and Related Transactions 42.
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 43.
Signatures 45.
Exhibit Index 46.
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements reflect the Company's current expectations regarding its products,
its markets and its future financial and operating performance. These
statements, however, are subject to risks and uncertainties that may cause the
Company's actual results in future periods to differ materially from those
expected. Such risks and uncertainties include, but are not limited to,
unanticipated slowdowns in the Company's major markets, changing customer
preferences, lack of success of new products, loss of customers, competition,
increased raw material prices, problems associated with foreign sourcing of
parts and products, worldwide conditions and foreign currency fluctuations
that may affect results of operations 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.
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PART I
ITEM 1 BUSINESS
(a) General Development of Business
The Eastern Company (the Company) was incorporated under the laws of
the State of Connecticut in October, 1912, succeeding a co-partnership
established in October, 1858.
The business of the Company is the manufacture and sale of industrial
hardware, security products and metal products from five U.S. operations and
four wholly-owned foreign subsidiaries. The Company maintains nine physical
locations.
RECENT DEVELOPMENTS
Effective February 1, 2000, the Company acquired all the issued and
outstanding Common Stock of Ashtabula Industrial Hardware Co. (Ashtabula),
which was integrated into the Company's Industrial Hardware Group. Ashtabula
produces proprietary hardware for school and courtesy bus doors.
Effective April 6, 2000, the Company acquired two product lines from
Hansen International Inc. (Hansen). These proprietary locks are used to secure
the lids of tool boxes that are installed in the beds of pickup trucks and
other service vehicles. This acquisition represents a natural adjunct to
Industrial Hardware Group's core line of vehicular hardware. It was integrated
into our Canadian manufacturing facilities in Tillsonburg, Ontario.
The cost of the above acquisitions was approximately $4,070,000 and has
been accounted for using the purchase method. The acquired businesses are
included in the consolidated operating results of the Company from their date
of acquisition. Neither the actual results nor the pro forma effects of the
acquisitions of Ashtabula or Hansen are material to the Company's financial
statements.
Effective June 29, 2000, the Company acquired the assets and businesses
and assumed certain liabilities of Greenwald Industries, Inc. and Greenwald
Intellicard, Inc. (the Greenwald businesses). The Greenwald businesses design,
manufacture and market coin acceptance systems and provide smart cards, smart
card readers, value transfer stations, card management software and interface
boards primarily for the commercial laundry industry. The cost of the
acquisition of the Greenwald businesses was approximately $24,285,000,
including the assumption of approximately $749,000 of current liabilities.
(b) Business Segment Information
Financial information about business segments is included in Note 12 to
the Company's financial statements, included at Item 8 of this Annual Report
on Form 10-K.
(c) Narrative Description of Business
The Company operates in three business segments: Industrial Hardware,
Security Products and Metal Products.
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Industrial Hardware
The Industrial Hardware segment consists of Eberhard Manufacturing,
Eberhard Hardware Manufacturing Ltd. and Sesamee Mexicana, S.A. de C.V., and
designs, manufactures and markets a diverse product line of industrial and
vehicular hardware throughout North America. The segment's locks, hinges,
handles and related hardware can be found in tractor-trailer trucks, moving
vans, off-road construction and farming equipment, school buses, military
vehicles and recreational boats. They are also used in pickup trucks, sport
utility vehicles and fire and rescue vehicles. In addition, the segment
manufactures a wide selection of fasteners and other closure devices used to
secure access doors on various types of industrial equipment such as metal
cabinets, machinery housings and electronic instruments.
Typical products include passenger restraint locks, slam and draw latches,
dead bolt latches, compression latches, cam-type vehicular locks, hinges, tool
box locks and school bus door closure hardware. The 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 through in-house sales personnel
where greater representation of our diverse product lines can be promoted
across a variety of markets.
The Industrial Hardware segment sells its products to a diverse array of
markets from the truck, bus and automotive industries to the industrial
equipment, military and marine sectors. During 2000, several new products were
introduced for the transportation, truck accessory and industrial markets. The
acquisition of Ashtabula enables this segment to enter into the school and
courtesy bus hardware markets and introduces our basic product line to a new
market. Although service, quality and price are major criteria for servicing
these markets, the continued introduction of new and improved product designs
and acquisition of synergistic product lines is vital for maintaining and
increasing market share.
Security Products
The Security Products segment, made up of Greenwald Industries, Illinois
Lock Company, CCL Security Products, World Lock Company Ltd. and World
Security Industries Ltd.--is a leading manufacturer of security products. This
segment manufactures electronic and mechanical locking devices, both keyed and
keyless, for the computer, electronics, vending and gaming industries. The
segment supplies the firearms, luggage, furniture, laboratory equipment and
commercial laundry industries. With the acquisition of Greenwald the segment
manufactures and markets coin acceptors and other coin security products used
primarily in the commercial laundry markets. In addition, through the use of
"smart card" technology, the segment provides a new level of security for the
access control, municipal parking and vending markets.
Greenwald's product sales include timers, drop meters, coin chutes, money
boxes, meter cases, smart cards, value transfer stations, smart card readers,
card management software and access control units. Illinois Lock and CCL
Security Products sales include cabinet locks, cam locks, electric switch
locks, tubular key locks and combination padlocks. Many of the locks are sold
under the names DUO, X-STATIC(R), EXCALIBUR(TM), WARLOCK(TM), LITE LOCK(TM),
SESAMEE(R), PRESTOLOCK(R), HUSKI(TM), GUN BLOK(R), TRIGGER BLOK(TM) and
CABLELOCK(TM). These products are sold to original equipment manufacturers,
distributors, route operators, and locksmiths through a distribution channel
consisting of in-house salesmen, outside sales representatives and
distributors. Sales efforts are concentrated through in-house sales personnel
where greater representation of our diverse product lines can be promoted
across a variety of markets.
-5-
The Security Products segment continuously seeks new markets where it can
offer competitive pricing and provide customers with engineered solutions to
their security application needs.
Metal Products
The Metal Products segment, based at the Company's Frazer & Jones facility,
is the largest and most efficient producer of expansion shells for use in
supporting the roofs of underground mines. This segment also manufactures
specialty castings, which serve the construction and electrical industries.
Typical products include mine roof support anchors, couplers for braking
systems, adjustable clamps for construction and fittings for electrical
installations. Mine roof support anchors are sold to distributors and directly
to mines, while specialty castings are sold to original equipment
manufacturers.
Although there continues to be a need for the highly engineered proprietary
mine roof support products produced by this segment of the Company, changes in
mining technology continue to decrease demand for mechanical anchoring
systems. Intense competition from foreign foundries has adversely affected
demand in the contract castings market. To offset declines in the production
of malleable iron castings, the Company is examining the market potential and
possible production of ductile iron castings.
Raw materials and outside services were readily available from domestic
sources for all of the Company's segments during 2000 and are expected to be
readily available in 2001 and the foreseeable future. The Company also obtains
materials from Asian affiliated and nonaffiliated sources. The Company has not
experienced any problems obtaining material from its Asian sources in 2000 and
does not expect any problems in 2001.
Patent protection for the various product lines within the Company is
limited, but is sufficient to enhance competitive positions. Foreign sales and
license agreements are not significant.
None of the Company's business segments is seasonal.
The Company, across all its business segments, has increased its
emphasis on customer service by fulfilling the rapid delivery requirements of
our customers. As a result, investments in additional inventories are made on
a selective basis.
Customer lists for all business segments are broad-based geographically
and by markets and sales are not highly concentrated by customer. No customer
accounted for 10% or more of the Company's consolidated revenue for the year
ended December 30, 2000.
The dollar amount of the level of orders in the Company is believed to
be firm as of fiscal year ended December 30, 2000 at $11,504,000, as compared
to $9,031,000 at January 1, 2000.
The Company encounters competition in all of its business segments. The
Company has been successful in dealing with this competition by offering high
quality diversified products with the flexibility of meeting customer needs on
a timely basis. This is accomplished by effectively using internal engineering
resources, cost effective manufacturing capabilities, expanding product lines
through product development and acquisitions and maintaining sufficient
inventory for fast turnaround of customer orders. However, imports from Asia,
-6-
Latin America and Europe with weak currency exchange rates have created
additional competitive pressures.
Research and development expenditures in 2000 were $176,000 and
represented less than 1% of gross revenues. In 1999 and 1998 they were $72,000
and $132,000, respectively. The projects involved mine roof fasteners and
other malleable iron products, transportation and industrial hardware and
locking device hardware.
The average number of employees in 2000 was 634.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales
The Company includes five separate operating divisions located within
the United States, a wholly-owned Canadian subsidiary located in Tillsonburg,
Ontario, Canada, a wholly-owned Taiwanese subsidiary located in Taipei,
Taiwan, a wholly-owned subsidiary in Hong Kong and a wholly-owned subsidiary
in Mexico.
The Canadian, Taiwanese, Hong Kong and Mexican subsidiaries' revenue
and assets are not significant. Substantially all other revenues are derived
from customers located in the United States.
Financial information about foreign and domestic operations' net sales
and identifiable assets is included in Note 12 to the Company's financial
statements, included at Item 8 of this Annual Report on Form 10-K.
-7-
ITEM 2 PROPERTIES
The corporate office of the Company is located in Naugatuck,
Connecticut in a two story 8,000 square foot administrative building on 3.2
acres of land.
All of the Company's properties are owned or leased and are adequate to
satisfy current requirements. All of the Registrant's properties have the
necessary flexibility to cover any long-term expansion requirements.
The Industrial Hardware Group includes the following:
The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6
acres of land and a building containing 138,000 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 was
expanded during 2000 to provide additional capacity for the Ashtabula
acquisition and to accommodate additional business in the transportation and
industrial hardware industries.
The Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian
subsidiary in Tillsonburg, Ontario, owns 4.4 acres of land and a building
containing 31,000 square feet in an industrial park. The building is steel
frame, one-story, having curtain walls of brick, glass and insulated steel
panel. It is particularly suited for light fabrication, assembly and
warehousing and is adequate for long-term expansion requirements.
The Sesamee Mexicana subsidiary is leasing 1,950 square feet of a block
building located in an industrial park in Lerma, Mexico on an open-end basis.
The Security Products Group includes the following:
The Greenwald Industries Division in Chester, Connecticut owns 26 acres
of land and a building containing 120,000 square feet. The building is steel
frame, one story, having brick over concrete blocks. The Company also leases a
5,000 square foot facility in Boynton Beach, Florida. The building is of
concrete block construction. A monthly lease is in place.
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 expired on June 30, 2000 and an option to
renew for an additional five-year period was not exercised. The Company is
currently on monthly lease and is negotiating a new lease agreement.
The CCL Security Products Division is located in New Britain,
Connecticut where 26,000 square feet of a building is leased. The four storied
building is of brick and stone construction. A monthly lease is in place.
The World Lock Co. Ltd. subsidiary leases a brick and concrete building
containing 7,870 square feet and is located in Taipei, Taiwan.
The Metal Products Group consists of:
The Frazer and Jones Division in Solvay, New York, owns 17.9 acres of
land and buildings containing 205,000 square feet constructed for foundry use.
These facilities are well adapted to handle the division's current and future
casting requirements.
All owned properties are free and clear of any encumbrances.
-8-
ITEM 3 LEGAL PROCEEDINGS
There are no legal proceedings, other than ordinary routine
litigation incidental to the Company's business, or to which either the
Company or any of its subsidiaries is a party or to which any of their
property is the subject.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the American Stock Exchange
(ticker symbol EML). The approximate number of record holders of the Company
common stock on December 30, 2000 was 752.
High and low stock prices and dividends for the last two years were:
2000 1999
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Sales Price Sales Price
Quarter High Low Dividend Quarter High Low Dividend
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First $16.44 $13.63 $.11 First $17.20 $14.69 $.10
Second 14.63 12.75 .11 Second 18.25 14.00 .11
Third 14.75 11.25 .11 Third 19.50 15.75 .11
Fourth 16.00 11.75 .11 Fourth 16.44 14.75 .11
The Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends because they
are dependant on future earnings, capital requirements, and financial
conditions. In addition, the payment of dividends is subject to the
restrictions of the Company's loan agreement, with a financial institution, if
such payment would result in an event of default.
The information in the table above reflects a 3-for-2 stock split effective
May 1999.
-9-
ITEM 6 SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
INCOME STATEMENT ITEMS (in thousands)
Net sales $ 88,192 $ 74,678 $ 70,750 $ 67,331 $ 57,854
Cost of products sold 62,192 52,460 49,470 48,780 45,173
Depreciation and amortization 3,639 2,723 2,912 2,978 2,953
Interest expense 1,786 646 549 297 215
Income before income taxes 10,657 9,894 8,723 5,808 1,527
Income taxes 3,602 3,356 3,280 2,085 647
Net income 7,055 6,538 5,443 3,723 880
Dividends 1,601 1,573 1,429 1,268 1,241
BALANCE SHEET ITEMS (in thousands)
Inventories $ 17,103 $ 14,040 $ 12,778 $ 12,415 $ 10,898
Working capital 26,298 24,734 21,121 14,859 14,762
Property, plant and equipment, net 27,328 16,365 15,033 13,437 13,887
Total assets 84,857 54,894 50,072 45,798 42,492
Shareholders' equity 38,538 33,400 28,486 29,243 29,355
Capital expenditures 5,065 3,690 4,397 2,230 2,915
Long-term obligations, less current portion 28,540 8,565 8,552 60 224
PER SHARE DATA
Net income per share
Basic $ 1.95 $ 1.80 $ 1.49 $ 0.93 $ 0.22
Diluted $ 1.93 $ 1.75 $ 1.43 $ 0.92 $ 0.21
Dividends 0.44 0.43 0.39 0.32 0.31
Shareholders' equity 10.64 9.21 7.81 7.33 7.25
Average shares outstanding (Basic) 3,621,449 3,626,001 3,645,360 3,987,272 4,047,286
The information in the table above reflects a 3-for-2 stock split effective
May 1999.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fiscal 2000 marked our fourth consecutive year of record sales and
earnings. Net income totaled $7.1 million, or $1.95 per basic share, on sales
of $88.2 million. These results represent an 8% increase in net income from
1999 and an 18% increase in sales. Net income for 1999 totaled $6.5 million,
or $1.80 per basic share, on sales of $74.7 million. Most of the sales
increase was due to the acquisition of Greenwald Industries, Inc. and
Greenwald Intellicard, Inc. The acquisitions have been accounted for using the
purchase method from their date of acquisition of June 29, 2000 and are
included in the consolidated operating results of the Company from that date.
The earnings increase was due to the sale of new products with improved profit
margins; continued emphasis on cost control; and ongoing improvements in our
manufacturing productivity. The Company again ended the year with a strong
backlog, which totaled $11.5 million, up 27% from the 1999 year-end level.
The fourth quarter of 2000 was the 16th consecutive period in which we
increased earnings from the year-earlier period. Net income totaled $1.840
million, or $.51 per basic share, compared with $1.825 million, or $.50 per
basic share, in the 1999 fourth quarter. Fourth-quarter sales were $23.0
million compared with $17.0 million a year earlier--a 35% increase. Most of
the increase was attributable to the Greenwald acquisition.
The gross margin for the fourth quarter of 2000 was 32% of net sales as
compared to 36% for the fourth quarter of 1999. Product mix, in the fourth
quarter, accounted for the reduction in the gross margin percentage.
-10-
Selling and administrative expenses in the fourth quarter totaled $4.0
million, a 23% increase from the 1999 level. This increase was due to the
inclusion of the Greenwald business in the fourth quarter 2000; otherwise,
selling and administrative expenses would have been comparable to those for
the 1999 period.
RESULTS OF OPERATIONS
The following table shows, for 1998-2000, each line item from the
consolidated statements of income as a percentage of net sales.
2000 1999 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of products sold 70.5% 70.2% 69.9%
Gross margin 29.5% 29.8% 30.1%
Selling and administrative 15.6% 16.0% 17.2%
Other income 0.2% 0.4% 0.3%
Interest expense 2.0% 0.9% 0.8%
Income before income taxes 12.1% 13.3% 12.3%
Income taxes 4.1% 4.5% 4.6%
Net income 8.0% 8.8% 7.7%
Fiscal 2000 Compared to Fiscal 1999
Total net sales for 2000 increased 18% ($13.5 million) to $88.2 million from
$74.7 million for 1999. New product introductions raised sales by 13%; price
increases, by 1%; and volume increases, by 4%.
The Industrial Hardware segment experienced a 22% increase in sales from
1999. Volume increased sales by 1%, while internally developed new products (for
the truck accessory, industrial and commercial electronics cabinetry markets)
increased sales by 11%. Products acquired during 2000 (school bus door closure
hardware and several new toolbox locks for the truck accessory market) increased
sales by another 10%. Sales of heavy hardware to the tractor-trailer market
decreased 30% from 1999 levels. This market is expected to be down in the first
half of 2001 and show moderate increases in the second half of the year. Sales
of industrial hardware (such as rotary locks, locking recessed handles,
multi-point paddle handles and slam latches) to original equipment manufactures
and distributors more than offset the decline in the tractor-trailer market. Due
to surging demand for the industrial hardware products and expected growth in
the school bus market, the Company expanded its Cleveland manufacturing facility
by 40,000 square feet. At the Company's Mexican operation, sales grew 58% as
demand increased for the high-quality industrial and vehicular products offered
to the Mexican markets. The Company continues to expand its product offerings
and broaden its geographical markets outside of Mexico City.
The Security Products segment (formerly the Custom Locks segment) now
includes Greenwald Industries, which was acquired in June of 2000. Greenwald
manufactures coin acceptors and other coin security products used primarily in
the commercial laundry industry. Greenwald also produces cashless payment
-11-
systems that use advanced "smart card" technology. In the Security Products
segment, sales increased 38% from 1999. Volume increased sales by 37% and prices
increased them by 1%. The volume increase was attributable to the addition of
Greenwald sales for the last half of 2000. Although the commercial laundry
industry is a mature, relatively flat business, Greenwald sales are expected to
grow as the Company continues to develop new "smart card" products for this
market. The Company is also developing "smart card" products aimed at the access
control, vending and parking markets.
In other areas of the Security Products segment, sales of locks were down
slightly from 1999. Lock sales to the computer industry were down 17% primarily
because of delays in the introduction of new business computers and servers.
This business is expected to be in full production during 2001. Sales to the
gaming machine market were also off from 1999 levels due to minimal new casino
construction and few expansions of existing casinos. A 21% increase in sales
from our Asian operations helped offset the declines in sales to the computer
and gaming industries. Sales of PrestoLock(R) padlocks for soft-sided luggage
increased 6% from 1999 levels. However, orders are down for the first quarter of
2001 as customers hold back inventory levels in response to the slowdown in the
economy. Sales of Sesamee(R) keyless padlocks increased 16% from 1999 levels.
Although sales of Sesamees were generally up across all markets served, the
advance was greatest in the telecommunications market, where sales were fueled
by increased construction of cell phone towers. Sesamee padlocks are used to
secure gates and sheds around the towers.
In the Metal Products segment, sales were down 6% from the previous year.
Volume brought sales down 25%, while price increases raised sales 3% and new
products increased them 16%. The sales of new products were the result of orders
received from a foundry that had temporarily shut down due to a fire but
subsequently reopened. Without the infusion of new business from this foundry,
our contract casting business would have been down 27% from the previous year.
The Metal Products segment has been affected by an overall decline in domestic
production of malleable iron castings and a parallel increase in the importation
of foreign castings. The decline in domestic production is expected to continue
in 2001. Castings imported from countries in Asia, Latin America and Europe with
weak currency exchange rates are creating pricing pressure and have eroded our
contract casting business. This business has been further weakened by declines
in the market for residential gas fittings and residential and commercial
electrical fittings, and by the phaseout of certain automotive products. The
decline in contract casting sales is expected to continue during 2001. Sales of
mine roof support products were down 13% from 1999. Although coal remains one of
our Nation's largest energy resources, changes in mining techniques, such as
long wall mining and strip mining, have reduced the prevalence of underground
mining. This has lowered the demand for our expansion anchors that are used in
roof support systems for underground mines. The Company is examining various
strategies to address these issues, including the production of ductile iron
castings as a supplement to malleable iron castings.
Total gross margin for 2000 increased 17%, or $3.8 million, from 1999. The
increase resulted from higher sales. The gross margin percentage for 2000 was
comparable to 1999's--29.5% versus 29.8%--since the Company was able to
integrate the Greenwald acquisition with little disruption of current operations
or the incurrence of any additional charges which would have effected margins.
Total selling and administrative expenses were up 15%, or $1.9 million, from
1999. Most of the increase was due to the inclusion of Greenwald. Other items
that increased included goodwill amortization expenses (associated with the
acquisitions made in 2000), payroll expenses and advertising expenses.
Interest expense jumped 177%, or $1.1 million, from 1999 due to additional
borrowings principally for the acquisition of Greenwald in 2000.
-12-
Earnings before income taxes in 2000 increased 8%, or $763,000, from 1999.
Pretax earnings for the Industrial Hardware segment rose by 29%, or $1.5
million. This increase was due to greater sales volume, full use of production
facilities and sales of new products with higher profit margins. The Security
Products segment experienced a gain of 4%, or $152,000, in pretax earnings. This
increase resulted from the Greenwald acquisition; otherwise, pretax income would
have been negatively affected by lower earnings from existing lock operations.
In the Metal Products segment, earnings were down 5%, or $137,000, due to a
reduction in mine roof anchor sales and increased foreign competition in the
contract casting market. Corporate expenses were down 30%, or $422,000, as the
result of lower compensation expenses and lower group insurance costs.
The effective tax rate in 2000 was 34%, the same as in 1999.
Fiscal 1999 Compared to Fiscal 1998
Total net sales for 1999 increased 6% ($4.0 million) to $74.7 million from
$70.7 million for 1998. New product introductions raised sales by 5% and price
increases raised them 2%, more than offsetting a 1% drop caused by lower volume.
The volume reduction resulted from new product introductions which replaced some
mature products.
In the Industrial Hardware segment, sales rose 11% from 1998. Volume
increased sales 1%, while new products increased them 10%. During 1999, the
Company began a program to develop new products for the truck accessory and
various other markets. New products included a latch system for tonneau covers
used in the truck accessory market. Demand from the truck body and truck trailer
markets remained strong. Sales to the tractor-trailer industry increased 9% over
1998. At the Company's Canadian facility, sales increased 20% from 1998,
primarily because of higher demand from the Canadian tractor-trailer industry.
Sales at the Company's Mexican operation rose 37%, driven by increased demand
for high-quality industrial and vehicular products in Mexico.
At the Security Products segment (formerly the Custom Locks segment), 1999
sales were comparable to those in 1998. Price increases raised sales 2% and new
products raised them 1%, but these gains were offset by a 3% drop caused by
lower volume. Sales of locks to the computer industry increased 10% from 1998 as
the Company continued to develop replacement lock applications for this market.
The Company's PrestoLock(R) padlocks for soft-sided luggage gained market share
in 1999. New products included a four-dial PrestoLock providing up to 10,000
user-settable combinations. In addition, the Company continued to position
itself as the exclusive lock supplier to upscale luggage manufacturers by
offering to incorporate the manufacturers' brand names into the case of each
padlock and by offering exclusive designs for high-volume manufacturers. Retail
sales of trigger locks rose 25% as media attention on gun safety helped fuel
product demand. Increased sales of the luggage and trigger locks were offset by
a decline in catch and handle products sold through distributors.
In the Metal Products segment, sales were up 5% from 1998. Volume reduced
sales by 3% while new products and price increases each raised them by 4%. New
products included various contract casting products. The contract casting
business increased 34% due to the addition of several new customers and
heightened demand from existing customers. The increase in the contract casting
business helped to offset the decline in the mine roof support business. Sales
of mine roof support products were down 15% from 1998 due to decreased demand
resulting from mine closures and changes in mining technology. Although the new
technology has negatively affected sales, there continues to be a need for the
Company's highly engineered proprietary products.
-13-
Total gross margin for 1999 increased 4%, or $939,000, from 1998. The
increase resulted from higher sales, better product mix, greater utilization of
productive capacity and ongoing cost reduction programs.
Total selling and administrative expenses in 1999 were down 2%, or $213,000,
from 1998. This decrease was due to a reduction in compensation expense related
to stock awards earned.
Interest expense in 1999 was up by 18%, or $97,000. This was due to higher
levels of borrowings in 1999 than in the prior year.
Earnings before income taxes in 1999 increased 13%, or $1.2 million, over
1998. The Industrial Hardware segment realized a 41%, or $1.5 million, gain over
1998. The increase was due to greater sales volume, full utilization of
production facilities and sales of products with higher profit margins. The
Security Products Group experienced a gain of 11%, or $381,000, over 1998 pretax
earnings. This increase was the result of lower product costs from foreign
sources and a more favorable product mix. In the Metal Products segment,
earnings were down 12%, or $431,000, due to a reduction in mine roof anchor
sales. Corporate expenses were up 13%, or $161,000, due to higher compensation
expenses and higher group insurance costs.
The effective tax rate in 1999 was 34% versus 38% in 1998. The decrease
resulted from a favorable tax benefit received on a contribution of land to a
qualified land trust. In addition, the effective tax rate in 1998 was higher due
to higher foreign taxes associated with the repatriation of foreign earnings
through a dividend distribution.
Liquidity and Sources of Capital
2000 1999 1998
Current ratio 3.2 4.4 3.8
Average day's sales in accounts receivable 55 48 46
Inventory turnover 3.6 3.7 3.9
Ratio of working capital to sales 29.8% 33.1% 29.9%
Total debt to market capitalization 66.5% 15.5% 14.0%
Total debt to equity 81.6% 26.5% 30.3%
Cash provided by operating activities in 2000 was $10.4 million as compared
to $6.4 million in 1999 and $8.3 million in 1998. Cash generated internally in
2000 was sufficient to fund capital expenditures of $5.1 million and the payment
of $1.6 million in dividends.
In 2000, the Company entered into an unsecured loan agreement (the Loan
Agreement) with a financial institution. The proceeds under the Loan Agreement
were used to finance the Greenwald acquisition and to increase our line of
credit for future working capital needs. Under the term portion of the Loan
Agreement, the Company borrowed $25.0 million, which is payable in quarterly
principal payments of $625,000 during the first year. The quarterly principal
payments increase annually up to $1.0 million. A final principal payment of $9.0
million is due at maturity, on July 1, 2005. The Loan Agreement requires the
Company to maintain an interest rate swap contract with the lender for $15.0
million. This sum is to be reduced each quarter in accordance with the principal
repayment schedule for the term portion of the Loan Agreement. The interest rate
on the swap contract is fixed at 9.095%. Under the revolving credit portion of
the Loan Agreement, the Company may borrow up to $20.0 million until July 2,
2003. A quarterly commitment fee of 0.25% is to be paid on the unused portion.
As of December 30, 2000, $5.0 million was outstanding under the revolving credit
portion of the Loan Agreement; the Company does not expect to make any
repayments before July 3, 2003.
-14-
The interest rates on the term and the revolving credit portions of the Loan
Agreement may vary. For the term portion, the interest rate is based on LIBOR
plus a margin spread of 1.5% to 2.0%. For the revolving credit portion, the rate
is based on LIBOR plus a margin spread of 1.25% to 1.75%. The margin spread is
based on operating results calculated on a rolling-four-quarter basis.
In 1999, the Company borrowed $2.0 million to finance specific building
improvements and equipment acquisitions. The borrowing was structured in the
form of a lease classified as a capital lease obligation. The lease obligation
is collateralized by a security interest in the aforementioned equipment and a
$900,000 letter of credit.
The ratio of working capital to sales was 29.8% in 2000, 33.1% in 1999 and
29.9% in 1998. The higher ratio in 1999 was due to a higher cash balance to
finance the purchase of two small product lines (school bus door closure
hardware and toolbox locks) in 2000. These acquisitions were not material to the
Company's financial position or operating results.
Accounts receivable increased 45%, or $4.2 million, from the 1999 level.
This increase was the direct result of the Greenwald acquisition. The average
days' sales in accounts receivable increased to 55 days in 2000 from 48 in 1999
and 46 in 1998. The increase in collection days was due to a higher number of
foreign trade accounts, which often pay more slowly than do domestic trade
accounts. The Company continues to monitor and press for current collections of
accounts receivable.
Inventories increased in 2000 by 22%, or $3.1 million, from 1999. The
increase was due to the Greenwald acquisition. Inventory turnover remained
substantially unchanged at approximately 4 times. Inventories are slightly
higher than required, and the Company is working to reduce levels in order to
free up working capital.
Capital expenditures in 2000, 1999 and 1998 were $5.1 million, $3.4 million
and $4.4 million, respectively. The Company continuously upgrades and replaces
existing equipment to expand capacity, improve efficiency and satisfy safety and
environmental requirements. During 2000, the Company completed the addition of
40,000 square feet of manufacturing and office space to its facility in
Cleveland Ohio. The space was added to allow for the continued growth of the
Eberhard Manufacturing Division. The Company expects that capital expenditures
for 2001 will approximate the current year's depreciation expense of $3.2
million.
The present financial strength of the Company's balance sheet--demonstrated
by a current ratio of 3.2 to 1, positive cash flow from operating activities and
availability of a $15.0 million credit line --will enable the Company to meet
its current obligations and continue to grow in 2001.
Impact of Inflation and Changing Prices
The impact of inflation on the Company's operations has not been
significant, as the Company has generally been able to adjust its prices to
reflect higher manufacturing costs, or has been able to improve its
manufacturing processes to achieve increased productivity.
Historical data as presented in the financial statements reasonably relate
current costs, except for depreciation, to 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.
-15-
The Company uses the last-in-first-out LIFO method of accounting for its
domestic inventories and the first-in-first-out FIFO method for all other
inventories. Under the LIFO method, the cost of products sold reported in the
financial statements approximates current cost and thus provides a closer
matching of revenue and expenses in periods of increasing costs.
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's foreign manufacturing facilities account for approximately 14%
of total sales and 11% of total assets. Its U.S. operations buy from and sell to
these foreign affiliates, and also make limited sales (less than 10% of total
sales) to non-affiliated foreign customers. This trade activity could be
affected by fluctuations in foreign currency exchange or by weak economic
conditions. The Company's currency exposure is concentrated in the Canadian
dollar, Mexican peso, New Taiwan dollar and Hong Kong dollar. Because of the
Company's limited exposure to foreign markets, any currency exchange gains or
losses are not material.
The interest rate paid by the Company under its term loan agreement is
closely linked to the U.S. economy. To minimize significant interest rate
exposure, the Company entered into a swap agreement to fix the interest rate on
a portion of its term debt. The remainder of the term debt is subject to the
volatility of short-term interest rates, where a 1% change in interest rates
would cause a $145,000 increase or decrease in the Company's annual interest
cost. While the Company could enter into an additional swap agreement to fix the
rate, it does not expect to do so.
-16-
Item 8. Financial Statements and Supplementary Data
The Eastern Company
Consolidated Balance Sheets
December 30 January 1
2000 2000
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 4,541,706 $ 5,940,190
Accounts receivable, less allowances of $362,000 in 2000 and
$526,000 in 1999 13,506,033 9,321,653
Inventories:
Raw materials and component parts 8,707,240 5,292,595
Work in process 4,375,425 4,595,132
Finished goods 4,019,970 4,152,536
---------- ----------
17,102,635 14,040,263
Prepaid expenses and other 1,974,044 1,465,606
Deferred income taxes 944,300 1,179,900
---------- ----------
Total Current Assets 38,068,718 31,947,612
Property, Plant and Equipment
Land 701,173 215,925
Buildings 11,501,635 5,653,078
Machinery and equipment 28,095,050 23,255,830
Accumulated depreciation (12,970,152) (12,759,995)
---------- ----------
27,327,706 16,364,838
Other Assets
Goodwill, less accumulated amortization of $438,570 in 2000 and
$38,088 in 1999 11,435,086 7,023
Patents, technology, licenses and trademarks, less accumulated
amortization of $1,983,163 in 2000 and $1,688,861 in 1999
2,731,687 1,594,230
Prepaid pension cost 5,293,873 4,980,689
---------- ----------
19,460,646 6,581,942
---------- ----------
$84,857,070 $54,894,392
========== ==========
-17-
Consolidated Balance Sheets
December 30 January 1
2000 2000
---- ----
Liabilities and shareholders' equity
Current Liabilities
Accounts payable $ 4,624,749 $ 3,467,058
Accrued compensation 2,275,582 1,903,804
Other accrued expenses 1,966,902 1,570,009
Current portion of long-term debt 2,903,542 272,367
---------- ----------
Total Current Liabilities 11,770,775 7,213,238
Deferred income taxes 3,350,700 2,927,000
Long-term debt, less current portion 28,539,515 8,565,027
Accrued postretirement benefits 2,658,532 2,789,314
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:3,636,757 shares in 2000 and 3,647,942
shares in 1999; excluding shares held in treasury
of 1,650,726 in 2000 and 1,621,572 in 1999 878,024 1,154,147
Retained earnings 38,630,205 33,175,227
Unearned compensation (164,063) (211,406)
Accumulated other comprehensive loss - currency translation (806,618) (718,155)
---------- ----------
Total Shareholders' Equity 38,537,548 33,399,813
---------- ----------
$84,857,070 $54,894,392
========== ==========
See accompanying notes.
-18-
Consolidated Statements of Income
Year ended
December 30 January 1 January 2
2000 2000 1999
---- ---- ----
Net sales $88,192,294 $74,678,420 $70,749,529
Other income 227,305 296,985 181,466
----------- ----------- -----------
88,419,599 74,975,405 70,930,995
Costs and expenses
Cost of products sold 62,191,769 52,459,895 49,469,844
Selling and administrative 13,784,638 11,975,508 12,188,613
Interest 1,786,325 645,991 549,071
----------- ----------- -----------
77,762,732 65,081,394 62,207,528
----------- ----------- -----------
Income before income taxes 10,656,867 9,894,011 8,723,467
Income taxes 3,601,378 3,356,079 3,280,280
----------- ----------- -----------
Net income $ 7,055,489 $ 6,537,932 $ 5,443,187
=========== =========== ===========
Earnings per Share
Basic $ 1.95 $ 1.80 $ 1.49
=========== =========== ===========
Diluted $ 1.93 $ 1.75 $ 1.43
=========== =========== ===========
See accompanying notes.
Consolidated Statements of Comprehensive Income
Year ended
December 30 January 1 January 2
2000 2000 1999
---- ---- ----
Net income $ 7,055,489 $ 6,537,932 $ 5,443,187
Other comprehensive gain/(loss) -
Currency translation (88,463) 112,112 (267,056)
----------- ----------- -----------
Comprehensive income $ 6,967,026 $ 6,650,044 $ 5,176,131
=========== =========== ===========
See accompanying notes.
-19-
Consolidated Statements of Shareholders' Equity
Accumulated
Other
Comprehensive
Common Stock Retained Unearned Loss - Currency
Earnings Compensation Translation
------------ -------------- -------------- -----------------
Balances at January 3, 1998 $ 6,078,427 $24,220,894 $ (492,969) $(563,211)
Net income 5,443,187
Cash dividends declared, $.39 per share (1,429,474)
Redemption of stock rights (24,267)
Purchase of 325,046 shares of Common Stock for
treasury (5,455,231)
Issuance of 58,875 shares of Common Stock upon the
exercise of stock options 570,591
Issuance of 5,449 shares of Common Stock for
director fees 85,817
Issuance of 3,750 shares of Common Stock for
restricted stock awards 55,937 (55,937)
18,750 shares of Common Stock earned under
restricted stock award program 129,819 189,375
Currency translation adjustment (267,056)
----------- ----------- ---------- ---------
Balances at January 2, 1999 1,465,360 28,210,340 (359,531) (830,267)
Net income 6,537,932
Cash dividends declared, $.43 per share (1,573,045)
Purchase of 48,857 shares of Common Stock for (783,260)
treasury
Issuance of 69,825 shares of Common Stock upon the 538,705
exercise of stock options
Issuance of 5,561 shares of Common Stock for 81,467
director fees
11,250 shares of Common Stock cancelled under (148,125) 148,125
restricted stock award program
Currency translation adjustment 112,112
----------- ----------- ---------- ---------
Balances at January 1, 2000 1,154,147 33,175,227 (211,406) (718,155)
Net income 7,055,489
Cash dividends declared, $.44 per share (1,600,511)
Purchase of 29,154 shares of Common Stock for
treasury (416,438)
Issuance of 11,875 shares of Common Stock upon the
exercise of stock options 104,671
Issuance of 6,094 shares of Common Stock for
director fees 82,987
Change in fair value of restricted stock awards
(47,343) 47,343
Currency translation adjustment (88,463)
----------- ----------- ---------- ---------
Balances at December 30, 2000 $ 878,024 $38,630,205 $ (164,063) $(806,618)
=========== =========== ========== =========
See accompanying notes.
-20-
Consolidated Statements of Cash Flows
Year ended
December 30 January 1 January 2
2000 2000 1999
---- ---- ----
Operating Activities
Net income $ 7,055,489 $ 6,537,932 $ 5,443,187
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,639,384 2,722,885 2,911,850
Loss (gain) on sales of equipment and other assets 6,054 1,129 (86,872)
Provision for doubtful accounts (92,581) 87,808 136,304
Deferred income taxes 659,300 383,200 (101,600)
Issuance of Common Stock for directors' fees 82,987 81,467 85,817
Compensation related to earned contingent shares of Common
Stock - - 319,194
Changes in operating assets and liabilities:
Accounts receivable (910,198) (782,864) 375,957
Inventories 69,855 (1,153,634) (548,041)
Prepaid expenses and other (523,288) (47,657) (28,788)
Prepaid pension cost (313,184) (413,407) (349,677)
Other assets (243,561) (200,028) (69,144)
Accounts payable 526,086 415,737 (460,777)
Accrued compensation 381,824 (162,928) 649,745
Other accrued expenses 71,519 (1,064,785) (26,104)
----------- ----------- -----------
Net cash provided by operating activities 10,409,686 6,404,855 8,251,051
Investing Activities
Purchases of property, plant and equipment (5,065,275) (3,690,157) (4,396,641)
Business acquisitions, net of cash acquired (27,547,304) - -
Proceeds from sales of equipment and other assets 98,872 7,538 301,996
----------- ----------- -----------
Net cash used by investing activities (32,513,707) (3,682,619) (4,094,645)
Financing Activities
Proceeds from short-term debt - - 5,000,000
Proceeds from issuance of long-term debt 30,009,694 2,471,870 67,120
Principal payments on long-term debt (7,396,103) (2,265,721) (159,114)
Proceeds from sales of Common Stock 104,671 538,705 570,591
Purchases of Common Stock for treasury (416,438) (783,260) (5,455,231)
Redemption of stock rights - - (24,267)
Dividends paid (1,600,511) (1,573,045) (1,429,474)
----------- ----------- -----------
Net cash provided (used) by financing activities 20,701,313 (1,611,451) (1,430,375)
-21-
Consolidated Statements of Cash Flows (continued)
Year ended
December 30 January 1 January 2
2000 2000 1999
---- ---- ----
Effect of exchange rate changes on cash $ 4,224 $ 39,504 $ (47,419)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,398,484) 1,150,289 2,678,612
Cash and cash equivalents at beginning of year 5,940,190 4,789,901 2,111,289
----------- ----------- -----------
Cash and cash equivalents at end of year $ 4,541,706 $ 5,940,190 $ 4,789,901
=========== =========== ===========
See accompanying notes.
-22-
The Eastern Company
Notes to Consolidated Financial Statements
1. OPERATIONS
The operations of The Eastern Company (the Company) consist of three business
segments: industrial hardware, security products (formerly custom locks), and
metal products. The industrial hardware segment produces latching devices for
use on industrial equipment and instrumentation as well as a broad line of
proprietary hardware designed for truck bodies and other vehicular type
equipment. The security products segment manufactures and markets a broad
range of locks for traditional general purpose security applications as well
as specialized locks for firearms, soft luggage, coin-operated vending and
gaming equipment, and electric and computer peripheral components. This
segment also manufactures and markets coin acceptors and metering systems to
secure cash used in the commercial laundry industry and produces cashless
payment systems utilizing advanced smart card technology. The metal products
segment consists of a foundry, which produces anchoring devices used in
supporting the roofs of underground coal mines. This segment also manufactures
specialty products, which serve the construction, automotive and electrical
industries.
Sales are made to customers primarily in North America. Revenue from sales
transactions is recognized at the point of shipment. Ongoing credit
evaluations are made of customers for which collateral is generally not
required. Allowances for credit losses are provided; such losses have been
within management's expectations.
2. ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The year 1999
ended January 1, 2000.
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.
-23-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Foreign Currency Translation
For foreign operations, balance sheet accounts are translated at the current
year-end exchange rate; income statement accounts are translated at the
average exchange rate for the year. Resulting translation adjustments are made
directly to a separate component of shareholders' equity-- "Accumulated other
comprehensive loss - currency translation". Foreign currency exchange gains
and losses are not material in any year.
Cash Equivalents
Highly liquid investments purchased with a maturity of three months or less
are considered cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, generally determined by
the last-in, first-out (LIFO) method. Current cost exceeded the LIFO carrying
value by approximately $2,971,000 at December 31, 2000 and $2,827,000 at
January 1, 2000.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment (including equipment under a capital lease) are
stated on the basis of cost. Depreciation ($2,730,392 in 2000, $2,387,077 in
1999 and $2,539,547 in 1998) is computed generally using the straight-line
method based on the estimated useful lives of the assets.
Intangibles
Patents are amortized using the straight-line method over the lives of the
patents. Technology and licenses are generally amortized on a straight-line
basis over periods ranging from five to 17 years. Goodwill is being amortized
over periods ranging from five to 20 years.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying value of
long-lived assets, including goodwill and other intangible assets, may be
impaired, an evaluation is performed to determine if a write-down is required.
No events or changes in circumstances have occurred that indicate that the
carrying amount of such long-lived assets held and used may not be recovered.
-24-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (continued)
Product Development Costs
Product development costs, charged to expense as incurred, were $176,498 in
2000, $71,867 in 1999 and $131,857 in 1998.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were
$630,889 in 2000, $491,008 in 1999 and $421,018 in 1998.
Earnings Per Share
The denominators used in the earnings per share computations follow:
Basic: 2000 1999 1998
--------- --------- ---------
Weighted average shares outstanding 3,640,199 3,644,751 3,675,360
Contingent shares outstanding (18,750) (18,750) (30,000)
--------- --------- ---------
Denominator for basic earnings per share 3,621,449 3,626,001 3,645,360
========= ========= =========
Diluted:
Weighted average shares outstanding 3,640,199 3,644,751 3,675,360
Contingent shares outstanding (18,750) (18,750) (30,000)
Dilutive stock options 39,474 112,898 153,942
--------- --------- ---------
Denominator for diluted earnings per share 3,660,923 3,738,899 3,799,302
========= ========= =========
Derivatives
The Company will adopt Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, effective
December 31, 2000 for its 2001 fiscal year. To date, the Company's use of
derivatives has been minimal. As such, the new standard will not significantly
impact the Company's financial statements.
3. BUSINESS ACQUISITIONS
Effective June 29, 2000, the Company acquired the assets and businesses and
assumed certain liabilities of Greenwald Industries, Inc. and Greenwald
Intellicard, Inc. (the Greenwald businesses). The Greenwald businesses design,
manufacture and market coin acceptance systems and provide smart cards, smart
card readers, value transfer stations, card management software and interface
boards primarily for the commercial laundry industry. The cost of the
acquisition of the Greenwald businesses was approximately $24,285,000,
including the assumption of approximately $749,000 of current liabilities.
-25-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. BUSINESS ACQUISITIONS (continued)
Effective February 1, 2000 and April 6, 2000 the Company also acquired all the
issued and outstanding Common Stock of Ashtabula Industrial Hardware Co.
(Ashtabula) and two product lines from Hansen International Inc. (Hansen),
respectively. Ashtabula produces proprietary hardware for school and courtesy
bus doors. The Hansen product lines produce proprietary locks to secure the
lids of toolboxes that are installed in the beds of pickup trucks and other
vehicles. The cost of these two acquisitions was approximately $4,070,000.
The above acquisitions have been accounted for using the purchase method. The
acquired businesses are included in the consolidated operating results of the
Company from their date of acquisition. The excess of the cost of the acquired
businesses over the fair market value of the net assets acquired has been
allocated to goodwill that is being amortized using the straight-line method
over 15 years.
Neither the actual results nor the pro forma effects of the acquisitions of
Ashtabula or Hansen are material to the Company's financial statements.
Unaudited pro forma results assuming the Greenwald businesses were acquired
January 2, 1999, follow:
2000 1999
---- ----
Net sales $ 96,985,297 $ 92,107,420
Net income 6,841,451 6,251,932
Per share:
Basic $1.89 $1.72
Diluted $1.87 $1.67
4. CONTINGENCIES
In 1999, all litigation relating to environmental matters was settled without
any material impact on financial condition, operating results or cash flows.
The aggregate provision for losses related to these and other contingencies
arising in the ordinary course of business was not material to operating
results for any year presented. There is a nominal aggregate liability for all
contingencies as of December 30, 2000 and $100,000 as of January 1, 2000.
Although possible, no significant change in these estimated liabilities is
contemplated.
-26-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. DEBT
In 2000, the Company entered into an unsecured loan agreement (the Loan
Agreement) with a financial institution. Under the term portion of the Loan
Agreement the Company borrowed $25,000,000 which is payable in quarterly
principal payments of $625,000. The quarterly principal payments increase
annually up to $1,000,000 with a final principal payment due at maturity on
July 1, 2005 of $9,000,000. The Company maintains an interest rate swap
contract as required, with the lender, for $15,000,000 reduced on a quarterly
basis in accordance with the principal repayment schedule of the term portion
of the Loan Agreement. The interest rate on the swap contract is fixed at
9.095%. The Company may borrow up to $20,000,000 to July 2, 2003 under the
revolving credit portion of the Loan Agreement with a quarterly commitment fee
of 1/4% on the unused portion. As of December 30, 2000, $5,009,694 was
outstanding under the revolving credit portion of the Loan Agreement; the
Company does not anticipate any repayments thereof prior to July 3, 2003.
The interest rates on the term and the revolving credit portions of the Loan
Agreement may vary. The interest rates may vary based on LIBOR rate plus a
margin spread of 1.5% to 2.0% for the term portion and 1.25% to 1.75% for the
revolving credit portion. The margin rate spread is based on operating results
calculated on a rolling-four-quarter basis.
In 1999, the Company borrowed $2,000,000 to finance specific building
improvements and equipment acquisitions. The borrowing was structured in the
form of a lease classified as a capital lease obligation. The lease obligation
is collateralized by a security interest in the equipment referred to above
and a $900,000 letter of credit.
Debt consists of:
2000 1999
---- ----
Note payable (Paid prior to maturity in 2000.) $ 6,500,000
Term loan $24,375,000
Revolving credit loan 5,009,694
Capital lease obligation with interest at 4.99%
and payable in monthly installments of $21,203
through April 2009 1,731,827 1,895,394
Other 326,536 442,000
----------- -----------
31,443,057 8,837,394
Less current portion 2,903,542 272,367
----------- -----------
$28,539,515 $ 8,565,027
=========== ===========
The Company paid interest of $1,308,108 in 2000, $642,330 in 1999 and $485,621
in 1998.
-27-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. DEBT (continued)
Collectively, under the covenants of the Loan Agreement and capital lease
obligation, the Company is required to maintain specified financial ratios and
amounts. In addition, the Company is restricted to, among other things,
capital leases, purchases or redemptions of its capital stock, mergers and
divestitures, and new borrowing.
As of January 1, 2000 scheduled annual principal maturities of long-term debt,
including capital lease obligations, for each of the next five years follow:
2001 - $2,904,000; 2002 - $3,412,000; 2003 - $9,931,000; 2004 - $4,206,000;
and 2005 - $10,210,000.
6. STOCK RIGHTS
The Company has a stock rights plan. At December 30, 2000 there were 3,636,757
stock rights outstanding under the plan. Each right may be exercised to
purchase one share of the Company's Common Stock at an exercise price of $80,
subject to adjustment to prevent dilution.
The rights generally become exercisable ten days after an individual or group
acquires 10% of the Company's outstanding common shares or after commencement
or announcement of an offer for 10% or more of the Company's Common Stock. The
stock rights, which do not have voting privileges, expire on July 22, 2008,
and may be redeemed by the Company at a price of $.0067 per right at any time
prior to their expiration. In the event that the Company were acquired in a
merger or other business combination transaction, provision shall be made so
that each holder of a right shall have the right to receive, upon exercise
thereof at the then current exercise price, that number of shares of common
stock of the surviving company which at the time of such transaction would
have a market value of two times the exercise price of the right.
7. STOCK OPTIONS AND aWARDS
The Company has five incentive stock option plans for officers, other key
employees, and nonemployee directors: 1983, 1989, 1995, 1997 and 2000. 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 and 2000 plans, 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 granted in 1998, 1999, and 2000 were granted at prices equal to
the fair market value of the stock on the dates granted.
-28-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 30, 2000, 3,750 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:
2000 1999 1998
---------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- ----------
Outstanding, beginning of year 3,750 $6.25 18,750 $6.25 33,750 $6.25
Exercised - - (15,000) $6.25 (15,000) $6.25
----- -------- --------
Outstanding, end of year 3,750 $6.25 3,750 $6.25 18,750 $6.25
===== ======== ========
Exercisable, end of year:
At $6.25 3,750 3,750 18,750
At December 30, 2000, 59,642 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:
2000 1999 1998
---------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- ----------
Outstanding, beginning of year 70,517 $10.62 125,342 $ 8.63 139,575 $ 8.13
Granted - - - - 7,142 $14.00
Exercised (10,875) $ 7.64 (54,825) $ 6.08 (21,375) $ 7.11
-------- -------- --------
Outstanding, end of year 59,642 $11.16 70,517 $10.62 125,342 $ 8.63
======== ======== ========
Exercisable, end of year:
At $6.05 - - 47,325
At $6.25 - 3,000 10,500
At $8.17 - 7,875 7,875
At $9.92 30,000 30,000 30,000
At $11.92 22,500 22,500 22,500
At $14.00 7,142 7,142 7,142
-29-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 30, 2000, 345,000 shares of the Company's unissued Common Stock
were reserved for options and awards under its 1995 Incentive Stock Option
Plan. Changes in stock options and restricted stock awards under this plan
follow:
Stock Options
2000 1999 1998
---------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- ----------
Outstanding, beginning of year 207,858 $14.62 75,358 $12.96 37,500 $11.92
Granted 118,391 $14.25 132,500 $15.56 37,858 $14.00
------- ------- ------
Outstanding, end of year 326,249 $14.55 207,858 $14.62 75,358 $12.96
======= ======= ======
Exercisable, end of year:
At $11.92 37,500 37,500 37,500
At $14.00 37,858 37,858 37,858
At $14.25 25,274 - -
At $15.25 120,000 120,000 -
At $18.50 10,800 10,800 -
Stock Awards
2000 1999 1998
---------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Fair Value Fair Value Fair Value
at Date of at Date of at Date of
Awards Grant Awards Grant Awards Grant
-------- ---------- -------- ---------- -------- ----------
Outstanding, beginning of year 18,750 $11.28 30,000 $11.99 45,000 $10.95
Granted - - - - 3,750 $14.92
Cancelled - - (11,250) $13.17 (18,750) -
------ ------ ------
Outstanding, end of year 18,750 $11.28 18,750 $11.28 30,000 $11.99
====== ====== ======
-30-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
At December 30, 2000, 301,500 shares of the Company's unissued Common Stock
were reserved for options under its 1997 plan. Changes in stock options under
this plan follow:
2000 1999 1998
---------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ---------- --------- ---------- --------- ----------
Outstanding, beginning of year 250,000 $12.48 187,500 $11.55 135,000 $ 9.92
Granted - - 62,500 $15.25 75,000 $14.00
Exercised (1,000) $ 9.92 - - (22,500) $ 9.92
------- ------- -------
Outstanding, end of year 249,000 $12.49 250,000 $12.48 187,500 $11.55
======= ======= =======
Exercisable, end of year:
At $9.92 111,500 112,500 112,500
At $14.00 75,000 75,000 75,000
At $15.25 62,500 62,500 -
In 2000 the Company's Board of Directors approved the 2000 Incentive Stock
Option Plan. Under this plan options to purchase up to 300,000 shares of the
Company's unissued Common Stock may be granted. This plan is subject to
shareholder approval.
Compensation expense for stock options is recognized under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. As such, no expense is recognized if, at the date of grant, the
exercise price of the option is at least equal to the fair market value of the
Company's Common Stock. Compensation expense for restricted stock awards
granted is recognized when earned based on the achievement of targeted annual
operating results through December 31, 2000. Compensation expense related to
stock awards of $319,194 in 1998 was required to be recognized. No expense was
required to be recognized in 2000 and 1999.
-31-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
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 $6,753,124,
$1.86, and $1.84, respectively in 2000, $5,857,372, $1.62, and $1.60,
respectively in 1999 and $5,247,825, $1.44, and $1.38, respectively in 1998.
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:
2000 1999 1998
------ ------ ------
Risk free interest rate 6.50% 6.50% 4.65%
Expected volatility 0.310 0.322 0.223
Expected option life 5 years 5 years 5 years
Weighted-average dividend yield 3.1% 2.6% 2.9%
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:
2000 1999 1998
------ ------ ------
Property, plant and equipment $ 2,430,800 $ 2,239,000 $ 2,105,100
Pension accruals 2,027,500 1,942,400 1,781,100
Other 171,100 125,600 56,600
----------- ----------- -----------
Total deferred income tax liabilities 4,629,400 4,307,000 3,942,800
Other postretirement benefits (1,018,200) (1,087,000) (1,120,600)
Inventories (555,600) (516,300) (422,900)
Allowance for doubtful accounts (119,700) (189,900) (160,800)
Accrued compensation (231,300) (340,900) (364,700)
Accrual for contingencies - (39,000) (112,500)
Other (298,200) (385,900) (397,400)
----------- ----------- -----------
Total deferred income tax assets (2,223,000) (2,559,900) (2,578,900)
----------- ----------- -----------
Net deferred income tax liabilities $ 2,406,400 $ 1,747,100 $ 1,363,900
=========== =========== ===========
-32-
The Eastern Company
Notes to Financial Statements (continued)
8. INCOME TAXES (continued)
Income before income taxes consists of:
2000 1999 1998
------ ------ ------
Domestic $ 8,732,558 $ 8,646,360 $ 7,520,617
Foreign 1,924,309 1,247,651 1,202,850
----------- ----------- -----------
$10,656,867 $ 9,894,011 $ 8,723,467
=========== =========== ===========
Income taxes follow:
2000 1999 1998
------ ------ ------
Current:
Federal $ 2,240,200 $ 2,392,200 $ 2,526,414
Foreign 303,978 220,879 411,166
State 397,900 359,800 444,300
Deferred 659,300 383,200 (101,600)
----------- ----------- -----------
$ 3,601,378 $ 3,356,079 $ 3,280,280
=========== =========== ===========
A reconciliation of income taxes computed using the U.S. federal statutory
rate to those reflected in operations follows:
2000 1999 1998
---------------------------------- ------------------------------- ------------------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
Income taxes using U.S.
federal statutory
rate $ 3,623,300 34% $ 3,364,000 34% $ 2,966,000 34%
State income taxes, net
of federal benefit
293,400 3 271,400 3 286,600 3
Impact of foreign
subsidiaries on
effective tax rate
(350,300) (3) (203,300) (2) (203,400) (2)
Other--net 34,978 - (76,021) (1) 231,080 3
----------- --- ----------- --- ----------- ---
$ 3,601,378 34% $ 3,356,079 34% $ 3,280,280 38%
=========== === =========== === =========== ===
Total income taxes paid were $2,520,234 in 2000, $3,560,889 in 1999 and
$2,911,595 in 1998.
United States income taxes have not been provided on the undistributed
earnings of foreign subsidiaries ($5,143,878 at December 30, 2000) because
such earnings are intended to be reinvested abroad indefinitely or repatriated
only when substantially free of such taxes.
-33-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
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:
2001 $ 402,413
2002 387,166
2003 378,052
2004 374,995
2005 374,995
-----------
$ 1,917,621
===========
Rent expense for all operating leases was $406,631 in 2000, $301,330 in 1999
and $290,892 in 1998.
10. RETIREMENT BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering most
U.S. employees. Plan benefits are generally based upon age at retirement,
years of service and, for its salaried plan, the level of compensation. The
Company also sponsors unfunded nonqualified supplemental retirement plans that
provide certain current and former officers with benefits in excess of limits
imposed by federal tax law. U.S. salaried employees and most employees of the
Company's Canadian subsidiary are covered by defined contribution plans.
The Company also provides health care and life insurance for substantially all
retired salaried employees in the United States.
-34-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Significant disclosures relating to these benefit plans follow:
Pension Benefits Postretirement Benefits
------------------- -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Change in Benefit Obligation
Benefit obligation at beginning of year $(30,882,054) $(29,561,475) $ (2,762,631) $ (2,593,502)
Change due to availability of final actual
assets and census data (168,031) (37,248) 335,524 (107,779)
Plan amendment (a) (288,272)
Service cost (745,299) (785,095) (70,474) (70,970)
Interest cost (2,111,917) (1,993,294) (163,608) (182,370)
Actuarial gain (loss) 647,714 (505,348)
Benefits paid 1,939,667 2,000,406 179,723 191,990
------------ ------------ ------------ ------------
Benefit obligation at end of year $(31,608,192) $(30,882,054) $ (2,481,466) $ (2,762,631)
============ ============ ============= ============
Change in Plan Assets
Fair value of plan assets at beginning
of year $ 35,711,003 $ 34,218,707 $ 863,442 $ 812,339
Change due to availability of final actual
assets and census data (25,672) (11,975) (16,156)
Actual return on plan assets 2,198,637 3,405,582 76,924 71,467
Employer contributions 92,244 87,120 6,482
Benefits paid (1,939,667) (2,000,406) (4,208)
------------ ------------ ------------ ------------
Fair value of plan assets at end of year $ 36,036,545 $ 35,711,003 $ 934,873 $ 863,442
============ ============ ============= ============
Funded status- over (under) $ 4,428,353 $ 4,828,949 $ (1,546,593) $ (1,899,189)
Unrecognized prior service cost 1,177,138 854,245 (143,411) (164,500)
Unrecognized net actuarial loss (gain) 810,272 675,402 (968,528) (725,625)
Unrecognized net asset at transition (1,121,890) (1,377,907)
------------ ------------ ------------ ------------
Prepaid (accrued) benefit costs $ 5,293,873 $ 4,980,689 $ (2,658,532) $ (2,789,314)
============ ============ ============= ============
(a) A plan was amended to increase benefits for specified retired participants.
-35-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
All of the plans' assets at December 30, 2000 and January 1, 2000 and are
invested in listed stocks and bonds and pooled investment funds, including
430,874 shares of the Common Stock of the Company having a market value of
$5,655,221 and $6,732,406 at those dates, respectively. Dividends received
during 2000 and 1999 on the Common Stock of the Company were $189,585 and
$185,276, respectively.
Pension Benefits
2000 1999 1998
------ ------ ------
Assumptions
Discount rate 7.0% 7.0% 7.0%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 4.25% 4.25% 4.25%
Components of Net Benefit Income
Service cost $ 745,299 $ 785,095 $ 707,063
Interest cost 2,111,917 1,993,294 1,860,284
Actual return on plan assets (2,678,131) (3,387,907) (3,614,036)
Net amortization and deferral (474,594) 306,030 801,806
Defined contribution plans expense 120,038 129,771 125,399
----------- ----------- -----------
Net benefit income $ (175,471) $ (173,717) $ (119,484)
=========== =========== ===========
Postretirement Benefits
2000 1999 1998
------ ------ ------
Discount rate 7% 7% 7%
Expected return on plan assets 9% 9% 9%
Components of Net Benefit Cost
Service cost $ 70,474 $ 70,970 $ 89,536
Interest cost 163,608 182,370 202,790
Actual return on plan assets (76,924) (71,467) (67,405)
Net amortization and deferral (101,735) (78,026) (54,065)
----------- ----------- -----------
Net benefit cost $ 55,423 $ 103,847 $ 170,856
=========== =========== ============
For measurement purposes relating to the postretirement benefit plan, the life
insurance cost trend rate is 1%. The health care cost trend rate for
participants retiring after January 1, 1991 is nil; no increase in that rate
is expected because of caps placed on benefits. The health care cost trend
rate for participants who retired prior to January 1, 1991 is also nil; that
rate is expected to remain at 4.5% for the year 2000 and thereafter.
-36-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
A one-percentage-point change in assumed health care cost trend rates would
have the following effects on the postretirement benefit plan:
1-Percentage Point
Increase Decrease
---------- ----------
Effect on total of service and interest cost components $ 33,193 $ (15,813)
Effect on postretirement benefit obligation $ 288,152 $(150,431)
11. FINANCIAL INSTRUMENTS
The carrying values of financial instruments (cash and cash equivalents,
accounts receivable, accounts payable, and debt) as of December 31, 2000 and
January 1, 2000 approximate fair value. Fair value was based on expected cash
flows and current market conditions.
12. REPORTABLE SEGMENTS
The accounting policies of the segments are substantially the same as those
described in Note 2. Operating profit is total revenue less operating
expenses, excluding interest and general corporate expenses. Intersegment
revenue, which is eliminated, is recorded on the same basis as sales to
unaffiliated customers. Identifiable assets by reportable segment consist of
those directly identified with the segment's operations. Corporate assets
consist primarily of cash and cash equivalents, notes and other investments.
2000 1999 1998
------ ------ ------
Revenue:
Sales to unaffiliated customers:
Industrial Hardware $34,434,876 $28,272,937 $25,376,277
Security Products 31,643,219 22,892,284 22,988,887
Metal Products 22,114,199 23,513,199 22,384,365
----------- ----------- -----------
88,192,294 74,678,420 70,749,529
General corporate 227,305 296,985 181,466
----------- ----------- -----------
$88,419,599 $74,975,405 $70,930,995
=========== =========== ===========
-37-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
2000 1999 1998
------ ------ ------
Intersegment Revenue:
Industrial Hardware $ 94,172 $ 98,523 $ 217,981
Security Products 726,730 378,931 262,642
----------- ----------- -----------
$ 820,902 $ 477,454 $ 480,623
=========== =========== ===========
Income Before Income Taxes:
Industrial Hardware $ 6,587,954 $ 5,122,149 $ 3,644,711
Security Products 3,968,999 3,816,595 3,435,259
Metal Products 2,894,827 3,032,282 3,462,808
----------- ----------- -----------
Operating Profit 13,451,780 11,971,026 10,542,778
General corporate expenses (1,008,588) (1,431,024) (1,270,240)
Interest expense (1,786,325) (645,991) (549,071)
----------- ----------- -----------
$10,656,867 $ 9,894,011 $ 8,723,467
=========== =========== ===========
Geographic Information:
Net Sales:
United States $76,298,084 $66,124,407 $63,505,315
Foreign 11,894,210 8,554,013 7,244,214
----------- ----------- -----------
$88,192,294 $74,678,420 $70,749,529
=========== =========== ===========
Identifiable Assets:
United States $75,933,931 $48,512,143 $45,340,817
Foreign 8,923,139 6,382,249 4,730,898
----------- ----------- -----------
$84,857,070 $54,894,392 $50,071,715
=========== =========== ===========
Identifiable Assets:
Industrial Hardware $23,202,232 $14,415,840 $11,426,221
Security Products 33,991,827 9,437,909 8,996,052
Metal Products 16,597,956 20,546,949 20,966,751
----------- ----------- -----------
73,792,015 44,400,698 41,389,024
General corporate 11,065,055 10,493,694 8,682,691
$84,857,070 $54,894,392 $50,071,715
=========== =========== ===========
-38-
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
2000 1999 1998
------ ------ ------
Depreciation and Amortization
Industrial Hardware $ 866,778 $ 550,275 $ 632,185
Security Products 909,427 341,568 417,115
Metal Products 1,830,038 1,812,449 1,837,000
----------- ----------- -----------
3,606,243 2,704,292 2,886,300
General corporate 33,141 18,593 25,550
----------- ----------- -----------
$ 3,639,384 $ 2,722,885 $ 2,911,850
=========== =========== ===========
Capital Expenditures
Industrial Hardware $ 3,962,555 $ 1,374,651 $ 914,486
Security Products 545,906 261,370 366,036
Metal Products 493,535 1,999,929 3,094,435
----------- ----------- -----------
5,001,996 3,635,950 4,374,957
Currency translation adjustment 6,424 (5,225) 16,640
General corporate 56,855 59,432 5,044
----------- ----------- -----------
$ 5,065,275 $ 3,690,157 $ 4,396,641
=========== =========== ===========
-39-
Report of Ernst & Young LLP, Independent Auditors
THE Board of Directors
The Eastern Company
We have audited the accompanying consolidated balance sheets of The Eastern
Company as of December 30 and January 1, 2000, and the related consolidated
statements of income, comprehensive income, shareholders' equity, and cash
flows for each of the three years in the period ended December 30, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 December 30, 2000 and January 1, 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 30, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Hartford, Connecticut
January 26, 2001
-40-
Supplementary Financial Information
Selected quarterly financial information (unaudited)
2000
First Second Third Fourth Year
------------- -------------- ------------- -------------- ----
Net sales $ 20,214,419 $ 20,324,617 $ 24,695,211 $ 22,958,047 $ 88,192,294
Gross profit 5,705,665 5,690,126 7,157,986 7,446,748 26,000,525
Selling and administrative expenses 3,315,844 3,018,095 3,463,028 3,987,671 13,784,638
Net income 1,508,462 1,695,468 2,011,555 1,840,004 7,055,489
Net income per share:
Basic $ .42 $ .47 $ .56 $ .51 $ 1.95
Diluted $ .41 $ .46 $ .56 $ .50 $ 1.93
1999
First Second Third Fourth Year
------------- -------------- ------------- -------------- ----
Net sales $ 19,383,654 $ 20,029,666 $ 18,241,677 $ 17,023,423 $ 74,678,420
Gross profit 5,396,798 5,513,164 5,143,847 6,164,716 22,218,525
Selling and administrative expenses 3,042,678 2,993,536 2,719,175 3,220,119 11,975,508
Net income 1,462,747 1,577,909 1,671,800 1,825,476 6,537,932
Net income per share:
Basic $ .40 $ .44 $ .46 $ .50 $ 1.80
Diluted $ .39 $ .42 $ .45 $ .49 $ 1.75
The information in the table above reflects a 3-for-2 stock split effective
May 1999.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-41-
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 and 4 of said proxy
statement, being the portion captioned "Item No. 1. Election of Directors" and
the information appearing on page 12 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 John L. Sullivan III, Vice President, Secretary
and Treasurer.
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 14 through 19 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 10 and 11 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 10 and 11, and 14
and 15 and 17 and 18 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.
-42-
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial statements Page
Consolidated Balance Sheets - December 30, 2000 and January 1, 2000................... 17.
Consolidated Statements of Income -- Fiscal years ended December 30, 2000,
January 1, 2000 and January 2, 1999................................................ 19.
Consolidated Statements of Comprehensive Income -- Fiscal
years ended December 30, 2000, January 1, 2000, and January 2, 1999................... 19.
Consolidated Statements of Shareholders' Equity -- Fiscal
years ended December 30, 2000, January 1, 2000 and January 2, 1999................... 20.
Consolidated Statements of Cash Flows--Fiscal years ended
December 30, 2000, January 1, 2000, and January 2, 1999............................... 21.
Notes to Consolidated Financial Statements............................................ 23.
Report of Ernst & Young LLP, Independent Auditors..................................... 40.
Supplementary Financial Information
Selected quarterly financial information (unaudited).................................. 41.
(2) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts...................................... 44.
Schedules other than that listed above have been omitted because the required
information is contained in the financial statements and notes thereto, or
because such schedules are not required or applicable.
(3) Exhibits
See the index to exhibits at page 46 of this Form 10-K Annual
Report
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last
quarter of the fiscal year ended December 30, 2000.
-43-
The Eastern Company and Subsidiaries
Schedule II - Valuation and Qualifying accounts
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
(1) (2)
Balance at Beginning Charged to Costs Charged to Other Deductions - Balance at End
Description of Period and Expenses Accounts-Describe Describe of Period
- ------------------------------------ --------------------- ---------------- ----------------- ------------ -------------
Fiscal year ended December 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $526,000 ($92,581) $71,419 (a) $362,000
======== ======= ======= ========
Fiscal year ended January 1, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $439,000 $87,808 808 (a) $526,000
======== ======= === ========
Fiscal year ended January 2, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $329,000 $136,304 $26,304 (a) $439,000
======== ======== ======= ========
(a) Uncollectible accounts written off, net of recoveries
-44-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated March 23, 2001 THE EASTERN COMPANY
By /s/ John L. Sullivan III
---------------------------
John L. Sullivan III
Vice President, Secretary and Treasurer
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 23, 2001
-------------------------
Leonard F. Leganza
Director, President
and Chief Executive Officer
/s/ John W. Everets March 23, 2001
-------------------------
John W. Everets
Director
/s/ Charles W. Henry March 23, 2001
-------------------------
Charles W. Henry
Director
/s/ David C. Robinson March 23, 2001
-------------------------
David C. Robinson
Director
/s/ Donald S. Tuttle, III March 23, 2001
-------------------------
Donald S. Tuttle III
Director
-45-
EXHIBIT INDEX
(3) Restated Certificate of Incorporation dated August 14, 1991
is incorporated by reference to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 28, 1991 and
the Registrant's Form 8-K filed on February 13, 1991. Amended
and restated bylaws dated July 29, 1996 is incorporated by
reference to the Registrant's Form 8-K filed on July 29, 1996.
(4) Rights Agreement entered into between the Registrant and
BankBoston N.A. dated as of August 6, 1998 and Letter to all
shareholders of the Registrant, dated July 22, 1998 together
with Press Release dated July 22, 1998 describing the
Registrant's redemption of shareholders Purchase Rights dated
September 16, 1991 and the issuance of a new Purchase Rights
dividend distribution are incorporated by reference to the
Registrant's Form 8-K filed on August 6, 1998.
(10)(a) Amendment to the Deferred Compensation Agreement with Russell
G. McMillen dated May 1, 1988 is incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988. The Deferred Compensation Agreement
with Russell G. McMillen dated October 28, 1980 and amended on
March 27, 1986 is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 3, 1987.
(b) The Eastern Company 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.
(c) 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, as amended by Amendment
No.1 and Amendment No. 2 are incorporated by reference to the
Registrant's Form 10-K filed on March 29, 2000.
(d) 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, and
Post-Effective Amendment No. 1 to the Registrants Form S-8
filed on March 2, 2000.
(e) Supplemental Retirement Plan dated September 9, 1998 with
Leonard F. Leganza is incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999.
(f) Severance Agreement dated February 21, 2001 with Leonard. F.
Leganza attached hereto on page 48.
(g) The Eastern Company 2000 Executive Stock Incentive Plan
effective July 2000 attached hereto on page 54.
-46-
(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) Consent of independent auditors attached hereto on page 48.
(27) Financial Data Schedule attached hereto beginning on page 54.
-47-
Exhibit 10(f)
SEVERANCE AGREEMENT
AGREEMENT dated as of February 21, 2001 by and between THE EASTERN
COMPANY, a Connecticut corporation having its principal office at 112 Bridge
Street, Naugatuck, CT 06770 (hereinafter, "Company") and LEONARD F. LEGANZA of
62 Tunxis Village, Farmington, CT 06032 (hereinafter, "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is serving as the chief executive officer of the
Company; and
WHEREAS, the Company wishes to provide the Executive with certain
severance benefits following his termination of employment with the Company.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Average Adjusted Compensation" shall mean the average of
the Executive's annual compensation over the five calendar years ending prior
to the date of a Change in Control. Average Adjusted Compensation shall be
determined by taking into account all of the compensation payable to the
Executive by the Company (including any pre-tax contributions made to a
cafeteria plan or a Section 401(k) plan), but shall exclude any compensation
resulting from the exercise of stock options granted to the Executive by the
Company.
(b) "Average Basic Compensation" shall mean the average of the
sum of the Executive's annual rate of base pay and annual incentive
compensation over the three calendar years ending prior to the date of the
Executive's termination of employment. Average Basic Compensation shall be
determined by excluding any compensation resulting from the exercise of stock
options granted to the Executive by the Company.
(c) "Average Total Compensation" shall mean the average of the
Executive's annual compensation over the five calendar years ending prior to
the date of a Statutory Change in Control (or such shorter period of time
during which the Executive is employed by the Company). Average Total
Compensation shall be determined by taking into account all of the
compensation payable to the Executive by the Company (including any pre-tax
contributions made to a cafeteria plan or a Section 401(k) plan), and shall be
determined pursuant to Section 280G of the Code. If the five calendar year
period includes a calendar year in which the Executive was not employed for
the entire year, the Executive's compensation for such calendar year shall be
annualized.
(d) "Cause" shall mean gross negligence in connection with the
Executive's employment or gross negligence in failing to perform his
employment responsibilities in the best interests of the Company. No act or
omission shall constitute Cause under this Agreement unless the Board of
Directors of the Company has provided the Executive with a detailed written
notice of their conclusion that such an act or omission has occurred, and then
only if the Executive has failed to correct such act or omission within a
reasonable period of time.
-48-
(e) "Change of Control" shall mean:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 50% of either (A) the
then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (B) the combined voting power of
the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition directly from the Company, (B) any
acquisition by the Company, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A),
(B) and (C) of subsection (iii) of this Section 1(e); or
(ii) Individuals who, as of the date hereof,
constitute the Board of Directors of the Company (the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board of Directors of the Company; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board of Directors of the Company; or
(iii) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 75% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be;
(B) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, more than 50% of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination; and (C) at least a majority of the members of
-49-
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board of
Directors of the Company, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company
of a complete liquidation or dissolution of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986,
as amended (the "Code").
(g) "Good Reason" shall mean, without the express written
consent of the Executive:
(i) the assignment to him of any duties materially
inconsistent with and inferior to his positions, duties and
responsibilities with the Company during the preceding six (6) month
period, or a change which makes his reporting responsibilities, titles,
or offices materially inferior to his reporting responsibilities,
titles and offices during the preceding six (6) month period (except in
connection with the termination of the Executive's employment for
disability or retirement, or as a result of his death, or by the
Executive for other than Good Reason); or
(ii) a material reduction by the Company in his base
compensation or short term or long term incentive compensation (unless
such reduction is generally applicable to all senior executive officers
of the Company); or
(iii) a material reduction by the Company in the
employee benefit programs in which the Executive participated during
the preceding six (6) month period (unless such reduction is generally
applicable to all senior executive officers of the Company).
(h) "Parachute Payment Limit" shall mean 2.99 times the
Executive's Average Total Compensation, as determined pursuant to Section 280G
of the Code.
(i) "Statutory Change in Control" shall mean a change in
ownership or effective control of the Company, or a change in the ownership of
a substantial portion of the assets of the Company, as determined pursuant to
Section 280G of the Code.
(j) "Tax Advisor" shall mean the independent accounting
firm engaged by the Company.
(k) "Total Parachute Payments" shall mean any and all payments
or benefits which are in the nature of compensation and which are received (or
to be received) by the Executive in connection with a Statutory Change in
Control, as determined pursuant to Section 280G of the Code.
2. Payments in the Event a Change in Control Occurs.
------------------------------------------------
If a Change in Control of the Company occurs, then the Company shall
pay to the Executive a severance payment equal to 2.99 times the Executive's
Average Adjusted Compensation. Average Adjusted Compensation shall be
determined as of the date of the Change in Control.
The severance payment described in this Section 2 shall be paid to the
Executive in a single lump sum amount within thirty (30) days following the
date of the Change in Control.
3. Payments in the Event a Change in Control Does Not Occur.
---------------------------------------------------------
-50-
The provisions of this Section 3 shall apply in the event that a
severance payment is not payable under the provisions of Section 2.
If: (a) the Company terminates the employment of the Executive without
Cause; or (b) the Executive terminates his employment for Good Reason; or (c)
no later than the second anniversary of the date of this Agreement the Board
of Directors of the Company has selected an individual to replace the
Executive as the Chief Executive Officer of the Company following his
termination of employment and the Executive terminates his employment no later
than the third anniversary of the date of this Agreement, then the Company
shall pay to the Executive a severance payment equal to 2.0 times the
Executive's Average Basic Compensation. Average Basic Compensation shall be
determined as of the date of the Executive's termination of employment, but
without regard to any reduction in the Executive's compensation that
constitutes Good Reason for the Executive to terminate his employment.
The severance payment described in this Section 3 shall be paid to the
Executive in a single lump sum amount within thirty (30) days following the
Executive's termination of employment.
4. Limitations on Severance Payments. Notwithstanding anything in this
Agreement to the contrary, in the event that a Statutory Change in Control has
occurred (whether or not a Change in Control has occurred) and the Total
Parachute Payments are determined by the Tax Advisor not to be deductible, in
whole or in part, by the Company as a result of Section 280G of the Code, then
the severance payment described in Section 2 or Section 3 (to the extent it is
included in the Total Parachute Payments) shall be reduced until all of the
Total Parachute Payments are deductible in accordance with Section 280G of the
Code, or the severance payment to be made pursuant to Section 2 or Section 3
is reduced to zero. For purposes of this limitation, no portion of the Total
Parachute Payments shall be taken into account to the extent that the receipt
of such payments, in the determination of the Tax Advisor, is effectively
waived by the Executive prior to the date which is fifteen (15) days following
the date of the Change in Control or the Executive's termination of employment
(as the case may be) and prior to the earlier of the date of constructive
receipt and the date of payment thereof. The determination of the Tax Advisor
as to the deductibility of the Total Parachute Payments shall be completed not
later than forty-five (45) days following the date of the Change in Control or
the Executive's termination of employment (as the case may be), and such
determination shall be communicated in writing to the Company, with a copy to
the Executive, within said forty-five (45) day period. The good faith
determination of the Tax Advisor as to the deductibility of the Total
Parachute Payments shall be deemed conclusive and binding on the Company and
the Executive. The Company shall pay the fees and other costs of the Tax
Advisor hereunder. In the event that the Tax Advisor is unable or declines to
serve for purposes of making the foregoing determination, the Company shall
appoint another accounting firm of national reputation to serve as the Tax
Advisor, with the Executive's consent.
5. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor shall anything herein
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan, policy, practice or program of or any contract or
agreement with the Company or any of its affiliated companies at or subsequent
to his termination of employment shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as
explicitly modified by this Agreement.
-51-
6. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and
such amounts shall not be reduced whether or not the Executive obtains other
employment. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a
result of any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Code; provided, however, that the Company shall be obligated to pay the
Executive such legal fees and expenses only to the extent that the Executive
is successful on the merits in a court of law or pursuant to an arbitration
proceeding, or the Company and the Executive agree to a settlement of any such
contest.
7. Successors.
----------
(a) This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
8. Miscellaneous.
-------------
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by
the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
-------------------
Leonard F. Leganza
62 Tunxis Village
Farmington, CT 06032
-52-
If to the Company:
-----------------
The Eastern Company
112 Bridge Street
P.O. Box 460
Naugatuck, CT 06770
Attn: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under
this Agreement such Federal, state, local or foreign taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provision of this Agreement or the failure to
assert any right the Executive or the Company may have hereunder shall not be
deemed to be a waiver of such provision or right or any other provision or
right of this Agreement.
9. Termination of Deferred Compensation Agreement. The Deferred
Compensation Agreement between the Company and the Executive dated September
9, 1998 is hereby terminated and superceded by this Agreement, and the terms
of such Deferred Compensation Agreement shall no longer have any force or
effect.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
ATTEST: THE EASTERN COMPANY
/s/ John L. Sullivan III By /s/ David C. Robinson
------------------------ ---------------------
John L. Sullivan III David C. Robinson
Its Secretary Its Chairman, Compensation
Committee
/s/ Leonard F. Leganza
----------------------
Leonard F. Leganza
-53-
Exhibit 10(g)
THE EASTERN COMPANY
2000 EXECUTIVE STOCK INCENTIVE PLAN
1. Purpose.
-------
The purpose of The Eastern Company 2000 Executive Stock Incentive Plan
(the "Plan") is to promote the interests of The Eastern Company and its
shareholders by providing a method whereby executives and other key employees
of the Company may become owners of the Company's common stock by the exercise
of incentive stock options or nonqualified stock options or the grant of
shares of restricted stock, and thereby increase their proprietary interest in
the Company's business, encourage them to remain in the employ of the Company
and increase their personal interest in its continued success and progress. In
addition, another purpose of the Plan is to promote the interests of the
Company by providing a method whereby nonemployee directors of the Company may
become owners of the Company's common stock by the exercise of nonqualified
stock options or the grant of shares of restricted stock, and thereby
encourage qualified individuals to become members of the board of directors of
the Company.
2. Definitions.
-----------
As used herein, the following terms shall have the following meanings:
(a) "Award" shall mean the grant of an incentive stock option, a
nonqualified stock option, restricted stock, or other stock-based methods of
compensation authorized by Section 6 of the Plan.
(b) "Award Agreement" shall mean an agreement described in Section 7 of
the Plan which is entered into between the Company and a Participant and which
sets forth the terms, conditions and limitations applicable to an Award
granted to the Participant.
(c) "Board" shall mean the board of directors of The Eastern Company.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the Incentive Compensation Committee of the
Board or any successor committee with substantially the same responsibilities.
(f) "Company" shall mean The Eastern Company and each "parent or
subsidiary corporation" of The Eastern Company (as those terms are defined in
Section 424 of the Code).
(g) "Company Common Stock" shall mean the common stock, no par value,
of The Eastern Company.
(h) "Disability" shall mean the inability of a Participant to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
-54-
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months, as defined in Section 22(e)(3) of the Code.
(i) "Employee" shall mean an employee of the Company.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect from time to time, or any successor statute.
(k) "Fair Market Value" shall mean the reported price at which Company
Common Stock was last traded on the day on which such value is to be
determined (or, if there are no reported trades on such day, the last previous
day on which there was a reported trade).
(l) "Incentive Stock Option" shall mean a Stock Option which complies
with all of the requirements for incentive stock options set forth in Section
422 of the Code and which may be issued pursuant to Section 6.1.
(m) "Insider" shall mean any person who is subject to Section 16 of the
Exchange Act.
(n) "Non-Employee Director" shall mean a member of the board of
directors of The Eastern Company who is not an Employee.
(o) "Nonqualified Stock Option" shall mean a Stock Option which does
not comply with all of the requirements for Incentive Stock Options set forth
in Section 422 of the Code and which may be issued pursuant to Section 6.1.
(p) "Parent and/or Subsidiary Corporations" shall mean the parent
and/or subsidiary corporations of The Eastern Company, as those terms are
defined in Section 424 of the Code.
(q) "Participant" shall mean an Employee or a Non-Employee Director who
has been designated by the Committee as eligible to receive an Award pursuant
to the terms of the Plan. The only Employees that the Committee may designate
as Participants are those Employees who are salaried officers or key employees
(whether or not directors) of the Company.
(r) "Restricted Stock" shall mean shares of Company Common Stock which
have certain restrictions attached to the ownership thereof and which may be
issued pursuant to Section 6.2 of the Plan.
(s) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission, as now in force or as such regulation or successor
regulation shall hereafter be amended.
(t) "Section 16" shall mean Section 16 of the Exchange Act and the
rules promulgated thereunder, as they may be amended from time to time.
(u) "Securities Act" shall mean the Securities Act of 1933, as amended
and in effect from time to time, or any successor statute.
(v) "Stock Option" shall mean a right granted pursuant to Section 6.1
of the Plan to purchase a specified number of shares of Company Common Stock
at a specified price during a specified period of time. Stock Options may be
either Incentive Stock Options or Nonqualified Stock Options.
-55-
3. Administration.
--------------
(a) In order to administer the issuance of Awards to Participants
pursuant to the Plan, there shall be a Committee which is appointed by the
Board and which consists of not less than three Non-Employee Directors of the
Company. Each member of the Committee shall be a non-employee director as such
term is defined for purposes of Rule 16b-3.
(b) Subject to the express provisions of the Plan, the Committee shall
periodically determine which Employees and/or Non-Employee Directors shall be
Participants in the Plan and the nature, amount, pricing, timing and other
terms of the Awards. However, in no event may an Incentive Stock Option be
granted to a Non-Employee Director. Each Award shall be evidenced by an Award
Agreement which shall be signed by an officer of the Company and by the
Participant.
(c) The Committee shall have full power and authority, subject to such
orders or resolutions not inconsistent with the provisions of the Plan as may
from time to time be issued or adopted by the Board, to interpret the
provisions of and administer the Plan. Subject to any applicable provisions of
the certificate of incorporation or the bylaws of the Company, all such
decisions shall be final and binding on all persons including the Company and
its shareholders, Employees, Non-Employee Directors and Participants. In the
event of any conflict between an Award Agreement and the Plan, the terms of
the Plan shall govern.
(d) The Committee may delegate to designated officers or employees of
the Company the authority to execute and deliver such instruments and
documents, to do all such acts and things, and to take all such other steps
deemed necessary or advisable for the effective administration of the Plan in
accordance with its terms and purpose.
(e) It is the intent of the Company that the Plan and the Awards
granted hereunder shall satisfy and be interpreted in a manner that, in the
case of Participants who are or may be Insiders, satisfies the applicable
requirements of Rule 16b-3, so that such persons will be entitled to the
benefits of Rule 16b-3 or other exemptive rules under Section 16 and will not
be subjected to avoidable liability thereunder. If any provision of the Plan
or of any such Award would otherwise frustrate or conflict with the intent
expressed in this Section 3(e), that provision (to the extent possible) shall
be interpreted and deemed amended so as to avoid such conflict. To the extent
of any remaining irreconcilable conflict with such intent, the provision shall
be deemed void as applicable to Insiders.
4. Eligibility.
-----------
Awards may be granted only to those Employees and/or Non-Employee
Directors who are designated as Participants from time to time by the
Committee. However, in no event may an Incentive Stock Option be granted to a
Non-Employee Director. Subject to the express conditions of the Plan, the
Committee shall determine which Employees and/or Non-Employee Directors shall
be Participants, the types of Awards to be made to Participants and the terms,
conditions and limitations applicable to the Awards. More than one Award may
be granted to the same Participant.
-56-
5. Shares Subject to the Plan.
--------------------------
The total amount of Company Common Stock with respect to which Awards
may be granted under this Plan shall not exceed in the aggregate 300,000
shares of Company Common Stock. The shares relating to Awards granted under
this Plan shall be authorized but unissued shares of Company Common Stock.
Subject to the limitations of the Code and Rule 16b-3 (if applicable),
if any Award granted under this Plan lapses, expires, terminates, ceases to be
exercisable or is forfeited, in whole or in part, for any reason, then the
shares subject to but not issued under such Award shall be available for the
grant of other Awards.
6. Awards.
------
Awards may include those described in this Section 6. The Committee may
grant Awards singly or in combination with other Awards, as the Committee may
in its sole discretion determine. Subject to the other provisions of this
Plan, Awards may also be granted in combination with, in replacement of, or as
alternatives to, grants or rights under any other stock incentive plan of the
Company.
6.1. Stock Options.
-------------
(a) The exercise price of each Stock Option shall be
determined by the Committee. However, in the case of Incentive Stock Options,
in no event shall the exercise price be less than one hundred percent (100%)
of the Fair Market Value of the shares of Company Common Stock at the time of
grant of the Stock Option.
(b) In no event shall an Incentive Stock Option be granted to
a Non-Employee Director. In addition, an Incentive Stock Option shall not be
granted under this Plan to an Employee who, at the time of such grant, owns
(actually or constructively) more than ten percent (10%) of the total voting
power of all classes of stock of the Company, unless the purchase price of the
shares subject to such Incentive Stock Option is at least one hundred ten
percent (110%) of the Fair Market Value of the shares of Company Common Stock
at the time of the grant of the option and the option is not exercisable after
the expiration of five years from the date it is granted.
(c) No Stock Option intended as an Incentive Stock Option
shall be exercisable in whole or in part after ten years from the date it is
granted. The Committee, in its discretion, may impose vesting or other
restrictions which provide that a Stock Option may not be exercised in whole
or in part for any period or periods of time specified by the Committee, or
may provide for the amendment of outstanding unvested Stock Options in order
to accelerate the vesting of such Stock Options. Except as may be so provided
and except as provided in Section 6.1(d), any Stock Option may be exercised in
whole at any time, or in part from time to time, during its term.
(d) Any Stock Option, the term of which has not theretofore
expired, may be exercised during the optionee's employment with the Company or
during the optionee's service as a Non-Employee Director. In addition, subject
to the condition that no Stock Option intended as an Incentive Stock Option
may be exercised in whole or in part after ten years from the date it is
granted:
(i) upon the termination of an optionee's
employment or service as a Non-Employee Director other
than by reason of death, the optionee may, within three months after the date
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of such termination, exercise such option in whole or in part to the extent it
was exercisable (or became exercisable) at the time of his or her termination
of employment or service as a Non-Employee Director, and after such three
month period the right to exercise the Stock Option shall cease; provided,
however, that: (A) if such termination is due to Disability, such three month
period shall be extended to twelve (12) months; and (B) if such termination is
due to retirement at or after attaining age sixty-five (65), such three month
period shall be extended to twelve (12) months; and
(ii) upon the death of any optionee, either prior
to the termination of his or her employment or
service as a Non-Employee Director or within the three month or twelve (12)
month period referred to in Section 6.1(d)(i) above, such optionee's estate
(or the person or persons to whom such optionee's rights under the Stock
Option are transferred by will or the laws of descent and distribution) may,
within twelve (12) months after the date of such optionee's death, exercise
such Stock Option in whole or in part to the extent it was exercisable (or
became exercisable) at the time of his or her death, and after such twelve
(12) month period the right to exercise the Stock Option shall cease.
(e) The exercise price of each share subject to a Stock Option
shall, at the time of exercise of the Stock Option, be paid in full in cash,
or with previously acquired shares of Company Common Stock having an aggregate
Fair Market Value at such time equal to the exercise price, or in cash and
such shares. Notwithstanding the above, in connection with the exercise of an
Incentive Stock Option, payment with shares of Company Common Stock which
constitute "statutory option stock" (as defined in Section 424(c)(3)(B) of the
Code) and which were previously acquired by the optionee by the exercise of
options granted under an option plan maintained by the Company shall be
permitted only if the date of such payment is at least two years from the date
of grant of the options under the option plan and such shares were held by the
optionee for at least one year.
(f) Upon the exercise of a Stock Option, a certificate or
certificates representing the shares of Company Common Stock so purchased
shall be delivered to the person entitled thereto.
(g) An optionee shall have no rights as a shareholder with
respect to shares subject to his or her Stock Option until such shares are
issued to him or her and are fully paid, and no adjustment will be made for
dividends or other rights for which the record date is prior thereto.
(h) The provisions of Section 9 shall apply to any shares of
Company Common Stock issued to a Participant upon the exercise of a Stock
Option.
(i) Each Stock Option granted under this Plan shall by its
terms be non-transferable by the optionee other than by will or the laws of
descent and distribution and, during the lifetime of the optionee, shall be
exercisable only by the optionee.
6.2 Restricted Stock.
----------------
(a) Restricted Stock shall be subject to such terms,
conditions and restrictions as the Committee deems appropriate. Such terms,
conditions and restrictions may include, but are not limited to, restrictions
upon the sale, assignment, transfer or other disposition of the Restricted
Stock. The Committee may provide for the lapse of any such terms, conditions
and restrictions, or may waive any such terms, conditions or restrictions,
based on such factors or criteria as the Committee may determine.
(b) If a Participant receives a grant of Restricted Stock, and
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if the Participant desires to accept such grant, then the Participant shall
pay to the Company, in cash, an amount determined by the Committee. Such
amount may be greater than or equal to zero. Such amount may be paid at any
time prior to the sixtieth (60th) day following the lapse of the restrictions
applicable to the shares of Restricted Stock.
(c) After receipt of any payment required by the Committee in
connection with the grant of shares of Restricted Stock, or as of the date of
grant of shares of Restricted Stock if no such payment is required, the
Company shall issue to the Participant a certificate or certificates
representing the shares of Restricted Stock so granted. The certificates shall
have affixed thereto a legend, substantially in the following form, in
addition to any other legends required by the Plan or applicable law:
"The shares of Company Common Stock represented by this certificate are
subject to the restrictions described in an Award Agreement dated , a
copy of which will be furnished upon request by the issuer, and may not
be sold, exchanged, transferred, pledged, hypothecated or otherwise
disposed of except in accordance with the terms of such Award
Agreement."
Each transfer agent of Company Common Stock shall be informed of such
restrictions.
In aid of the restrictions described in this Section 6.2 that
are applicable to the Restricted Stock, the Participant shall, immediately
upon receipt of the certificate or certificates for such shares, deposit such
certificate or certificates (together with a stock power or instrument of
transfer appropriately endorsed in blank) with the Secretary of the Company to
be held in escrow. In the event such restrictions lapse, the certificate or
certificates shall be delivered to the Participant free and clear of such
restrictions. In the event the shares of Restricted Stock are forfeited, the
certificate or certificates shall be delivered to the Company.
Notwithstanding the above, the provisions of Section 9 shall
continue to apply to shares of Restricted Stock even if the restrictions
described in this Section 6.2 have lapsed.
(d) Upon issuance of a certificate or certificates
representing shares of Restricted Stock in accordance with the provisions of
Section 6.2(c), the Participant shall thereupon be deemed to be a shareholder
with respect to all of the shares of Company Common Stock represented by such
certificate or certificates. The Participant shall thereafter have, with
respect to such shares of Restricted Stock, all of the rights of a shareholder
of the Company (including the right to vote the shares of Restricted Stock and
the right to receive any cash or stock dividends on such Restricted Stock).
(e) In the event that a Participant's employment with the
Company terminates for any reason, or in the event that a Participant ceases
to be a Non-Employee Director, then any shares of Restricted Stock still
subject to the restrictions described in this Section 6.2 on the date of the
termination of his or her employment or service as a Non-Employee Director
shall automatically be forfeited.
(f) Each share of Restricted Stock granted under this Plan
shall by its terms be non-transferable by the Participant, other than by will
or the laws of descent and distribution, while the restrictions described in
this Section 6.2 remain in effect. While shares of Restricted Stock remain
subject to such restrictions, all rights with respect to such shares shall be
exercisable during a Participant's lifetime only by the Participant.
6.3 Other Awards.
------------
The Committee may from time to time grant shares of Company
Common Stock, other stock-based and non-stock-based Awards (including, without
limitation, Awards pursuant to which shares of Company Common Stock are or may
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in the future be acquired), Awards denominated in stock units, securities
convertible into shares of Company Common Stock, stock appreciation rights,
performance shares, phantom securities and dividend equivalents. The Committee
shall determine the terms and conditions of such Awards; provided, however,
that such Awards shall not be inconsistent with the terms and purposes of this
Plan.
7. Award Agreements.
----------------
Each Award granted under this Plan shall be evidenced by an Award
Agreement setting forth the number of shares of Company Common Stock subject
to the Award, and such other terms and conditions applicable to the Award as
are determined by the Committee. By acceptance of an Award, the Participant
thereby agrees to such terms and conditions and to the terms of this Plan
pertaining thereto.
8. Term of Plan.
------------
This Plan shall terminate on July 19, 2010 (ten years after the date of
its original adoption by the Board) or upon any earlier termination date
established by action of the Board, and no Awards shall be granted thereafter.
Such termination shall not affect the validity of any Awards then outstanding.
9. Securities Law Considerations.
-----------------------------
(a) The provisions of this Section 9 shall apply to all Awards granted
pursuant to the Plan, except to the extent that, in the opinion of counsel for
the Company, such provisions are not required by the Securities Act or any
other applicable law, regulation or rule of any governmental agency.
(b) At the time of the grant of an Award and at the time of the
acquisition of shares of Company Common Stock pursuant to an Award, a
Participant shall represent, warrant and covenant that:
(i) Any shares of Company Common Stock acquired upon exercise
of the Award shall be acquired for the Participant's account for investment
only and not with a view to, or for sale in connection with, any distribution
of the shares in violation of the Securities Act or any rule or regulation
under the Securities Act.
(ii) The Participant has had such opportunity as he or she has
deemed adequate to obtain from representatives of the Company such information
as is necessary to permit the Participant to evaluate the merits and risks of
his or her investment in shares of Company Common Stock.
(iii) The Participant is able to bear the economic risk of
holding shares acquired pursuant to the Award for an indefinite period.
(iv) The Participant understands that: (A) the shares acquired
pursuant to the Award will not be registered under the Securities Act and will
be "restricted securities" within the meaning of Rule 144 under the Securities
Act; (B) such shares cannot be sold, transferred or otherwise disposed of
unless they are subsequently registered under the Securities Act or an
exemption from registration is then available; (C) in any event, an exemption
from registration under Rule 144 or otherwise under the Securities Act may not
be available for at least two years and even then will not be available unless
a public market then exists for the shares of Company Common Stock, adequate
information concerning the Company is then available to the public and other
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terms and conditions of Rule 144 are complied with; and (D) there is now no
registration statement on file with the Securities and Exchange Commission
with respect to any stock of the Company subject to the Plan and the Company
has no obligation to register under the Securities Act any such stock.
(v) The Participant agrees that, if the Company offers for the
first time any shares of Company Common Stock for sale pursuant to a
registration statement under the Securities Act, the Participant will not,
without the prior written consent of the Company, publicly offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares
acquired pursuant to an Award for a period of one hundred eighty (180) days
after the effective date of such registration statement.
By making payment pursuant to an Award, the Participant shall be deemed to
have reaffirmed, as of the date of such payment, all of the representations
set forth in this Section 9 which he or she made at the time of grant of the
Award.
(c) All stock certificates representing shares of Company Common Stock
issued to a Participant pursuant to an Award shall have affixed thereto a
legend, substantially in the following form, in addition to any other legends
required by the Plan or applicable law:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and applicable
state securities laws, and may not be transferred, sold or otherwise
disposed of in the absence of an effective registration statement with
respect to the shares evidenced by this certificate, filed and made
effective under the Securities Act of 1933, as amended, and applicable
state securities laws, or an opinion of counsel satisfactory to the
issuer to the effect that registration under such Act or such laws is
not required."
10. Adjustment Provisions.
---------------------
(a) If through, or as a result of, any merger, consolidation, sale of
all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction: (i) the outstanding shares of Company
Common Stock are increased or decreased or are exchanged for a different
number or kind of shares or other securities of the Company, or (ii)
additional shares or new or different shares or other securities of the
Company or other non-cash assets are distributed with respect to shares of
Company Common Stock or other securities, then the aggregate number of shares
of Company Common Stock subject to this Plan, the number of shares of Company
Common Stock subject to each outstanding Award, and the exercise price per
share in each such outstanding Award, shall be proportionately adjusted.
(b) Any adjustments under this Section 10 will be made by the Board,
whose determination as to what adjustments, if any, will be made and the
extent thereof will be final, binding and conclusive. No fractional shares
will be issued pursuant to an Award on account of any such adjustments.
(c) No adjustments shall be made under this Section 10 which would,
within the meaning of any applicable provision of the Code, constitute a
modification, extension or renewal of an Incentive Stock Option or a grant of
additional benefits to a Participant who has been granted an Incentive Stock
Option.
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11. Amendments and Discontinuance.
-----------------------------
The Board may amend, suspend or discontinue the Plan, but may not,
without the prior approval of the shareholders of the Company, make any
amendment which operates: (a) to abolish the Committee, change the
qualification of its members or withdraw its authority to interpret or
administer the Plan; (b) to make any material change in the class of eligible
Employees under the Plan; (c) to increase the total number of shares for which
Awards may be granted under the Plan except as permitted by the provisions of
Section 10 hereof; (d) to extend the term of the Plan; (e) to permit
adjustments or reductions of the price at which shares may be acquired under
an Award previously-granted under the Plan except as permitted by the
provisions of Section 10 hereof; (f) to extend the maximum Incentive Stock
Option period; or (g) to decrease the minimum Incentive Stock Option price.
12. Continuance of Employment or Service as a Non-Employee Director.
---------------------------------------------------------------
Neither the Plan nor the grant of any Award hereunder shall interfere
with or limit in any way the right of the Company to terminate any Employee's
employment or to terminate the service of any Non-Employee Director at any
time and for any reason, nor shall the Plan or the grant of any Award
hereunder impose any obligation on the Company to continue the employment of
any Employee or the service of any Non-Employee Director.
13. Tax Withholding.
---------------
The Participant shall be responsible for the payment of all Federal,
state and local taxes relating to the grant, vesting or exercise of any Award
granted under the Plan. The Company shall have the power to withhold, or to
require a Participant to remit to the Company, an amount sufficient to satisfy
Federal, state and local withholding tax requirements on any Award granted
under the Plan. To the extent permissible under applicable tax, securities and
other laws, the Company may, in its sole discretion, permit the Participant to
satisfy a tax withholding requirement by directing the Company to apply shares
of Company Common Stock to which the Participant is entitled as a result of
the exercise of a Stock Option or the lapse of restrictions on shares of
Restricted Stock.
14. Required Notifications by Participant.
-------------------------------------
(a) If any Participant shall, in connection with an Award, make an
election pursuant to Section 83(b) of the Code (whereby the Participant elects
to include in gross income in the year of the transfer the amount specified in
Section 83(b) of the Code), then such Participant shall notify the Company of
such election within ten (10) days of the filing of such election with the
Internal Revenue Service.
(b) If any Participant shall dispose of shares of Company Common Stock
issued pursuant to the exercise of an Incentive Stock Option under the
circumstances described in Section 421(b) of the Code (whereby the Participant
makes a disqualifying disposition of the shares before expiration of the
applicable holding periods), then such Participant shall notify the Company of
such disqualifying disposition within ten (10) days of the disposition.
15. Limits of Liability.
-------------------
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(a) Any liability of the Company to any Participant with respect to an
Award shall be based solely upon the contractual obligations created by the
Plan and the Award Agreement.
(b) Neither the Company, nor any member of the Board or the Committee,
nor any other person participating in the determination of any question under
the Plan or the interpretation, administration or application of the Plan,
shall have any liability to any party for any action taken or not taken, in
good faith, under the Plan.
16. Requirements of Law.
-------------------
The grant of Awards and the issuance of shares of Company Common Stock
upon the exercise of an Award shall be subject to all applicable laws, rules
and regulations, and to such approvals by any governmental agencies as may be
required.
17. Governing Law.
-------------
The Plan, and all Award Agreements hereunder, shall be construed
pursuant to and in accordance with the laws of the State of Connecticut. The
parties to the Plan and each Award Agreement agree that the state and federal
courts of Connecticut shall have jurisdiction over any suit, action or
proceeding arising out of, or in any way related to, the Plan or any Award
Agreement. The parties waive, to the fullest extent permitted by law, any
objection which any of them may have to the venue of any such suit, action or
proceeding brought in such courts, and any claim that such suit, action or
proceeding brought in such courts has been brought in an inconvenient forum.
In the event that any party shall not have appointed an agent for service of
process in Connecticut, the party agrees that it may be served with process by
registered or certified mail, return receipt requested, to the party at its
respective address as reflected on the records of the Company. All notices
shall be deemed to have been given as of the date so delivered or mailed.
18. Effective Date.
--------------
The Plan shall be effective as of the date of its adoption by the
Board, and Awards may be granted under the Plan from and after the date of
such adoption; provided, however, that if, within twelve (12) months after
such date, the shareholders of the Company have not approved the Plan, then
the provisions of the Plan shall be null and void and any Awards granted under
the Plan shall terminate and cease to be of any force or effect.
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Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We 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. 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 26, 2001, with respect to the
consolidated financial statements and schedule of The Eastern Company included
in this Annual Report (Form 10-K) for the year ended December 30, 2000.
/s/Ernst & Young LLP
Hartford, Connecticut
March 23, 2001
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