SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 29,1997 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 THE EASTERN COMPANY (Exact Name of Registrant as specified in its charter) Connecticut 06-0330020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 112 Bridge Street, Naugatuck, Connecticut 06770 - ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) (203) 729-2255 (Registrant's Telephone Number, Including Area Code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of March 29,1997 Common Stock, No par value 2,764,164 -1-
PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) - ------ ASSETS March 29, 1997 December 28,1996 CURRENT ASSETS - -------------- Cash and cash equivalents $ 2,167,776 $ 2,269,031 Accounts receivable, less allowance: 1997- $605,000; 1996- $567,000 8,624,094 7,018,961 Inventories 11,475,048 10,897,827 Prepaid expenses and other current assets 1,915,916 2,287,155 ------------ ------------ Total Current Assets 24,182,834 22,472,974 Property, plant and equipment 26,450,275 25,961,043 Accumulated depreciation (12,731,251) (12,074,420) ------------ ------------ 13,719,024 13,886,623 Prepaid pension cost 4,055,932 4,017,397 Other assets, net 2,030,169 2,115,240 ------------ ------------ TOTAL ASSETS $ 43,987,959 $ 42,492,234 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES - ------------------- Notes payable $ 3,130,980 $ 3,630,980 Accounts payable 2,877,367 2,396,582 Accrued compensation and withholding 1,616,634 859,701 Accrued expenses 878,593 823,560 ------------ ------------ Total Current Liabilites 8,503,574 7,710,823 Deferred federal income taxes 2,389,800 2,389,800 Long-term debt 158,776 224,415 Accrued postretirement benefits 2,815,633 2,812,690 Shareholders' Equity - -------------------- Common Stock, No Par Value: Authorized Shares - 25,000,000 Issued & outstanding shares: 1997-2,764,164; 1996-2,696,284 8,791,767 8,272,614 (Excluding Shares in Treasury: 1997-610,987; 1996-610,987) Preferred Stock, No Par Value Authorized Shares - 2,000,000 (No shares issued) Unearned compensation (266,563) (200,938) Retained earnings 21,594,972 21,282,830 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $43,987,959 $42,492,234 =========== =========== See accompanying notes. -2-
THE EASTERN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 29, 1997 MARCH 30, 1996 -------------- -------------- Net sales $ 15,934,598 $ 14,541,552 Interest income 35,977 36,709 ------------ ------------ Total 15,970,575 14,578,261 Cost of products sold 11,949,759 12,117,549 ------------ ----------- 4,020,816 2,460,712 Selling and administrative expenses 2,981,969 2,691,835 Interest expense 66,307 50,839 ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 972,540 (281,962) Income taxes 358,117 (79,801) ----------- ----------- NET INCOME (LOSS) $ 614,423 $ (202,161) =========== ============= Net income (loss) per share $ 0.23 $ (0.07) Cash dividends per share $ 0.115 $ 0.115 Average shares outstanding 2,723,079 2,696,284 See accompanying notes. -3-
<TABLE> <CAPTION> THE EASTERN COMPANY AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 29, 1997 MARCH 30, 1996 -------------- -------------- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ 614,423 $ (202,161) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 659,864 763,246 Gain on sale of equipment and other assets - - Postretirement benefits other than pensions 2,943 3,000 Provision for losses on accounts receivable 17,500 17,500 Changes in operating assets and liabilities: Accounts receivable (1,627,285) (503,836) Inventories (587,000) 2,987 Prepaid expenses 370,489 30,364 Prepaid pension (38,534) (636,064) Accounts payable 686,337 700,253 Accrued expenses 638,191 698,265 Other assets 84,033 (12,569) ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 820,961 860,985 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (538,062) (1,172,221) Other 38,256 - ----------- ------------ NET CASH USED BY INVESTING ACTIVITIES (499,806) (1,172,221) FINANCING ACTIVITIES: Payment on line of credit (500,000) - Proceeds from line of credit - 1,000,000 Principal payments on long-term debt (60,000) (60,000) Proceeds from sales of Common Stock 453,528 - Dividends paid (317,880) (310,074) ------------ ------------ NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (424,352) 629,926 Effect of exchange rate changes on cash 1,942 3,810 ----------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (101,255) 322,500 Cash and Cash Equivalents at Beginning of Year 2,269,031 1,521,361 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,167,776 $ 1,843,861 =========== ============ </TABLE> See accompanying notes. -4-
THE EASTERN COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) THREE MONTHS ENDED MARCH 29, 1997 MARCH 30, 1996 -------------- -------------- Primary: Average shares outstanding 2,723,079 2,696,284 Net effect of dilutive stock options -- based on the treasury stock method using average market price 29,396 - ---------- --------- Total 2,752,475 2,696,284 ========== ========= Net income (loss) 614,423 (202,161) ========== ========== Net income (loss) per share $0.22 ($0.07) ===== ======= Fully diluted: Average shares outstanding 2,723,079 2,696,284 Net effect of dilutive stock options -- based on the treasury stock method using quarter-end market price, if higher than average market price 29,619 - ---------- --------- Total 2,752,698 2,696,284 ========== ========= Net income (loss) 614,423 (202,161) ========== ========= Net income (loss) per share $0.22 ($0.07) ====== ======= See accompanying notes. -5-
THE EASTERN COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) March 29, 1997 Note A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for such interim periods have been reflected therein. The condensed balance sheet as of December 28, 1996 has been derived from the audited financial statements at that date. Note B - Net Income (Loss) Per Share Net income (loss) per share of common stock is based on the weighted average number of shares outstanding during each period (1997 - 2,723,079 shares; 1996 - 2,696,284 shares). Common stock equivalents (stock options) did not have a material dilutive effect on net income per share in 1997. The computation of net income per share of common stock on a fully diluted basis did not result in any material dilution in 1997. Stock options were anti-dilutive in 1996 and were excluded from the per share calculations. Note C - Litigation The Registrant is involved in litigation relating to environmental matters for which the ultimate outcome is not expected to have any material adverse impact on financial position, operating results or liquidity. See Part II Item 1 Legal Proceedings for further information. -6-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Eastern's financial performance in the first quarter of 1997 demonstrated its continued strength in its core business and increased manufacturing efficiency. Net Income for the first quarter of 1997 was $614 thousand or $.23 per share on sales of $15.9 million versus a net loss in the first quarter of 1996 of $202 thousand or $.07 per share on sales of $14.5 million. Earnings would have been 35% higher without the expense associated with this year's proxy contest. Eastern's shareholders overwhelmingly supported Management's candidates, over a dissident slate of directors. The first quarter 1997 net sales increased 10% or $1.4 million from the first quarter of 1996. Sales volume and price increases, each accounted for 4% of the increased sales, respectively. The additional 2% increase was the result of new product introductions. Leading the way in sales growth, were the contract casting products produced by the Frazer & Jones Division. This product line increased 30% over the prior year. Increased business in the automotive accessories market and industrial hardware lines offset declines in the tractor trailer industry. Sales volume in the mining industry picked up over the comparable period a year ago as a result of the agreement entered into in August 1996 with Excel Mining System, the Country's largest manufacturer of mine roof bolts. Sales of custom locks were up 6% over last years level. New products include contract casting products offered by Frazer & Jones Division and various vehicular products offered by Eberhard Manufacturing Division. Also, the recently introduced Gun Blok product line experienced increased sales volume in the first quarter of 1997 versus the first quarter of 1996. This new product line is generating tremendous interest in both the domestic and international marketplace. Gross margin as a percentage of sales for the three months ended March 28, 1997 was 25% compared to 17% for the same period a year ago. This anticipated return of profitability, was attributable to higher margin yielding products, a 1.4% reduction in cost of products sold, and improved capacity utilization at the Frazer & Jones Division. All of the Registrant's divisions and subsidiaries reported improved gross margins. Selling and administrative expenses were up 11% or $300 thousand as compared to the same period a year ago. Expressed as a percent of sales, selling and administrative expenses were 18.7% versus 18.5% for the comparable period a year ago. This increase was primarily due to defense costs incurred by the Registrant to defend a hostile takeover attempted by Millbrook Capital Management, Inc. and related proxy contest. -7-
Liquidity and Sources of Capital Cash flows from operations were $821 thousand for the first quarter of 1997 versus $861 thousand in the first quarter of 1996. Cash generated from the exercise of stock options was $454 thousand. This combined cash flow was sufficient to fund the Registrant's capital expenditure program, paydown it's short-term credit line by $500 thousand, and make it's 226th consecutive quarterly dividend payment to shareholders. Inventory balances at the end of the first quarter of 1997 of $11.5 million were $600 thousand higher than year end 1996, and $300 thousand lower than the first quarter of 1996. Inventory turns of 4.2 times at the end of the first quarter of 1997 was comparable to the previous year end rate and also the first quarter of 1996. The Registrant believes inventory levels are adequate to meet customer requirements and anticipated increased sales activity. Accounts receivable increased by $1.6 million, compared to year end 1996; this increase was driven by the growth in sales volume. The average day's sales in accounts receivable for the first quarter of 1997 was 49 days; this compares to a level of 52 days for the comparable period a year ago. This improvement is the result of management's continued collection efforts. Additions to property, plant and equipment were $500 thousand during the first three months of 1997 versus $1.2 million for the comparable period a year ago. Total 1997 capital expenditures are expected to be lower than the expected $2.6 million level of depreciation for the year. Other Matters On June 24, 1994, the Registrant settled all claims with both the Beacon Heights Coalition and the Laurel Park Coalition and the respective complaints against the Registrant on behalf of the Coalitions were dismissed by stipulation. Claims against the Registrant and certain other defendants filed by the two governments agencies as described in Part II, item 1 below were dismissed by the Court. A final judgement was entered by the U. S. District Court in the consolidated proceedings on March 17, 1995. Appeals, however, were filed by the two government agencies as described in Part II, item 1 below. On November 1, 1996, the United States Court of Appeals for the Second Circuit reversed the U.S. District Court's ruling dismissing government agencies environmental claims against the Registrant and certain other defendants, and the environmental claims by the Laurel Park and Beacon Heights Coalitions against numerous defendants. The Court of Appeals, is expected to remand the case to the U.S. District Court in Connecticut for further proceedings. See further description in Part II, Item 1 below. -8-
The Registrant continues to actively monitor the situation. It is management's opinion that the resolution of these matters will not have a material adverse effect on the Registrant's financial position, operating results or liquidity. After serving as President and C.E.O. for 9 years, Mr. Stedman G. Sweet has elected to take early retirement from The Eastern Company. He is succeeded by Leonard F. Leganza who formerly served as Executive Vice President and Chief Financial Officer of Scovill Manufacturing Company. Mr. Leganza has been a Director of Eastern for 16 years and prior to his new responsibilities Chairman of the Executive, Compensation and Audit Committees. He will serve as President and C.E.O. while the Board of Directors searches for a permanent replacement for this position. PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS- - ------ ------------------ (A) In April 1988, Murtha Enterprises Inc. and related parties (collectively "Murtha"), as the result of a February 1987 suit (docket number N-87-52 PCD) brought by the U. S. Environmental Protection Agency (the "EPA") and others, concerning the Beacon Heights and Laurel Park landfills, instituted third-party actions against approximately 200 companies or individuals including the Registrant. The underlying suit against Murtha was settled with EPA and the other parties and the Consent Decree has been approved by the Court. On September 22, 1988, the EPA filed a complaint against the Registrant and seven other defendants seeking recovery of present and future response costs incurred by the United States in connection with the Beacon Heights landfill. The complaint alleged total damages of approximately $1.8 million ($1.3 million actual and $.5 million future). On October 31, 1988 the court consolidated the EPA action against the Registrant with the other cases under docket number N-87-52 (PCD). By complaint dated September 6, 1990, the Beacon Heights Coalition (the "Beacon Coalition"), a group of parties who have entered into a consent order with EPA, instituted a direct action against the Registrant and approximately 400 other named parties concerning the Beacon Heights landfill. The Beacon Coalition claimed that these defendants generated or transported hazardous substances disposed of at the Beacon Heights landfill, and are therefore responsible for a share of the Beacon Coalition's response costs. The Registrant has filed answers to both the EPA Complaint and the Beacon Coalition Complaint. In March 1991, a Laurel Park Coalition which did not include the Registrant entered into Consent Decree and Administrative Order by Consent with the EPA and the State of Connecticut to remediate the Laurel Park landfill. The Consent Decree has been approved by the Court. -9-
In May 1991, EPA and the State of Connecticut ("State") each filed a complaint against the Registrant and three other defendants seeking recovery of present and future response costs incurred in connection with the Laurel Park landfill. The EPA claims costs in excess of $1.8 million and the state claims costs in excess of $2.5 million. On July 1, 1991, the court consolidated these actions against the Registrant with the other cases under docket number N-87-52 (PCD). The Registrant filed answers to both of these complaints. By order dated February 8, 1994, the court granted a motion filed by Registrant for judgement on the pleadings against EPA and the state with respect to each of their claims against Registrant. By motions dated February 22, 1994 and February 23, 1994, EPA and the state respectively moved for reconsideration of the court's order, which motions were denied. By order dated February 8, 1994, the court permitted the Laurel Park Coalition to file a complaint against eight parties including the Registrant, which claims were to be assigned for trial if the Coalition files a complaint. On June 24, 1994 , the Registrant settled all claims with both the Beacon Heights Coalition and the Laurel Park Coalition and the respective complaints against the Registrant on behalf of the Coalitions were dismissed by stipulation. No complaints are now pending in the U.S. District Court involving the Registrant. On March 17, 1995, the U.S. District Court entered a final judgement in the consolidated proceedings (docket number N-87-52(PCD)) which included the granting of Registrant's motion for judgement on the pleadings. As a result of this judgement, no complaints were then pending in the U.S. District Court involving the Registrant. On April 17, 1995, the State filed its notice of appeal from this final judgement with the U.S. District Court. On May 10, 1995, EPA filed its notice of appeal from the judgement. On November 1, 1996 the U.S. Court of Appeals for the Second Circuit reversed the District Court ruling dismissing EPA and State of Connecticut environmental claims against the Registrant and environmental claims by the Laurel Park and Beacon Heights Coalitions against numerous defendants. The Court of Appeals remanded the case to the U.S. District Court in Connecticut for further proceedings. The governmental lawsuits, brought after governmental settlements with the Coalitions, seek to recover remediation costs of the governments unreimbursed by the Coalition settlements or the settlement with the owner/operator in connection with the Laurel Park and Beacon Heights landfills. The EPA has claimed that the Registrant and five other defendants (two corporate and three individual) are responsible for an aggregate of $3.0 million in remediation costs with respect to the Beacon Heights landfill and that the Registrant and one other corporate defendant are responsible for an aggregate of $2.3 million in remediation costs with respect to the Laurel Park landfill; Connecticut has claimed that the Registrant and one other defendant are responsible for an aggregate of $800,000 in remediation costs with respect to the Laurel Park landfill. The Registrant intends to continue to vigorously contest any liability relating to these governmental claims. The Registrant would also pursue its rights of contribution against the other defendants in the event of any liability, which the Registrant expects would significantly reduce any liability imposed. In addition, it would file claims against its insurance carriers. -10-
In its decision, the Second Circuit also reversed the U.S. District Court's dismissal of numerous actions brought by the Beacon Heights and Laurel Park Coalitions against non-settling parties. These Coalitions assumed full responsibility for cleaning up the two landfill sites and, as noted above, the Registrant has settled with both Coalitions with respect to liability at these sites in 1994. It is believed that many of the defendants in the pending Coalition actions and certain other persons who have not been sued by the governments have a responsibility for remediation cost and may be brought into these actions as co-defendants with the Registrant. The Registrant intends to resist the EPA and State claims and if necessary bring these other persons into the action to share the costs of reimbursements to the governments if ultimately imposed. On or about December 12, 1996, NRS Carting Company and Zollo Drum Company, Inc., defendants to the Coalitions' actions but not to the governments' actions, petitioned the Court of Appeals for rehearing relative to the Court's decision regarding successor liability. On April 25,1997, the Court of Appeals issued a decision denying the petition for rehearing. Although the Court of Appeals has not yet entered an order that will result in the EPA and State claims being returned to the U. S. District Court for Connecticut, it is expected to do so within the next month. The Registrant will continue to vigorously pursue its legal interest in this matter. The Registrant believes that these actions will not have a materially adverse impact on the Registrant's consolidated financial position, operating results or liquidity. (B) The Registrant was involved in two actions with MMI Investments, LLC ("MMI"). The first action, filed on or about August 15, 1996, was captioned MMI Investments, LLC vs. The Eastern Company, Docket number CV 96-134473 ("MMI's action"). The second action, filed on or about September 9, 1996, was captioned The Eastern Company vs. MMI Investments, LLC, docket number CV 96-134839 ("Eastern's action"). The two actions were consolidated before the Connecticut Superior Court for the Judicial District of Waterbury at Waterbury. In MMI's action, MMI sought an order of mandamus from the Court to compel the Registrant to turn over a copy of its shareholder list to MMI. In the Eastern action, the Registrant sought to enjoin MMI (purporting to represent 10% of the Registrant's shares) from calling or attempting to call a special meeting of the Registrant's shareholders on the grounds that (A) its request did not comport with the threshold requirement under Connecticut law and the Registrant's bylaws that the request be made by holders of at least 35% of the Registrant's shares and (B) the purported purposes submitted by MMI for the special meeting were improper. The Registrant also sought declaratory relief regarding these two issues. On December 3, 1996, the Connecticut Superior Court issued a decision enjoining MMI from calling a special meeting pursuant to any request for the call of such a meeting made prior to that date by MMI. The court held that the written request of holders of at least 35% of Eastern's shares was required under Connecticut law to call a special meeting of shareholders. The court permitted MMI to inspect the Registrant's shareholder list. The Registrant and MMI each filed an appeal of the court's decision, which appeals were withdrawn on January 21, 1997. There are no other material legal proceedings, other than ordinary routine litigation incidental to the business, to which either the Registrant or any of its subsidiaries is a party of or which any of their property is the subject. -11-
ITEM 2 CHANGES IN SECURITIES - ------ --------------------- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES - - ------ ------------------------------- None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- The Registrant held its Annual Meeting of the Stockholders at the Naugatuck Elks Lodge, Naugatuck, Connecticut on Wednesday, the twenty-sixth day of March, 1997. The matter voted on and the voting results were: FOR WITHHELD AGAINST ABSTENTION 1) Election of three directors for three year terms expiring in the year 2000. Management Nominees: Ole K. Imset 1,641,193 31,577 Stedman G. Sweet 1,639,647 33,123 Donald S. Tuttle III 1,641,149 31,621 MMI Nominees: J. Dyson 710,188 7,267 C. Lifflander 710,084 7,371 G. Scherer 710,084 7,371 Continuing Directors: Charles W. Henry John W. Everets Donald E. Whitmore, Jr. Russell G. McMillen David C. Robinson Leonard F. Leganza 2) Approval of Ernst & Young LLP as independent auditors: 1,907,905 20,336 461,405 3) Approval of Directors Fee Program: 1,729,003 306,939 353,704 4) Stockholder Proposal that Directors consider sale of the Company: 934,154 1,400,490 55,583 -12- ITEM 5 OTHER INFORMATION - - ------- ----------------- None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- None SIGNATURES Pursuant to the requirements 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. THE EASTERN COMPANY (Registrant) DATE: May 13, 1997 /s/Leonard F. Leganza ------------ ---------------------------- Leonard F. Leganza President and Chief Executive Officer DATE: May 13, 1997 /s/Donald E. Whitmore, Jr. ------------ ---------------------------- Donald E. Whitmore, Jr., Executive Vice President and Chief Financial Officer -13-