UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
of the securities exchange act of 1934
For the transition period from ___________________ to ___________________
Commission file number 0-1489
BEST UNIVERSAL LOCK CO.
(Exact name of registrant as specified in its charter)
DELAWARE 91-0144790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 50444, INDIANAPOLIS, INDIANA 46250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 849-2250
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT NOMINAL OR PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(Any sales of the registrant's stock by nonaffiliates within 60 days prior to
the date of filing would have sold at a price unknown to the
registrant.)
Indicate the number of shares outstanding of each of the registrant's classes
of common, as of February 9, 1996.
SERIES A COMMON STOCK 86,469 SHARES
SERIES B COMMON STOCK 300,000 SHARES
Documents incorporated by reference: List the following documents if
incorporated by reference and the part of the form 10-K into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1993. The listed documents should be clearly
described for identification purposes.
NONE
BEST UNIVERSAL LOCK CO. (a nonoperating holding company)
FORM 10-K ANNUAL REPORT
INDEX
Item No. Page
And Title No.
--------- ----
1 Description of Business 3
2 Properties 6
3 Pending Legal Proceedings 6
4 Submission of Matters to a Vote of Security Holders 7
5 Market for the Registrant's Common Stock and Related
Security-Holder Matters 7
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
8 Financial Statements and Supplementary Data 16
9 Disagreements on Accounting and Financial Disclosure 44
10 Directors and Executive Officers of the Registrant 44
11 Executive Compensation 46
12 Security Ownership of Certain Beneficial Owners
and Management 49
13 Certain Relationships and Related Transactions 52
14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 53
Signatures 54
Index to Exhibits 55
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS. Registrant was organized
in 1923 as a Corporation under the laws of the State of Washington and was
reincorporated in 1995 under the laws of the State of Delaware. Neither the
registrant nor any subsidiary has ever been the subject of any bankruptcy,
receivership or similar proceedings. There has not been any material
reclassification, merger, consolidation, nor changes in the mode of conducting
business of the registrant or of any of its significant subsidiaries during the
fiscal year just ended, other than the reincorporation described above.
Registrant originally obtained certain licenses and
assignments of patent rights to a removable key-controlled core mechanism and
other inventions and started the manufacture of certain of the Best locking
devices incorporating said removable key-controlled core mechanism.
About 1928 registrant reassigned and transferred its
equipment, inventory and patents to its subsidiary, Best Lock Corporation, in
exchange for controlling stock; and Best Lock Corporation has continued since
said date, in its own right or through its agents and its totally-held
subsidiaries, to manufacture and sell Best locking devices.
Since registrant is a nonoperating parent of Best Lock
Corporation, it is necessary to include a description of Best Lock Corporation's
business in order to understand the character and development of the total
enterprise. The following, therefore, is a description of the business of Best
Lock Corporation (hereinafter sometimes referred to as "Lock").
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
(1) Industry segments. Lock is engaged in only one
industry segment. All reports and comments in this Form 10-K apply to that one
industry.
(2) Lines of business. Lock is engaged in only one line of
business, i.e., the manufacture or sourcing, distribution and sale of access
control products and related services.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
(1) The principal business of Lock is the manufacture or
sourcing, distribution and sale of access control products and services,
primarily including locks, lock components and adaptations. Lock specializes in
providing locking systems for commercial end-users, including institutional,
industrial and government facilities.
(i) Lock's mechanical locking system is built
around a removable key-controlled core and housing utilizing the tumbler system.
The sale of Lock's system of locks includes the adaptation of other lock
manufacturers' hardware to receive this removable key-controlled core and
housing which is manufactured by Lock. Additionally, Lock has supplemented its
product offerings to end-users with other access control and auxiliary products.
Best Lock Corporation's mechanical locks,
lock components and adaptations are manufactured or assembled in its plant
located in Indianapolis, Indiana and sold by Lock through sales representatives
throughout the United States, Canada and
3
other countries. Lock's representatives are independent representatives
maintaining separate inventories, or corporate-owned sales offices, both
selling directly to end-users.
Lock does not manufacture all of the access
control products it sells, but purchases a number of such items from other
manufacturers. Lock is not exclusively represented by any regional hardware
house as are most of the large lock manufacturers but its products are sold
through many regional hardware houses as a modification of their regular lines.
In connection with the sale of its system of locks, Lock assists in maintaining
and setting up for its customers a masterkey plan for proper control and
security of the customer's locking system.
Lock sells its products in the United States
and abroad. Some of its foreign sales are made by its agent and totally-held
subsidiary, Best Universal Locks Limited, of the Province of Ontario, Canada.
Lock's sales have generally increased during the past five years.
Information as to approximate percentage of
total sales revenue of classes of similar products for each of the specified
fiscal years is as follows. It is not believed that the changes in percentages
represent a material change in the mix of the product line.
Name of Class 1995 1994 1993
------------- ---- ---- ----
Door Security Products 68% 67% 67%
All Others 32 33 33
There have not been any significant changes
in the kinds of products produced or products or services sold since the
beginning of the fiscal year.
Lock is continuing its program of selling to
contract hardware houses in an attempt to enlarge its sales to new construction
projects.
(ii) There has not been any public announcement
of a new product or industry segment which would require the investment of a
material amount of the assets of Lock during the next fiscal year.
(iii) The raw materials essential to Lock's
manufacturing business are standard metals in bar stock of various cross-
sectional shapes. Approximately 80% of the shapes are standard and
approximately 20% are specially made. The majority of essential raw materials
are purchased from three midwestern suppliers. There are no significant
problems related to the procurement of raw materials for Lock's manufacturing
business, other than the normal forces of supply and demand, possible strikes
or other production factors of the suppliers.
(iv) Patents and patent rights have been and are
a significant factor in Lock's business. Lock has a substantial number of
licenses and patent rights relating to the locking art and other mechanical
fields, and has engaged in substantial experimental and developmental work in
connection with such licenses and patent rights. The first patent rights
acquired by registrant were related to the Best Universal removable core. A
number of the early patent rights licensed or otherwise acquired have expired.
Continuing research and development results in patents being issued to Lock on
various aspects of its product line. Legal action related
4
to a recent patent was pursued to trial in early 1995, involving design and
utility patents on a patented keying system. Reference is made to Item 3 for
further discussion. Registrant has several registered trademarks regarding the
use of the word 'Best' in association with security products. These are
considered important and valuable assets of the company.
(v) While there is no particular seasonal factor
in Lock's business, a backlog for its manufacturing business exists for
production planning.
(vi) There is no unusual working capital
requirement by Lock. Normal working capital requirements for inventory and
accounts receivable are met through internal funding or borrowings from outside
bank sources.
(vii) The manufacturing, sourcing, distribution or
selling business of Lock is not dependent upon any one single customer, or very
few customers, the loss of which would have a material adverse effect on Lock.
(viii) Lock's backlog of orders as of the dates
shown below are believed to be firm.
February 9, 1996 $ 4,219,942
March 15, 1995 6,417,949
It is expected that 100% of the backlog on
February 9, 1996 will be filled within the current fiscal year. Lock's order
sales and order flow do not generally reflect any seasonal fluctuations.
(ix) It is not believed that any material portion
of the business of Lock is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the government.
(x) The business of Lock is highly competitive.
The principal methods of competition are in the areas of price, product
performance, delivery and service. There are ten to fifteen major lock
manufacturing companies in the United States, some of which have substantially
greater sales and resources than Lock. These companies manufacture and sell a
wide variety of locks and locking hardware or other access control products.
The major companies also sell masterkeyed systems of locks in competition with
Lock's lock systems.
Due to the fact that registrant and Lock have
been engaged in business for more than sixty-five years and have specialized in
the sale of masterkeyed systems of locks, it believes that Lock is a significant
factor in this specialized field. Since industry statistics are not available,
registrant is not able to state Lock's relative standing in the overall lock
market or in the more specialized masterkeyed system of locks market.
(xi) Registrant did not expend any funds on
research. Lock expended approximately $3,055,000, $3,050,000 and $2,345,000 on
research activities relating to the development of new products or the
improvement of existing products in the years ending December 31, 1995, 1994 and
1993, respectively.
Lock has not engaged in any material customer
sponsored research during the past three fiscal years.
(xii) Lock does not believe there will be any
material effect that compliance with Federal, state or local provisions
regarding the discharge of materials
5
into the environment, or otherwise relating to the protection of the
environment, will have upon the capital expenditures, earnings and competitive
position of Lock or its subsidiary.
Lock estimates it will voluntarily invest
approximately $299,507 during its current and succeeding fiscal year to continue
to enhance the Company's overall environmental standards. This amount includes
capital expenditures ($30,000) and operating expenses of environmental
protection facilities.
(xiii) The staff of registrant, being a nonoperating
holding corporation, consisted of its directors, officers and their assistants,
being five in number. The staff of Lock as of the close of its fiscal year
consisted of approximately 497 production and maintenance employees; and 698
office, sales and executive employees.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES. Lock is engaged, through its totally-held subsidiary, Best
Universal Locks Limited, in sales in Canada. There are other foreign sales
throughout the world. The total of all such foreign sales amounted to
approximately 6%, 7% and 7% of Lock's total sales during 1995, 1994 and 1993,
respectively. The risk and profitability of such business does not differ
substantially from domestic sales.
ITEM 2. PROPERTIES.
Registrant and its parent, Frank E. Best, Inc., do not own or
operate any plants, manufacturing or physical properties. The following is a
description of the properties of registrant's subsidiary, Best Lock Corporation
and its subsidiary.
Manufacturing facilities and engineering and executive offices of
Lock are located in multi-purpose brick and masonry buildings containing a total
of approximately 215,000 square feet of manufacturing space, 30,000 square feet
of warehouse space and 57,000 square feet of office space at 6161 East 75th
Street, Indianapolis, Indiana. The buildings were built specifically for Lock's
use in four major phases in 1958, 1965, 1977 and 1989. Lock is using the
majority of the floor space in the premises. The production facilities located
on the premises include stamping, drilling, broaching, automatic screw machines
and all other equipment used by registrant in its manufacturing business. Lock
also maintains an engineering department, masterkey department, general
accounting, marketing and executive offices in the office portion of the
buildings. These buildings are located on an approximately 50 acre tract of
real estate owned in fee simple by Lock.
Lock and its totally-held subsidiary also occupy corporate sales
distribution offices, six of which are owned in fee simple and 24 of which are
leased. All properties, both owned and leased, together with the related
machinery and equipment contained therein, are considered to be well maintained,
in good operating condition and suitable and adequate for present and
foreseeable future needs.
ITEM 3. PENDING LEGAL PROCEEDINGS.
Best Lock Corporation vs. ILCO - Unican Corporation (Federal
District court, Indianapolis, Cause No. IP 93-1092C). This action by Lock
against ILCO, a North Carolina corporation, charged ILCO with infringement of
Lock's patent, trade dress and trademark right in certain patented keys and
other keys, and with unfair competition.
On August 18, 1995, the court entered an "Order on Joint Motion
to Amend the Final Judgment and for dismissal of Remaining Claims" finding for
the defendant, Ilco Unican Corporation, relating to the validity of U.S. Patent
No. 5,136,869 and U.S. Design patent No. 327, 636; stipulating infringement if
the patents had not been invalid; dismissing with prejudice with
6
respect to Ilco Unican Corporation the remaining claims pertaining to trademark,
trade dress and unfair competition brought by Lock; dismissing without prejudice
the remaining trademark, trade dress and unfair competition declaratory judgment
counterclaims brought by Ilco Unican Corporation and awarding no monetary
damages.
On September 18, 1995, Lock filed Notice of Appeal with the Court
of Appeals for the Federal Circuit.
If the Court of Appeals for the Federal Circuit upholds the trial
court, Lock believes there will be no material adverse impact on the
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Election of Directors at Annual Shareholder Meeting on
October 30, 1995: (A total of 359,546 shares were represented by owner or
proxy).
Votes For
---------
Russell C. Best 355,734
Mariea L. Best 355,657
Gregg A. Dykstra 355,675
Martin O. Nelson 10,830
A proposal to accept an Agreement and Plan of Merger to effect a
reincorporation in the State of Delaware.
For Against Abstain
--- ------- -------
355,706 3,764 76
A proposal to ratify and approve the selection of Arthur Andersen
LLP as auditors for the year 1995.
For Against Abstain
--- ------- -------
358,051 1,439 56
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY-HOLDER
MATTERS.
The registrant's Series A stock is classified as over-the-
counter, and from time to time may be listed in the National Quotation Bureau,
Inc.'s "Pink Sheets." Such quotations may not necessarily represent the value
of actual transactions. As determined by a third party professional appraiser
each year for the purpose of the Best Lock Corporation Stock Bonus Plan, the
value of registrant's Class A shares as of December 27, 1995 and December 31,
1994 was $66.82 and $65.96 per share respectively. There are 746 shareholders
of record of registrant's Series A stock as of February 9, 1996.
7
The registrant's Series B stock is totally-held by its parent,
Frank E. Best, Inc. This stock was valued as of December 27, 1995 and
December 31, 1994 at $73.51 and $72.56 per share, respectively, by a third party
professional appraiser.
The registrant's preferred stock was redeemed on July 1, 1995.
It was valued at $100.00 per share by a third party professional appraiser as of
December 31, 1994.
Dividends have been declared and paid annually in the respective
amounts of $1.67 and $1.66 per share on the Series A common stock, and $1.10 and
$1.09 per share on the Series B common stock. Dividends of $7.00 per share on
the preferred stock were paid annually for both 1995 and 1994. There is no
known restriction on registrant's present or future ability to pay such
dividends other than the availability of sufficient funds. There is a present
expectation that dividends will continue to be paid in the future.
Registrant is utilizing an independent clearinghouse to
facilitate submission of stock deemed to be "abandoned property" under various
state laws. During 1995, 1994, and 1993, 243, 0 and 182 shares respectively,
were submitted to the appropriate state authorities through this clearinghouse.
Such property will be held for various periods of time as required by each state
prior to being placed on the market for disposition.
8
ITEM 6. Selected Financial Data. Page 1 of 2
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1995 THROUGH 1991
The following consolidated summary of selected financial data should be read in
conjunction with the accompanying notes to consolidated financial statements:
1995 1994 1993 1992 1991
-------------- -------------- ------------- ------------- -------------
Net sales $ 118,546,487 $ 104,669,003 $ 98,895,807 $ 84,865,287 $ 74,752,175
Net income (loss) before cumulative
effect of change in accounting principle (3,738,475) 1,514,931 802,612 1,766,630 3,074,244
Net income (3,738,475) 1,514,931 1,275,877 1,766,630 3,074,244
Total assets 68,918,617 71,028,899 64,178,858 62,233,977 61,800,053
Long-term obligations
(excluding deferred taxes) 19,067,424 4,444,971 4,745,065 4,552,378 2,228,349
Common stock and common stock
of Best, redeemable under Stock
Bonus Plan 1,821,647 4,087,473 - - -
Earnings and dividends per common share - see page 2 of 2.
9
ITEM 6
Page 2 of 2
BEST LOCK COMPANIES
BEST LOCK CORPORATION AND SUBSIDIARY
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1995 THROUGH 1991
- --------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
Earnings (loss) per share of common stock:
Best Lock Corporation and Subsidiary
(121,653.85 shares outstanding in 1995;
131,185.85 shares outstanding in 1994;
131,238.85 shares outstanding each year 1993-1991) -
Net income (loss) before cumulative effect of
change in accounting principle $(33.88) $ 16.83 $ 8.76 $ 18.73 $ 32.32
Cumulative effect of SFAS 109 "Accounting
for Income Taxes" $ 0.00 $ 0.00 $ 4.95 $ 0.00 $ 0.00
----- ----- ----- ----- -----
Net income (loss) $(33.88) $ 16.83 $ 13.71 $ 18.73 $ 32.32
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Best Universal Lock Co. and Subsidiaries
(Series A - 86,469 shares and Series B - 300,000
shares outstanding each year) -
Series A -
Net income (loss) $ (9.95) $ 3.92 $ 3.30 $ 4.57 $ 7.95
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Series B -
Net income (loss) $ (9.95) $ 3.92 $ 3.30 $ 4.57 $ 7.95
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Frank E. Best, Inc. and Subsidiaries
(598,710 shares outstanding each year) -
Net income (loss) $ (6.43) $ 1.93 $ 1.45 $ 2.27 $ 3.97
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Dividends per share:
Best Lock Corporation, common $ 5.41 $ 5.40 $ 5.00 $ 4.90 $ 4.70
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Best Universal Lock Co. -
Preferred (7% cumulative) $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Series A Common (Note 2) 1.67 1.66 1.63 1.61 1.59
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Series B Common (Note 2) 1.10 1.09 1.06 1.04 1.02
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Frank E. Best, Inc. Common $ 0.53 $ 0.52 $ 0.51 $ 0.49 $ 0.47
----- ----- ----- ----- -----
----- ----- ----- ----- -----
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since Frank E. Best, Inc. and Best Universal Lock Co. are non-operating parents
of Best Lock Corporation, a discussion of Best Lock Corporation's business is
necessary in order to understand the character and development of the total
enterprise. As the variations between the financial statements of these three
companies are not significant, the discussion and analysis of Best Lock
Corporation is representative of all. The following, therefore, is a discussion
of the business of Best Lock Corporation.
RESULTS OF OPERATIONS - 1995 VS. 1994
The Company experienced record sales of $118.5 million in 1995, up 13% from
1994. Improved sales volume both at the Best Locking Systems Division and at
the Best Lock Manufacturing Division, as well as a decrease in the backlog at
Best Lock Manufacturing, attributed to the increase in sales. Higher material
costs significantly impacted the gross margin for 1995, which decreased from
47.5% of sales to 40.6%. Approximately $1.8 million of the increase in material
costs was related to the redesign of the Company's 9K lever handle lock, which
occurred in late 1994. The Company did not increase the price of this product
to its customers, even though the standard cost per unit increased by
approximately 18% due to the redesign. A task force has been formed for the
purpose of decreasing costs related to the production of the 9K lock by
mid-1996. Higher scrap rates in the production of this product were also
experienced during 1995, which increased costs by approximately $1.0 million.
In addition, the Company disposed of obsolete inventory during the year of
approximately $2.1 million. Salaries, wages and fringe benefits associated with
the manufacture of products increased by approximately $1.9 million during 1995.
Selling, general and administrative, and engineering costs increased by $7.3
million over 1994. During the fourth quarter, the Company announced a
restructuring plan with the goal of significantly reducing payroll-related
expenses. The provisions of the plan include early retirement as well as
voluntary and involuntary separation for employees in certain job
classifications, mostly non-production related. The Company recorded a $3.1
million restructuring charge for anticipated separation and facilities closing
costs associated with this plan. Professional fees were higher than the prior
year by $3.0 million, mainly attributable to assistance required for the
development and installation of new software for the order fulfillment, accounts
payable, and general ledger functions. This software was put into production
during the third quarter of 1995 and the first quarter of 1996. Higher sales
commissions of $485,000, due to higher sales and a change in commission rates,
and increased travel expenses of $366,000 accounted for the remainder of the
increase in selling, general and administrative and engineering expenses.
Research and development expenditures totaled $3.1 million during 1995, a slight
increase over 1994. The Company began marketing its electronic access security
product during the fourth quarter of the year. Other research and development
expenditures related to the development of computer software for internal use.
As a result of the factors described above, operating income decreased by $8.9
million, or 7.5% of sales, to a loss of $6.1 million for 1995. Interest expense
increased by $863,000, due to borrowings against a bank line of credit.
Proceeds from the borrowings were used to finance the purchase of an interest in
Best Lock Partnership (a newly-formed partnership created for the purpose of
acquiring shares of Best and Universal from Walter E. Best and certain other
family members and trusts) and for the payment of severance, vacation and bonus
payments to Walter E. Best, Robert W. Best, Richard E. Best, Marshall W. Best
and Edwina McLemore in exchange for their resignations. $1.2 million of the
proceeds from the borrowings was also
11
used for payment in exchange for covenants not to compete from Walter E. Best,
Robert W. Best, Richard E. Best, and Marshall W. Best.
Other income increased by $748,000 from 1994 to 1995. During 1994, the
Company accrued $701,000 of professional fees relating to the settlement of
claims arising from a derivative action against it by a director, as well as
all claims against the Chief Executive Officer and another officer. These
expenses were reflected in other income (expense) in 1994.
Net income decreased by $6.4 million to a loss of $4.2 million, or 3.5% of sales
in 1995. Income tax benefit was 35.9% of the loss before tax in 1995. For
1994, income tax expense was 8.1% of the income before tax, mainly due to the
generation of tax credits during 1993 that the company recognized in 1994.
RESULTS OF OPERATIONS - 1994 VS. 1993
The Company's net sales for 1994 increased 6% over 1993, primarily due to
improved sales volume related to the recognition of a full year of sales for
sales offices that began operations during 1993. The gross margin improved to
47.5% of sales from 43.0% in 1993, due to the overall higher level of retail
sales at the distribution level. The Company also negotiated a three year
purchase agreement with its major brass supplier to keep materials costs
consistent with 1993 while the market price for brass, the largest raw material
component of its products, increased approximately 11%.
Salaries and wages were $4.3 million higher than 1993 levels, due primarily to a
charge of $2.3 million in the fourth quarter for anticipated employee-related
expenses related to restructuring plans. The restructuring, which was
partially completed on February 15, 1995, included the resignation of Walter E.
Best, Chairman of the Board and President, as well as the resignations of
Richard E. Best and Marshall W. Best, both Vice Presidents of the Company.
Expansion of the Company's sales distribution offices during 1993, when only a
partial year of operating expenses were recognized, also resulted in an increase
in salaries and wages during 1994. Employee benefit costs increased $2 million
over 1993 due to (1) higher health insurance claims costs, a portion of which
the company is self-funding; (2) a change in the assumptions used in calculating
the present value of the retirement benefit for the former President, Walter E.
Best, which increased expense by $900,000; and (3) a change in the discount rate
used to calculate the actuarial present value of the accumulated retirement
benefit obligation. This change in the discount rate, from 7 1/2% in 1993 to 8%
in 1994, resulted in a reduction in expense of $434,000.
Total selling, general and administrative and engineering expenses increased
$6.3 million, or 15.5% over 1993. Reductions in bad debt expense of $500,000
and lower repairs and utilities expenditures of $500,000 partially offset the
increase in salaries and benefits costs described above. Professional fees
increased by $1.1 million as the Company sought assistance in selecting software
for the order processing, inventory management, and accounting functions as well
as for other special projects.
Net income of $2.2 million increased 23% over 1993 to 2% of sales. Income taxes
decreased by $686,000 to 8% of income before taxes, due to the generation during
1993 of certain tax credits of approximately $656,000 that the Company recorded
in 1994.
On February 15, 1995, the Company settled a derivative action that had been
threatened by a director during the third quarter of 1994. Expenses related to
the settlement of the threatened litigation increased other non-operating
expenses by $701,000 during 1994.
12
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 2.0 at December 31, 1995, compared to 2.6 at
December 31, 1994. Cash and cash equivalents decreased by $3.4 million during
1995, as excess cash was used to purchase treasury stock and for increased
levels of capital expenditures. The current ratio was also affected by an
increase in current liabilities of $2.2 million due to the $3.1 million charge
for restructuring expenses.
The Company's continued emphasis on inventory management and backlog reduction
resulted in a decrease in inventory of $3.2 million. Finished goods inventory
in the corporate owned sales distribution facilities and at the manufacturing
plant decreased by $1.6 million from 1994. Raw material and work-in-process
inventory at the manufacturing plant also decreased by $1.6 million.
Property, plant and equipment additions increased by $1.7 million to $5.6
million in 1995 from the 1994 total of $3.9 million. Approximately $3.7 million
of the 1995 capital expenditures related to the installation of enhanced
computer systems and related software. Capital expenditures for 1996 are
expected to be in the $4 million range, which includes approximately $2.3
million for improvements to manufacturing equipment.
Total liabilities increased by $16.7 million from 1994 to 1995, mainly due to
increased borrowings of $15.2 million. Other accrued expenses decreased by
$626,000 due to the payment of professional fees related to the settlement of a
derivative action against the Company by a director.
The Company desires to retain its strong credit rating, and therefore pays all
vendors according to terms and takes all discounts offered.
Cash provided by operating activities decreased to $1.4 million in 1995,
compared with $11.0 million in 1994 and $5.4 million in 1993. The $9.6 million
decrease was due primarily to the decrease in net income of $6.4 million. The
remainder of the decrease was a result of the change in cash used for working
capital purposes.
During 1995, the Company negotiated a $25 million bank line of credit for the
purpose of acquiring an interest in Best Lock Partnership. On February 15,
1995, $12.0 million was borrowed under the line of credit in order to finance
this transaction. As of December 31, 1995, $15.0 million was outstanding. The
additional $3.0 million borrowed during 1995 was used to purchase treasury
stock. The remainder of the line remains available for additional funds, if
required. The Company expects to repay the loan from current operating funds.
The Company also believes that the amounts available from operating cash flows
and under the line of credit will be sufficient to meet its expected cash needs,
including planned capital expenditures.
While not having a material impact on the current level of sales, the growth
potential of future sales may be affected by the outcome of the following
action. Best Lock Corporation vs. ILCO - Unican Corporation (Federal District
Court, Indianapolis, Cause No. IP 93-1092C). This action by the Company against
ILCO, a North Carolina corporation, charged ILCO with infringement of the
Company's trade dress and trademark right in certain patented keys and other
keys, and with unfair competition. On August 18, 1995, the Court entered an
"Order on Joint Motion to Amend the Final Judgment and for Dismissal of
Remaining Claims" finding for the defendant, Ilco Unican Corporation, relating
to the validity of U.S. Patent No. 5,136,869 and U.S. Design Patent No. 327,636;
stipulating infringement if the patents had not been held invalid; dismissing
with prejudice with respect to Ilco Unican Corporation the remaining claims
13
pertaining to trademark, trade dress and unfair competition brought by the
Company; dismissing without prejudice the remaining trademark, trade dress and
unfair competition declaratory judgment counterclaims brought by Ilco Unican
Corporation and awarding no monetary damages. On September 18, 1995, the
Company filed Notice of Appeal with the Court of Appeals for the Federal
Circuit.
OTHER
Foreign sales decreased to approximately 6% of total sales during 1995, from 7%
in 1994 and 1993. The profit on these sales improved by approximately $250,000
during 1995.
The firm backlog of approximately $4.2 million as of February 9, 1996 is $2.2
million lower than the prior year. The Company significantly reduced its
backlog during 1995 by re-engineering certain processes in the manufacturing,
assembly and shipping areas. The Company is continuing to focus on customer
satisfaction in the areas of delivery and service, which will result in shorter
lead times.
The Company has not experienced any unusual inflation in its purchases or sales
for the years 1995, 1994, or 1993.
The Company has not had and does not expect to incur any significant future
environmental liability.
14
This page not used.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) 1. Financial Statements:
Report of Independent Public Accountants
Corporate Balance Sheets, December 31, 1995 and 1994
Corporate Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Income (Loss) for the Years Ended
December 31, 1995,1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
Schedules Supporting Consolidated Financial Statements-
Schedule
Number
--------
II Valuation and Qualifying Accounts - Corporate and
Consolidated for the Years Ended December 31, 1995, 1994
and 1993
III Investments in, Equity in Earnings of, and Dividends
Received From Affiliates and Other Persons - for the
Years Ended December 31, 1995, 1994 and 1993
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shareholders of Best Universal Lock Co.:
We have audited the accompanying corporate balance sheets of BEST UNIVERSAL
LOCK CO. (a Delaware corporation) as of December 31, 1995 and 1994, and the
related corporate statements of cash flows for each of the three years in the
period ended December 31, 1995 and the accompanying consolidated balance
sheets of BEST UNIVERSAL LOCK CO. AND SUBSIDIARIES as of December 31, 1995
and 1994, and the related consolidated statements of income (loss),
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BEST UNIVERSAL LOCK CO. and
BEST UNIVERSAL LOCK CO. AND SUBSIDIARIES as of December
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes.
Our audits were made for the purpose of forming an opinion on the consolidated
statements taken as a whole. The schedules listed under Item 8 are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic consolidated financial statements. These schedules have been
subjected to the auditing procedures applied to the audit of the basic
consolidated financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 11, 1996.
17
BEST UNIVERSAL LOCK CO. (a nonoperating holding company)
CORPORATE BALANCE SHEETS
December 31
-------------------------------
1995 1994
------------ -------------
ASSETS
Current assets
Cash $ 40,951 $ 23,764
------------ -------------
Total current assets 40,951 23,764
Investment in subsidiary at
underlying book value,
eliminated in consolidation
(Note 1)(Schedule III) 32,162,608 36,329,401
------------ -------------
Total assets $ 32,203,559 $ 36,353,165
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 87,364 $ 72,034
Other liabilities 44,340 22,390
------------ -------------
Total liabilities 131,704 94,424
------------ -------------
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, 7% cumulative,
$100 par value, 500 shares
authorized, 63 shares outstanding
1994 (Note 16) - 6,300
Series A common stock, no par value,
100,000 shares authorized, 86,469
shares outstanding (Note 2) 1,102,579 1,102,579
Series B common stock, no par value,
300,000 shares authorized and
outstanding (Note 2) 1 1
------------ -------------
Total capital stock 1,102,580 1,108,880
------------ -------------
Accumulated earnings
Balance at beginning of year 35,294,051 34,250,100
------------ -------------
Net income
Equity in income (loss) of Lock
Consolidated, eliminated in
consolidation (Note 1) (3,682,875) 1,554,263
Corporate expense, net (55,600) (39,332)
------------ -------------
Total net income (loss) (3,738,475) 1,514,931
------------ -------------
Premium on redemption of preferred shares (315) -
Cash dividends paid-
Preferred ($7 per share in 1995 and 1994) (441) (441)
Series A common ($1.67 per share in 1995 and
$1.66 per share in 1994) (Note 2) (144,403) (143,539)
Series B common ($1.10 per share in 1995 and
$1.09 per share in 1994) (Note 2) (330,000) (327,000)
------------ -------------
Balance at end of year 31,080,417 35,294,051
------------ -------------
Cumulative translation adjustment (111,142) (144,190)
------------ -------------
Total shareholders' equity 32,071,855 36,258,741
------------ -------------
Total liabilities and shareholders' equity $ 32,203,559 $ 36,353,165
------------ -------------
------------ -------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
18
BEST UNIVERSAL LOCK CO. (a nonoperating holding company)
CORPORATE STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------------------------
1995 1994 1993
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ - $ - $ -
Cash paid to suppliers (18,314) (21,764) (3,609)
Dividend received from subsidiary 516,960 516,004 477,782
Interest received - - 12
Interest paid - - -
Income taxes paid - (43,400) (27,054)
-------- -------- --------
Net cash provided by operating activities 498,646 450,840 447,131
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Note receivable from subsidiary - - -
Dividend payments (474,844) (470,980) (459,384)
Premium on redemption of preferred stock (315) - -
Redemption of preferred stock (6,300) - -
-------- -------- --------
Net cash used in financing activities (481,459) (470,980) (459,384)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 17,187 (20,140) (12,253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,764 43,904 56,157
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 40,951 $ 23,764 $ 43,904
-------- -------- --------
-------- -------- --------
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (55,600) $ (39,332) $ (34,352)
Adjustments-
Dividend received from subsidiary 516,960 516,004 477,782
Changes in assets and liabilities-
Increase (decrease) in
Accounts payable and accrued expenses 5,827 (15,632) 774
Income taxes payable 31,459 (10,200) 2,927
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 498,646 $ 450,840 $ 447,131
-------- -------- --------
-------- -------- --------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
19
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
----------------------------------------------
1995 1994
--------------------- ---------------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 1,389,827 $ 4,815,847
Trade receivables
Direct 11,878,119 11,680,289
Sales representatives and other 1,893,871 2,688,434
Allowance for uncollectible accounts (263,559) (244,829)
Estimated refundable income taxes 2,628,103 141,708
Current portion of notes receivable (Note 15) 14,895 81,987
Inventories (Notes 1 and 4) 11,383,058 14,579,058
Deferred income taxes (Notes 1 and 5) 4,239,578 3,566,922
Other prepaid expenses 379,906 152,342
-------------------- ---------------------
Total current assets 33,543,798 37,461,758
-------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 1 and 3)
Land and buildings 14,037,266 13,770,826
Machinery and equipment 28,694,247 29,478,143
Tooling 8,423,818 8,090,184
Furniture, fixtures and other 10,925,909 8,342,633
Construction work-in-progress 2,473,290 975,301
-------------------- ---------------------
64,554,530 60,657,087
Less - accumulated depreciation (33,734,786) (30,519,725)
-------------------- ---------------------
Total property, plant and equipment 30,819,744 30,137,362
-------------------- ---------------------
OTHER ASSETS
Long-term notes receivable (Note 15) 3,358,972 3,280,332
Other assets 1,196,103 149,447
-------------------- ---------------------
Total assets $ 68,918,617 $ 71,028,899
-------------------- ---------------------
-------------------- ---------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31
----------------------------
1995 1994
------------- -------------
CURRENT LIABILITIES
Notes payable $ 2,500 $ 2,500
Current portion of retirement benefit
obligations 1,362,431 1,381,967
Trade accounts payable 3,487,402 1,641,302
Customer advances 1,433,801 1,501,304
Accrued liabilities
Income taxes 462,195 941,490
Property and other taxes 976,765 960,153
Payroll and vacation pay 4,225,317 3,918,751
Accrued restructuring (Note 14) 3,462,508 2,394,593
Accrued medical claims 970,000 850,000
Other 207,599 843,546
------------- -------------
Total current liabilities 16,590,518 14,435,606
------------- -------------
LONG-TERM DEBT (Note 7) 15,197,079 -
RETIREMENT BENEFIT OBLIGATION (Note 10) 3,870,345 4,444,971
DEFERRED INCOME TAXES (Notes 1 and 5) 2,120,957 2,269,369
------------- -------------
Total liabilities 37,778,899 21,149,946
------------- -------------
MINORITY INTEREST IN SUBSIDIARIES 9,424,347 13,620,212
------------- -------------
COMMON STOCK AND COMMON STOCK OF BEST,
REDEEMABLE UNDER STOCK BONUS PLAN (Note 8) 1,821,647 4,087,473
------------- -------------
SHAREHOLDERS' EQUITY
Capital stock:
Preferred stock, 7% cumulative, $100 par value,
500 shares authorized, 63 shares oustanding
1994 (Note 16) - 6,300
Series A common stock, no par value, 100,000
shares authorized, 86,469 shares outstanding 1,102,579 1,102,579
Series B common stock, no par value, 300,000
shares authorized and outstanding 1 1
------------- -------------
Total capital stock 1,102,580 1,108,880
Accumulated earnings 31,080,417 35,294,051
Cumulative translation adjustment (Note 1) (111,140) (144,190)
Common stock and common stock of Best,
redeemable under Stock Bonus Plan (Note 8) (1,821,647) (4,087,473)
Treasury stock (10,356,486) -
------------- -------------
Total shareholders' equity 19,893,724 32,171,268
------------- -------------
Total liabilities and shareholders' equity $ 68,918,617 $ 71,028,899
------------- -------------
------------- -------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
BEST LOCK COMPANIES
BEST LOCK CORPORATION AND SUBSIDIARY
BEST UNIVERSAL LOCK CO. ( A NON-OPERATING HOLDING COMPANY) AND SUBSIDIARIES
FRANK E. BEST, INC. (A NON-OPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------------
1995 1994 1993
------------- ------------- -------------
NET SALES $ 118,546,487 $ 104,669,003 $ 98,895,807
OPERATING EXPENSES
Cost of Goods Sold 70,380,467 54,913,711 56,361,196
Selling 30,349,379 26,766,914 24,919,160
General and Administrative 21,554,232 16,434,727 12,661,743
Engineering, research and development 2,336,673 3,775,743 3,085,631
------------ ------------ ------------
Total operating expenses 124,620,751 101,891,095 97,027,730
------------ ------------ ------------
OPERATING INCOME (LOSS) (6,074,264) 2,777,908 1,868,077
Interest expense (870,062) (6,809) (47,510)
Other income (expense), net 380,427 (367,685) 210,609
------------ ------------ ------------
INCOME (LOSS) before provision for income taxes (6,563,899) 2,403,414 2,031,176
Provision (benefit) for income taxes (Note 5) (2,359,401) 195,259 881,658
------------ ------------ ------------
NET INCOME (LOSS) before cumulative effect of change in accounting principle (4,204,498) 2,208,155 1,149,518
Cumulative effect of change in accounting principle (Note 1) - - 650,000
------------ ------------ ------------
NET INCOME (LOSS), Best Lock Corporation and Subsidiary (4,204,498) 2,208,155 1,799,518
Minority interest in net (income) loss, Best Lock Corporation and Subsidiary 521,623 (653,892) (489,289)
Corporate - Best Universal Lock Co. expense (55,600) (39,332) (34,352)
------------ ------------ ------------
NET INCOME (LOSS), Best Universal Lock Co. and Subsidiaries (3,738,475) 1,514,931 1,275,877
Minority interest in net (income) loss, Best Universal Lock Co. and Subsidiaries 1,029,185 (339,232) (285,415)
Corporate - Frank E. Best, Inc. expense (42,848) (22,409) (125,438)
------------ ------------ ------------
NET INCOME (LOSS), Frank E. Best, Inc. and Subsidiaries $ (2,752,138) $ 1,153,290 $ 865,024
------------ ------------ ------------
------------ ------------ ------------
Best Lock Best Universal Lock Co. Frank E.
Earnings (loss) per common share: Corporation Series A Series B Best, Inc.
------------ ------------ ------------ ------------
1995 $ (33.88) $ (9.95) $ (9.95) $ (6.43)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
1994 $ 16.83 $ 3.92 $ 3.92 $ 1.93
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
1993:
Income before cumulative effect of change in accounting principle $ 8.76 $ 2.08 $ 2.08 $ 0.83
Cumulative effect on prior years of adopting
SFAS 109 "Accounting for Income Taxes" 4.95 1.22 1.22 0.62
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 13.71 $ 3.30 $ 3.30 $ 1.45
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding:
1995 124,114.13 75,669.87 300,000.00 427,806.72
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
1994 131,235.37 86,469.00 300,000.00 598,710.00
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
1993 131,238.85 86,469.00 300,000.00 598,710.00
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
December 31
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
CAPITAL STOCK
Preferred stock, 7% cumulative, $100
par value, 500 shares authorized,
63 shares outstanding 1994 and 1993 $ - $ 6,300 $ 6,300
Series A common stock, no par value,
100,000 shares authorized, 86,469 shares outstanding 1,102,579 1,102,579 1,102,579
Series B common stock, no par value,
300,000 shares authorized and
outstanding 1 1 1
-------------- -------------- --------------
Total capital stock 1,102,580 1,108,880 1,108,880
-------------- -------------- --------------
ACCUMULATED EARNINGS
Balance at beginning of year 35,294,051 34,250,100 33,433,607
Net income (loss) (3,738,475) 1,514,931 1,275,877
Premium on redemption of preferred shares (315) - -
Cash dividends (see below) (474,844) (470,980) (459,384)
-------------- -------------- --------------
Balance at end of year 31,080,417 35,294,051 34,250,100
-------------- -------------- --------------
CUMULATIVE TRANSLATION ADJUSTMENT (111,140) (144,190) (79,045)
COMMON STOCK AND COMMON STOCK OF BEST,
REDEEMABLE UNDER STOCK BONUS PLAN (Note 8) (1,821,647) (4,087,473) -
TREASURY STOCK
Balance at beginning of year - - -
Shares purchased (10,356,486) - -
-------------- -------------- --------------
Balance at end of year (10,356,486) - -
-------------- -------------- --------------
Total shareholders' equity $ 19,893,724 $ 32,171,268 $ 35,279,935
-------------- -------------- --------------
-------------- -------------- --------------
Cash dividends per share:
Preferred $ 7.00 $ 7.00 $ 7.00
Series A common 1.67 1.66 1.63
Series B common 1.10 1.09 1.06
The accompanying notes to consolidated financial statements are an integral part
of these statements.
23
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 119,115,874 $ 103,456,897 $ 95,602,652
Cash paid to suppliers and employees (116,082,490) (92,572,720) (88,644,068)
Interest received 494,908 137,171 78,190
Interest paid (761,831) (3,353) (48,065)
Income taxes paid (1,460,682) (29,356) (1,627,444)
--------------- --------------- ---------------
Net cash provided by operating activities 1,305,779 10,988,639 5,361,265
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 88,383 167,790 34,654
Capital expenditures (5,541,531) (3,896,048) (4,738,876)
Note receivable from an officer - (3,400,000) -
--------------- --------------- ---------------
Net cash used in investing activities (5,453,148) (7,128,258) (4,704,222)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings against unsecured line of credit 29,064,607 - -
Payments on unsecured line of credit (14,100,000) - -
Purchase of treasury stock (13,793,834) (20,405)
Redemption of preferred stock (6,300) - -
Dividend payments (450,588) (663,665) (637,797)
Premium paid on redemption of preferred stock (315) - -
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 713,570 (684,070) (637,797)
--------------- --------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,779 (6,860) (24,895)
--------------- --------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,426,020) 3,169,451 (5,649)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,815,847 1,646,396 1,652,045
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,389,827 $ 4,815,847 $ 1,646,396
--------------- --------------- ---------------
--------------- --------------- ---------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (3,738,475) $ 1,514,931 $ 1,275,877
Adjustments-
Depreciation and amortization 4,904,810 4,364,558 4,057,571
Provision for losses on accounts receivable 117,417 38,413 503,023
(Gain) loss on sale of property, plant and equipment 83,408 (4,875) 18,304
Minority interest related to current year earnings (loss) (521,623) 653,892 489,289
Changes in assets and liabilities-
(Increase) decrease in
Accounts and notes receivable 600,453 (703,419) (3,071,112)
Refundable income taxes (2,559,696) 1,484,991 (887,465)
Inventories 3,226,858 (139,575) 1,843,195
Prepaid and other expenses (900,220) (1,860,533) 99,677
Other assets (1,341,471) 222,977 67,934
Increase (decrease) in
Accounts payable, customer advances and accrued liabilities 2,584,752 4,890,133 805,397
Income taxes payable (407,860) 683,221 89,820
Deferred income taxes (148,412) (125,857) (406,307)
Retirement benefit and benefit obligation (594,162) (30,218) 476,062
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,305,779 $ 10,988,639 $ 5,361,265
--------------- --------------- ---------------
--------------- --------------- ---------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
24
BEST LOCK COMPANIES
BEST LOCK CORPORATION AND SUBSIDIARY
BEST UNIVERSAL LOCK COMPANY (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS
The principal business of the Best Lock Companies is the manufacture or
sourcing, distribution and sale of access control products and services.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for each parent company in the
Best Lock Companies include their respective subsidiaries as indicated below:
Percent
Parent Company Subsidiaries Owned
-------------- ------------ ------
Frank E. Best, Inc. Best Universal Lock Co. 83%
(Best)
Best Universal Lock Best Lock Corporation 79%
Co. (Universal)
Best Lock Best Universal Locks 100%
Corporation Limited (Canada)
(Lock or the Company)
All significant intercompany accounts, investments and transactions
have been eliminated in the consolidations.
Best and Universal, other than their investment in subsidiaries, have
no significant assets or liabilities.
Best, Universal, and Lock file separate federal income tax returns,
as these entities are not eligible to file on a consolidated basis.
c. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value. Cash equivalents consist of
government securities.
25
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
d. INVENTORIES
Inventories are valued using the last-in, first-out (LIFO) method for
approximately 95% of consolidated inventories. The remaining inventories are
valued at the lower of cost, first-in, first-out (FIFO) or market.
e. REVENUE RECOGNITION
Sales are recognized when product is shipped to customers or when
service or installation is complete.
f. DEPRECIATION
Depreciation is provided on the straight-line method for book purposes
and on an accelerated method for income tax purposes.
g. AMORTIZATION
During 1995, the Company purchased covenants not to compete for
$1,240,000 which are being amortized ratably over the life of the covenants.
Amortization expense was $206,667 in 1995.
h. INCOME TAXES
The Company adopted the provisions of Financial Accounting Standards
Board Statement No. 109 "Accounting for Income Taxes" (SFAS 109) effective
January 1, 1993. SFAS 109 requires a change from the deferral method to the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized by applying enacted
statutory tax rates applicable to future years to temporary differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date. Under the deferral method, deferred taxes were recognized using the tax
rate applicable to the year of the calculation and were not adjusted for
subsequent changes in tax rates. The effect of adopting SFAS 109 has been
reflected in the Consolidated Statement of Income (Loss) for the year ended
December 31, 1993 as a cumulative effect of a change in accounting principle of
$650,000.
i. RESEARCH AND DEVELOPMENT
Research and development costs related to products are expensed as
incurred. Development costs related to software for internal use are expensed
or capitalized as incurred, depending on the useful life of the expenditure.
The total amounts expensed were approximately $3,055,000, $3,050,000 and
$2,345,000 in 1995, 1994, and 1993, respectively.
26
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
j. CURRENCY TRANSLATION The accounts of Lock's Canadian
subsidiary are translated in accordance with Financial Accounting Standards
Board Statement No. 52, whereby the balance sheet accounts are translated at
the exchange rate in effect at period end, income accounts are translated at
the average rate of exchange during the period, and translation gains and
losses are excluded from net earnings by being recorded as a component of
shareholders' equity (Cumulative Translation Adjustment). The Company's
consolidated financial statements include translation gains (losses) of
$56,459, ($89,392) and ($93,199) in 1995, 1994 and 1993, respectively, all of
which are reflected as a component of shareholders' equity.
k. NONCASH TRANSACTION
The Company financed the purchase of $348,702 of treasury stock during
1995 by issuing a note payable.
l. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. DIVIDENDS
The Articles of Incorporation of Universal require that dividends on common
stock be distributed as follows: a) the first approximately $138,000 in
dividends are to be distributed equally to Series A holders and to Series B
holders and, b) the remainder is distributed on an equal per share basis to
Series A and B holders (on a noncumulative basis). These disproportionate
distributions are reflected in calculating the minority interest of Best.
27
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY, PLANT AND EQUIPMENT
For financial reporting purposes, depreciation is provided using the
following straight-line rates:
Buildings 2-1/2%, 3% & 5%
Land Improvements 6-2/3% & 10%
Machinery and equipment 8-1/3%
Tooling 12-1/2% & 20%
Furniture and fixtures 10% to 33%
Vehicles 20% to 50%
A 3-year depreciation life was adopted in 1995 for certain items such as
computers, fax machines, copiers and telephone systems, to reflect a decreased
useful life resulting from accelerating technology changes. Depreciation life
for additions of this type was 5 years in 1994 and years prior. Computer
software is being depreciated using a 5 year life.
Expenditures for property, plant and equipment are reflected as construction
work-in-progress until they are placed into service. The type and nature of the
costs capitalized include only costs from unrelated third parties for equipment
and installation.
Maintenance and repairs are expensed as incurred. Replacements and
betterments which extend the useful life of an asset are capitalized in the
property accounts.
Retirements are removed from property accounts at cost and the related
depreciation is removed from the accumulated depreciation accounts. Gains or
losses on dispositions of property and equipment are reflected in other income
(expense) in the consolidated statements of income (loss).
4. INVENTORIES
FIFO cost of inventories approximates replacement cost and exceeds LIFO
inventory by $8,597,000, $7,616,000 and $7,562,000 in 1995, 1994 and 1993,
respectively.
28
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Inventories reflected at LIFO cost were as follows:
December 31
-----------
1995 1994 1993
---- ---- ----
Finished goods $ 4,958,614 $ 6,526,239 $ 6,691,204
Work-in-process 6,182,505 7,816,878 7,546,117
Raw material 241,939 235,941 252,207
----------- ----------- -----------
Total Inventory $11,383,058 $14,579,058 $14,489,528
----------- ----------- -----------
----------- ----------- -----------
The cost of materials, direct labor and manufacturing overhead associated
with the production of inventories is included in the valuation of inventory.
During 1995 and 1993, inventory quantities were reduced. This reduction
resulted in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the cost of 1995 and 1993 purchases.
The effect of these liquidations increased net income by approximately $480,000
and $40,000 or $3.87 and $.31 per share of common stock in 1995 and 1993,
respectively.
5. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
U. S. Federal -
Current $ (1,293,028) $ 1,688,594 $ 726,795
Deferred (646,845) (1,847,248) 39,772
Foreign -
Current 203,810 12,880 (49,569)
Deferred 4,902 17,694 36,105
State -
Current (515,232) 462,885 122,590
Deferred (113,008) (139,546) 5,965
------------ ------------- ----------
$ (2,359,401) $ 195,259 $ 881,658
------------ ------------- ----------
------------ ------------- ----------
29
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Earnings (loss) before income taxes were as follows:
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
Domestic $(7,060,863) $ 2,335,442 $ 2,063,230
Foreign 496,964 67,972 (32,054)
----------- ----------- ------------
$(6,563,899) $ 2,403,414 $ 2,031,176
----------- ----------- ------------
----------- ----------- ------------
The effective rate of income taxes provided (benefited) varied from the
U.S. Federal statutory rate for the following reasons:
Year Ended December 31
----------------------
1995 1994 1993
---- ---- ----
Statutory Federal tax rate (34.0)% 34.0% 34.0%
The statutory rate of tax provided
was increased (decreased) by:
State income taxes, net of
Federal income tax benefit (6.3) 8.8 4.0
Foreign tax credit - (27.3) -
Foreign income taxes 0.6 0.3 9.2
Other credits - (10.8) (5.0)
Nondeductible expenses 5.5 5.0 2.1
Other (1.7) (1.9) (.9)
----- ------ -----
Effective rate of tax provided (benefited) (35.9)% 8.1% 43.4%
----- ------ -----
----- ------ -----
The Company has $816,000 of unutilized foreign tax credits available to
offset certain future U. S. tax obligations. These credits expire in 1998. The
Company believes these foreign tax credits will be utilized during the carryover
period and thus has recorded the benefit of the item as a reduction to the
provision for income taxes for the year ended December 31, 1994.
The Company also has alternative minimum tax credits available to offset
certain future U. S. tax obligations. These credits have no expiration date and
were generated as a result of the carryback of the 1995 net operating loss to
1992 and 1993. The benefit of these credits has been reflected as a reduction
to the provision for income taxes for year ended December 31, 1995.
30
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effect of temporary differences giving rise to the Company's
consolidated current and noncurrent deferred income taxes are as follows:
Asset (Liability)
------------------
as of December 31,
------------------
1995 1994
---- ----
Current deferred income taxes :
Vacation accrual $ 768,760 $759,511
Inventory capitalized for tax purposes,
expensed for book purposes 209,286 256,711
Current portion of pension and qualified
retirement benefit obligations 625,097 598,462
Restructuring accrual 1,382,926 1,071,003
Medical claims accrual 301,547 248,274
Inventory reserve 119,820 283,475
Current portion of foreign tax credit 307,467 142,609
Current portion of AMT credit 287,037 -
Other 237,638 206,877
----------- -----------
$ 4,239,578 $ 3,566,922
----------- -----------
Noncurrent deferred income taxes:
Excess tax over book depreciation $(4,366,125) $(4,154,697)
Noncurrent portion of foreign tax credit 508,612 513,391
Noncurrent portion of AMT credit 345,788 -
Noncurrent portion of pension and quali-
fied retirement benefit obligations 1,337,114 1,371,937
Other 53,654 -
----------- -----------
$(2,120,957) $(2,269,369)
----------- -----------
----------- -----------
31
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. LICENSE AGREEMENT
Under the terms of a 1928 license agreement between Lock and its parent
companies (Universal and Best), Lock agreed to issue a companion share of stock
to Universal for each share of voting stock sold or otherwise disposed of during
the full period of the corporate existence.
7. DEBT
The Company has an agreement with a financial institution for letters of
credit available primarily for issuance to a foreign vendor. At December 31,
1995, the Company had no outstanding letters of credit.
The Company entered into a $25,000,000 line of credit agreement on February
15, 1995, which was amended effective December 31, 1995. The agreement expires
on May 5, 1998 and bears interest at a variable rate, based upon the prime rate
or LIBOR, at the Company's election. The line of credit is secured by a blanket
lien on all accounts and notes receivable, inventory, machinery and equipment,
and intangible assets with a negative pledge on real estate. The agreement
contains financial covenants including those relating to debt service coverage,
tangible net worth, and liabilities to tangible net worth. As of December 31,
1995, the Company was in compliance with all required covenants. The Company
borrowed $12,000,000 under this agreement on February 15, 1995. The highest
amount outstanding during 1995 was $15,300,000. The interest on these
borrowings is based on LIBOR. The interest rate at December 31, 1995 was 7.06%.
Interest expense on the 1995 borrowings was $809,242.
8. STOCK BONUS PLAN
The Best Lock Corporation Stock Bonus Plan (Stock Bonus Plan) is available
to Lock employees meeting certain eligibility requirements. The Stock Bonus
Plan is noncontributory and is qualified pursuant to the applicable provisions
of the Internal Revenue Code. Lock's cash contributions to the Stock Bonus Plan
were zero in 1995 and 1994 and $250,000 in 1993, which amounts have been charged
to expense in the accompanying financial statements. Contributions are
determined by Lock's Board of Directors.
The Stock Bonus Plan was amended in 1994. Under the amended plan,
participants, upon reaching certain eligibility requirements, may receive cash
or shares of Lock, Universal and/or Best common stock. In the event the
participants elect or are required to receive shares, the participants have the
right to require Lock to repurchase such shares in cash at its fair market
value. As a result, the fair market value of the shares, determined based on an
independent appraisal, held by the Stock Bonus Plan, has been reflected in the
accompanying consolidated balance sheets as "Common stock and common stock of
Universal and Best, redeemable under Stock Bonus Plan."
On December 28, 1995, Lock purchased all of the common stock of Best held
by the Stock Bonus Plan at an independently appraised value as of December 27,
1995, of $29.74 per share. The purpose of this transaction was to provide
liquidity to the Stock Bonus Plan in anticipation of payments out of the plan
pursuant to the early retirement plan discussed in Note 14.
32
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The fair market value of the shares held by the Stock Bonus Plan at
December 31, 1995, was $5,931,931; however, the Company has calculated the
present value of the potential future cash payments (net of cash held) by the
Company under the Stock Bonus Plan payable in years 1996 through 2021 to be
approximately $350,000. The significant assumptions used to calculate the
present value of the potential future cash payments referred to above are as
follows:
1) The fair market value of Lock (10,539.19 common shares) and Universal
(27,262 common shares) shares held by the Stock Bonus Plan will not
appreciate or depreciate in future periods.
2) Annual cash dividends per share are assumed to continue to be paid as
follows: Lock $5.41, Universal $1.67. The calculation assumes the
cash dividend received by the Stock Bonus Plan will be available for
cash distributions to retirees from the Plan. Thus, the present value
of the potential future cash payments by the Company has been reduced
by the cash dividends received by the Plan.
3) All payments with the exception of certain known future terminations
are assumed to occur one year after the participant's retirement.
Retirement is assumed to be in the year the participant reaches age
65.
4) The discount rate used to calculate the present value of Lock's
potential future cash payments was 8.25%.
5) It is assumed that an additional $750,000 will be paid out of the Plan
during 1996 and $750,000 will be paid out of the Plan during 2001 as a
result of the early retirement and voluntary separation plan discussed
in Note 14.
9. SEGMENT REPORTING
The Best Lock Companies are engaged in the manufacture and sale of access
control products and services only, and as such do not report on a segment
basis. Foreign sales amounted to approximately 6% of total sales during 1995
and 7% of total sales during 1994 and 1993.
10. RETIREMENT PLANS
Effective September 1, 1989, the Company adopted a noncontributory defined
benefit Employees' Pension Plan (the Plan) to provide retirement benefits to
substantially all current and retired U. S. employees as of September 1, 1989.
The Company has received a favorable determination letter for the Plan from the
Internal Revenue Service. The Plan provides benefits for past service only.
The monthly benefit is based on the employee's years of service and compensation
as of September 1, 1989. The benefits for retired employees were based upon
amounts specified in the Plan. Under the Plan's provisions, all participants
were 100% vested at September 1, 1989. Normal retirement age is 65 with
provisions for earlier retirement with reduced benefits. After several years of
accelerated funding, the Company is currently making quarterly contributions to
the Plan in amounts necessary to meet minimum governmental funding requirements.
Company
33
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
contributions are made to a trust fund whose assets consist of investments in
high-quality short-term money market instruments.
The Plan's funded status is as follows:
DECEMBER 31
-----------
1995 1994
---- ----
Actuarial present value of the accumu-
lated benefit obligation $7,447,021 $7,246,736
Plan assets at fair value 5,669,032 4,938,080
---------- ----------
Retirement benefit obligation
included in the consolidated
balance sheets $1,777,989 $2,308,656
---------- ----------
---------- ----------
The discount rate used to calculate the actuarial present value of the
accumulated benefit obligation was 8% in 1995 and 1994 and 7.5% in 1993. The
long-term rate of return on plan assets was 8% in 1995 and 1994 and 7.5% in
1993. The changes in the discount rate for 1994 and 1993 resulted in a
reduction in pension expense in 1994 of $434,000, and an increase in pension
expense in 1993 of $431,000. Net periodic pension cost including interest
totaled $340,592 in 1995, $31,842 in 1994 and $865,485 in 1993.
In addition to the Plan adopted on September 1, 1989, the Company executed
supplemental retirement benefit agreements with certain retirees and officers.
For financial reporting purposes, the actuarial present value (discounted at 8%
in 1995 and 1994 and 7.5% in 1993) of the benefits to be provided under the
terms of these agreements were recognized in 1989 and subsequent years, except
for the agreement with the Company's former President, which, prior to 1994, was
amortized over his estimated remaining service life. Effective in 1994, the
actuarial present value of the benefit to be provided to the Company's former
President under the terms of the agreement was fully recognized. This change in
assumptions resulted in an increase in expense of approximately $800,000. The
Company recognized costs related to these agreements of $356,758, $1,030,833,
and $365,533 in 1995, 1994 and 1993, respectively. The retirement benefit
obligation for supplemental benefits included in the consolidated balance sheets
totaled $3,035,429 and $3,104,885 at December 31, 1995 and 1994, respectively.
The benefits under these agreements will be paid monthly by the Company over the
lifetime of the recipients and, upon their death, 50% of the scheduled amount
for the lifetime of the surviving spouse. These agreements may be amended by
the Company.
During 1992, the Company adopted a retirement benefit program in its
Canadian subsidiary, Best Universal Locks, Limited, to become effective January
1, 1993. This Registered Retirement Savings Plan (the RRSP), which conforms to
Canadian pension law, will be funded for all current employees based on years of
service and compensation as of December 31, 1992. Under the RRSP provisions,
the accounts of all participants are 100% vested, and are registered in their
own names. This individual savings plan allows employee and Company
contributions up to annual limits specified by Canadian law. The Company
expensed the past service obligation (excluding interest) in 1992. The Company
is funding the past service obligation over approximately four
34
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
years, beginning in 1993. The expenses related to this benefit were $26,380,
$15,817 and $22,721 in 1995, 1994, and 1993, respectively. The retirement
benefit obligation for the RRSP included in the consolidated balance sheets
totaled $39,774 and $35,563 at December 31, 1995 and 1994, respectively.
In addition, the Company executed supplemental retirement benefit
agreements with present Canadian retirees beginning January 1, 1993. For
financial reporting purposes, the actuarial present value (discounted at 7.5% in
1995, 1994 and 1993) of the benefits to be provided under the terms of these
agreements was charged to expense in the amounts of $34,463, $34,359 and $62,379
in 1995, 1994 and 1993, respectively. The retirement benefit obligation for the
Canadian agreements included in the consolidated balance sheets totaled $379,584
and $377,834 at December 31, 1995 and 1994, respectively. The benefits under
these agreements will be paid monthly by the Company over the lifetime of the
recipients and, upon their death, 50% of the scheduled amount for the lifetime
of the surviving spouse.
A summary of the retirement benefit obligations included in the
consolidated balance sheets is presented below:
1995 1994
---- ----
Defined Benefit Employees
Pension Plan $ 1,777,989 $ 2,308,656
Supplemental Retirement Benefit
Agreements 3,035,429 3,104,885
Registered Retirement Savings
Plan (Canada) 39,774 35,563
Supplemental Retirement Benefit
Agreements (Canada) 379,584 377,834
------------ -----------
$ 5,232,776 $ 5,826,938
------------ -----------
------------ -----------
Current Portion $ 1,362,431 $ 1,381,967
Non-current Portion 3,870,345 4,444,971
------------ -----------
$ 5,232,776 $ 5,826,938
------------ -----------
------------ -----------
The Company implemented a 401(k) profit sharing plan (the 401(k) Plan)
during 1994. Employees are eligible after reaching age 21 and completing one
year of continuous service as of the enrollment dates each year. Employer
contributions to the 401(k) Plan are determined by the Company's Board of
Directors. Participants begin vesting in the employer contributions after 1
year of service at which time they are 20% vested. Employees become 100% vested
after 5 years of service. Company contributions to the 401(k) Plan amounted to
$571,000 and $221,000 in 1995 and 1994.
35
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. CONTINGENCIES
From time to time the Company may be a party to litigation incidental to
its business. Management is of the opinion that the ultimate resolution of any
known claims will not have a material adverse impact on the Company's financial
position or results of operations.
The Company leases various office and warehouse facilities and other
vehicles under noncancelable lease arrangements. Lease terms are from one to
ten years and most provide options to renew. Future minimum lease payments
under noncancelable operating leases as of December 31, 1995 are as follows:
AMOUNT
1996 $ 636,909
1997 546,014
1998 399,837
1999 183,576
2000-2005 469,425
------------
$ 2,235,761
------------
------------
Rent expense charged to operations totaled $761,024, $852,565 and $935,645
in 1995, 1994, and 1993, respectively.
12. UNDISTRIBUTED EARNINGS
In general, it is Lock's intention to reinvest the earnings of its foreign
subsidiary in its operations and to repatriate these earnings only when it is
advantageous to do so. Also, it is Universal's and Best's intention to
minimize, if not eliminate, any income taxes associated with amounts distributed
by its domestic subsidiaries. As a result, it is expected that the amount of
income taxes resulting from a repatriation will not be significant.
Accordingly, deferred tax amounts are not being recorded related to
undistributed earnings. The cumulative amounts of undistributed earnings on
which income taxes have not been recognized are as follows:
DECEMBER 31
-----------
1995 1994
---- ----
Best $26,000,000 $27,200,000
Universal $31,300,000 $35,000,000
Lock $ 1,934,000 $ 1,600,000
36
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. RECLASSIFICATIONS
Certain reclassifications have been made in the consolidated balance
sheets and statements of income (loss) for the years ended December 31, 1994
and 1993 to conform to the current year presentation.
14. RESTRUCTURING
In the fourth quarter of 1995, the Company accrued $3.1 million in
connection with the announcement of a board approved early retirement, voluntary
and involuntary separation plan to reduce the work force by approximately 340
people. The Company plans to reduce payroll-related expenses by consolidating
certain functions in the distribution division and by consolidating or
eliminating certain internal processes in the manufacturing and support
functions. The restructuring charge includes estimated employee-related and
facilities expenses associated with the consolidation and termination of certain
operations and employees. The plan is expected to be substantially completed
during 1996.
On February 15, 1995, the Company settled all claims arising from a
derivative action threatened against it by a director, as well as all claims
against Lock's Chief Executive Officer and another officer. The material
components of the settlement include: (i) the resignation of Walter E. Best
from the Board of Directors and as President of each of Lock, Universal, Best,
and Walter E. Best Company, Inc.; (ii) the resignation of Richard E. Best and
Marshall W. Best as officers and employees of Lock and the resignation of Robert
W. Best and Marshall W. Best as officers and employees of Lock and the
resignation of Robert W. Best as an employee; (iii) the payment of the total sum
of $2,134,349 as severance, vacation and bonus payments to Walter E. Best,
Robert W. Best, Rich E. Best, Marshall W. Best and Edwina McLemore, an employee
of Lock; (iv) the payment of the total sum of $1,240,000 in exchange for
covenants not to compete from Walter E. Best, Robert W. Best, Richard E. Best
and Marshall W. Best; and (v) the payment of the total sum of $8,178, 296 for
the acquisition of shares of Lock and interests in a partnership as described
below. At December 31, 1994, the Company had accrued all costs associated with
the severance, vacation and bonus payments referred to above. In addition, the
Company accrued $701,060 of professional fees incurred related to the settlement
of the claims referred to above, which has been reflected in other income
(expense) in the consolidated statements of income (loss).
On February 15, 1995, Lock purchased for cash an 87% non-voting interest in
a partnership for $5,582,626. The purpose of the partnership, which was newly
formed, is to acquire and hold securities for investment purposes. The purchase
price of the shares was based on the appraised value of such shares as of
December 31, 1993 as determined by an independent appraiser. An opinion that
the transactions were fair to the Company was rendered by Merrill Lynch, Pierce,
Fenner & Smith Incorporated to the Company's Board of Directors.
The partnership purchased directly or indirectly 204,053 shares of Best
common stock, 8,787 shares of Universal Series A common stock and 11.25 shares
of Universal preferred stock.
In addition, on February 15, 1995, Lock acquired 6,742 shares of its own
common stock at an appraised value of $385.00 per share or $2,595,670.
37
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Lock's acquisition of its interest in the partnership and its redemption of
its own common shares were funded through the utilization of a portion of the
line of credit of $25,000,000 as discussed in Note 7.
The Company accounted for the purchase of the Lock shares and the 87%
partnership interest as treasury stock, which resulted in a reduction to
shareholders' equity of Lock of $8,178,296, Universal of $5,582,626 and Best of
$5,077,403. As a result of these transactions, the minority interest of
Universal decreased from 27% to 23% and the minority interest of Best decreased
from 22% to 21%.
During 1995, in addition to the above transactions, the Company acquired
shares of Lock, Universal and Best which were accounted for as treasury stock.
This treatment resulted in a reduction to shareholders' equity of Lock of
$5,848,082, Universal of $4,773,932 and Best of $3,869,643. As a result of
these transactions, the minority interest of Universal decreased from 23% to 21%
and the minority interest of Best decreased from 21% to 17%.
15. RELATED PARTY TRANSACTIONS
On May 5, 1994, Lock's Board of Directors approved a loan of $3.4 million
to Russell C. Best, Chief Executive Officer, under the terms of an Employment
Agreement entered into by Lock and Russell C. Best. On May 18, 1994, $3.4
million was borrowed, with interest at 7.2%, by Russell C. Best. The terms of
the loan include repayment over a thirty (30) year period in equal annual
installments of principal and interest totaling $279,519.
The Company entered into a split dollar life insurance agreement as of
December 29, 1995 with a trust established by Russell C. Best, pursuant to which
the Company and the trust will share in the premium costs of a whole life
insurance policy that has a face value death benefit of $5,000,000. Under the
agreement, the Company will pay approximately $55,000 each policy year for the
first 15 years of the policy. The Company is not obligated to make its share of
the annual premium. Only the trustee may cancel or surrender the policy. Upon
the death of Mr. Best, the Company will receive the cumulative amount of its
premium payments. Prior to Mr. Best's death and prior to the 30th year of the
policy, upon cancellation or surrender of the policy, the Company will receive
the lesser of its cumulative premium payments or the cash surrender value of the
policy. To the extent the policy is not canceled or surrendered in its first 30
years, the Company will receive its cumulative premium payments in the 30th year
of the policy.
Walter E. Best, former President of the Company, is the President and owns
in excess of 10% of the stock of Best Aircraft Corporation. The Company leased
automobiles from Best Aircraft Corporation, paying $30,030, $183,470 and
$180,656 for such services in 1995, 1994, and 1993, respectively. Larry W.
Rottmeyer, employed during 1994, became a Director and Vice President of the
Company during 1995. Mr. Rottmeyer resigned as a Director on February 26, 1996
and was removed as a Vice President on March 5, 1996. During Mr. Rottmeyer's
employment, he was also a Director and a greater than 10% equity owner of
Marcon, Inc. until June 9, 1995. The Company purchased market research services
from Marcon, Inc., during 1995 and 1994, paying $547,942 and $291,716 for such
services, respectively. Eric M. Fogel, Director from October 30,
38
BEST LOCK COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1995 until March 1, 1996, is a partner in the law firm of Holleb & Coff. The
Company paid Holleb & Coff $112,221 in 1995 for legal services.
16. REDEMPTION OF BEST UNIVERSAL LOCK CO. STOCK
On July 1, 1995, Universal redeemed all 63 shares of its outstanding
preferred stock at $105 per share plus cumulative dividend, for a total of
$7,056.
17. OUTSTANDING SHARES
The number of outstanding shares of Universal and Best used in the
calculation of earnings per share differs from the number of outstanding shares
shown on the cover page of the 10-K for each of the two companies. The cover
page of the 10-K reflects all shares legally outstanding. The earnings per
share disclosures reflect as treasury stock shares held by subsidiaries of
Universal and Best that are still legally outstanding, in accordance with
generally accepted accounting principles.
39
SCHEDULE II
Page 1 of 3
BEST LOCK COMPANIES
Best Lock Corporation and Subsidiary
Best Universal Lock Co. (a nonoperating holding company) and Subsidiaries
Frank E. Best, Inc. (a nonoperating holding company) and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED
FOR THE YEAR ENDED DECEMBER 31, 1995
Collections Deductions
Additions of Accounts For Accounts
Balance Charged to Previously Receivable Balance
Description January 1 Income Written off Written off December 31
- -------------------------------------- ----------- ------------ ------------- -------------- -------------
CORPORATE
Best Universal Lock Co. $ - $ - $ - $ - $ -
----------- ----------- ----------- ----------- ----------
Frank E. Best, Inc. $ - $ - $ - $ - $ -
----------- ----------- ----------- ----------- ----------
CONSOLIDATED (Best Lock
Corporation and Subsidiaries)
Allowance for uncollectible
accounts receivable $ 244,829 $ 117,417 $ 28,522 $ (127,209) $ 263,559
----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating
holding companies and do not have any significant assets or liabilities, other
than their investment in subsidiaries.
40
SCHEDULE II
Page 2 of 3
BEST LOCK COMPANIES
BEST LOCK CORPORATION AND SUBSIDIARY
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED
FOR THE YEAR ENDED DECEMBER 31, 1994
- -------------------------------------------------------------------------------------------------------------------------------
Collections Deductions
Additions of Accounts For Accounts
Balance Charged to Previously Receivable Balance
Description January 1 Income Written off Written off December 31
- -------------------------------------- ----------- ------------ ------------- ------------- -------------
CORPORATE
Best Universal Lock Co. $ - $ - $ - $ - $ -
------------ ------------- ------------- -------------- --------------
------------ ------------- ------------- -------------- --------------
Frank E. Best, Inc. $ - $ - $ - $ - $ -
------------ ------------- ------------- -------------- --------------
------------ ------------- ------------- -------------- --------------
CONSOLIDATED (Best Lock
Corporation and Subsidiaries)
Allowance for uncollectible
accounts receivable $ 350,136 $ 38,413 $ 4,134 $ (147,854) $ 244,829
------------ ------------- ------------- -------------- --------------
------------ ------------- ------------- -------------- --------------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating
holding companies and do not have any significant assets or liabilities,
other than their investment in subsidiaries.
41
SCHEDULE II
Page 3 of 3
BEST LOCK COMPANIES
BEST LOCK CORPORATION AND SUBSIDIARY
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED
FOR THE YEAR ENDED DECEMBER 31, 1993
- -------------------------------------------------------------------------------------------------------------------------------
Collections Deductions
Additions of Accounts For Accounts
Balance Charged to Previously Receivable Balance
Description January 1 Income Written off Written off December 31
- -------------------------------------- ----------- ------------ ------------- -------------- -------------
CORPORATE
Best Universal Lock Co. $ - $ - $ - $ - $ -
----------- ------------ ------------ -------------- ------------
Frank E. Best, Inc. $ - $ - $ - $ - $ -
----------- ------------ ------------ -------------- ------------
CONSOLIDATED (Best Lock
Corporation and Subsidiaries)
Allowance for uncollectible
accounts receivable $ 249,969 $ 503,023 $ 275 $ (403,131) $ 350,136
----------- ------------ ------------ -------------- ------------
----------- ------------ ------------ -------------- ------------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating
holding companies and do not have any significant assets or liabilities,
other than their investment in subsidiaries.
42
SCHEDULE III
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
INVESTMENTS IN, EQUITY IN EARNINGS OF, AND DIVIDENDS RECEIVED FROM
AFFILIATES AND OTHER PERSONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------------------------------------------------------
Name of Issuer and Title of Issue 1995 1994 1993
- ----------------------------------- ------------ ------------ ------------
Best Universal Lock Co.
SUBSIDIARY CONSOLIDATED:
Best Lock Corporation
Common stock, no par value, 61,560.34 shares
issued for a nontransferable license to use
certain patents and processes; 33,996.00
issued in consideration for the net assets of
Best Universal Lock Co. (Notes 1 and 6)
Year acquired: 1928 Through 1948
Consideration: Asset and Intangibles
Number of shares 95,556.34 95,556.34 95,556.34
----------- ----------- -----------
----------- ----------- -----------
Balance, January 1 $ 36,329,401 $ 35,356,287 $ 34,591,699
----------- ----------- -----------
Equity in net income (loss) of subsidiary consolidated, before market
value adjustment related to shares held by Stock Bonus Plan (3,233,398) 1,607,822 1,310,229
Equity in excess of market value over book value of
subsidiary's shares held by Stock Bonus Plan - Note 8 (449,483) (53,559) -
Distribution of earnings by subsidiary (516,960) (516,004) (477,782)
Change in cumulative translation adjustment 33,048 (65,145) (67,859)
----------- ----------- -----------
Balance, December 31 $ 32,162,608 $ 36,329,401 $ 35,356,287
----------- ----------- -----------
----------- ----------- -----------
43
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and officers have not been selected as such under any
arrangement or understanding between them and any other person(s).
(a) IDENTIFICATION OF DIRECTORS.
Tenure as Expiration
Name Age Positions Director of Term
---- --- --------- -------- -------
Russell C. Best 34 President/CEO Since 1991 12/31/96
and Director
Mariea L. Best 32 Director Since 1995 12/31/96
Gregg A. Dykstra 39 Secretary/Treasurer Since 1995 12/31/96
and Director
Larry W. Rottmeyer* 40 Director Since 1995 12/31/96
Eric M. Fogel** 40 Director Since 1995 12/31/96
* Larry W. Rottmeyer resigned his position effective February 26, 1996.
** Eric M. Fogel resigned his position effective March 1, 1996.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS.
All Positions Period Served
Expiration and Offices with in such
Name Age of Office Registrant Position
- ---- --- --------- ---------- --------
Russell C. Best 34 12/31/96 President/CEO Since 1991
Mariea L. Best 32 12/31/96 Vice President Since 1995
Gregg A. Dykstra 39 12/31/96 Secretary/Treasurer Since 1995
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
None.
(d) FAMILY RELATIONSHIPS. Mariea L. Best is the spouse of Russell C.
Best.
44
(e) BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS DURING THE
PAST FIVE YEARS.
(1) Russell C. Best, President/Chief Executive Officer and Director,
has served registrant and Frank E. Best, Inc. as President since February 15,
1995; prior thereto Vice President of registrant and Frank E. Best, Inc. from
prior to 1990; Chairman of the Board of Lock since March 1995; President of Lock
since February 15, 1995; Chief Executive Officer of Lock since May 1994;
Executive Vice President of Lock from June 1992 to May 1994; Marketing Director
of Lock from 1989-1992; Director of registrant, Frank E. Best, Inc. and Lock
since 1991.
Mariea L. Best, Director, has served registrant in this capacity
since 1995; Vice President of registrant and Frank E. Best, Inc. since 1995;
sole shareholder and president of Best Event and Travel, Inc. from 1991-1994;
Special Event Coordinator for Wiersma from 1987-1990; Director of registrant,
Frank E. Best, Inc. and Lock since 1995.
Gregg A. Dykstra, Secretary, has served registrant and Frank E.
Best, Inc. as Secretary since March 1995; Treasurer of Lock since March 1995;
Secretary of Lock from March 1995 to October 1995; Vice President of Lock since
1995; General Counsel of Lock from November 1989 to July 1995; Director of
registrant, Frank E. Best, Inc. and Lock since 1995.
Larry W. Rottmeyer, Director, has served registrant, Frank E.
Best, Inc. and Lock in this capacity since 1995 until February 26, 1996; Vice
President of Lock since September 1995; Director of Business Development of Lock
from May 1995 to September 1995; Vice President of Marketing of Lock from
October, 1994 to May 1995: Chief Executive Officer/President for Marcon
Corporation, an independent marketing and research firm, from October 1994 to
June 1995; Chief Executive Officer/President and senior marketing consultant for
Marcon Corporation from 1987 to October 1994; Director of Reflectix, Inc. since
January 1994.
Eric M. Fogel, Director, has served registrant, Frank E. Best,
Inc. and Lock in this capacity since 1995 until March 1, 1996; partner in the
law firm of Holleb & Coff, Chicago, Illinois, since December 1993; associate in
the law firm of Sonnenschein Nath & Rosenthal, Chicago, Illinois, from July 1989
to November 1993.
(2) Directorships. Russell C. Best who was a Director of registrant
through December 31, 1995, was also a Director of Lock and Frank E. Best, Inc.
through December 31, 1995. Mariea L. Best, Gregg A. Dykstra, Larry W. Rottmeyer
and Eric M. Fogel became Directors of registrant, Frank E. Best, Inc. and Lock
in 1995.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. To the knowledge of the
registrant, none of the directors within the previous five years has filed a
petition under the Bankruptcy Act or any state insolvency law nor was a
receiver, fiscal agent or similar officer appointed for such persons or any
partnership in which they may have been general partners or any corporation of
which they were executive officers. Furthermore, to the knowledge of the
registrant no director or executive officer has been convicted in a criminal
proceeding (except traffic violation or other minor offense) or is subject to a
criminal proceeding presently pending, nor to the knowledge of management is any
director subject to any order, judgment or decree by any Court of competent
jurisdiction, permanently or temporarily enjoining such director from acting as
an investment adviser, underwriter, broker or dealer in securities or as an
affiliated person, director or employee of any investment company, bank, savings
and loan association or insurance company or from engaging in or conducting any
conduct or practice in connection with such activity or in connection with the
purchase or sale of any security.
45
ITEM 11. EXECUTIVE COMPENSATION.
(a) COMPENSATION. The information in the following table discloses all
remuneration paid to the Chief Executive Officer and the other four most highly
compensated executive officers or directors of registrant, for services in all
capacities to the registrant and its subsidiaries during the fiscal years ended
December 31, 1995, 1994 and 1993, all of such remuneration having been paid by
Lock.
(b) SUMMARY COMPENSATION TABLE
Position Year Total Salary(3) Total Bonus(4) Total Other(5)
-------- ---- -------------- -------------- --------------
Russell C. Best 1995 $ 597,745 $ 0 $ 96,487
Chief Executive Officer 1994 406,657 343,665 13,562
1993 250,705 1,779 12,076
Gregg A. Dykstra 1995 260,687 100,000 9,581
Vice-President 1994 155,832 11,475 7,760
1993 147,148 1,779 8,515
Larry W. Rottmeyer(1) 1995 273,986 100,000 10,565
Vice-President 1994 41,539 270 43
1993 0 0 0
Walter E. Best(2) 1995 873,276 0 3,731
Chairman and President 1994 444,965 3,665 11,550
1993 435,668 1,779 11,637
Roger E. Beaverson(2) 1995 187,070 0 7,424
Secretary/Treasurer 1994 182,019 2,015 12,450
1993 189,777 1,779 11,564
(1) Removed as an officer March 5, 1996
(2) Walter E. Best resigned his positions effective February 15, 1995. Roger E.
Beaverson resigned his position effective June 16, 1995.
(3) In the case of Russell C. Best, the salary amount for 1995 includes $7,867
in taxes paid by the Company on the value of a trip paid by the Company. In the
case of Gregg A. Dykstra, the salary amount for 1995 includes an auto stipend of
$11,577. The 1995 salary amount for Gregg A. Dykstra also includes an amount
equal to $80,033 as a retroactive base pay adjustment for 1995 which was paid in
1996. In the case of Larry W. Rottmeyer, the salary amount for 1995 includes an
auto stipend of $17,300 and $7,228 in taxes paid by the Company on the value of
a trip paid by the Company. The 1995 salary amount for Larry W. Rottmeyer also
includes an amount equal to $64,584 as a retroactive base pay adjustment for
1995 which was paid in 1996. In the case of Walter E. Best, the salary amount
for 1995 includes $121,275 paid pursuant to a supplemental retirement agreement,
$500,000 paid as severance, $9,000 paid as consulting fees, and $4,250 in tax
return preparation fees. In the case of Richard E. Best, the salary amount for
1995 includes $423,381 paid as severance and $1,770 in tax return preparation
fees.
(4) In 1995, the bonus payments were discretionary and were paid in 1996 in
recognition of services provided in 1995. In the case of Russell C. Best, the
bonus amount for 1994 includes an
46
amount equal to $340,000 in recognition of services provided in calendar year
1994, payable in accordance with the employment agreement with Russell C. Best.
In 1994, the bonus payments consisted of a flat base amount plus a percentage
based on the employee's achievement of certain business objectives. In 1993,
the bonus payments were flat amounts.
(5) In the case of Russell C. Best, this amount includes the value of group
term life premiums in excess of $50,000 ($920, $459, and $213 respectively, in
1995, 1994 and 1993), the annual lease value of his company vehicle ($16,449,
$12,316, and $9,583 respectively, in 1995, 1994 and 1993), the amount paid by
the Company for tax return preparation and legal fees on his behalf ($14,882,
$787 and $530 respectively in 1995, 1994 and 1993), contributions by the Company
to the 401(k) plan on his behalf ($3,000 in 1995), $1,750 contributed by the
Company to the Best Lock Corporation Stock Bonus Plan, a defined contribution
plan, on his behalf in 1993, $317 in disability insurance premiums paid on his
behalf in 1995, $547 in spousal travel paid by the Company in 1995, $11,205 in
value of a trip paid by the Company in 1995, and for 1995, $49,168 reflecting
the present value of the economic benefit of the portion of a split dollar life
insurance premium paid by the Company, based on the time period between the date
the premium was paid and December 29, 2025, the earliest date the Company could
receive a refund, without interest, of the premium paid. In the case of Gregg
A. Dykstra, this amount includes the value of group term life premiums in excess
of $50,000 ($149, $218, and $185 respectively, in 1995, 1994 and 1993), the
annual lease value of his company vehicle ($6,100, $6,100, and $5,517
respectively, in 1995, 1994 and 1993), the value of spousal travel paid by the
Company ($332 in 1995 and $1,339 in 1993), the amount paid by the Company for
tax return preparation fees on his behalf ($375 in 1994 and 1993), contributions
by the Company to the 401(k) plan on his behalf ($3,000 and $1,067 respectively
in 1995 and 1994), and $1,099 contributed by the Company to the Best Lock
Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in
1993. In the case of Larry W. Rottmeyer, this amount includes the value of
group term life premiums in excess of $50,000 ($190 and $43 respectively, in
1995 and 1994), $332 in spousal travel paid by the Company in 1995, and $10,043
in value of a trip paid by the Company in 1995. In the case of Walter E. Best,
this amount includes the annual lease value of his company vehicle ($731,
$5,850, and $5,850 respectively, in 1995, 1994 and 1993), the amount paid by the
Company for tax return preparation fees on his behalf ($4,250 and $3,970
respectively, in 1994 and 1993), contributions by the Company to the 401(k) plan
on his behalf ($3,000 and $1,450 respectively in 1995 and 1994), and $1,817
contributed by the Company to the Best Lock Corporation Stock Bonus Plan, a
defined contribution plan, on his behalf in 1993. In the case of Roger E.
Beaverson, this amount includes the value of group term life premiums in excess
of $50,000 ($400, $1,599, and $1,496 respectively, in 1995, 1994 and 1993), the
annual lease value of his company vehicle ($1,917, $7,225, and $7,750
respectively, in 1995, 1994 and 1993), the excess of market value over purchase
price of his company vehicle of $1,333 in 1995, the value of spousal travel paid
by the Company ($626 and $881 respectively, in 1994 and 1993), the amount paid
by the Company for tax return preparation fees on his behalf ($775 in 1995),
contributions by the Company to the 401(k) plan on his behalf ($3,000 in both
1995 and 1994), and $1,438 contributed by the Company to the Best Lock
Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in
1993.
47
(c) COMPENSATION PURSUANT TO PLANS.
(1) The Best Lock Corporation Stock Bonus Plan is a qualified
noncontributory defined contribution plan available to all employees above the
age of 21 with one year of full-time service. Voluntary contributions by Lock
to the plan are made upon the authority of the Board of Directors, and are
allocated on the basis of annual compensation and years of service. The funds
of the Plan are to be invested primarily in securities of the registrant or its
affiliates. Amounts are distributed from the Plan upon the resignation,
retirement, termination, or death of the employee in accordance with Plan
provisions. Employer contributions for the account of the individuals named in
the Compensation Table are less than $50,000 in each year presented.
(2) Russell C. Best, along with other employees, participates in a
qualified noncontributory defined benefit pension plan approved by Lock's Board
of Directors in 1989. The monthly benefit payable thereunder is based on the
employee's compensation and years of past service as of September 1, 1989.
Normal retirement age is 65, with provisions for earlier retirement with reduced
benefits. Such payments are to be made for their lifetime, following which 50%
of the monthly amount will be provided for the lifetime of a surviving spouse.
The monthly benefit payable to Russell C. Best under this Plan is $490.
(d)(e)(f) OTHER COMPENSATION. There was no other compensation paid to the
named individuals exceeding 10% of the compensation reported for such
individual.
(g) COMPENSATION OF DIRECTORS. Directors are paid $25,000 per calendar
year for services rendered, effective April 1, 1995.
(h) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN
CONTROL ARRANGEMENT. On May 5, 1994, Lock and Russell C. Best entered into an
Employment Agreement (the "Agreement") pursuant to which Russell C. Best assumed
the duties of Chief Executive Officer of Lock. The initial term of the
Agreement expires December 31, 1998; however, the term is automatically extended
by one additional year on December 31 of each year unless earlier terminated
such as by notice by either party to the other at least thirty (30) days prior
to December 31 of such year.
The Agreement provides for a base salary of $425,000 per year,
subject to increases for inflation and other factors, plus the participation of
Russell C. Best in all general and executive compensation and benefit plans of
Lock, including any incentive or bonus plans. The Agreement further provides
for a loan of up to $3,400,000 to Russell C. Best, to be repaid to Lock over a
thirty year period with interest at 7.2% per annum. Such loan must be secured
by acceptable collateral, but in any event by all assets acquired with the
proceeds of the loan. The loan is secured by a pledge of certain of the shares
of Frank E. Best, Inc. acquired with its proceeds and certain shares of
registrant owned by Russell C. Best. Such shares will be released from this
pledge pro rata as the principal of the loan is repaid to Lock.
The Agreement also provides severance benefits in the event of
termination of employment under certain circumstances. In the event of
termination of employment by Lock without "cause" or by Russell C. Best with
"cause" (as such terms are defined in the Agreement), he will receive in each
year throughout the unexpired portion of the term of the Agreement including any
extensions occurring prior to the date of termination, his then current base
salary, plus the average of the aggregate amounts of any bonuses, incentive
payments, and/or contingent compensation received by him in each of the three
immediately preceding calendar years. If Lock terminates Russell C. Best's
employment with "cause," or if he terminates employment without "cause," Russell
C. Best would forfeit all compensation and benefits following such termination.
48
Consistent with the terms of the Agreement, on May 18, 1994, Lock
loaned $3,400,000 to Russell C. Best pursuant to the terms of a Loan Agreement
dated May 5, 1994, to which Lock and Russell C. Best are parties. The terms of
the loan were as provided in the Agreement.
On May 16, 1994, the Company entered into an Agreement Respecting Sale
of Stock (the "Put Agreement") with Russell C. Best. The Put Agreement provided
that Russell C. Best had the right, exercisable at any time on or before
December 31, 1994, to require the Corporation to purchase from him any shares of
Frank E. Best, Inc. owned by him at the time of exercise at a price of $29.36
per share. The Put Agreement expired unexercised on December 31, 1994. There
are no compensatory plans or arrangements with respect to any individual named
in the compensation tables, resulting from the individual's resignation,
retirement, or any changes following a change in control of the registrant.
(i) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. There
are no interlock or insider participation arrangements involving any executive
or board member of registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following
information is given as of February 9, 1996:
49
Title of Name and Type of Amount Percent
Class Address Ownership Owned of Class
- --------------------------------------------------------------------------------
Series B, Frank E. Best, Inc. Of Record 300,000 100%
common c/o Best Lock
Corporation
P. O. Box 50444
Indianapolis, Indiana
46250
Series A, The NBD Bank, N.A. As Trustee 27,262 40%
common One Indiana Square for Stock
Indianapolis, Bonus Plan
Indiana 46204
Series A, Best Lock Partnership Of Record 8,787 13%
common c/o Best Lock
Corporation
P. O. Box 50444
Indianapolis, Indiana
46250
(b) SECURITY OWNERSHIP OF MANAGEMENT. The following information is given
as of February 9, 1996:
Amount Percent
Title of Class Beneficially Owned of Class
-------------- ------------------ --------
Common stock, $1 par value, of Frank E.
Best, Inc., (registrant's parent)
(Owned by Russell C. Best, Director and
CEO/President) 463,139.00 (1) 70%
(Owned by Mariea L. Best, Director and
Vice President) 1.00 0%
(Owned by Gregg A. Dykstra, Director and
Secretary) 1.00 0%
(Owned by Directors and Officers of
registrant, as a group, 3 in number) 463,141.00 70%
50
Series A, common stock, no par value, of
registrant
(Owned by Russell C. Best, Director and
CEO/President) 38,176.00 (2) 56%
(Owned by Mariea L. Best, Director and
Vice President) 1.00 0%
(Owned by Gregg A. Dykstra, Director and
Secretary) 27,263.00 (2) 40%
(Owned by Larry W. Rottmeyer, Director) 27,262.00 (2) 40%
(Owned by Directors and Officers of the
registrant, as a group, 3 in number) 56,263.00 56%
Series B, common stock, no par value,
of registrant
(Owned by Russell C. Best, Director and
CEO/President) 300,000.00 (3) 100%
Common stock, no par value, of Lock,
(registrant's subsidiary)
(Owned by Russell C. Best, Director and
CEO/President) 107,779.53 (4) 89%
(Owned by Mariea L. Best, Director) 1.00 0%
(Owned by Gregg A. Dykstra, Director and
Vice President) 10,537.19 (4) 9%
(Owned by Larry W. Rottmeyer, Director and
Vice President) 10,537.19 (4) 9%
(Owned by Directors and Officers of the
registrant, as a group, 2 in number) 107,780.53 89%
(1) This figure represents Russell C. Best's direct and beneficial
ownership by virtue of his power to vote or direct the voting of 113,311
shares held by him and 204,053 shares held by Best Lock Partnership and
his power to dispose of 145,775 shares owned by Best Lock Corporation.
(2) This figure represents the named individual's direct and beneficial
ownership by virtue of his or her power to vote or to direct the voting
of shares held in his own name (or in the case of Russell C. Best, 8,787
shares owned by Best Lock Partnership and his power to dispose of 8,085
shares owned by Best Lock Corporation), and shared power to direct the
disposition of 27,262 shares held by the Best Lock Corporation Stock
Bonus Plan.
(3) This figure represents Russell C. Best's beneficial ownership by virtue of
his power to vote or to direct the voting of 300,000 shares held by Frank
E. Best, Inc., of which he has voting control.
51
(4) This figure represents the named individual's direct and beneficial
ownership by virtue of his power to vote or to direct the voting of
shares held in his own name (or in the case of Russell C. Best,
95,556.34 shares owned by registrant, of which he has voting control),
and shared power to direct the disposition of 10,537.19 shares held by
the Best Lock Corporation Stock Bonus Plan.
(c) CHANGES IN CONTROL. There are no arrangements known to registrant,
the operation of which may at a subsequent date result in a change in control of
the registrant.
(d) SECTION 16(A) REPORTING DELINQUENCIES. Based solely upon a
review of Forms 3 and 4 and amendments thereto provided to the Corporation
during the most recent fiscal year and Form 5 and amendments thereto furnished
to the Corporation with respect to its most recent fiscal year and written
representations from its directors, officers and more than 10% shareholders, the
following sets forth certain information concerning Section 16(a) reporting
delinquencies by the above-referenced persons during the Corporation's most
recently completed fiscal year.
With respect to Section 16(a) of the Exchange Act, the following insider
filings were delinquent: Mariea L. Best, Form 3; Gregg A. Dykstra, Form 3; Eric
M. Fogel, Form 3; and Larry W. Rottmeyer, Form 3.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. On May 5, 1994, Best Lock
Corporation's Board of Directors approved a loan of $3.4 million to Russell C.
Best, Chief Executive Officer, under the terms of an Employment Agreement
entered into by Best Lock Corporation and Russell C. Best. On May 18, 1994,
$3.4 million was borrowed by Russell C. Best under the terms of the loan, which
include repayment over a thirty (30) year period in equal annual installments of
$279,519, including interest at 7.2%.
(b) CERTAIN BUSINESS RELATIONSHIPS. Walter E. Best, former President of
Lock, is the President and owns in excess of 10% of the stock of Best Aircraft
Corporation. Lock leased automobiles from Best Aircraft Corporation, paying
$30,030, $183,470 and $180,656 for such services in 1995, 1994, and 1993,
respectively. Larry W. Rottmeyer became a Director of registrant in 1995. Mr.
Rottmeyer resigned as a Director on February 26, 1996. During Mr. Rottmeyer's
directorship, he was also a Director and a greater than 10% equity owner of
Marcon, Inc. until June 9, 1995. Lock purchased market research services from
Marcon, Inc., during 1995 and 1994, paying $547,942 and $291,716 for such
services, respectively. Eric M. Fogel, Director from October 30, 1995 until
March 1, 1996, is a partner in the law firm of Holleb & Coff. Registrant paid
Holleb & Coff $112,221 in 1995 for legal services.
(c) INDEBTEDNESS OF MANAGEMENT. There was no indebtedness to the
registrant at any time since the beginning of the registrant's last fiscal year
in an amount in excess of $60,000 by any (1) executive officer, director,
nominee for director, or immediate family member of the preceding; (2) entity in
which any executive officer or director is an executive officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; or (3) trust or estate in which any executive officer or
director has a substantial beneficial interest or as to which he serves as a
trustee or in a similar capacity, other than the indebtedness described in (a)
above.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS: All required financial statements and schedules
are included in Item 8 of this Form 10-K.
(b) REPORTS ON FORM 8-K: None filed in last quarter of 1995.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized and representing a
majority of the Board of Directors.
Date: March 30, 1996
BEST UNIVERSAL LOCK CO.
By: /s/ RUSSELL C. BEST By: /s/ GREGG A. DYKSTRA
------------------- --------------------
Russell C. Best Gregg A. Dykstra
Chief Executive Officer Director
and Director
By: /s/ PAULA J. TINKEY
-------------------
Paula J. Tinkey
Principal Accounting Officer
54
INDEX TO EXHIBITS
Exhibit
-------
3 (a) Certificate of Incorporation
3 (b) By-Laws
10 (a) Credit Agreement
10 (b) Split Dollar Insurance Agreement
21 Subsidiaries (incorporated by reference in Note 1 to the consolidated
financial statements)
55