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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ /X/] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 0-1490
FRANK E. BEST, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 35-1142810
(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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's classes of
common, as of April 30, 1996.
Common Stock 598,710 Shares
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INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Loss)
for the three months ended March 31, 1996 3
Condensed Consolidated Balance Sheets at March 31, 1996
and December 31, 1995 4-5
Condensed Consolidated Statements of Shareholders' Equity
at March 31, 1996 and December 31, 1995 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
2
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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended March 31
----------------------------
1996 1995
------------- -------------
NET SALES $ 27,287,087 $ 29,156,288
OPERATING EXPENSES
Cost of goods sold 15,188,396 15,814,522
Selling 8,685,191 6,894,952
General and administrative 4,527,828 4,389,803
Engineering, research and development 428,058 625,440
------------ ------------
Total operating expenses 28,829,473 27,724,717
------------ ------------
OPERATING INCOME (LOSS) (1,542,386) 1,431,571
Interest expense (300,289) (137,346)
Other income, net 81,552 132,519
------------ ------------
INCOME (LOSS) before provision for income taxes (1,761,123) 1,426,744
Provision (benefit) for income taxes (669,344) 597,541
------------ ------------
NET INCOME (LOSS), Best Lock Corporation and Subsidiary (1,091,779) 829,203
Minority interest in net (income) loss, Best Lock Corporation and Subsidiary 234,298 (175,750)
Corporate - Best Universal Lock Co. (expense) (6,448) (96)
------------ ------------
NET INCOME (LOSS), Best Universal Lock Co. and Subsidiaries (863,929) 653,357
Minority interest in net (income) loss, Best Universal Lock Co. and Subsidiaries 145,475 (192,332)
Corporate - Frank E. Best, Inc. income (expense) 21,066 (66)
------------ ------------
NET INCOME (LOSS), Frank E. Best, Inc. and Subsidiaries $ (697,388) $ 460,959
------------ ------------
------------ ------------
Best Lock Best Universal Lock Co. Frank E.
-------------------------
Corporation Series A Series B Best, Inc.
----------- ----------- ----------- -----------
Earnings (loss) per common share, three months ended:
March 31, 1996 $ (8.97) $ (2.39) $ (2.39) $ (2.53)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
March 31, 1995 $ 6.49 $ 1.71 $ 1.71 $ 0.90
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding, three months ended:
March 31, 1996 121,653.85 60,739.31 300,000.00 275,408.89
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
March 31, 1995 127,827.43 82,731.60 300,000.00 511,919.46
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to condensed consolidated financial statements.
3
FRANK E. BEST, INC. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1996 1995
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 259,661 $ 1,413,372
Trade receivables
Direct 12,405,658 11,878,119
Sales representatives and other 2,410,146 1,893,871
Allowance for uncollectible accounts (231,683) (263,559)
Estimated refundable income taxes 2,975,516 2,628,103
Current portion of notes receivable 53,252 14,895
Inventories 11,159,578 11,383,058
Prepaid income taxes 4,238,839 4,239,578
Other prepaid expenses 303,376 379,906
------------ ------------
Total current assets 33,574,343 33,567,343
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and buildings 13,850,412 14,037,266
Machinery and equipment 28,109,967 28,694,247
Tooling 8,403,868 8,423,818
Furniture, fixtures and other 12,920,087 9,927,645
Construction work-in-progress 691,368 2,473,290
------------ ------------
63,975,702 63,556,266
Less - accumulated depreciation (34,778,829) (33,734,786)
------------ ------------
Total property, plant and equipment 29,196,873 29,821,480
------------ ------------
OTHER ASSETS
Long-term notes receivable 3,358,972 3,358,972
Other assets 1,022,300 1,084,300
------------ ------------
Total assets $ 67,152,488 $ 67,832,095
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
4
FRANK E. BEST, INC. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1996 1995
----------- -----------
CURRENT LIABILITIES
Notes payable and current portion of long-term debt $ 2,500 $ 2,500
Current portion of retirement benefit obligations 1,335,763 1,362,431
Accounts payable 3,907,998 3,517,797
Customer advances 1,394,871 1,433,801
Accrued liabilities
Income taxes 139,554 478,185
Property and other taxes 1,221,392 976,765
Payroll, vacation and benefits 4,512,260 5,195,317
Accrued severance 3,342,067 3,462,508
Other 390,407 219,252
----------- -----------
Total current liabilities 16,246,812 16,648,556
----------- -----------
LONG-TERM DEBT 15,716,236 15,197,079
RETIREMENT BENEFIT OBLIGATION 3,572,169 3,870,345
DEFERRED INCOME TAXES 2,532,239 2,120,957
----------- -----------
Total liabilities 38,067,456 37,836,937
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES 14,300,249 14,503,728
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 600,000 shares
authorized; 598,710 shares issued 598,710 598,710
Capital surplus 77,972 77,972
----------- -----------
Total capital stock 676,682 676,682
Accumulated earnings 23,183,482 23,880,870
Cumulative translation adjustment (98,012) (88,753)
Treasury stock (8,977,369) (8,977,369)
----------- -----------
Total shareholders' equity 14,784,783 15,491,430
----------- -----------
Total liabilities and shareholders' equity $67,152,488 $67,832,095
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
5
FRANK E. BEST, INC. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
March 31 December 31
1996 1995
----------- ------------
COMMON STOCK, $1 par value, 600,000 shares
authorized; 598,710 shares issued $ 598,710 $ 598,710
CAPITAL SURPLUS 77,972 77,972
----------- ------------
Total capital stock 676,682 676,682
----------- ------------
ACCUMULATED EARNINGS
Balance at beginning of year 23,880,870 27,491,946
Net income (loss) - (three months ended March 31, 1996
and twelve months ended December 31, 1995) (697,388) (3,255,138)
Cash dividends -- (317,316)
Difference between dividends of Series A and
Series B common shareholders of Best Universal
Lock Co. -- (38,622)
----------- ------------
Balance at end of year 23,183,482 23,880,870
----------- ------------
CUMULATIVE TRANSLATION ADJUSTMENT (98,012) (88,753)
----------- ------------
TREASURY STOCK
Balance at beginning of year (8,977,369) --
Shares purchased -- (8,977,369)
----------- ------------
Balance at end of period (8,977,369) (8,977,369)
----------- ------------
Total shareholders' equity $14,784,783 $ 15,491,430
----------- ------------
----------- ------------
Cash dividends per share: $ 0.00 $ 0.53
----------- ------------
----------- ------------
See accompanying notes to condensed consolidated financial statements.
6
FRANK E. BEST, INC. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
---------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 26,695,189 $ 28,379,629
Cash paid to suppliers and employees (27,917,000) (31,134,075)
Interest received 53,141 291,808
Interest paid (378,085) (28,416)
Income taxes paid 396,459 (753,443)
------------ ------------
Net cash provided (used) by operating activities (1,150,296) (3,244,497)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 3,619 1,161
Capital expenditures (521,484) (1,581,654)
------------ ------------
Net cash used in investing activities (517,865) (1,580,493)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings against unsecured line of credit 14,100,000 12,000,000
Payments on unsecured line of credit (13,580,843) --
Purchase of treasury stock -- (8,211,021)
------------ ------------
Net cash provided by financing activities 519,157 3,788,979
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4,707) (253)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,153,711) (1,036,264)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,413,372 4,843,579
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 259,661 $ 3,807,315
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) $ (728,476) $ 460,959
Adjustments-
Depreciation and amortization 1,321,783 1,126,063
Provision for losses on accounts receivable 13,950 78,619
(Gain) loss on sale of property, plant and equipment 47,192 (1,123)
Minority interest related to current year
earnings (loss) (379,921) 368,082
Changes in assets and liabilities-
(Increase) decrease in
Accounts and notes receivable (1,131,707) (812,800)
Refundable income taxes (347,413) 68,407
Inventories 219,885 (872,482)
Prepaid income taxes and other expenses 77,269 471,480
Other assets (71,260) (1,323,561)
Increase (decrease) in
Accounts payable, customer advances and
accrued liabilities 79,457 (2,001,157)
Income taxes payable (337,493) (631,966)
Deferred income taxes 411,282 7,563
Retirement benefit and benefit obligation (324,844) (182,581)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (1,150,296) $ (3,244,497)
------------ ------------
------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have not been
audited by independent accountants. In the opinion of the Company's management,
the financial statements reflect all adjustments necessary to fairly present the
results of operations for the three-month periods ended March 31, 1996 and 1995,
the Company's financial position at March 31, 1996 and December 31, 1995, and
the cash flows for the three-month periods ended March 31, 1996 and 1995. These
adjustments are of a normal recurring nature.
Certain notes and other information have been omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1995 Form 10-K.
The results for the first quarter of 1996 are not necessarily indicative of
future financial results.
The condensed consolidated financial statements for each parent company in
the Best Lock Companies (the Company) include their respective subsidiaries as
indicated below:
Percent Owned
Parent Company Subsidiaries as of March 31, 1996
- -------------- ------------ --------------------
Frank E. Best, Inc. Best Universal Lock Co. 83%
(Best)
Best Universal Lock Best Lock Corporation 79%
Co. (Universal)
Best Lock Best Universal Locks Limited (Canada) 100%
Corporation (Lock or the Company)
2. INCOME TAXES
The effective tax rate for the first quarter of 1996 was (38.0) percent compared
with 41.9 percent for the first quarter of 1995. Foreign tax expense provided
on first quarter 1996 income in Canada decreased the benefit generated on the
first quarter 1996 loss in the United States. Additionally, nondeductible
expenses were higher for the first quarter of 1996 compared to the first quarter
of 1995, which resulted in a decrease in the first quarter 1996 tax benefit. In
the first quarter of 1995, both the U.S. and Canada had taxable income. The
effective tax rates are higher than the U.S. Federal statutory rate of 34% due
to a higher tax rate in Canada and state income taxes.
8
3. FINANCING ARRANGEMENTS
The Company entered into a $25,000,000 line of credit agreement on February
15, 1995, which was amended 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 March 31, 1996 the
Company was in compliance with all required covenants. The balance of the line
at March 31, 1996 was $15,600,000. The highest amount outstanding since
February 15, 1995 was $17,700,000. The interest rate on these borrowings is
based on LIBOR or prime. The interest rate at March 31, 1996 and December 31,
1995 was 6.84% and 7.06%, respectively. Interest expense on the borrowings for
the three months ended March 31, 1996 and 1995 was $289,076 and $112,087,
respectively.
4. RECLASSIFICATIONS
Certain reclassifications have been made to the statement of income and
balance sheet for the prior periods to conform to the current period
presentation.
5. RESTRUCTURING
During 1995, the Company recorded a restructuring charge of $3.1 million in
connection with the announcement of a board approved early retirement, voluntary
and involuntary separation plan . The Company plans to reduce the number of
employees in all divisions and centralize certain functions in the
distribution division. As of March 31, 1996, 55 employees had separated or
agreed to separate under the voluntary separation or early retirement provisions
of the plan. In conjunction with the 55 acceptances, the Company accrued
approximately an additional $1 million in restructuring expenses during the
first quarter of 1996, due to the additional expenses associated with voluntary
separation and early retirement. The total number of anticipated separations
was reduced during the first quarter from 340 in the original plan to 193. The
Company reduced the restructuring reserve during the first quarter of 1996 by
approximately $1 million in conjunction with this revision.
9
ITEM 2. 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 (the Company).
ANALYSIS OF RESULTS OF OPERATIONS
Sales for the first quarter of 1996 were $1.9 million lower than the same period
of 1995. Lower sales from the manufacturing division (BLM) to independent
distributors and Authorized Contract Construction Dealers accounted for the
majority of the decrease. In addition, sales during the first quarter of 1995
were exceptionally strong. Sales for the first quarter of 1995 were 25% higher
than the same period of 1994, but for the year were only 13% higher.
The gross profit on sales declined to 44.3% of sales, compared to 45.8% in the
prior year. Lower absorption of fixed costs in the BLM division, due to lower
sales, caused most of the erosion in the gross profit percentage. Margins
improved minimally in the distribution division (BLS).
Operating income (loss) decreased $3.0 million to (5.7)% of sales from 4.9% for
the same period in 1995. Selling, general and administrative, and engineering
expenses increased $1.7 million, or 14.5%, in the first quarter of 1996 compared
to 1995. Higher expenditures for advertising, publications, conventions and
sales conferences in the selling area accounted for the majority of the
increase.
The effective tax rate for the first quarter of 1996 was (38.0) percent compared
with 41.9 percent for the first quarter of 1995. Foreign tax expense provided
on first quarter 1996 income in Canada decreased the benefit generated on the
first quarter 1996 loss in the United States. Additionally, nondeductible
expenses were higher for the first quarter of 1996 compared to the first quarter
of 1995, which resulted in a decrease in the first quarter 1996 tax benefit. In
the first quarter of 1995, both the U.S. and Canada had taxable income. The
effective tax rates are higher than the U.S. Federal statutory rate of 34% due
to a higher tax rate in Canada and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity continues to be strong for the first quarter of 1996,
due to the availability of approximately $9 million on the line of credit.
Working capital increased by approximately $400,000, mainly due to payouts of
payroll and vacation that were accrued at December 31, 1995. The current ratio
of 2.1:1 at March 31, 1996 improved slightly from the ratio of 2.0:1 at December
31, 1995. Cash and cash equivalents decreased by $1.1 million, due to a change
in the payment terms for certain customers of the BLM division, which allowed
cash to become available to manage the amount of long-term debt outstanding.
Inventory turns remained fairly constant at 3.0 in the first quarter of 1996
compared to 3.1 in the first quarter of 1995.
Capital expenditures for the first quarter of 1995 were approximately $500,000.
Capital spending is projected to total between $2.0 and $4.0 million for the
year. The Company plans to meet its 1996 working capital and capital
expenditure requirements through funds from operations and from its existing
credit facility.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Company's Form 10-K for the year ended
December 31, 1995. There have been no new legal proceedings initiated during
the quarter, nor has there been a change in status or termination of any
previously reported legal proceeding.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRANK E. BEST, INC..
--------------------------------
(Registrant)
Date: May 15, 1996 By: /s/ Stephen J. Cooper
------------------- -----------------------------
Treasurer
/s/ Paula J. Tinkey
-----------------------------
Controller
12