SCHEDULE 14A INFORMATION PROXY STATEMENT
PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
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The Eastern Company
---------------------------------------
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THE EASTERN COMPANY
112 Bridge Street
P.O. Box 460
Naugatuck, CT 06770-0460
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 25, 2007
--------------
The Annual Meeting of shareholders of The Eastern Company ("Eastern" or the
"Company") will be held on April 25, 2007 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 one director.
2. To consider, ratify and approve the Board of Directors' authorization
to amend the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from twenty-five million
(25,000,000) to fifty million (50,000,000).
3. To ratify the Audit Committee's recommendation and the Board of
Directors appointment of UHY LLP as the independent registered public
accounting firm to audit the consolidated financial statements of the
Company and its subsidiaries for the fiscal year 2007.
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed February 23, 2007 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 or call the toll free number
provided on the enclosed proxy card. 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,
Theresa P. Dews
Secretary
March 19, 2007
PROXY STATEMENT
of
THE EASTERN COMPANY
for the Annual Meeting of Shareholders
To Be Held on April 25, 2007
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 2007 Annual Meeting of Shareholders and at any
adjournment thereof. This proxy statement is first being furnished to
shareholders on or about March 19, 2007.
GENERAL INFORMATION REGARDING VOTING AT THE ANNUAL MEETING
The Board of Directors of Eastern has fixed the close of business on
February 23, 2007 as the record date for determining the shareholders entitled
to notice of, and to vote at, the Annual Meeting. On the record date, there were
5,503,211 outstanding shares of Eastern common stock, no par value ("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 of Directors 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 Mr. Henry
to the Board of Directors, (2) FOR the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock and
(3) FOR the appointment of UHY LLP as the independent registered public
accounting firm. 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.
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 19, 2007. 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.
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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 or a broker "non-vote" is
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 Mr. Henry as a director.
FOR the amendment to the Company's Certificate of Incorporation to
increase the number of authorized shares of Common Stock.
FOR the appointment of UHY LLP as the independent registered public
accounting firm.
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Item No. 1
ELECTION OF DIRECTOR
At the meeting, one director will be elected to serve for a three-year term
which expires in 2010 or until his successor is elected and qualified. Mr.
Charles W. Henry, a current director whose term expires in 2007, is the nominee
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
nominee named below. If the nominee is unable or unwilling to accept nomination,
the proxies will be voted for the election of such other person as may be
recommended by the Board of Directors. The Board of Directors, however, has no
reason to believe that the Company's nominee 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 Mr. Henry as
a director.
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 NOMINEE FOR ELECTION AT THE 2007 ANNUAL MEETING
FOR A THREE-YEAR TERM EXPIRING IN 2010
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 23, of
The Company Other Directorships Since 2007 Class
----------- ------------------- ----- ---- -----
Charles W. Henry, 57 Partner 1989 141,845 2.5%
Director 1,2,3 Kernan & Henry
Waterbury, CT
(Law Firm)
-3-
CONTINUING DIRECTORS (TERMS TO EXPIRE IN 2009)
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 23, of
The Company Other Directorships Since 2007 Class
----------- ------------------- ----- ---- -----
David C. Robinson, 64 Business Consultant 1990 145,719 2.6%
Director 1,2 (Aug 2006 - Present)
Consultant (Nov 2005 - Aug 2006)
Sinclair-Robinson Group
Wallingford, CT
Managing Director (Aug 2004 - Nov 2005)
Sinclair-Robinson Group
Wallingford, CT
(Employee Benefit Specialists)
President (Through - Jul 2004)
The Robinson Company
Waterbury, CT
(Employee Benefit Specialists)
Donald S. Tuttle III, 58 Vice President Investments 1988 135,575 2.4%
Director 1,2,3 UBS Financial Services, Inc.
Middlebury, CT
(Investment Firm)
CONTINUING DIRECTORS (TERMS TO EXPIRE IN 2008)
Common
Stock
Beneficially
Name, Age and Positions Principal Occupation Owned as of Percentage
Presently Held with During Past Five Years: Director February 23, of
The Company Other Directorships Since 2007 Class
----------- ------------------- ----- ---- -----
John W. Everets, 60 Chairman (Jan 2006 - Present) 1993 116,887 2.1%
Director 2,3 Yorkshire Capital
Boston, MA
(Investment Firm)
President and CEO (Jan 2004 - Dec 2005)
G.E. H.P.S.C.
Boston, MA
(Financial Services)
Chairman and CEO (July 1993 - Jan 2004)
H.P.S.C.
Boston, MA
(Financial Services)
Director: M.F.I. Inc.
Leonard F. Leganza, 76 Chairman, President & CEO 1981 328,887 5.7%
Director, Chairman, The Eastern Company
President and Chief Naugatuck, CT
Executive Officer
of the Company 1 Director: American-Republican Inc.
1 Member of the Executive Committee
2 Member of the Compensation Committee
3 Member of the Audit Committee
-4-
Item No. 2
AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
General
Article Fourth of the Certificate of Incorporation currently authorizes
twenty-five million (25,000,000) shares of Common Stock, having no par value,
one million (1,000,000) shares of a single class of voting preferred stock
having no par value, and one million (1,000,000) shares of a single class of
non-voting preferred stock having no par value.
As of February 23, 2007, there were 5,503,211 issued and outstanding shares
of the Company's Common Stock and 8,498,667 additional shares reserved for
various purposes. 7,000,939 shares of the Company's Common Stock were reserved
for issuance upon the exercise of stock purchase rights (the "Rights") under the
Company's stock purchase rights plan, 1,425,250 shares were reserved for
issuance under the Company's stock option plans, and 72,478 shares were reserved
for issuance under the directors' fee program. Due to the necessity of reserving
these shares with respect to the Rights, the option plans and the directors' fee
program, there remain unreserved 10,998,122 shares consisting of 8,465,033
unissued shares and 2,533,089 shares held in the treasury.
Purpose
The proposed increase in the number of authorized shares of Common Stock is
designed to provide the Board of Directors of the Company with additional
flexibility in pursuing its long range business objectives. The proposed
increase would allow the Board of Directors of the Company to issue additional
shares of Common Stock in stock dividends, stock splits and public or private
offerings, to use shares of Common Stock to acquire other businesses, to issue
Common Stock in connection with incentive stock plans or stock option plans, and
to issue Common Stock for any other proper corporate purposes. The shareholders
may not be required or requested to approve the issuance of the additional
shares in all such cases. To the extent the additional authorized shares are
issued for the above purposes of the Company, the issuance of the shares would
result in a dilution of the ownership interest of the existing shareholders.
The additional authorized shares of Common Stock could also enable the
Board of Directors to render more difficult or to discourage an attempt by
another person or entity to obtain control of the Company. Such additional
shares could be issued by the Board in a private or public sale, merger or
similar transaction, increasing the number of outstanding shares and thereby
diluting the equity interest and voting power of a party attempting to obtain
control of the Corporation.
Proposed Amendment
On October 25, 2006, the Board of Directors unanimously adopted a
resolution authorizing and approving, subject to shareholder approval, an
amendment to Article Fourth of the Certificate of Incorporation. The amendment
increases the authorized number of shares of Common Stock of the Company from
twenty-five million (25,000,000) to fifty million (50,000,000).
The amendment reads as follows:
`FOURTH: The authorized capital stock of the corporation shall consist
of fifty million (50,000,000) shares of common stock, having no par
value, one million (1,000,000) shares of a single class of voting
preferred stock having no par value, and one million (1,000,000)
shares of a single class of non-voting preferred stock having no par
value.'
The Board of Directors recommends a vote FOR the amendment to the Company's
Certificate of Incorporation.
-5-
Item No. 3
APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of UHY LLP ("UHY") acts as our principal independent registered
public accounting firm. The services of UHY for the fiscal year ended December
30, 2006 included an audit of the consolidated financial statements of the
Company; assistance in connection with filing the Form 10-Q quarterly reports
and 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 UHY for 2006, which were similar to the
audit services provided in the prior year, were approved by the Audit Committee
in advance of the work being performed.
UHY has a continuing arrangement with UHY Advisors, Inc. ("Advisors")
whereby it leases professional personnel who are full time professional
employees of Advisors. The Advisors organization provides non-audit services. As
a result of UHY's arrangement with Advisors, UHY has no full-time employees;
therefore, all audit services performed for the Company by UHY for 2006 and 2005
were provided by permanent, full-time employees of Advisors that were leased to
UHY. UHY manages and supervises the audit engagement and the audit personnel and
is exclusively responsible for the firm's report rendered in connection with its
audits of the Company's 2006 and 2005 consolidated financial statements. No
non-audit services were provided by Advisors to the Company in 2006 and 2005.
The Audit Committee has recommended, and the Board of Directors has
approved, continuing the services of UHY for the current fiscal year.
Accordingly, the Board of Directors will recommend at the meeting that the
shareholders approve the appointment of UHY to audit the consolidated financial
statements of the Company for the current year.
The proposal to appoint UHY as the independent registered public accounting
firm 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 UHY 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: UHY audit fees were $228,057 in 2006 and $185,460 in 2005.
Audit fees include fees associated with the annual audit and the reviews of the
Company's quarterly reports on Form 10-Q for the quarters ended April 1, 2006,
July 1, 2006 and September 30, 2006.
Audit-Related Fees: UHY fees for audit related services were zero in 2006
and $600 in 2005. Audit related services were primarily for Sarbanes-Oxley
Section 404 consultations.
Tax Fees: UHY did not provide any tax services in 2006 and 2005.
All Other Fees: UHY did not provide any non-audit services in 2006 and
2005.
The Board of Directors recommends a vote FOR the appointment of UHY LLP as
the independent registered public accounting firm.
-6-
On July 13, 2005, the Audit Committee of the Board of Directors of the
Company recommended and approved the dismissal of Ernst & Young LLP as the
Company's independent registered public accounting firm, effective July 13,
2005. On July 13, 2005, the Board of Directors of the Company accepted the
recommendation of the Audit Committee. The report of Ernst & Young LLP on the
Company's consolidated financial statements as of January 1, 2005 and the fiscal
year ended January 1, 2005 did not contain any adverse opinion or disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. During the fiscal year ended January 1, 2005 and through
the date of dismissal of Ernst & Young, LLP, there were no disagreements between
the Company and Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would
have caused Ernst & Young LLP to make reference to the subject matter of the
disagreements in connection with its report. Moreover, none of the "reportable
events" described in Item 304(a)(1)(v) of Regulation S-K of the Securities and
Exchange Commission ("SEC") occurred during the fiscal year ended January 1,
2005 or through the date of dismissal of Ernst & Young, LLP. Ernst & Young LLP
has furnished to the Company a copy of a letter addressed to the SEC which
states that Ernst & Young LLP does not disagree with the above statements.
On July 13, 2005, the Audit Committee of the Board of Directors of the
Company recommended and approved the appointment of UHY as the Company's
independent registered public accounting firm, effective July 13, 2005. On July
13, 2005, the Board of Directors of the Company accepted the recommendation of
the Audit Committee.
During the fiscal year ended January 1, 2005 and through the date of the
appointment of UHY, neither the Company nor anyone acting on its behalf
consulted UHY regarding: (A) either the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements; or (B) any matter that was either the subject of a disagreement with
Ernst & Young LLP on accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make
reference to the matter in connection with its report regarding the Company's
consolidated financial statements, or a "reportable event" as described in Item
304(a)(1)(v) of Regulation S-K of the SEC.
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AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that all audit committee members are
financially literate and are independent under the current listing standards of
the American Stock Exchange. The Board has also determined that John W. Everets
qualifies as an "audit committee financial expert" as defined by the SEC rules
adopted pursuant to the Sarbanes-Oxley Act of 2002.
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 revised
written charter for the Audit Committee on February 4, 2004, 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
registered public accounting firm is 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 registered public accounting firm and management. In
connection therewith, the Audit Committee reviewed with the independent
registered public accounting firm 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
registered public accounting firm 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
registered public accounting firm 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 six meetings during fiscal year 2006.
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 30, 2006 for filing with the Securities and Exchange
Commission. The Audit Committee has recommended and the Board of Directors has
approved, subject to shareholder ratification, the selection of UHY LLP as the
Company's independent registered public accounting firm for the current fiscal
year.
Audit Committee:
John W. Everets, Chairman
Charles W. Henry
Donald S. Tuttle III
-8-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL SHAREHOLDERS
The following table sets forth information, as of February 23, 2007 (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)
--------------------------------------------------------------------------------------------------
Brown Advisory Holdings Incorporated ("BAHI")(c) 570,219 10.4%
901 South Bond Street, Suite 400
Baltimore, MD 21231
Russell Trust Co. as trustee under the Salaried 308,423 5.6%
Employees' Retirement Plan of The Eastern Company (d)
John W. Everets 116,887 2.1%
Charles W. Henry (e) 141,845 2.5%
Leonard F. Leganza 328,887 5.7%
David C. Robinson 145,719 2.6%
John L. Sullivan III (f) 101,139 1.8%
Donald S. Tuttle III 135,575 2.4%
Russell G. McMillen (g) 258,194 4.6%
All directors and executive officers as a group (7 persons)(h) 1,205,559 19.3%
(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 or nominee, 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 per a Schedule 13G/A filed February 13, 2007.
Brown Advisory Holding Incorporated ("BAHI") is a registered
broker-dealer.
-9-
(d) Reported shareholdings as of February 23, 2007. The Eastern Company,
in accordance with its fiduciary responsibilities, will provide
Russell Trust Co., as trustee of the salaried pension plan, with
voting instructions for the Common Shares held in this trust.
(e) Includes 15,187 shares beneficially owned by Mr. Robinson, over which
Mr. Henry has sole voting power only, and 7,500 shares beneficially
owned by Mr. McMillen, over which Mr. Henry has shared voting and
investment power.
(f) Mr. Sullivan is a Named Executive Officer of the Company. See
"Executive Compensation - Summary Compensation Table" for information
regarding Mr. Sullivan's age and business experience.
(g) Emeritus Director of the Company.
(h) Directors and Executive Officers (including the Emeritus Director)
have sole voting and investment power as to 1,205,559 shares (19.3% of
the outstanding stock). Included are stock options for 743,500 shares
deemed exercised solely for purposes of showing beneficial ownership
by such group.
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 2006, 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 Board of Directors of the Company is committed to sound corporate
governance practices. The Board of Directors believes that its corporate
governance practices enhance its ability to achieve the Company's goals and to
govern the Company with high standards of integrity.
The Company's Board of Directors has three standing committees: an
Executive Committee, an Audit Committee and a Compensation Committee. During
2006, the Board of Directors had six (6) meetings. During 2006, each Director
attended 100 percent of these meetings and the meetings of committees on which
he served.
Executive Committee. The Executive Committee, acting with the full
authority of the Board of Directors, approves minutes, monthly operating
reports, capital expenditures, banking matters, and other issues requiring
immediate attention. During 2006, the Executive Committee held no meetings.
-10-
Audit Committee. The Audit Committee advises the Board of Directors
and provides oversight on matters relating to the Company's financial
reporting process, accounting functions and internal controls, and the
qualifications, independence, appointment, retention, compensation and
performance of the Company's independent registered public accounting firm.
The Audit Committee also provides oversight with respect to the legal
compliance and ethics programs established by management and the Board of
Directors. The Company's Code of Business Conduct and Ethics, as adopted by
the Board of Directors on February 4, 2004 is available on the Company's
website at www.easterncompany.com. During 2006, the Audit Committee held
six (6) meetings.
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.
The Board of Directors adopted the Company's Compensation Committee Charter
on December 13, 2006, and it is available on the Company's website at
www.easterncompany.com. During 2006, the Compensation Committee held two
(2) meetings.
The Company does not have a standing nominating committee. Rather, due to
the small size of the Company's Board of Directors, the independent members of
the Board of Directors consider director nominees. As defined by the rules and
regulations of the American Stock Exchange, the independent members of the Board
of Directors of the Company include all of the members of the Board of Directors
other than the chairman, president and chief executive officer of the Company.
These independent directors select and nominate individuals for election to the
Board of Directors. A copy of the charter describing the nominations process for
directors is available on the Company's website at www.easterncompany.com.
Each member of the Board of Directors must have the ability to apply good
business judgment and must be able to exercise his or her duties of loyalty and
care. Candidates for the position of director must exhibit proven leadership
capabilities and high integrity, exercise high level responsibilities within
their chosen careers, and have an ability to quickly grasp complex principles of
business and finance. In general, candidates will be preferred to the extent
they hold an established executive level position in business, finance, law,
education, research, government or civic activities. When current members of the
Board of Directors are considered for nomination for reelection, their prior
contributions to the Board of Directors, their performance and their meeting
attendance records are taken into account.
The independent members of the Board of Directors will consider director
nominees who are identified either by the directors, by the shareholders, or
through some other source. The independent members of the Board of Directors may
also utilize the services of a third party search firm to assist them in the
identification or evaluation of director candidates, as they deem necessary or
appropriate.
Shareholders wishing to submit the names of qualified candidates for
possible nomination to the Board of Directors may make such a submission by
sending to the Board of Directors (in care of the Secretary of the Company) the
information described in the Company's Bylaws. This information generally must
be submitted not more than 90 days nor less than 60 days prior to the first
anniversary of the preceding year's annual meeting.
The independent members of the Board of Directors will make a preliminary
assessment of each proposed nominee based upon his or her resume and
biographical information, the individual's willingness to serve as a director,
and other background information. This information is evaluated against the
criteria described above and the specific needs of the Company at the time.
Based upon a preliminary assessment of the candidate(s), those who appear best
suited to meet the needs of the Company may be invited to participate in a
series of interviews, which are used as a further means of evaluating potential
candidates. On the basis of information learned during this process, the
independent members of the Board of Directors will determine which nominee(s)
they will recommend for election to the Board of Directors. The independent
members of the Board of Directors use the same process for evaluating all
nominees, regardless of the original source of the nomination.
-11-
DIRECTOR COMPENSATION
Change in
pension value
and
Non-equity nonqualified
Fees Earned Incentive deferred All
or Paid in Stock Option Plan compensation Other
Cash Awards Awards Compensation earnings Compensation Total
Name (1) ($) (2) ($) ($) ($) ($) ($) (3) ($)
-------- ----------- ------- ------ ------------ ------------- ------------ -----
John W. Everets $24,612 $395 $25,007
Charles W. Henry 24,604 395 24,999
David C. Robinson 24,600 395 24,995
Donald S. Tuttle III 24,605 395 25,000
Russell G. McMillen (4) 15,688 - 15,688
(1) This table discloses 2006 director compensation. All non-employee
directors who served as a director in 2006 received compensation.
(2) In 2006, The Eastern Company paid non-employee directors an annual
rate of $24,600, which was paid in Common Shares of the Company or
cash, in accordance with the Directors Fee Program adopted by the
shareholders on March 26, 1997 and amended on January 5, 2004. The
amounts listed could include adjustments for fractional shares from
previous periods. The directors make an annual election, within a
reasonable time before their first quarterly payment, to receive their
fees in the form of cash, stock or a combination thereof. The election
remains in force for one year. Messrs. Henry, Robinson, Tuttle and
McMillen elected to receive all or a portion of their director
compensation in stock.
(3) All non-employee directors are provided a $50,000 life insurance
benefit.
(4) Mr. McMillen is an emeritus director and is compensated for meetings
that he attends.
POLICIES AND PROCEDURES CONCERNING RELATED PERSONS TRANSACTIONS
Our Code of Business Conduct and Ethics prohibits all conflicts of interest
between the Company and any of its directors, officers and employees, except
under guidelines approved by the Board of Directors or committees of the Board
of Directors. A conflict of interest exists whenever an individual's private
interests interfere or conflict in any way (or even appear to interfere or
conflict) with the interests of the Company. Employees are encouraged to report
any conflicts of interest, or potential conflicts of interest, to their
supervisors or superiors. However, if they do not believe it appropriate or if
they are not comfortable approaching their supervisors or superiors about their
concerns or complaints, then they may contact either the chairman of the Audit
Committee of the Board of Directors or Company counsel. The Code of Business
Conduct and Ethics is available for review at our website at
www.easterncompany.com.
To identify related party transactions, each year the Company requires our
directors and executive officers to complete a questionnaire that identifies any
transaction with the Company or any of its subsidiaries in which the director or
executive officer or their family members have an interest. If any related party
transactions are reported, the Board of Directors reviews them to determine if
the potential for a prohibited conflict of interest exists. Prior to its review,
the Board of Directors will require full disclosure of all material facts
concerning the relationship and financial interest of the relevant individuals
in the transaction. Each year, our directors and executive officers also review
our Code of Business Conduct and Ethics.
-12-
COMPENSATION DISCUSSION AND ANALYSIS
Compensation Governance
The Compensation Committee of the Board of Directors is established
pursuant to a resolution adopted by the Board of Directors. The Committee
recommends to the Board of Directors policies and processes for the regular and
orderly review of the performance and compensation of the Company's senior
executive management personnel, including the Chairman, President and Chief
Executive Officer. The Committee regularly reviews, administers, and when
necessary recommends changes to the Company's stock incentive and
performance-based compensation plans. The Compensation Committee has adopted a
charter and it is available on the Company's website at www.easterncompany.com.
The Committee is comprised of members of the Board of Directors, none of
whom may be an active or retired officer or employee of the Company or any of
its subsidiaries. Members of the Compensation Committee are appointed annually
by the Board of Directors. Messrs. David C. Robinson, Donald S. Tuttle III, John
W. Everets, and Charles W. Henry were the members of the Compensation Committee
during fiscal 2006. Mr. Robinson is the Chairman of the Committee. The
Compensation Committee held two meetings during the year ended December 30,
2006.
This report by the Compensation Committee will focus on:
The guiding principles and objectives underlying the Company's compensation
program, including what performance the program is designed to reward; and
A description of each of the components of the compensation program,
including an explanation of why these elements have been selected as the
preferred means to achieve the compensation program's objectives, and how
the amount of each element of compensation is determined.
Principles and Objectives of the Compensation Program
The Company's compensation programs and policy are designed to attract,
motivate, retain and reward highly qualified executives and employees, and to
reinforce the relationship between individual performance and business results
in a manner that aligns the interests of executives and shareholders. The
following principles guide the Company's compensation practices as applied to
all executives.
Compensation levels should be sufficiently competitive to attract and retain
highly qualified executives and employees.
The Company endeavors to pay compensation at levels consistent with
prevailing levels of compensation for similar positions in the geographic areas
in which the Company maintains operations, in order to enable it to attract and
retain the talent needed to achieve its business objectives. The Compensation
Committee has used various sources to evaluate the competitiveness and overall
structure of executive compensation and non-employee director compensation.
Compensation should be related to performance and should reinforce cooperation
and a team-based approach to achieving business success.
The Company believes that a significant portion of executive compensation
should take the form of annual incentives that generally reflect the results of
operations achieved by the Company and its subsidiaries. Under this policy
executives typically receive annual incentives. The Company believes that its
policy of paying annual incentives based on individual and overall results of
operations supports an integrated business model and a team-based approach.
-13-
Compensation should reflect position and responsibility, and compensation for
named executive officers should be more heavily weighted toward incentive pay.
Total compensation should generally increase with position and
responsibility. Employees in named executive officer positions have greater
roles and responsibilities associated with achieving the Company's performance
goals, and therefore should have a greater portion of their compensation tied to
the achievement of those goals. Accordingly, a greater percentage of
compensation for more senior positions, particularly those with the greatest
responsibility for driving achievement of performance targets, is paid in the
form of short- and long-term incentive pay.
Incentive compensation should be flexible and responsive to the Company's
business environment, and should strike a balance between short-term and
long-term performance.
The Company's incentive compensation program is balanced between short- and
long-term incentive compensation. Short-term incentive compensation -- annual
cash incentives -- are awarded based on business units and other performance
criteria. This design achieves our objective of offering superior pay for
superior performance. Long-term incentive compensation is an important component
of the Company's total compensation for executives. The Company's long-term
incentive compensation program has used stock options and restricted stock
awards as a long-term performance incentive. The Committee believes that the
Company's stock incentive program provides executives with the opportunity to
increase their ownership in the Company, thereby more closely aligning the best
interest of the shareholders and the executives.
Components of the Compensation Program
Base salary
Base salaries are set after review of market data for similar positions,
and are reviewed annually. The market data used for 2007 was Watson Wyatt Data
Services survey report on Top Management Compensation in the manufacturing
sector.
The compensation of the Company's Chairman, President and Chief Executive
Officer Leonard F. Leganza is determined pursuant to the terms and conditions of
an employment agreement between Mr. Leganza and the Company, entered into
effective February 22, 2005. Pursuant to the terms of the employment agreement,
Mr. Leganza is entitled to receive base compensation at a rate determined by the
Board of Directors. As a result, Mr. Leganza received an annual base salary of
$475,000 for the fiscal year ended December 30, 2006. The Compensation Committee
increased Mr. Leganza's annual base salary from $475,000 to $550,000 effective
December 31, 2006.
The compensation of named executive officer John L. Sullivan III, Vice
President and Chief Financial Officer is determined annually by the Compensation
Committee and approved by the Board of Directors. Mr. Sullivan's base salary was
$240,000 for the fiscal year ended December 30, 2006. Effective December 31,
2006, Mr. Sullivan received an increase in his rate of base pay to $250,000.
Short-Term Incentives -- Annual Cash Incentives
The named executive officers are eligible to receive incentive compensation
based on the combined performance of the company's nine (9) business units with
respect to two specific financial goals for each business unit as related to
their annual operating plans. 75% of the incentive compensation is determined by
the combined business units operating earnings performance and 25% on working
capital efficiency. All incentive payments are subject to approval by the
Compensation Committee.
During 2006 if the combined business units achieved the earnings plan, a
target award of 30% would be earned. A threshold payment of 10% of the target
award would be made if the combined business units achieved 80% of the plan and
a maximum payment of 100% of the target award would be made if the combined
business units achieved at least 155% of the plan. No payment would be made if
the combined business units failed to achieve 80% of the plan.
-14-
If the combined business units achieved a working capital ratio to sales of
26%, a target award of 30% could be earned. A threshold payment of 10% of the
target award would be made if the combined business units' working capital ratio
was 28% and a maximum payment of 100% of the target award would be made if the
combined business units' working capital ratio was 19%.
Retirement and other Post-Termination Plans
401(k) Plans
The Company maintains a savings and investment plan (the "SIP Plan") for
eligible employees, including executive officers. 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 $15,000 for
calendar year 2006, plus an additional $5,000 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 2006 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.
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.
An employee reaches his or her normal retirement date and can begin
benefits without reduction upon reaching age 65 (or, if later, the earlier of
the attainment of age 70 or the completion of five years of participation in the
plan). An employee reaches his or her early retirement date when he or she
reaches age 55 after completing 20 years of service. An employee who is eligible
for early retirement can elect to begin to receive his or her benefits on an
actuarially reduced basis. In addition, if an employee's age and years of
service equal at least 90, the employee can elect to begin to receive his or her
benefits with a smaller reduction for early commencement than is otherwise
applicable for early retirement.
Supplemental Benefit Plans
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.
-15-
Employment Agreement
On February 22, 2005, the Company executed an Employment Agreement (the
"Agreement") with the Company's President and Chief Executive Officer, Leonard
F. Leganza. The term of the Agreement will expire on December 31, 2007, subject
to renewal for one or more additional one-year periods.
Under the terms of the Agreement, Mr. Leganza would serve as the President
and Chief Executive Officer of the Company through December 31, 2006, and become
the Chairman of the Board of Directors of the Company on January 1, 2007. On
December 13, 2006, Mr. Leganza was appointed Chairman of the Board, as well as
President and Chief Executive Officer. During the term of the Agreement, Mr.
Leganza will be entitled to receive base compensation at a rate determined by
the Board of Directors, and will also be eligible to participate in the
Company's incentive plans.
If Mr. Leganza's employment as President and Chief Executive Officer
terminates for any reason other than for cause (as defined in the Agreement),
Mr. Leganza will be entitled to receive deferred compensation equal to $100,000
per year for five years (pro rated if he both ceases to be President and Chief
Executive Officer and terminates his service as a member of the Board of
Directors prior to January 1, 2008). The deferred compensation will begin on the
later of January 1, 2008 or the date on which he ceases to be President and
Chief Executive Officer. However, the deferred compensation will begin earlier
than January 1, 2008 if he both ceases to be President and Chief Executive
Officer and terminates his service as a member of the Board of Directors prior
to that date.
If Mr. Leganza's employment is terminated without cause, Mr. Leganza and
his spouse will continue to be entitled to participate in the Company's group
medical insurance plan.
Pension Benefits Table
The following table provides certain information regarding the present
value of accumulated benefits under the Company's qualified and nonqualified
defined benefit pension plans:
Number of Years Present Value
of Credited of Accumulated Payments During
Name Plan Name Service Benefit (1) Last Fiscal Year
------------------ ------------------- --------------- -------------- -----------------
Leonard F. Leganza Salaried Employees 9 $321,647 -
Retirement Plan of
The Eastern Company
Supplemental 9 $391,212 -
Retirement Plan for
the Chief Executive
Officer of The
Eastern Company
Deferred $410,020 (2) -
compensation under
Employment
Agreement between
the Company and Mr.
Leganza dated
February 22, 2005
John L. Sullivan III Salaried Employees 30 $360,675 -
Retirement Plan of
The Eastern Company
(1) Present value is determined by reference to the 1983 GAM (blended)
mortality table and an interest rate of 7%.
(2) This benefit represents the present value of deferred compensation of
$100,000 per year payable for five years and commencing on January 1,
2007 as if Mr. Leganza had terminated employment without cause and
ceased to be a member of the Board of Directors of the Company on that
date.
-16-
COMPENSATION COMMITTEE REPORT
We, the Compensation Committee of the Board of Directors of the Company,
have reviewed and discussed the Compensation Discussion and Analysis set forth
above with management and, based on such review and discussions, have
recommended to the Board of Directors inclusion of the Compensation Discussion
and Analysis in this proxy statement and, through incorporation by reference
from this proxy statement, in the Company's annual report on Form 10-K for the
fiscal year ended December 30, 2006.
Compensation Committee:
John W. Everets
Charles W. Henry
David C. Robinson, Chairman
Donald S. Tuttle III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the 2006 fiscal year, no member of the Compensation Committee was,
or had previously been, an officer or employee of the Company or its
subsidiaries or had any direct or indirect material interest in a transaction
with the Company or in a business relationship with the Company that would
require disclosure under the applicable rules of the Securities and Exchange
Commission. In addition, no interlocking relationship existed between any member
of the Compensation Committee or an executive officer of the Company, on the one
hand, and any member of the compensation committee (or committee performing
equivalent functions, or the full board of directors) or an executive officer of
any other entity, on the other hand.
-17-
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 year ended December 30,
2006 of those persons who, at December 30, 2006 were (i) the Chairman of the
Board, President and Chief Executive Officer; and (ii) the Vice President and
Chief Financial Officer (collectively, the "Named Officers").
Change in
Pension value
and non-
qualified
Non-Equity compen- All Other
Name and Principal Stock Option Incentive Plan sation Compen-
Position as of Salary Bonus Awards Awards Compensation earnings sation Total
December 30, 2006 Year ($) (1) ($) ($) ($) ($) (2) ($) (3) ($) ($)
------------------ ---- ---------- ------- ------- ------ -------------- -------------- --------- ------
Leonard F. Leganza, 76 2006 $475,000 $329,686 - - - $ 48,368 $ 23,877 $876,931
Chairman of the Board,
President and CEO (4)
John L. Sullivan III, 54 2006 240,000 166,578 - - - 48,976 23,730 479,284
Vice President and
CFO (5)
(1) Amounts shown were earned in 2006 and paid in 2007.
(2) The amount shown reflects the aggregate change in the actuarial present
value of each named executive officer's accumulated benefit under all
defined benefit plans, including supplemental plans, from December 31, 2005
to December 31, 2006. For Mr. Leganza, accruals under the qualified defined
benefit plan equaled $51,761 and under the SERP equaled ($3,393). For Mr.
Sullivan, accruals under the qualified defined benefit plan equaled
$48,976.
(3) All Other Compensation includes Company 410(k) matching contributions, cost
for use of a company-owned vehicle, company paid term life insurance
premiums, life insurance under the Company's defined benefit plan and the
value of life insurance in excess of $50,000. Matching contributions for
Mr. Leganza equal $4,400 and for Mr. Sullivan equal $4,400. Cost for use of
a company-owned vehicle for Mr. Leganza equals $8,250 and Mr. Sullivan
equals $5,350. Term life insurance premiums for Mr. Leganza equal $1,957
and for Mr. Sullivan equal $2,056. The value of life insurance in excess of
$50,000 for Mr. Leganza equals $4,882 and for Mr. Sullivan equals $1,238.
Life insurance under the Company's defined benefit plan for Mr. Leganza
equals $4,388 and for Mr. Sullivan equals $10,686.
(4) Mr. Leganza was appointed as the Chairman of the Board on December 13, 2006
and became President and CEO on April 23, 1997.
(5) Mr. Sullivan was appointed Chief Financial Officer on December 13, 2006.
Prior to that, he was the Vice President, Treasurer and Secretary of the
Company.
-18-
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 expired on
February 8, 2005. No additional options or shares of restricted stock may be
granted under the 1995 Plan. However, options previously granted remain
exercisable in accordance with their terms.
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 337,500 shares to 487,500 shares (as adjusted
for stock splits).
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 450,000
shares (as adjusted for stock splits).
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.
Incentive stock options generally may not be granted under the 2000 Plan 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, stock appreciation rights or long-term incentive awards to any Named
Officers during the year ended December 30, 2006. No outstanding stock options
were exercised by any Named Officers during the year ended December 30, 2006.
-19-
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Option Awards Stock Awards
------------------------------------------------------------------------- -----------------------------------------
Equity
incentive
Equity plan
incentive awards:
Market plan Market
Equity Number value of awards: or payout
incentive of shares Number of value of
plan shares or unearned unearned
Number of awards: or unit units shares, shares,
Number of securities Number of of of units or units or
securities underlying securities stock stock other other
underlying unexercised underlying that that rights rights
unexercised options unexercised Option have have that that
Option options (#) unearned exercise Option not not have not have not
Grant (#) (1) Un- options price expiration vested vested vested vested
Name Date Exercisable exercisable (#) ($) date (#) ($) (#) ($)
--------- --------- ----------- ----------- ------------ -------- --------- ------- ------- ---------- ---------
Leonard F. 9/17/1997 15,124.50 - - $ 6.61 9/17/2007 - - - -
Leganza
9/17/1997 29,875.50 - - 6.61 9/17/2007 - - - -
12/16/1997 56,250.00 - - 7.95 12/16/2007 - - - -
9/9/1998 10,712.25 - - 9.33 9/9/2008 - - - -
9/9/1998 56,787.75 - - 9.33 9/9/2008 - - - -
12/15/1999 19,671.00 - - 10.17 12/15/2009 - - - -
12/15/1999 62,829.00 - - 10.17 12/15/2009 - - - -
7/19/2000 48,750.00 - - 9.50 7/19/2010 - - - -
John L. 12/16/1997 7,500.00 - - 7.95 12/16/2007 - - - -
Sullivan III
7/21/1999 18,750.00 - - 12.33 7/21/2009 - - - -
12/15/1999 15,000.00 - - 10.17 12/15/2009 - - - -
7/19/2000 30,000.00 - - 9.50 7/19/2010 - - - -
4/26/2001 22,500.00 - - 9.60 4/26/2011 - - - -
(1) Stock Options granted under the Company's Executive Incentive Plans
-20-
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
The Employment Agreement between the Company and Mr. Leganza dated February
22, 2005 (the "Agreement") provides certain change in control benefits.
If Mr. Leganza's employment is terminated after a change in control of the
Company (as defined in the Agreement), Mr. Leganza will be entitled to receive a
lump sum severance payment equal to 2.99 times his average adjusted compensation
(as defined in the Agreement). However, this amount will be reduced to the
extent necessary to avoid the applicability of Section 280G of the Internal
Revenue Code. Following a change in control, Mr. Leganza will also be entitled
to receive the deferred compensation and medical benefits, whether or not his
termination of employment is for cause.
Pursuant to the terms of the Agreement, Mr. Leganza has entered into
certain noncompetition, nonsolicitation and nondisclosure covenants with the
Company.
The Agreement supersedes the terms of the prior severance agreement between
the Company and Mr. Leganza dated February 21, 2001.
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.
The following table provides certain information regarding the benefits
payable under the change in control agreements, based on compensation received
for the fiscal year ending December 30, 2006:
Absent a change in control Following a change in control
------------------------------ --------------------------------
Termination Termination Termination Termination
For Without Cause For Without Cause
Name Cause Cause
-------------------- ------------- ----------- ------------- ----------- --------------
Leonard F. Leganza Medical $0 $ 9,395 $ 9,395 $ 9,395
continuation
Deferred 0 410,020 410,020 410,020
compensation
Lump sum 0 0 1,644,500 1,644,500
severance
-- ------- --------- ---------
Total 0 419,415 2,063,915 2,063,915
John L. Sullivan III Lump sum 0 0 0 250,000
severance (1)
-- -- -- -------
Total 0 0 0 250,000
(1) Mr. Sullivan's lump sum severance benefit is payable only if an unfriendly
change in control occurs.
-21-
SHAREHOLDER RETURN PERFORMANCE INFORMATION
The U.S. Securities and Exchange Commission requires that the Company
include in its Annual Report on Form 10-K the line graph presented below. The
Company is also including the graph in this proxy statement for the Company's
shareholders' ease of reference.
The following graph sets forth the Company's cumulative total shareholder
return based upon an initial $100 investment made on December 31, 2001 (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-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
Eastern Co. $100 $ 95 $139 $183 $182 $277
Wilshire 5000 $100 $ 79 $104 $117 $125 $144
S&P (C) Industrial Machinery $100 $ 99 $137 $162 $159 $181
Copyright (C) 2007, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
-22-
ADDITIONAL INFORMATION
Any shareholder who intends to present a proposal at the 2008 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
20, 2007. Any shareholder who intends to present a proposal at the 2008 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 26, 2008 and no
later than February 25, 2008.
It is the Company's policy to have the members of the Board of Directors
attend the Annual Meeting, to the extent feasible. All of the members of the
Board of Directors attended the 2006 Annual Meeting.
If any shareholder wishes to send communications to the Board of Directors
or to any member of the Board of Directors, he or she may do so by sending such
communications to the Board of Directors or to the individual director in care
of The Eastern Company, 112 Bridge Street, P.O. Box 460, Naugatuck, Connecticut
06770. All such communications will be delivered to the Board of Directors or to
the individual director in strict confidence.
FORM 10-K ANNUAL REPORT
A copy of the Company's annual report on Form 10-K as filed with the
Securities and Exchange Commission for the fiscal year ended December 30, 2006
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. Form 10-K is also available on the Company's
website at www.easterncompany.com.
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.
Theresa P. Dews
Secretary
March 19, 2007
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EXHIBIT `A'
The Eastern Company
AUDIT COMMITTEE CHARTER
(1) General
There shall be a committee of the Board which shall be called the Audit
Committee (the "Committee").
The Committee shall consist of no fewer than three members. Each member of the
Committee shall satisfy the independence, experience and financial expertise
requirements of Section 10A of the Securities Exchange Act of 1934 (as amended
by the Sarbanes-Oxley Act of 2002, and the rules promulgated thereunder) and the
rules and regulations of the American Stock Exchange. Directors' fees are the
only compensation that a Committee member may receive from the Company.
The Board shall appoint the members of the Committee annually, considering the
views of the president and chief executive officer, as appropriate. The members
of the Committee shall serve until their successors are appointed and qualify,
and shall designate the chairman of the Committee. The Board shall have the
power at any time to change the membership of the Committee and to fill
vacancies in it, subject to such new member(s) satisfying the independence,
experience and financial expertise requirements referred to above.
The Committee shall meet on at least a quarterly basis.
Except as expressly provided in this Charter or the by-laws of the Company or as
otherwise provided by law or the rules of the American Stock Exchange, the
Committee shall fix its own rules of procedure.
(2) Statement of Purpose and Policy
The Committee shall provide assistance to the Board 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,
the independent auditors, the internal auditors, and the 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 with the power to retain
outside counsel or other experts for this purpose.
(3) Audit Committee Authority and Responsibilities
The Committee shall have the authority to appoint or replace the Company's
independent accounting firm (subject, if applicable, to shareholder
ratification), and shall approve all audit engagement fees and terms and all
non-audit engagements with the independent accounting firm. The Committee shall
consult with management but shall not delegate these responsibilities, except
that pre-approvals of non-audit services may be delegated to a single member of
the Committee. In its capacity as a committee of the Board, the Committee shall
be directly responsible for the oversight of the work of the independent
accounting firm (including resolution of disagreements between management and
the independent accounting firm regarding financial reporting) for the purpose
of preparing or issuing an audit report or related work, and the independent
accounting firm shall report directly to the Committee.
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The Committee shall have the authority, to the extent it deems necessary or
appropriate, to retain special legal, accounting or other consultants to advise
the committee and carry out its duties, and to conduct or authorize
investigations into any matters within its scope of responsibilities. The
Committee shall meet periodically with management and the independent accounting
firm in separate executive sessions in furtherance of its purposes.
The Committee may request any officer or employee of the Company or the
Company's outside counsel or independent accounting firm to attend a meeting of
the Committee or to meet with any members of, or consultants to, the Committee.
The Committee shall make regular reports to the Board. The Committee shall
review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval. The Committee shall annually review
the Committee's own performance.
In performing its functions, the Committee shall undertake those tasks and
responsibilities that, in its judgment, would most effectively contribute and
implement the purposes of the Committee. The following functions are some of the
common recurring activities of the Committee in carrying out its oversight
responsibility:
Review and discuss with management and the independent accounting firm the
Company's annual audited financial statements, including disclosures made
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations" or similar disclosures, and the matters required to be
discussed pursuant to the Statement on Auditing Standards No. 61, and
recommend to the Board whether the audited financial statements should be
included in the Company's Form 10-K.
Review and discuss with management and the independent accounting firm the
Company's quarterly financial statements, including disclosures made under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" or similar disclosures, and the matters required to be
discussed pursuant to the Statement on Auditing Standards No. 61, prior to
the filing of its Form 10-Q, including the results of the independent
accounting firm's reviews of the Company's quarterly financial statements
to the extent applicable.
Review and discuss with management and the independent accounting firm, as
applicable: (a) major issues regarding accounting principles and financial
statement presentations, including any significant changes in the Company's
selection or application of accounting principles, and major issues as to
the adequacy of the Company's internal controls and any special audit steps
adopted in light of material control deficiencies; (b) analyses prepared by
management or the independent accounting firm setting forth significant
financial reporting issues and judgments made in connection with the
preparation of the financial statements, including analyses of the effects
on the financial statements of alternative methods under generally accepted
accounting principles ("GAAP"); (c) any management letter provided by the
independent accounting firm and the Company's response to that letter; (d)
any problems, difficulties or differences encountered in the course of the
audit work, including any disagreements with management or restrictions on
the scope of the independent accounting firm's activities or on access to
requested information and management's response thereto; (e) the effect of
regulatory and accounting initiatives, as well as off-balance sheet
structures, on the financial statements of the Company; and (f) earnings
press releases (paying particular attention to any use of "pro-forma," or
"adjusted" non-GAAP, information), as well as financial information and
earnings guidance (generally or on a case-by-case basis) provided to
analysts and rating agencies.
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.
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.
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Establish and review procedures for the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential, anonymous
submission by Company employees of concerns regarding questionable
accounting or auditing matters.
Review and discuss all relationships which the independent accounting firm
has with the Company in order to consider and evaluate the independent
accounting firm's continued independence, ensure the rotation of the lead
(or coordinating) audit partner and other significant audit partners, and
establish clear hiring policies for employees or former employees of the
independent accounting firm who are proposed to be hired by the Company.
When applicable, review the independent accounting firm's attestation to
management's report included in the annual report on Form 10-K which
evaluates the Company's internal controls and procedures for financial
reporting.
Review any reports of the independent accounting firm mandated by Section
10A of the Securities Exchange Act of 1934, as amended, and obtain from the
independent accounting firm any information with respect to illegal acts in
accordance with Section 10A.
Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
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.
(4) Limitations of Audit Committee's Roles
While the Committee has the responsibilities and powers set forth in its
Charter, it is not the duty of the Committee to prepare financial statements, to
plan or conduct audits, or to determine that the Company's financial statements
and disclosures are complete and accurate and are in accordance with GAAP and
applicable rules and regulations. These are the responsibilities of management
with advice from the independent accounting firm.
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PROXY
THE EASTERN COMPANY
112 Bridge Street, P.O. Box 460, Naugatuck, CT 06770-0460
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby appoints David C. Robinson and Donald S. Tuttle III 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 25, 2007 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, 2 and 3 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, 2 and 3.
(Continued and to be signed on the reverse side)
Annual Meeting of Shareholders of
THE EASTERN COMPANY
April 25, 2007
MAIL - Sign, date and mail your proxy card
in the envelope provided as soon as possible.
-OR-
TELEPONE - Call toll-free 1-800-PROXIES
(1-800-77609437) from any touch-tone telephone
and follow the instructions. Have your control
number and proxy card available when you call.
Please detach and mail in the envelope provided.
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The Board of Directors recommends a vote FOR proposals 1, 2 and 3
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 one Director for a 3-year term:
NOMINEE:
[ ] FOR NOMINEE ( ) C.W. Henry
[ ] AGAINST NOMINEE
2. Approve the amendment to the Company's FOR AGAINST ABSTAIN
Certificate of Incorporation to [ ] [ ] [ ]
increase the number of authorized shares
of Common Stock.
3. Ratify the appointment of the independent FOR AGAINST ABSTAIN
registered public accounting firm [ ] [ ] [ ]
(UHY LLP)
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
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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.