THE EASTERN COMPANY
112 Bridge Street
P.O. Box 460
Naugatuck, CT 06770-0460
--------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 23, 2003
--------------
The Annual Meeting of shareholders of The Eastern Company ("Eastern" or
the "Company") will be held on April 23, 2003 at 11:00 a.m., local time, at the
office of the Company, 112 Bridge Street, Naugatuck, Connecticut 06770-0460, for
the following purposes:
1. To elect two directors.
2. To ratify the Board of Directors' appointment of Ernst & Young LLP
as independent auditors to audit the consolidated financial
statements of the Company and its subsidiaries for the fiscal year
2003.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed February 21, 2003 as the record date for
the determination of common shareholders entitled to notice of, and to vote at,
the Annual Meeting or any adjournment thereof.
Your vote is very important. Whether or not you plan to attend the Annual
Meeting, we urge you to sign, date and return the enclosed proxy card promptly
in the postpaid return envelope that is provided. If you attend the meeting and
desire to vote in person, your proxy will not be used.
All shareholders are cordially invited to attend the meeting, and
management looks forward to seeing you there.
By order of the Board of Directors,
John L. Sullivan III
Secretary
March 17, 2003
PROXY STATEMENT
of
THE EASTERN COMPANY
for the Annual Meeting of Shareholders
To Be Held on April 23, 2003
The Board of Directors of The Eastern Company ("Eastern" or the "Company")
is furnishing this proxy statement in connection with its solicitation of
proxies for use at the 2003 Annual Meeting of Shareholders and at any
adjournment thereof. This proxy statement is first being furnished to
shareholders on or about March 17, 2003.
GENERAL INFORMATION REGARDING VOTING AT THE ANNUAL MEETING
The Board of Directors of Eastern ("Board") has fixed the close of
business on February 21, 2003 as the record date ("Record Date") for determining
the shareholders entitled to notice of, and to vote at, the Annual Meeting. On
the Record Date, there were 3,631,869 outstanding shares of Eastern common stock
("Common Shares") with each Common Share entitled to one vote.
The presence, in person or by proxy, of holders of a majority of the
voting power of the Common Shares entitled to vote at the Annual Meeting is
necessary to constitute a quorum.
Shares represented by Eastern's proxy card will be voted at the Annual
Meeting, either in accordance with the directions indicated on the proxy card,
or, if no directions are indicated, in accordance with the recommendations of
the Board contained in this Proxy Statement and on the form of proxy. If a proxy
is signed and returned without specifying choices, the Common Shares represented
thereby will be voted (1) FOR the proposal to elect Messrs. Robinson and Tuttle
to the Board of Directors and (2) FOR the appointment of Ernst & Young LLP as
independent auditors. The Company is not aware of any matters other than those
set forth herein which will be presented for action at the Annual Meeting. If
other matters should be presented, the persons named in the proxy intend to vote
such proxies in accordance with their best judgment.
A shareholder may revoke the appointment of a proxy by making a later
appointment or by giving notice of revocation to The Eastern Company, 112 Bridge
Street, P.O. Box 460, Naugatuck, CT 06770-0460. Attendance at the Annual Meeting
does not in itself revoke the appointment of a proxy; however, it may be revoked
by giving notice in open meeting. A revocation made during the Annual Meeting
after the polls have been closed will not affect the previously taken vote.
-1-
Solicitation of Proxies
The cost of solicitation of proxies will be borne by the Company. This
solicitation by mail to the Company's shareholders (including this proxy
statement and the enclosed proxy) began on approximately March 17, 2003. In
addition to this solicitation by mail, officers and regular employees of the
Company and its subsidiaries may make solicitation by mail, telephone or
personal interviews, and arrangements may be made with companies, brokerage
firms, and others to forward proxy material to their principals. The Company
will defray the expenses of such additional solicitations.
Voting at the Annual Meeting
A plurality of the votes duly cast is required for the election of
directors. Each of the other matters to be acted upon at the Annual Meeting will
be approved if the votes cast in favor of the matter exceed the votes cast
opposing the matter.
Under Connecticut law, an abstaining vote and a Broker "non-vote" are
considered to be present for purposes of determining a quorum but is not deemed
to be a vote cast. A broker "non-vote" occurs when a nominee holding shares for
a beneficial owner does not vote on a particular proposal because the nominee
does not have discretionary voting power with respect to that item and has not
received instructions from the beneficial owner. As a result, abstentions and
broker "non-votes" are not included in the tabulation of the voting results on
the election of directors or the other matters to be acted on at the Annual
Meeting, each of which requires the approval of a plurality or majority of the
votes cast, and therefore do not have the effect of votes of opposition in such
tabulations.
The Board of Directors recommends voting:
FOR the election of Messrs. Robinson and Tuttle as directors.
FOR the appointment of Ernst & Young LLP as independent auditors.
-2-
Item No. 1
ELECTION OF DIRECTORS
At the meeting, two directors will be elected to serve for a three-
year term which expires in 2006 and until their successors are elected and
qualified. Mr. David C. Robinson and Mr. Donald S. Tuttle III, current
directors whose terms expire in 2003, are the nominees for election at the
meeting.
Unless otherwise specified in your proxy, the persons with power of
substitution named in the proxy card will vote your shares FOR the Company's
nominees named below. If the nominees are unable or unwilling to accept
nomination, the proxies will be voted for the election of such other persons as
may be recommended by the Nominating Committee of the Board of Directors. The
Board of Directors, however, has no reason to believe that the Company's
nominees will be unavailable for election at the Annual Meeting. Approval of
this resolution requires the affirmative vote of a plurality of the votes duly
cast by the shares represented at the meeting which are entitled to vote on the
matter.
The Board of Directors recommends a vote FOR the election of Messrs.
Robinson and Tuttle as directors.
Each director has furnished the biographical information set forth below
with respect to his present principal occupation, business and other
affiliations, and beneficial ownership of equity securities of the Company.
Unless otherwise indicated, each director has been employed in the principal
occupation or employment listed for at least the past five years.
COMPANY NOMINEES FOR ELECTION AT THE 2003 ANNUAL MEETING
FOR A THREE-YEAR TERM EXPIRING IN 2006
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 21, of
The Company Other Directorships Since 2003 Class
----------- ------------------- ----- ---- -----
David C. Robinson, 60 President 1990 92,029 2.5%
Director 1,2,3,4,5 The Robinson Company
Waterbury, CT
(Employee Benefit Specialists)
Director: Engineered Sinterings &
Plastics Inc.
Donald S. Tuttle III, 54 Vice President Investments 1988 81,498 2.2%
Director 1,2,3,4,5 UBS PaineWebber
Middlebury, CT
(Investment Firm)
-3-
Continuing DirectorS (TermS to Expire in 2005)
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 21, of
The Company Other Directorships Since 2003 Class
----------- ------------------- ----- ---- -----
John W. Everets, 56 Chairman and CEO 1993 75,221 2.0%
Director 1,2,3,4,5 H.P.S.C. Inc.
Boston, MA
(Financial Services)
Director: H.P.S.C. Inc.
Dairy Mart
Leonard F. Leganza, 72 President and CEO 1981 207,809 5.4%
Director, President and The Eastern Company
Chief Executive Officer Naugatuck, CT
of the Company 1,4 Director: American Republican, Inc.
Continuing Director (Term to Expire in 2004)
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 21, of
The Company Other Directorships Since 2003 Class
----------- ------------------- ----- ---- -----
Charles W. Henry, 53 Partner 1989 74,229 2.0%
Director 1,2,3,4,5 Kernan & Henry
Waterbury, CT
(Law Firm)
1 Member of the Executive Committee
2 Member of the Compensation Committee
3 Member of the Audit Committee
4 Member of the Nominating Committee
5 Member of the Pension Trust Committee
-4-
Item No. 2
APPOINTMENT OF INDEPENDENT AUDITORS
The services of Ernst & Young LLP for the fiscal year ended December 28,
2002 included an audit of the consolidated financial statements of the Company;
assistance in connection with filing the Form 10-K annual report with the
Securities and Exchange Commission; assistance on financial accounting and
reporting matters; and meetings with the Audit Committee of the Board of
Directors.
All audit services provided by Ernst & Young LLP for 2002, which were
similar to the audit services provided in prior years, were approved by the
Audit Committee in advance of the work being performed.
The Board of Directors recommends continuing the services of Ernst & Young
LLP for the current fiscal year. Accordingly, the Board of Directors will
recommend at the meeting that the shareholders approve the appointment of Ernst
& Young LLP to audit the consolidated financial statements of the Company for
the current year.
The proposal to appoint Ernst & Young LLP as independent auditors will be
approved if, at the Annual Meeting at which a quorum is present, the votes cast
in favor of the proposal exceed the votes cast opposing the proposal.
Representatives of Ernst & Young LLP will be present at the Annual Meeting
and will have an opportunity to make a statement if they desire to do so, as
well as respond to questioning.
Audit Fees: Ernst & Young LLP audit fees were $224,569 in 2002 and
$206,101 in 2001, including fees associated with the annual audit, the reviews
of the Company's quarterly reports on Form 10-Q and statutory audits required
internationally.
Audit-Related Fees: Fees for audit related services were $28,455 in 2002
and $28,000 in 2001. Audit related services primarily include audits of the
employee benefit plans of the Company and an S-8 Filing in 2001.
Tax Fees: Tax fees were $8,623 in 2002 and $8,791 in 2001.
All Other Fees: None
The Board of Directors recommends a vote FOR the appointment of Ernst &
Young LLP as independent auditors.
-5-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL SHAREHOLDERS
The following table sets forth information, as of February 21, 2003
(unless a different date is specified in the notes to the table), with respect
to (a) each person known by the Board of Directors of the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Shares, (b)
each current director of the Company, (c) each of the Named Officers (as
hereinafter defined) and (d) all directors and executive officers of the Company
as a group:
Amount and nature
of beneficial Percent of
Shareholder ownership (a) class (b)
----------- ------------- ---------
Fleet National Bank as trustee under the Salaried 325,282 9.0%
Employees' Retirement Plan of The Eastern Company (c)
100 Federal Street
Boston, MA 02110
Dimensional Fund Advisors, Inc. (d) 182,500 5.0%
1299 Ocean Avenue, Suite 650
Santa Monica, CA 90401
FleetBoston Corporation (e) 190,373 5.2%
100 Federal Street
Boston, MA 02110
TowerView LLC (f) 199,200 5.5%
500 Park Avenue
New York, NY 10022
John W. Everets 75,221 2.0%
Charles W. Henry 74,229 2.0%
Leonard F. Leganza 207,809 5.4%
David C. Robinson 92,029 2.5%
John L. Sullivan III (g) 50,724 1.4%
Donald S. Tuttle III 81,498 2.2%
Russell G. McMillen (h) 185,608 5.0%
All directors and executive officers as a group (7 persons)(i) 767,118 18.6%
-6-
(a) The Securities and Exchange Commission has defined "beneficial owner"
of a security to include any person who has or shares voting power or
investment power with respect to any such security or who has the right
to acquire beneficial ownership of any such security within 60 days.
Unless otherwise indicated, (i) the amounts owned reflect direct
beneficial ownership, and (ii) the person indicated has sole voting and
investment power.
Amounts shown include the number of Common Shares subject to
outstanding options under the Company's stock option plans that are
exercisable within 60 days.
Reported shareholdings include, in certain cases, shares owned by or in
trust for a director's or nominee's spouse, and in which all beneficial
interest has been disclaimed by the director or the nominee.
(b) The percentages shown for the directors and executive officers are
calculated on the basis that outstanding shares include Common Shares
subject to outstanding options under the Company's stock option plans
that are exercisable by the directors and officers within 60 days.
(c) Reported shareholdings as of February 21, 2003. The Eastern Company, in
accordance with its fiduciary responsibilities, will provide Fleet
National Bank, as trustee of the salaried pension plan, with voting
instructions for the Common Shares held in this trust.
(d) Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment
advisor, is deemed to have beneficial ownership of 182,500 Common
Shares per a Schedule 13G filed as of February 3, 2003, all of which
shares are held in portfolios of DFA Investment Dimensions Group Inc.,
a registered open-end investment company, or in series of the DFA
Investment Trust Company, a Delaware business trust, or the DFA Group
Trust and DFA Participation Group Trust, investment vehicles for
qualified employee benefit plans, for all of which Dimensional Fund
Advisors Inc. serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.
(e) Reported shareholdings per a Schedule 13G filed February 12, 2003.
(f) TowerView LLC is deemed to have beneficial ownership of 199,200 Common
Shares per a Schedule 13G filed as of January 16, 2003.
(g) Mr. Sullivan is a Named Officer of the Company. See "Executive
Compensation - Summary Compensation Table" for information regarding
Mr. Sullivan's age and business experience.
(h) Emeritus Director of the Company.
(i) Directors and Executive Officers (including the Emeritus Director) have
sole voting and investment powers as to 767,118 shares (18.6% of the
outstanding stock). Included are stock options for 486,395 shares
deemed exercised solely for purposes of showing beneficial ownership by
such group.
-7-
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and officers, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the American Stock Exchange. Directors, officers and greater-than-10%
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) reports that they file. Based solely on its review
of copies of such reports filed with the SEC since January 2002, or written
representations from certain reporting persons that no such reports were
required for those persons, the Company believes that all persons subject to the
reporting requirements of Section 16(a) have filed the required reports on a
timely basis.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has five standing committees: an
Executive Committee, an Audit Committee, a Compensation Committee, a Nominating
Committee and a Pension Trust Committee. During 2002, the Board of Directors had
seven (7) meetings. During 2002 each Director attended 100 percent of those
meetings and the meetings of committees on which he served.
Executive Committee. The Executive Committee, acting with full authority
of the Board of Directors, approves minutes, monthly operating reports, capital
expenditures, banking matters, and other issues requiring immediate attention.
Executive Committee meetings are generally scheduled when necessary. During
2002, no Executive Committee Meetings were held.
Audit Committee. The Audit Committee is responsible for reviewing the plan
and scope of the audit, reviewing the Company's audited financial statements and
discussing other audit matters with the Company's independent auditors. During
2002, three (3) Audit Committee Meetings were held.
Compensation Committee. The Compensation Committee is responsible for
establishing basic management compensation, incentive plan goals, and all
related matters, as well as determining stock option grants to employees. One
(1) Compensation Committee Meeting was held in 2002.
Nominating Committee. The Nominating Committee, which is responsible for
making recommendations to the Board of Directors as to board size and to
nominate prospective candidates to serve as Directors, held no meetings in 2002.
The Nominating Committee will consider candidates recommended by other
Directors, as well as candidates recommended in writing by shareholders in
accordance with the procedure set forth in the Company's by-laws. In general, a
shareholder must provide such written notice not less than 60 or more than 90
days prior to April 23, 2004.
Pension Trust Committee. The Pension Trust Committee is responsible for
reviewing the investment policy and performance of the Salaried Employees'
Retirement Plan of The Eastern Company, The Eastern Company Pension Plan for
Hourly-Rated Employees of the Eberhard Manufacturing Company Division, The
Eastern Company Pension Plan for Hourly-Rated Employees of the Frazer & Jones
Company Division and The Eastern Company Savings and Investment Plan. The
Pension Trust Committee held one (1) meeting in 2002.
-8-
Report of the Audit Committee
The Audit Committee oversees the Company's financial reporting process on behalf
of the Board of Directors. The Board of Directors adopted a written charter for
the Audit Committee on May 24, 2000, which is included as Exhibit A to this
proxy statement.
Management has the primary responsibility for the financial statements and the
reporting process, including the system of internal control. The independent
auditors are responsible for expressing an opinion on the conformity of those
statements with generally accepted accounting principles. Within this framework,
the Audit Committee has reviewed and discussed the audited financial statements
included in the Annual Report on Form 10-K with the independent auditors and
management. In connection therewith, the Audit Committee reviewed with the
independent auditors their judgments as to the quality, not just the
acceptability, of the Company's accounting principles; the reasonableness of
significant judgments; the clarity of disclosures in the financial statements;
and other related matters as required to be discussed under generally accepted
auditing standards.
In addition, the Audit Committee has discussed with the independent auditors the
auditors' independence from management and the Company, including the matters in
the written disclosures required by the Independence Standards Board, and
considered the compatibility of nonaudit services with the auditors'
independence.
The Audit Committee also discussed with the Company's independent auditors the
overall scope and plan for their audit, their evaluation of the Company's
internal controls and the overall quality of the Company's financial reporting.
The Audit Committee meets with and without management present and held three
meetings during fiscal year 2002.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Company's Annual Report on Form 10-K for
the year ended December 28, 2002 for filing with the Securities and Exchange
Commission. The Audit Committee and the Board of Directors have also
recommended, subject to shareholder approval, the selection of Ernst & Young LLP
as the Company's independent auditors for the current fiscal year.
Audit Committee:
John W. Everets, Chairman
Charles W. Henry
David C. Robinson
Donald S. Tuttle III
-9-
EXECUTIVE COMPENSATION
Summary Compensation Table
The following information relates to annual and long-term compensation for
services to the Company in all capacities for the fiscal years ended December
28, 2002, December 29, 2001 and December 30, 2000 of those persons who, at
December 28, 2002 were (i) the Chief Executive Officer; and (ii) the Vice
President, Secretary and Treasurer (collectively, the "Named Officers").
Annual Compensation Long Term Compensation
Awards Payouts
Other Restricted Securities
Name and Principal Annual Shares Underlying LTIP All Other
Position as of Salary Bonus (1) Compensation Awards Options/SARs Payouts Compensation (2)
December 28, 2002 Year ($) ($) ($) ($) (#) ($) ($)
----------------- ---- --- --- --- --- --- --- ---
Leonard F. Leganza, 72 2002 $350,000 $140,000 -- -- -- -- $ 5,463
Director, President and 2001 $350,000 -- -- -- -- -- $ 4,871
CEO 2000 $300,167 $270,000 -- -- 32,500 -- $ 4,413
John L. Sullivan III, 50 2002 $160,000 $ 64,000 -- -- -- -- $ 8,031
Vice President, Secretary 2001 $145,000 -- -- -- 15,000 -- $ 4,607
and Treasurer (3) 2000 $130,167 $117,000 -- -- 20,000 -- $ 4,103
(1) Bonuses are reported in the year earned. Payment is normally made the
following year.
(2) All Other Compensation includes matching Company 401(k) contributions,
premiums for term life insurance in excess of $50,000 and car allowance.
(3) Mr. Sullivan became Vice President and Treasurer on January 2, 2000. Prior
to that, he was the Corporate Controller and Treasurer of the Company. Mr.
Sullivan was appointed Secretary on April 26, 2000.
-10-
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on Value at FY-End(#) at FY-End ($) (i)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Leonard F. Leganza -- -- 181,534(ii) 18,466(ii) $42,300 --
President & CEO
John L. Sullivan III -- -- 41,827(iii) 23,173(iii) -- --
Vice President,
Secretary & Treasurer
(i) Based on the fair market value of the Company Common Shares on
December 28, 2002 of $11.33 per share and the option exercise prices
ranging from $9.92 to $18.50 per share.
(ii) The exercise price of 151,534 exercisable options and 18,466 unexercisable
options exceeds $11.33, the fair market value of the Company Common Stock
on December 28, 2002.
(iii) The exercise price of 41,827 exercisable options and 23,173 unexercisable
options exceeds $11.33, the fair market value of the Company Common Stock
on December 28, 2002.
PENSION PLANS
Retirement Benefits
The Company maintains a pension plan for salaried employees. Under the
plan, the amount of a member's annual normal retirement benefit is equal to one
percent (1%) of total annual compensation applicable to each year of service and
the sum of one half of one percent (0.5%) of average annual compensation plus
one half of one percent (0.5%) of average annual compensation in excess of
$10,000, multiplied by years of service not in excess of thirty (30). Average
annual compensation means the average of the member's annual compensation for
the five (5) consecutive calendar years prior to retirement which result in the
highest average.
As of December 28, 2002, Messrs. Leganza and Sullivan had 5 and 26 years
of service respectively. The estimated annual retirement benefits payable to
Messrs. Leganza and Sullivan are $18,819 and $106,756 respectively. These
benefits are based on the five year certain form of annuity.
-11-
The Company has adopted an unfunded supplemental employee retirement plan
(the "SERP") for the benefit of Mr. Leganza. Under the terms of the SERP, Mr.
Leganza will receive a monthly retirement benefit equal to the excess of: (a)
the benefit he would be entitled to receive under the Company's qualified
pension plan, based on the assumption that Mr. Leganza was fully vested under
the plan and without regard to the limitations on benefits imposed by the
Internal Revenue Code; over (b) the benefit which he is actually entitled to
receive under the Company's qualified pension plan, subject to the plan's
vesting schedule and the limitations on benefits imposed by the Internal Revenue
Code. The monthly retirement benefit under the SERP will begin at the time of
Mr. Leganza's termination of employment. The benefit will be paid as an annuity
over Mr. Leganza's life, with 60 monthly payments guaranteed. However, if Mr.
Leganza is married at the time benefits start, his benefits will be actuarially
adjusted and will be paid over his life with the provision that, at the time of
his death, 50% of the amount payable to him during his lifetime will be paid to
his surviving spouse for the remainder of her lifetime. The SERP also provides
for the payment of benefits in the event of Mr. Leganza's death or disability
while employed.
SIP Plan
The Company maintains a savings and investment plan (the "SIP Plan") for
eligible employees. An eligible employee who is participating in the SIP Plan
may execute a salary reduction agreement requiring the Company to reduce his or
her taxable earnings by a percentage of his or her compensation (as elected by
the participant) and to contribute that amount to the SIP Plan. The amount of
the contribution could not exceed $11,000 for calendar year 2002, plus an
additional $1,000 of catch-up contribution for those participants age 50 and
older. If an employee executes such a salary reduction agreement, the Company
will make a matching contribution to the SIP Plan on behalf of the employee. For
2002 the matching contribution equaled 50% of that portion of an employee's
salary reduction contribution which did not exceed 4% of his or her earnings. An
employee is fully vested in his or her salary reduction contributions and the
earnings on those contributions. An employee will become vested in any matching
contributions, and the earnings thereon, with full vesting after completing five
years of service or upon reaching age 65. Employees who are participating in the
SIP Plan may direct that their account balances be invested in one or more
investment options offered under the plan.
EXECUTIVE INCENTIVE PLAN
The President and the Vice President, Secretary and Treasurer were
eligible to receive an incentive subject to a maximum of 100% of base pay, with
the actual amount of the incentive being based on the performance of the Company
during 2002. All group Vice Presidents and Division Managers were eligible to
earn their incentive, with unlimited potential, based on achieving their
respective division or group earnings targets.
Effective for 2003, the President and the Vice President, Secretary and
Treasurer may receive an incentive subject to a maximum of 100% of base pay. All
group Vice Presidents and Division Managers will earn their incentive bonus,
with unlimited potential, based on achieving their respective division or group
earnings targets.
-12-
STOCK OPTIONS
On April 26, 1989, the shareholders approved The Eastern Company 1989
Executive Stock Incentive Plan (the "1989 Plan"), which by its terms expired on
February 7, 1999. No additional options may be granted under the 1989 Plan.
However, options previously granted remain exercisable in accordance with their
terms.
On April 26, 1995, the shareholders approved The Eastern Company 1995
Executive Stock Incentive Plan (the "1995 Plan"), which by its terms will expire
either on February 8, 2005 or upon any earlier termination date established by
the Board of Directors. The 1995 Plan authorizes the granting of incentive stock
options and non-qualified stock options to purchase Common Shares and the
granting of shares of restricted stock. The Compensation Committee of the
Company's Board of Directors will determine the restrictions which will apply to
shares of restricted stock granted under the 1995 Plan. Awards may be granted to
salaried officers and other key employees of the Company, whether or not such
employees are also serving as directors of the Company. The 1995 Plan also
provides for the grant of non-qualified stock options to purchase 16,875 shares
of common stock to each non-employee director of the Company upon his or her
first election as a director. The total amount of Common Shares which may be
issued under awards granted under the 1995 Plan shall not exceed in the
aggregate 375,000 shares.
On September 17, 1997 the Compensation Committee adopted The Eastern
Company 1997 Directors Stock Option Plan (the "1997 Plan") which by its terms
will expire either on September 16, 2007 or upon any earlier termination date
established by the Board of Directors. The 1997 Plan authorizes the granting of
non-qualified stock options to the non-employee directors of the Company to
purchase Common Shares. On December 15, 1999, the Board of Directors approved an
increase in the total number of Common Shares which may be issued under options
granted under the 1997 Plan from 225,000 shares to 325,000 shares.
On April 25, 2001, the shareholders approved The Eastern Company 2000
Executive Stock Incentive Plan (the "2000 Plan"), which by its terms will expire
either on July 19, 2010 or upon any earlier termination date established by the
Board of Directors. The 2000 Plan authorizes the granting of incentive stock
options and non-qualified stock options to purchase Common Shares and the
granting of shares of restricted stock. The Compensation Committee of the
Company's Board of Directors will determine the restrictions which will apply to
shares of restricted stock granted under the 2000 Plan. Awards may be granted to
salaried officers and other key employees of the Company, whether or not such
employees are also serving as directors of the Company. The 2000 Plan also
provides for the grant of nonqualified stock options to non-employee directors
of the Company. The total amount of Common Shares which may be issued under
awards granted under the 2000 Plan shall not exceed in the aggregate 300,000
shares.
The purchase price of the shares subject to each option granted under the
1989 Plan and each incentive stock option granted under the 1995 and 2000 Plans
may not be less than the fair market value of the shares on the date of grant.
The purchase price of shares subject to non-qualified stock options granted
under the 1995, 1997 and 2000 Plans, and the price (if any) which must be paid
to acquire a share of restricted stock granted under the 1995 and 2000 Plans,
will be set by the Compensation Committee of the Company's Board of Directors.
All non-qualified stock options granted to date have required a purchase price
equal to 100% of the fair market value of the Common Shares on the date of the
grant.
-13-
Incentive stock options generally may not be granted under the 1995 and
2000 Plans to any employee who owns more than ten percent (10%) of the Company's
voting stock at the time of such grant. Incentive stock options must be
exercised within ten years. Non-qualified stock options must be exercised within
the period set forth in the plan or, if the plan permits, within the period
established by the Compensation Committee. Moreover, options may not be
exercised more than three months after termination of employment or termination
of service as a director, except in the case of death or disability, in which
event the option may be exercised within one year after death or disability.
Under the 1995, 1997 and 2000 Plans, the three month period is also extended to
one year for an optionee who terminates employment or terminates service as a
director at or after reaching age sixty-five (65).
Option/SAR and Long-term Incentive Plan. There were no grants of stock
options or stock appreciation rights, no exercises of stock options, and no
grants of long-term incentive awards during the fiscal year ended December 28,
2002.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company ("Outside Director")
is paid a director's fee for his services at the rate of $10,000 as well as
$1,000 for each directors' meeting and $700 for each committee meeting attended.
All annual retainer fees and meeting fees paid to non-employee members of the
Board of Directors of the Company are paid in Common Shares of the Company
rather than in cash, in accordance with the Directors Fee Program adopted by the
shareholders on March 26, 1997.
-14-
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE IN CONTROL ARRANGEMENTS
The Company has adopted a severance agreement (the "Agreement") for the
benefit of Mr. Leganza. If a change in control of the Company has not occurred
and Mr. Leganza's employment is terminated without cause, or Mr. Leganza
terminates his employment for good reason, Mr. Leganza will receive a lump sum
severance benefit equal to 2.0 times his annual base salary and incentive
compensation (but excluding any compensation resulting from the exercise of
stock options), averaged over the three calendar years ending prior to the date
of his termination of employment. If a change in control of the Company has
occurred, Mr. Leganza will receive a lump sum payment equal to 2.99 times his
total compensation (but excluding any compensation resulting from the exercise
of stock options), averaged over the five calendar years ending prior to the
date of the change in control. Notwithstanding the above, in no event will the
payments under the Agreement exceed the limits on benefits imposed by the
Internal Revenue Code.
Should an unfriendly change in control of the Company take place, John L.
Sullivan III is guaranteed to receive a lump sum payment equal to one full year
of his annual base salary.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
All non-employee members of the Board of Directors are members of the
Compensation Committee. In reviewing and overseeing the Company's compensation
programs, the Compensation Committee adheres to a compensation philosophy which
provides executive compensation programs that are designed to:
Attract and retain key executives crucial to the long-term success of
the Company.
Reward executives for the achievement of operational and strategic
objectives.
Compensate executives commensurate with each executive's performance,
experience and responsibilities.
Align the interests of executives with the long-term interest of
shareholders through award opportunities that can result in the
ownership of common stock.
As a means of implementing these compensation philosophies and
objectives, the Company's compensation program for executives consists of base
salary, participation in the Company's incentive compensation program,
participation in the employee stock incentive programs, and such individual
bonuses as the Committee deems warranted based on the personal achievements of
each managing director and corporate executive. The base salaries are determined
by evaluating the executives' responsibilities and their individual performance,
as well as the competitive environment. Participation in the incentive
compensation program is at the discretion of the Compensation Committee. Awards
under the incentive compensation program to Company executives are based upon
achieving targeted operating earnings goals linked to overall corporate goals.
The Compensation Committee believes that the employee stock incentive programs
provide executives, who have substantial responsibility for the management and
growth of the Company, with the opportunity to increase their ownership in the
Company, thereby more closely aligning the best interests of the shareholders
and the executives.
Effective December 30, 2001, the Compensation Committee increased the
salary paid to John L. Sullivan III by 10% based upon his level of achievement
in line with the Company's executive compensation program.
Compensation Committee:
John W. Everets
Charles W. Henry
David C. Robinson, Chairman
Donald S. Tuttle III
-15-
SHAREHOLDER RETURN PERFORMANCE INFORMATION
The following graph sets forth the Company's cumulative Total Shareholder
Return based upon an initial $100 investment made on December 31, 1997 (i.e.,
stock appreciation plus dividends during the past five fiscal years) compared to
the Wilshire 5000 Index and the S&P Industrial Machinery Index.
The Company manufactures and markets a broad range of locks, latches,
fasteners and other security hardware that meets the diverse security and safety
needs of industrial and commercial customers. Consequently, while the S&P
Industrial Machinery Index being used for comparison is the standard index most
closely related to the Company, it does not completely represent the Company's
products or market applications. The Wilshire 5000 is a market index made up of
5,000 publicly-traded companies, including those having both large and small
capitalization.
(CHART OF CUMULATIVE TOTAL RETURN APPEARS HERE)
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02
Eastern Co. $100 $132 $125 $108 $102 $ 97
Wilshire 5000 $100 $123 $153 $136 $121 $ 96
S&P(C)Industrial $100 $ 95 $108 $103 $109 $108
Machinery
Copyright(C)2003, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
-16-
ADDITIONAL INFORMATION
Any shareholder who intends to present a proposal at the 2004 Annual
Meeting of shareholders and desires that it be included in the Company's proxy
material must submit to the Company a copy of the proposal on or before November
18, 2003. Any shareholder who intends to present a proposal at the 2004 Annual
Meeting but does not wish that the proposal be included in the Company's proxy
material must provide notice of the proposal to the Company, in accordance with
the terms of the Company's by-laws, no earlier than January 24, 2004 and no
later than February 23, 2004.
FORM 10-K ANNUAL REPORT
A copy of the corporation's annual report on Form 10-K as filed with the
Securities and Exchange Commission for the fiscal year ended December 28, 2002
will be furnished without exhibits to shareholders upon written request.
Exhibits to the Form 10-K will be provided if so indicated. Direct all inquiries
to Investor Relations, The Eastern Company, 112 Bridge Street, P.O. Box 460,
Naugatuck, Connecticut 06770-0460.
OTHER BUSINESS
Under Connecticut law, no business other than the general purpose or
purposes stated in the notice of meeting may be transacted at an annual meeting
of shareholders. If any matter within the general purposes stated in the notice
of meeting but not specifically discussed herein comes before the meeting or any
adjournment thereof, the persons named in the enclosed proxy will vote upon such
matter in accordance with their best judgment.
This proxy statement and the above notice are sent by order of the Board
of Directors.
John L. Sullivan III
Secretary
March 17, 2003
-17-
EXHIBIT `A'
The Eastern Company
AUDIT COMMITTEE CHARTER
Organization
This Charter governs the operations of the Audit Committee (the "Committee") in
fulfilling its oversight responsibilities by reviewing the financial reports and
other financial information prepared by The Eastern Company (the "Company"). The
Committee shall review and reassess the Charter and obtain the approval of the
Board of Directors at least annually. The Committee shall be appointed by the
Board of Directors and shall comprise at least three directors, each of whom are
independent of management and the Company. Members of the Committee shall be
considered independent if they have no relationship that may interfere with the
exercise of their independence with management and the Company. All Committee
members shall be financially literate, and at least one member shall have
accounting or related financial management expertise.
Statement of Policy
The Audit Committee shall provide assistance to the Board of Directors in
fulfilling its oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the internal audit function, the
annual independent audit of the Company's financial statements, and the legal
compliance and ethics programs as established by management and the Board. In so
doing, it is the responsibility of the Committee to maintain free and open
communication between the Committee, independent auditors, the internal
auditors, and management of the Company. In discharging its oversight role, the
Committee is empowered to investigate any matter brought to its attention with
full access to all books, records, facilities, and personnel of the Company and
the power to retain outside counsel, or other experts for this purpose.
Responsibilities and Processes
The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Board and report the results of its
activities to the Board. Management is responsible for preparing the Company's
financial statements and the independent auditors are responsible for auditing
those financial statements. The Committee in carrying out its responsibilities
believes its policies and procedures should remain flexible in order to best
react to changing conditions and circumstances. The Committee will take the
appropriate actions to set the overall corporate tone for quality financial
reporting, sound business risk practices, and ethical behavior, and shall meet
at least two times annually, or more frequently as circumstances dictate.
-18-
The following shall be the principal recurring processes of the Audit Committee
in carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Committee may supplement them as
appropriate.
The Committee shall have a clear understanding with management and the
independent auditors that the independent auditors are ultimately
accountable to the Board and the Audit Committee, as representatives of
the Company's shareholders. The Committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace
the independent auditors. The Committee shall discuss with the auditors
their independence from management and the Company and the matters
included in the written disclosures required by the Independence Standards
Board. Annually, the Committee shall review and recommend to the Board the
selection of the Company's independent auditors, subject to shareholders'
approval.
The Committee shall review with the independent auditors, the Company's
internal auditor, and financial and accounting personnel, the adequacy and
effectiveness of the accounting and financial controls of the corporation,
and elicit any recommendations for the improvement of such internal
control procedures or particular areas where new or more detailed controls
or procedures are desirable. Particular emphasis should be given to the
adequacy of such internal controls to expose any payments, transaction, or
procedures that might be deemed illegal or otherwise improper. Further,
the committee periodically should review company policy statements to
determine their adherence to an ethical code of conduct.
The Committee shall have sufficient opportunity for the internal and
independent auditors to meet with the members of the audit committee
without members of management present. Among the items to be discussed in
these meetings are the independent auditors evaluation of the
corporation's financial, accounting, and auditing personnel, and the
cooperation that the independent auditors received during the course of
the audit.
The independent auditors may discuss at their discretion with the
Committee the results of the quarterly review and any other matters
required to be communicated to the Committee by the independent auditors
under generally accepted auditing standards. The Chair of the Committee
may represent the entire Committee for the purposes of this review.
The Committee shall meet with the independent auditors and financial
management of the Company to review the scope of the proposed audit for
the current year and the audit procedures to be utilized, and at the
conclusion thereof review such audit, including any comments or
recommendations of the independent auditors.
-19-
The Committee shall review with management and the independent auditors
the financial statements to be included in the Company's Annual Report on
Form 10-K (or the annual report to shareholders if distributed prior to
the filing of Form 10-K), including its judgment about the quality, not
just acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the financial
statements. Also, the Committee shall discuss the results of the annual
audit and any other matters required to be communicated to the Committee
by the independent auditors under generally accepted auditing standards.
The Committee shall review the disclosures concerning the Committee and
its operations as may be required for inclusion in proxy materials
distributed by the Company in connection with meetings of its
shareholders.
The Committee shall perform any other activities consistent with this
Charter, the Company's By-laws, or governing law as the Committee or the
Board deems necessary or appropriate.
-20-
Appendix
PROXY
THE EASTERN COMPANY
112 Bridge Street, Naugatuck, CT 06770-0460
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints John W. Everets and Charles W. Henry, or any one
or more of them, true and lawful attorneys and agents, with the power of
substitution for the undersigned in his name, place and stead, to vote at the
Annual Meeting of Shareholders of The Eastern Company on April 23, 2003 and any
adjournments thereof, all shares of common stock of said Company which the
undersigned would be entitled to vote, if then personally present, as specified
on the reverse side of this card on proposals 1 and 2 and in their discretion on
all other matters coming before the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED BY THE SHAREHOLDER BUT IF NO CHOICE IS
SPECIFIED, IT WILL BE VOTED FOR PROPOSALS 1 AND 2.
(Continued and to be signed on the reverse side)
Annual Meeting of Shareholders of
THE EASTERN COMPANY
April 23, 2003
Please date, sign and mail back your
proxy card as soon as possible!
Please detach and mail in the envelope provided.
-------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR proposals 1 and 2
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE (X).
1. Election of two Directors for a 3-year term:
NOMINEES:
[ ] FOR ALL NOMINEES ( ) D.C. Robinson
( ) D.S. Tuttle III
[ ] AGAINST ALL NOMINEES
[ ] FOR ALL EXCEPT
(See Instructions below)
INSTUCTION: To vote against any individual nominee(s), mark "FOR ALL EXCEPT"
and fill in the circle next to each nominee you wish to vote
against, as shown here: (x)
2. Ratify the appointment of auditors FOR AGAINST ABSTAIN
(Ernst & Young LLP) [ ] [ ] [ ]
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
-----------------------------------------------------------------------
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that [ ]
changes to the (registed names(s) on the account may not be submitted via
this method.
Signature of Shareholder -------------------------- Date -----------------
Signature of Shareholder -------------------------- Date -----------------
Note: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give full
title as such. If the signer is a corporation, please sign full
corporate name by duly athorized officer, giving full title as such.
If signer is a partnership, please sign in partnership name by authorized
person.