--------------------------------------------------------------------------------
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<PAGE>
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 June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
of the securities exchange act of 1934
For the transition period from ___________________ to ___________________
Commission file number 0-1490
FRANK E. BEST, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 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 August 1, 1995.
Common Stock 418,457.89 Shares
--------------------------------------------------------------------------------
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<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
for the three months ended
June 30, 1995 and 1994 3
Condensed Consolidated Statements of Income
for the six months ended
June 30, 1995 and 1994 4
Condensed Consolidated Balance Sheets
at June 30, 1995 and
December 31, 1994 5-6
Condensed Consolidated Statements
of Shareholders' Equity at
June 30, 1995 and December 31, 1994 7
Condensed Consolidated Statements
of Cash Flows for the six months
ended June 30, 1995 and 1994 8
Notes to Condensed Consolidated
Financial Statements 9-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 12-13
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
---------
2
<PAGE>
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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended June 30
1995 1994
---------------- -------------
<S> <C> <C>
NET SALES $ 29,283,096 $ 25,217,332
OPERATING EXPENSES
Cost of goods sold 16,884,715 13,736,410
Selling 6,435,296 5,837,327
General and administrative 4,786,088 3,224,177
Engineering, research and development 591,675 958,107
---------------- -------------
Total operating expenses 28,697,774 23,756,021
---------------- -------------
OPERATING INCOME 582,322 1,461,311
Interest expense (225,492) (1,398)
Other income, net 104,233 56,551
---------------- -------------
INCOME before provision for income taxes 464,063 1,516,464
Provision for income taxes 172,480 675,534
---------------- -------------
NET INCOME, Best Lock Corporation and Subsidiary 291,583 840,930
Minority interest in net income, Best Lock Corporation and Subsidiary (38,258) (228,649)
Corporate - Best Universal Lock Co. expense (10,306) (1,312)
---------------- -------------
NET INCOME, Best Universal Lock Co. and Subsidiaries 243,019 610,969
Minority interest in net income, Best Universal Lock Co. and Subsidiaries (52,005) (136,674)
Corporate - Frank E. Best, Inc. expense (12,336) (1,144)
---------------- -------------
NET INCOME, Frank E. Best, Inc. and Subsidiaries $ 177,678 $ 473,151
---------------- -------------
---------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Best Lock Best Universal Lock Co. Frank E.
------------------------------
<S> <C> <C> <C> <C>
Earnings per common share: Corporation Series A Series B Best, Inc.
----------------- ------------ ----------- ---------------
Three months ended June 30, 1995 $ 2.35 $ 0.64 $ 0.64 $ 0.42
----------------- ------------ ----------- ---------------
----------------- ------------ ----------- ---------------
Three months ended June 30, 1994 $ 6.41 $ 1.58 $ 1.58 $ 0.79
----------------- ------------ ----------- ---------------
----------------- ------------ ----------- ---------------
Weighted average shares outstanding:
1995 124,260.08 78,774.16 300,000.00 420,764.51
----------------- ------------ ----------- ---------------
----------------- ------------ ----------- ---------------
1994 131,238.85 86,469.00 300,000.00 598,710.00
----------------- ------------ ----------- ---------------
----------------- ------------ ----------- ---------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30
1995 1994
---------------- ----------------
<S> <C> <C>
NET SALES $ 58,635,938 $ 48,607,343
OPERATING EXPENSES
Cost of goods sold 32,649,239 25,818,766
Selling 13,923,733 12,366,671
General and administrative 8,828,958 6,367,600
Engineering, research and development 1,217,115 1,856,655
---------------- ----------------
Total operating expenses 56,619,045 46,409,692
OPERATING INCOME 2,016,893 2,197,651
Interest expense (362,838) (6,444)
Other income, net 236,752 111,085
---------------- ----------------
INCOME before provision for income taxes 1,890,807 2,302,292
Provision for income taxes 770,021 993,683
---------------- ----------------
NET INCOME, Best Lock Corporation and Subsidiary 1,120,786 1,308,609
Minority interest in net income, Best Lock Corporation and Subsidiary (214,008) (355,811)
Corporate - Best Universal Lock Co. expense (10,402) (1,623)
---------------- ----------------
NET INCOME, Best Universal Lock Co. and Subsidiaries 896,376 951,175
Minority interest in net income, Best Universal Lock Co. and Subsidiaries 245,337 (212,778)
Corporate - Frank E. Best, Inc. expense (12,402) (1,454)
---------------- ----------------
NET INCOME, Frank E. Best, Inc. and Subsidiaries $ 638,637 $ 736,943
---------------- ----------------
---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Best Lock Best Universal Lock Co. Frank E.
--------------------------
Earnings per common share: Corporation Series A Series B Best, Inc.
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Six months ended June 30, 1995 $ 8.89 $ 2.35 $ 2.35 $ 1.37
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Six months ended June 30, 1994 $ 9.97 $ 2.46 $ 2.46 $ 1.23
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding:
1995 126,033.90 80,741.94 300,000.00 466,090.17
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1994 131,238.85 86,469.00 300,000.00 598,710.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,860,286 $ 4,843,579
Trade receivables:
Direct 12,047,692 11,680,289
Sales representatives and other 3,032,261 2,688,434
Allowance for uncollectible accounts (254,513) (244,829)
Estimated refundable income taxes 336,979 141,708
Current portion of notes receivable 84,189 81,987
Inventories 16,401,630 14,579,058
Prepaid income taxes 3,169,531 3,566,922
Other prepaid expenses 114,154 152,342
-------------- --------------
Total current assets 36,822,209 37,489,490
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and buildings 13,895,203 13,770,826
Machinery and equipment 28,855,892 29,478,143
Tooling 8,259,188 8,090,184
Furniture, fixtures and other 9,172,961 8,342,408
Construction work-in-progress 2,970,669 975,301
-------------- --------------
63,153,913 60,656,862
Less - accumulated depreciation (32,118,985) (30,519,725)
-------------- --------------
Total property, plant and equipment 31,034,928 30,137,137
-------------- --------------
OTHER ASSETS
Long-term notes receivable 3,290,037 3,280,333
Other assets 978,439 54,050
-------------- --------------
Total assets $ 72,125,613 $ 70,961,010
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
---------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 115,140 2,500
Current portion of retirement benefit obligations 1,370,923 1,381,967
Trade accounts payable 2,459,609 1,641,302
Customer advances 1,487,976 1,501,304
Accrued liabilities:
Income taxes (644) 941,064
Property and other taxes 968,979 960,153
Payroll and vacation pay 3,611,601 3,918,751
Accrued severance 309,031 2,394,593
Accrued medical claims 910,000 850,000
Other 273,374 861,819
---------------- ---------------
Total current liabilities 11,505,989 14,453,453
---------------- ---------------
LONG-TERM DEBT 12,119,832 -
RETIREMENT BENEFIT OBLIGATION 4,099,375 4,444,971
DEFERRED INCOME TAXES 2,268,224 2,269,369
---------------- ---------------
Total liabilities 29,993,420 21,167,793
---------------- ---------------
MINORITY INTEREST IN SUBSIDIARIES 18,582,889 21,736,524
---------------- ---------------
COMMON STOCK AND COMMON STOCK OF BEST,
REDEEMABLE UNDER STOCK BONUS PLAN 2,288,171 2,288,171
---------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 600,000 shares
authorized and issued, 418,457.89 shares outstanding 1995;
598,710 shares outstanding 1994 598,710 598,710
Capital surplus 77,972 77,972
---------------- ---------------
Total capital stock 676,682 676,682
---------------- ---------------
Accumulated earnings 28,130,583 27,491,946
Cumulative translation adjustment (100,523) (111,935)
Common stock and common stock of Universal and
Best, redeemable under Stock Bonus Plan (2,288,171) (2,288,171)
---------------- ---------------
Treasury stock (5,157,438) -
---------------- ---------------
Total shareholders' equity 21,261,133 25,768,522
---------------- ---------------
Total liabilities and shareholders' equity $ 72,125,613 $ 70,961,010
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
------------ ------------
<S> <C> <C>
COMMON STOCK, $1 par value, 600,000 shares
authorized and issued, 418,457.89 shares outstanding 1995;
598,710 shares outstanding 1994 $ 598,710 $ 598,710
CAPITAL SURPLUS 77,972 77,972
------------ ------------
Total capital stock 676,682 676,682
------------ ------------
ACCUMULATED EARNINGS:
Balance at beginning of year 27,491,946 26,688,607
Net income (six months ended June 30, 1995
and twelve months ended December 31, 1994) 638,637 1,153,290
Cash dividends (see below) - (311,330)
Difference between dividends of Series A and
Series B common shareholders of Best Universal
Lock Co. - (38,621)
------------ ------------
Balance at end of year 28,130,583 27,491,946
------------ ------------
COMMON STOCK AND COMMON STOCK OF UNIVERSAL AND
BEST, REDEEMABLE UNDER STOCK BONUS PLAN (2,288,171) (2,288,171)
------------ ------------
CUMULATIVE TRANSLATION ADJUSTMENT (100,523) (111,935)
------------ ------------
TREASURY STOCK
Balance at beginning of year - -
Shares purchased (5,157,438) -
------------ ------------
Balance at end of period (5,157,438) -
------------ ------------
Total shareholders' equity $ 21,261,133 $ 25,768,522
------------ ------------
------------ ------------
Cash dividends per share: $ 0.00 $ 0.52
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 57,786,506 $ 48,275,730
Cash paid to suppliers and employees (59,898,776) (42,109,660)
Interest received 346,864 94,776
Interest paid (257,227) (6,369)
Income taxes paid (1,541,888) 695,262
--------------- ---------------
Net cash provided by operating activities (3,564,521) 6,949,739
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 81,351 155,245
Capital expenditures (3,176,596) (1,870,571)
Net from long-term investments - (3,400,000)
--------------- ---------------
Net cash used in investing activities (3,095,245) (5,115,326)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings against unsecured line of credit 12,000,000 -
Other borrowings 232,472 -
Purchase of treasury stock (8,559,729) -
--------------- ---------------
Net cash used in financing activities 3,672,743 -
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,730 (6,927)
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,983,293) 1,827,486
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,843,579 1,704,989
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,860,286 $ 3,532,475
--------------- ---------------
--------------- ---------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 638,637 $ 736,943
Adjustments-
Depreciation and amortization 2,227,037 2,294,674
Provision for losses on accounts receivable 55,242 47,587
Gain on sale of property, plant and equipment (1,814) (3,960)
Minority interest related to current year earnings 459,345 568,589
Changes in assets and liabilities-
(Increase) decrease in:
Accounts and notes receivable (737,505) (343,962)
Refundable income taxes (298,572) 800,000
Inventories (1,803,796) 583,965
Prepaid income taxes and other expenses 435,579 37,943
Other assets (1,309,932) (150,728)
Increase (decrease) in:
Accounts payable, customer advances and accrued liabilities (2,001,416) 1,619,693
Income taxes payable (869,541) 839,928
Deferred income taxes (1,145) 42,000
Retirement benefit and benefit obligation (356,640) (122,933)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (3,564,521) $ 6,949,739
--------------- ---------------
--------------- ---------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
<PAGE>
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 and six month periods ended June 30, 1995
and 1994, the Company's financial position at June 30, 1995 and December 31,
1994, and the cash flows for the six month periods ended June 30, 1995 and 1994.
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 1994 Form 10-K.
The results for the three and six months ended June 30, 1995 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:
<TABLE>
<CAPTION>
Percent Owned
Parent Company Subsidiaries as of June 30, 1995
-------------- ------------ -------------------
<S> <C> <C>
Frank E. Best, Inc. Best Universal Lock Co. 79%
(Best)
Best Universal Lock Best Lock Corporation 77%
Co. (Universal)
Best Lock Best Universal Locks Limited (Canada) 100%
Corporation (Lock)
</TABLE>
2. INCOME TAXES
The effective tax rates for the second quarters of 1995 and 1994 were 37.2 and
44.5 percent, respectively. The effective tax rates for the six months ended
June 30, 1995 and 1994 were 40.7 and 43.2 percent, respectively. 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.
9
<PAGE>
3. FINANCING AND RELATED PARTY ARRANGEMENTS
The Company entered into a new unsecured line of credit agreement on February
15, 1995. The new credit agreement expires on February 15, 2002 and bears
interest at a variable rate, based upon the prime rate, LIBOR or the Federal
Funds rate, at the Company's election. The variable rate also fluctuates based
upon the amounts borrowed under the credit agreement. The Company is subject to
the maintenance of certain financial ratio covenants under terms of the credit
agreement. The amounts available under this credit agreement are $25,000,000
through February 14, 1998 less $3,750,000 for each one year period thereafter
until expiration. Borrowings under the credit agreement are convertible, at the
Company's option, into term notes ranging from five to seven years, up through
February 14, 1998. The Company borrowed $12,000,000 under this agreement on
February 15, 1995. The interest on these borrowings is based on LIBOR, and was
7.43% as of June 30, 1995.
4. REDEMPTION OF BEST UNIVERSAL LOCK CO. STOCK
On July 1, 1995, Best Universal Lock Co., redeemed all 63 shares of
its outstanding preferred stock at $105 per share plus cumulative dividend,
for a total of $7,056. Best Universal Lock Co. is the parent of Best Lock
Corporation and is the subsidiary of Frank E. Best, Inc.
5. RECLASSIFICATIONS
Certain reclassifications have been made to the condensed consolidated
balance sheet and statement of income for the three and six months ended June
30, 1994 to conform to the current year presentation.
6. OTHER MATTERS
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 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,
Richard 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 sole purpose of the partnership, which was
newly formed, was to acquire shares of Best and Universal from Walter E. Best
and certain other family members and related trusts. The purchase price of the
shares was based on the appraised value of such shares as of December 31, 1993
as determined by an independent appraiser. An opinion that the transactions
were fair to the Company was rendered by Merrill Lynch, Pierce, Fenner & Smith
Incorporated to the Company's Board of Directors. The partnership owns 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.
10
<PAGE>
In addition, on February 15, 1995, Lock acquired 6,742 shares of its own
common stock at an appraised value of $385.00 per share or $2,595,670.
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
unsecured line of credit of $25,000,000 as discussed in Note 3.
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%.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 second quarter of 1995 increased $4 million (16%) over the same
period of 1994. Year to date sales for 1995 are 21% higher than 1994. Sales
from the manufacturing division (BLM) to independent distributors and
Authorized Contract Construction Dealers accounted for substantially all of
the second quarter increase. Sales at the company's distribution division
(BLS) increased 1% in the second quarter over 1994.
The gross profit on sales for the second quarter of 1995 was $917,000 higher
than the second quarter of 1994, but decreased to 42.3% of sales, compared to
45.5% in the prior year. The year to date gross profit percentage was 44.3% in
1995 and 46.9% in 1994. Increased sales accounted for approximately $2.3 million
of the $3.1 million increase in the cost of goods sold for the quarter and
$5.6 million of the year to date increase. Increases in the costs of purchased
parts and outside labor in the BLM division, mainly attributable to
inefficiencies involving the re-engineering of certain processes in the
manufacture of the Company's lever-handle cylindrical lock, accounted for the
remainder of the increase in costs.
Operating income in the second quarter of 1995 declined by $876,000 (60%) to
(2.0)% of net sales from 5.8% for the same period in 1994. Selling and
administrative expenses increased by $2.2 million, or 39.3%, in the second
quarter. Higher salaries and wages accounted for approximately $400,000 of
the increase. The Company is also in the process of implementing software
for the order processing, inventory management, and accounting functions,
which increased professional fees by $600,000 in the second quarter and
900,000 for the first six months.
Engineering expenses decreased by $366,000 (38.2%) over the second quarter of
1994, due to reductions in personnel associated with the development of certain
product lines and lower expenditures for engineering-related professional fees .
The Company's effective tax rate was 37.2% in the second quarter of 1995 as
compared to 44.5% for the same period in 1994. 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 working capital increased by $2.3 million, due to the
utilization of the unsecured line of credit, as discussed in Note 3 to the
condensed consolidated financial statements, and to a decrease in current
liabilities associated with payments primarily related to the resignations
discussed in Note 6 to the condensed consolidated financial statements. These
payments also resulted in an improvement in the current ratio from 2.6:1 at
December 31, 1994 to 3.2:1 at June 30, 1995.
12
<PAGE>
Days sales outstanding decreased to 45 days from 55 days at December 31, 1994
due to an overall improvement in collections, most of which occurred in the
first quarter. Inventory turns of 4.2 in the second quarter of 1995 were the
same as the second quarter of 1994. Inventory levels increased by $1.8
million in the second quarter of 1995, mainly attributable to increased
quantities on hand and to an increase in the cost of direct materials and
overhead inventory.
Capital expenditures for the first six months of 1995 were $3.2 million.
Capital spending is projected to total between $5.0 and $7.0 million for the
year. This total includes approximately $3.0 million for enhanced computer
systems and related software.
During the first quarter of 1995, the Company borrowed $12 million against an
unsecured line of credit to fund the purchase of $8.2 million in treasury stock.
Proceeds from the borrowing were also used to pay severance and accrued vacation
as described above.
The Company plans to meet its 1995 working capital and capital expenditure
requirements through funds from operations and borrowings on the line of credit.
13
<PAGE>
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, 1994. Best Lock Corporation vs. ILCO - Unican Corporation (Federal
District Court, Indianapolis, IN, Cause No. IP-93-1092C). This action by the
Company against ILCO, a North Carolina corporation, charges ILCO with
infringement of Best's patent, trade dress and trademark rights in certain
patented keys and other keys, and with unfair competition.
In the course of the trial, the Court severed the trade dress, trademark and
unfair competition claims from the patent claims. To date, only the patent
claims have been litigated. On August 2, 1995, the Court issued an "Entry of
Judgment" dismissing the entire cause with prejudice.
With respect to the patent claims the court issued a "Memorandum Opinion" on
August 2, 1995, holding the patents in suit, Utility Patent 5,136,869 and
Design Patent D327,636 invalid. Currently the keys involved in the
infringement suit remain covered by a Utility Patent (5,272,895) that was
issued by the U.S. Patent and Trademark Office during the course of the
abovementioned trial and not subject to that litigation or the Court's
opinion of August 2, 1995.
If the "Entry of Judgment" is upheld, the Company believes there will be no
material adverse impact on the consolidated financial position or results of
operations. Annual sales of the product since its introduction have not been
significant.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Form 8-K was filed on March 2, 1995 for each of the companies (Lock, Universal
and Best) to reflect the transaction described in Note 5 above.
14
<PAGE>
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: August 14, 1995 By: /s/ Gregg A. Dykstra.
--------------- -----------------
Secretary/Treasurer
/s/ Paula J. Tinkey
--------------------
Manager of Accounting
15
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0
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