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 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 1996 1995 1994 ------------- ---- ---- ----
Door Security Products 71% 68% 67% All Others 29 32 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. 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 7, 1997 $4,702,439 February 9, 1996 4,219,942
It is expected that 100% of the backlog on February 7, 1997 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 $769,000, $3,055,000 and $3,050,000 on research activities relating to the development of new products or the improvement of existing products in the years ending December 31, 1996, 1995 and 1994, 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 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 $336,802 during its current and succeeding fiscal year to continue to enhance the Company's overall environmental standards. This amount includes capital expenditures ($78,000) 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 448 production and maintenance employees; and 714 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%, 6% and 7% of Lock's total sales during 1996, 1995 and 1994, respectively. The risk and profitability of such business does not differ substantially from domestic sales.
ITEM 2.
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.
ITEM 3. PENDING LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
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 31, 1996 and 1995 was $68.54 and $67.68 per share respectively. There are 711 shareholders of record of registrant's Series A stock as of February 7, 1997.
The registrant's Series B stock is totally-held by its parent, Frank E. Best, Inc. This stock was valued as of December 31, 1996 and 1995 at $75.39 and $74.45 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 $1.68 and $1.67 per share on the Series A common stock, and $1.11 and $1.10 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 1996, 1995, and 1994, 50, 243 and 0 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.
ITEM 6.
ITEM 6. Selected Financial Data.
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1996 THROUGH 1992
- --------------------------------------------------------------------------------
The following consolidated summary of selected financial data should be read in conjunction with the accompanying notes to consolidated financial statements:
Earnings and dividends per common share - see page 9.
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, 1996 THROUGH 1992
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ITEM 7.
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 - 1996 VS. 1995
Sales grew modestly in 1996, increasing 4.0% over 1995 to a record of $122 million. The majority of the increase was generated from improved sales volumes in the Best Locking Systems (distribution) Division. A price increase on selected product lines, which became effective late in the third quarter of 1996, also improved sales slightly.
The gross margin improved significantly over 1995, to 47.7% of sales, compared to 41.0% in the prior year. The Company experienced a number of cost increases in 1995 which were either reduced or not experienced during 1996. These costs were for higher scrap rates (approximately $1.0 million), disposition of obsolete inventory (approximately $2.1 million), and higher salaries, wages, and fringe benefits associated with the manufacture of products ($1.9 million). During 1996, a task force completed a project of decreasing manufacturing costs associated with the production of the 9K lever handle lock. In 1995, the Company experienced approximately $1.8 million in increased material costs associated with the 9K lock, due to a redesign of the product which occurred in late 1994. During the third quarter of 1996, the Company discovered that mortise locksets manufactured since December of 1995 did not meet stated standards and could, in certain situations, cause a security breach. A $1.0 million charge to product service expense was recorded during the third quarter of 1996 as a result.
Operating expenses decreased by $3.0 million from 1995, the majority which is attributable to the following reasons. Salaries, wages and fringe benefits were $2.9 million lower than 1996, due to the 1995 $3.1 million restructuring charge associated with an early retirement, voluntary and involuntary separation plans for employees in certain job classifications, which was completed in 1996. The Company also made changes to the restructuring plan during 1996, which resulted in a reduction in expense of $800 thousand. Professional fees decreased $1.9 million from 1995, due to costs associated with development and installation of new software for the order processing accounts payable and general ledger functions which were incurred in 1995. These decreases were partially offset by increases in certain other expenses. Depreciation expense associated with non-production assets increased by $500 thousand, mainly due to depreciation on approximately $4.4 million of computer equipment placed into service during 1995, the majority of which is being depreciated over three years. Telephone, rent, seminars and training, and dues, fees, and subscriptions increased $900 thousand over 1995. The Company began leasing personal computers during 1996 which had previously been purchased, and a full year of costs associated with a corporate computer network, which was installed during 1995, were recognized.
Operating income increased by $13.0 million, to 5.7% of sales, due to the improved margins and lower operating expenses described above. Interest expense increased by $325 thousand in 1996, due to a full year of borrowing against a bank line of credit which was established on February 15, 1995.
Net income increased by $7.7 million to $3.5 million, or 2.8% of sales in 1996. Income tax expense was 42.8% of the income before tax in 1996, compared to a benefit of 35.9% of the loss before tax in 1995. The increase in the effective tax rate is due to an increase in state tax expense.
RESULTS OF OPERATIONS - 1995 VS. 1994
Sales for 1995 were $117.7 million, which was a record, and was 13.2% higher than 1994. Improved sales volumes 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. The 1995 gross margin decreased from 47.9% to 41.0% of sales, mainly due to increased material costs. 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. 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 were $7.3 million higher than 1994 levels. During the fourth quarter of 1995, the Company announced a restructuring plan with the goal of significantly reducing payroll-related expenses. The provisions of the plan included 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 in the fourth quarter of 1995 for costs associated with this plan. Professional fees were $3.0 million higher than 1994, mainly due 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. Sales commissions were $485,000 higher than 1994, due to higher sales and a change in commission rates. The remainder of the increase in selling, general and administrative, and engineering expenses was mainly due to higher travel expenses of $366,000.
Research and development expenditures for 1995 were approximately the same level as 1994, at $3.1 million. The Company began marketing its electronic access security product during the fourth quarter of 1995. Other research and development expenditures related to the development of computer software.
As a result of the factors described above, operating income decreased by $8.9 million, or 7.6% of sales, to a loss of $6.1 million for 1995. Interest expense increased by $863 thousand, 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 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 Office 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 3.6% 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 2.5 at December 31, 1996, compared to 2.0 at December 31, 1995. Current assets increased by $3.9 million during 1996, due to higher receivables. These higher receivables are associated with higher sales during the fourth quarter of 1996 of approximately $5.1 million. Inventories increased by $2.4 million, mainly at the manufacturing division, due to higher order volume in the fourth quarter of 1996. Estimated refundable income taxes decreased $2.6 million due to the receipt of refunds associated with the 1995 net loss.
Property, plant and equipment additions decreased by $4.2 million to $1.4 million in 1996 from the 1995 total of $5.6 million. Approximately $3.4 million of the 1995 capital expenditures related to the installation of enhanced computer systems and related software. Capital expenditures for 1997 are expected to be in the $3.5 million range, which includes approximately $1.5 million for improvements to manufacturing equipment and tooling.
Total liabilities decreased by $2.2 million from 1995 to 1996. Approximately $1.5 million of the decrease was in current liabilities. Accrued restructuring expense decreased $2.5 million, due to payouts of amounts expensed during 1995 and changes to the plan described in Note 14 to the consolidated financial statements. Accounts payable decreased approximately $802 thousand. Accrued income taxes increased $492 thousand, due to higher taxable income in 1996. The warranty accrual, established during 1996, increased $999 thousand. This accrual is for the estimated material, labor and travel costs to replace certain parts in mortise locksets manufactured from December of 1995 through September of 1996, as discussed above.
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 increased to $3.3 million in 1996, compared with $1.4 million in 1995. The $1.9 million increase was partially due to the increase in net income of $7.7 million, offset by a $4.5 million increase in accounts and notes receivable, and a $2.0 million decrease in accounts payable, customer advances, and other liabilities.
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, 1996, $15.0 million was outstanding. The remainder of the line remains available for additional funds, if required. The Company expects to repay the loan from future operating cash flows. 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.
OTHER
Foreign sales were approximately 6% of sales during 1996, which was the same percentage as 1995 and a slight decrease from the 7% level in 1994.
The firm backlog of approximately $4.7 million as of February 7, 1997 is approximately $500 thousand higher than the prior year. The increase is primarily due to a higher volume of orders in January 1997 compared with January 1996.
The Company has not experienced any unusual inflation in its purchases or sales for the years 1996, 1995, or 1994.
The Company has not had and does not expect to incur any significant future environmental liability.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(a) 1. Financial Statements:
Report of Independent Public Accountants
Corporate Balance Sheets, December 31, 1996 and 1995
Corporate Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Income (Loss) for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
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, 1996 through 1994
III Investments in, Equity in Earnings of, and Dividends Received From Affiliates and Other Persons - for the Years Ended December 31, 1996 through 1994
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, 1996 and 1995, and the related corporate statements of cash flows for each of the three years in the period ended December 31, 1996 and the accompanying consolidated balance sheets of BEST UNIVERSAL LOCK CO. AND SUBSIDIARIES as of December 31, 1996 and 1995, 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, 1996. 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 the Companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
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, February 6, 1997.
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) CORPORATE BALANCE SHEETS - --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) CORPORATE STATEMENTS OF CASH FLOWS
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The accompanying notes to consolidated financial statements are an integral part of these statements.
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
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The accompanying notes to consolidated financial statements are an integral part of these statements.
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
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The accompanying notes to consolidated financial statements are an integral part of these statements.
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)
The accompanying notes to consolidated financial statements are an integral part of these statements.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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The accompanying notes to consolidated financial statements are an integral part of these statements.
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
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 Co. (Universal) Best Lock Corporation 79% Best Lock Corporation (Lock or the Company) Best Universal Locks Limited (Canada) 100%
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.
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.
d. INVENTORIES Inventories are valued using the last-in, first-out (LIFO) method for approximately 97% 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.
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $248,000 in 1996 and $206,667 in 1995.
h. 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 $769,000, $3,055,000 and $3,050,000 in 1996, 1995, and 1994, respectively.
i. CURRENCY TRANSLATION The accounts of Lock's Canadian subsidiary are translated 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 consolidated financial statements include translation (losses) gains of ($87,109), $56,459 and ($89,392) in 1996, 1995 and 1994, respectively, all of which are reflected as a component of shareholders' equity.
j. NONCASH TRANSACTION The Company financed the purchase of $348,702 of treasury stock during 1995 by issuing a note payable.
k. 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 on a noncumulative basis 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. These disproportionate distributions are reflected in calculating the minority interest of Best.
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 2.50%, 3% & 5% Land Improvements 6.67% & 10% Machinery and equipment 8.33% Tooling 12.50% & 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. The depreciable 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), net in the consolidated statements of income (loss).
4. INVENTORIES
FIFO cost of inventories approximates replacement cost and exceeds LIFO inventory by $7,923,000, $8,597,000, and $7,616,000 in 1996, 1995 and 1994, respectively.
Inventories reflected at LIFO cost were as follows:
December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ------------
Finished goods $5,327,940 $4,958,614 $6,526,239 Work-in-process 8,171,868 6,182,505 7,816,878 Raw material 279,207 241,939 235,941 ----------- ----------- ------------ Total Inventory $13,779,015 $11,383,058 $14,579,058 ----------- ----------- ------------ ----------- ----------- ------------
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The cost of materials, direct labor and manufacturing overhead associated with the production of inventories is included in the valuation of inventory.
During 1995, 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 purchases. The effect of this liquidation increased net income by approximately $480,000 or $3.87 per share of common stock in 1995.
5. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Earnings (loss) before income taxes were as follows:
Years Ended December 31 --------------------------------------- 1996 1995 1994 ---------- ------------ -----------
Domestic $5,704,209 $(7,060,863) $2,335,442 Foreign 343,339 496,964 67,972 ---------- ------------ ----------- $6,047,548 $(6,563,899) $2,403,414 ---------- ------------ ----------- ---------- ------------ -----------
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effective income tax rate varied from the U.S. Federal statutory rate for the following reasons:
At December 31, 1996, the Company had $605,000 of unutilized foreign tax credits. Of this amount, approximately $158,000 must be used by 1998; the balance expires in 2001. The Company believes these foreign tax credits will be utilized during the carryover period and thus has recorded the benefit of the credits as a reduction to the provision for income taxes for the year ended December 31, 1996.
The Company also has alternative minimum tax credits available to offset 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 the balance of these credits of $147,000 has been reflected as a reduction to the provision for income taxes for the year ended December 31, 1996.
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:
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, 1996, the Company had no outstanding letters of credit.
The Company entered into a $25.0 million line of credit agreement on February 15, 1995, which was amended effective December 31, 1996 and 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, 1996, the Company was in compliance with all required covenants.
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 did not contribute to the Stock Bonus Plan in 1996, 1995, and 1994. Contributions are determined by Lock's Board of Directors.
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, redeemable under Stock Bonus Plan." The Stock Bonus Plan was amended in 1996 to allow 1996 retirees to receive distributions earlier than the plan previously provided. The accelerated payout for the 1996 retirees is based on a formula which considers age and years of service.
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.
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Sales outside the U.S. amounted to approximately 6% of total sales during 1996 and 1995 and 7% of total sales during 1994.
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 contributions are made to a trust fund whose assets consist of investments in high-quality short-term money market instruments.
A summary of the components of net periodic pension cost in 1996, 1995 and 1994 for the Plan follows:
1996 1995 1994 --------- -------- -------- Interest cost on projected benefit obligation $557,686 $691,987 $230,566 Actual return on plan assets (277,736) (351,395) (198,724) Net amortization and deferral (204,119) -- -- --------- -------- -------- Net periodic pension costs $75,831 $340,592 $31,842 --------- -------- -------- --------- -------- --------
Plan assumptions in 1996, 1995 and 1994 were:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . 8.0% Expected long-term rate of return on Plan assets. . . . . . . 8.0%
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the Plan's funded status and amounts recognized in the consolidated balance sheet at December 31, 1996:
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%) of the benefits to be provided under the terms of these agreements were recognized in 1989 and subsequent years. Prior to 1995, the agreement with the Company's former President 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 1994 expense of approximately $800,000. 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 components of net periodic pension cost in 1996, 1995 and 1994 for the supplemental retirement benefit agreements follows:
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Supplemental retirement benefit agreement assumptions in 1996, 1995 and 1994 were:
Discount rate. . . . . . . . . . . . . . . . . . . . . 8.0% Expected long-term rate of return on assets. . . . . . 8.0%
The following table sets forth the funded status of the supplemental retirement benefit agreements and amounts recognized in the consolidated balance sheet at December 31, 1996:
Actuarial present value of benefit obligation $2,991,444 Plan assets at fair value 114,311 ----------- Projected benefit obligation in excess of plan assets 2,877,133 Unrecognized net gain (loss) (153,170) Remaining net asset (obligation) at transition (34,596) Intangible asset 34,596 Charge to equity 153,170 ----------- Net pension liability $2,877,133 ----------- -----------
A summary of the retirement benefit obligations included in the consolidated balance sheets is presented below:
1996 1995 ---------- ---------- Defined Benefit Employees Pension Plan $1,332,931 $1,777,989 Supplemental Retirement Benefit Agreements 2,877,133 3,035,429 Other 368,453 419,358 ---------- ---------- $4,578,517 $5,232,776 ---------- ---------- ---------- ---------- Current Portion $1,365,118 $1,362,431 Noncurrent Portion 3,213,399 3,870,345 ---------- ---------- $4,578,517 $5,232,776 ---------- ---------- ---------- ----------
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 $541,000, $571,000 and $221,000 in 1996, 1995 and 1994, respectively.
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONTINGENCIES
From time to time the Company is a party to litigation incidental to its business. Management is of the opinion that the ultimate resolution of 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, 1996 are as follows:
Amount ---------- 1997 $ 991,592 1998 774,249 1999 452,072 2001 223,066 2001-2005 448,784 ---------- $2,889,763 ---------- ----------
Rent expense charged to operations totaled $956,413, $761,024 and $852,565 in 1996, 1995, and 1994, 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 ----------- ----------- 1996 1995 ----------- ----------- Best $17,436,000 $15,607,000 Universal 21,920,000 19,954,000 Lock 2,056,000 1,934,000
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated statements of income (loss) and balance sheet for the prior years to conform to the current year presentation.
14. 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's plan was to reduce the number of employees in all divisions and centralize certain functions in the distribution division.
As of December 31, 1996, 63 employees had separated or agreed to separate under the voluntary separation or early retirement provisions of the plan. In conjunction with the acceptances, the Company accrued approximately an additional $1 million in restructuring expenses during 1996, due to the additional expenses associated with voluntary separation and early retirement. The total number of anticipated separations was reduced from approximately 340 in the original plan to 63, resulting in an approximate $1.8 million reduction in the reserve. The number of anticipated separations was reduced due to a change in the management of the sales and marketing areas of the Company, which resulted in a revision to the plan to eliminate positions in those areas.
15. PARTNERSHIP INTEREST
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 included: (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.
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 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, Lock acquired 6,742 shares of its own common stock at an appraised value of $385.00 per share or $2,595,670. 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.
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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%.
16. 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 during 1995 and 1994, paying $30,030 and $183,470 for such services, 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, paying $547,942 for such services. Eric M. Fogel, Director from October 30, 1995 until March 1, 1996, is a partner in the law firm of Holleb & Coff. The Company paid Holleb & Coff $438,399 and $112,221 in 1996 and 1995 for legal services.
BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. 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.
18. 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.
SCHEDULE II
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 YEARS ENDED DECEMBER 31, 1996 THROUGH 1994
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, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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. Russell C. Best, 35, holds the position of Director, Chief Executive Officer and President. He has served as a director since 1991. Mariea L. Best, 33, Director, has served in this position since 1995. Gregg A. Dykstra, 40, served as Director and Vice President until February 17, 1997 when he resigned his officer and director positions. He has served as a director since 1995. All directors serve until the next annual meeting or until their successor is elected and qualified.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS. Russell C. Best, 35, has served as Chief Executive Officer since 1994 and as President since 1995. Gregg A. Dykstra, 40, served as Vice President from 1995 until February 17, 1997, when he resigned his officer position. Mark G. Ahearn, 42, has served as Secretary since 1996. Stephen J. Cooper, 49, has served as Treasurer since 1996. Paula J. Tinkey, 39, has served as Controller since 1996. All officers serve until their successor is appointed.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES.
None.
(d) FAMILY RELATIONSHIPS. Mariea L. Best is the spouse of Russell C.
Best.
(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 1995; prior thereto Vice President of registrant and Frank E. Best, Inc. since 1990; Chairman of the Board of Lock since March 1995; President of Lock since February 15, 1995; CEO 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 as a Director of registrant 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, Vice President, has served registrant and Frank E. Best, Inc. in this capacity since May 1996 until February 17, 1997; Secretary of registrant and Frank E. Best, Inc. from March 1995 to April 1996; Treasurer of registrant, Frank E. Best, Inc. and Lock from March 1995 to March 1996; Secretary of Lock from March 1995 to October 1995; Vice President of Lock since 1995 until February 17, 1997; General Counsel of Lock from November 1989 to July 1995; Director of registrant, Frank E. Best, Inc. and Lock since 1995 until February 17, 1997.
Mark G. Ahearn, Secretary, has served Lock as General Counsel since July of 1995; Secretary of registrant and Frank E. Best, Inc. since April 1996; Secretary of Lock since March 1996; Associate Counsel for Lock from April 1994 to July 1995; Staff Attorney for Lock from August 1992 to April 1994; self employed private legal practice from July 1991 to August 1992; State Director for United States Senator Dan Coats of Indiana from January 1989 to June 1991.
Stephen J. Cooper, Treasurer, has served registrant, Frank E. Best, Inc. and Lock as Treasurer since March of 1996; Senior Manager of Finance of Lock from June 1992 to March 1996; Controller of Lock from October 1986 to June 1992.
Paula J. Tinkey, Controller, has served registrant, Frank E. Best, Inc. and Lock as Controller since May of 1996; Manager of General Accounting of Lock from June 1992 to May 1996; Manager of Accounting for Hook Drugs Division, Hook-SupeRx, Inc. from April 1987 to April 1992.
(2) Directorships. Russell C. Best, who was a Director of registrant thorough December 31, 1996, was also a Director of Best Lock Corporation and Frank E. Best, Inc. through December 31, 1996. Mariea L. Best and Gregg A. Dykstra became Directors of registrant, Best Lock Corporation and Best Universal Lock Co. 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.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
(a) COMPENSATION. The information in the following table discloses all remuneration paid to the Chief Executive Officer and the other most highly compensated executive officers or directors of registrant whose total annual salary and bonus exceeds $100,000, for services in all capacities to the registrant and its subsidiary during the fiscal years ended December 31, 1996, 1995 and 1994, all of such remuneration having been paid by Lock.
(b) SUMMARY COMPENSATION TABLE
Name & Principal Position Year Total Salary(3) Total Bonus(4) Total Other(5) -------- ---- --------------- -------------- --------------
Russell C. Best 1996 $629,942 $ 0 $138,945 Chief Executive Officer 1995 597,745 0 96,487 1994 406,657 343,665 13,562
Gregg A. Dykstra(1) 1996 265,196 0 19,093 Vice-President 1995 260,687 100,000 9,581 1994 155,832 11,475 7,760
Larry W. Rottmeyer(2) 1996 210,794 0 8,655 Vice-President 1995 273,986 100,000 10,565 1994 41,539 270 43
(1) Resigned as an officer effective February 17, 1997.
(2) Removed as an officer effective March 5, 1996.
(3) In the case of Russell C. Best, the salary amount includes $735 and $7,867 in taxes paid by the Company on the value of a trip paid by the Company in 1996 and 1995, respectively. In the case of Gregg A. Dykstra, the salary amount includes an auto stipend of $11,380 and $11,577 in 1996 and 1995, respectively. The 1996 salary amount for Gregg A. Dykstra also includes $735 in taxes paid by the Company on the value of a trip paid by the Company. 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 includes an auto stipend of $3,602 and $17,300 in 1996 and 1995, respectively, and $735 and $7,228 in taxes paid by the Company on the value of a trip paid by the Company in 1996 and 1995, respectively. 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.
(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 amount equal to $340,000 in recognition of services provided in calendar year 1994, payable in accordance with the employment agreement between the Company and Mr. 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.
(5) In the case of Russell C. Best, this amount includes the value of group term life premiums in excess of $50,000 ($746, $920, and $459 respectively, in 1996, 1995 and 1994), the annual lease value of his company vehicle ($15,250, $16,449, and $12,316 respectively, in 1996, 1995 and 1994), the amount paid by the Company for tax return preparation and legal fees on his behalf ($7,268, $14,882, and $787 respectively in 1996, 1995 and 1994), contributions by the Company to the 401(k) plan on his behalf ($3,000 each in 1996 and 1995), $10,130 and $317 in disability insurance premiums paid on his behalf in
1996 and 1995, respectively, $547 in spousal travel paid by the Company in 1995, $3,100 and $11,205 in value of a trip paid by the Company in 1996 and 1995, respectively, $5,000 in value of a home security system paid by the Company on his behalf in 1996, and $94,451 and $49,168 in 1996 and 1995, respectively, 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 premiums were 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 ($436, $149, and $218 respectively, in 1996, 1995 and 1994), the annual lease value of his company vehicle ($6,100 each in 1995 and 1994), the excess of market value over purchase price of his company vehicle of $12,557 in 1996, the value of spousal travel paid by the Company ($332 in 1995), $3,100 in value of a trip paid by the company 1996, the amount paid by the Company for tax return preparation fees on his behalf ($375 in 1994), and contributions by the Company to the 401(k) plan on his behalf ($3,000, $3,000 and $1,067 respectively in 1996, 1995 and 1994). In the case of Larry W. Rottmeyer, this amount includes the value of group term life premiums in excess of $50,000 ($340, $190 and $43 respectively, in 1996, 1995 and 1994), the excess of market value over purchase price of a computer purchased by the company of $1,720 in 1996, $332 in spousal travel paid by the Company in 1995, $3,100 and $10,043 in value of a trip paid by the Company in 1996 and 1995, respectively, and contributions by the company to the 401(k) plan on his behalf of $699 in 1996.
(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 $5,000 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 pear 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.
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.
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 7, 1997:
(1) (2) (3) (3) (4)
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
Series A, The NBD Bank, N.A. As Trustee 27,262 41% 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
(b) SECURITY OWNERSHIP OF MANAGEMENT. The following information is given as of February 7, 1997:
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) 317,364.00(1) 71%
(Owned by Mariea L. Best, Director and Vice President) 1.00 0%
(Owned by Gregg A. Dykstra, Director and Vice President)(2) 1.00 0%
(Owned by Directors and Officers of registrant, as a group, 3 in number) 317,366.00 71%
Series A, common stock, no par value, of registrant
(Owned by Russell C. Best, Director and President) 38,176.00 (3) 57%
(Owned by Mariea L. Best, Director and Vice President) 1.00 0%
(Owned by Gregg A. Dykstra, Director and Vice President)(2) 27,263.00 (3) 41%
(Owned by Directors and Officers of the registrant, as a group, 3 in number) 38,178.00 57%
Series B, common stock, no par value, of registrant
(Owned by Russell C. Best, Director and President) 300,000.00 (4) 100%
Common stock, no par value, of Lock, (registrant's subsidiary)
(Owned by Russell C. Best, Director and President) 107,779.53(5) 89%
(Owned by Mariea L. Best, Director) 1.00 0%
(Owned by Gregg A. Dykstra, Director and Vice President)(2) 10,537.19(5) 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.
(2) Gregg A. Dykstra resigned his Director and Vice President positions effective February 17, 1997.
(3) 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 shared power to direct the disposition of 27,262 shares held by the Best Lock Corporation Stock Bonus Plan.
(4) 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.
(5) 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: Mark G. Ahearn, Form 3; Paula J. Tinkey, Form 3.
ITEM 13.
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. 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 $438,399 in 1996 and $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.
PART IV
ITEM 14.
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 1996.
Exhibits are omitted because they are not required or because the required information is included in the notes to consolidated financial statements.
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 31, 1997
BEST UNIVERSAL LOCK CO.
By: /s/ Russell C. Best By: /s/ Mariea L. Best -------------------------- -------------------------- Russell C. Best Mariea L. Best Chief Executive Officer Director and Director
By: /s/ Paula J. Tinkey ---------------------------- Paula J. Tinkey Controller Principal Accounting Officer
INDEX TO EXHIBITS
Exhibit -------
3(ii) Bylaws
21 Subsidiaries (incorporated by reference in Note 1 to the consolidated financial statements)
27 Financial Data Schedule