<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 0-1489
BEST UNIVERSAL LOCK CO.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-0144790
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 50444, INDIANAPOLIS, INDIANA 46250
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 849-2250
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 October 27, 1995.
Series A Common Stock 86,469 Shares
Series B Common Stock 300,000 Shares
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INDEX
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Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three months
ended September 30, 1995 and 1994 3
Condensed Consolidated Statements of Income for the nine months
ended September 30, 1995 and 1994 4
Condensed Consolidated Balance Sheets at September 30, 1995 and
December 31, 1994 5-6
Condensed Consolidated Statements of Shareholders' Equity at
September 30, 1995 and December 31, 1994 7
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
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 September 30
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
NET SALES $33,072,818 $28,334,128
OPERATING EXPENSES
Cost of goods sold 19,865,572 15,591,870
Selling 8,045,154 7,197,638
General and administrative 4,482,321 3,096,993
Engineering, research and development 645,764 1,167,434
----------- -----------
Total operating expenses 33,038,811 27,053,935
----------- -----------
OPERATING INCOME 34,007 1,280,193
Interest expense (227,767) (316)
Other income, net 69,764 59,645
----------- -----------
INCOME (LOSS) before provision for income taxes (123,996) 1,339,522
Provision (benefit) for income taxes (47,878) (46,621)
----------- -----------
NET INCOME (LOSS), Best Lock Corporation and Subsidiary (76,118) 1,386,143
Minority interest in net (income) loss, Best Lock Corporation and Subsidiary 292 (376,892)
Corporate - Best Universal Lock Co. expense (90) (2,011)
----------- -----------
NET INCOME (LOSS), Best Universal Lock Co. and Subsidiaries (75,916) 1,007,240
Minority interest in net (income) loss, Best Universal Lock Co. and Subsidiaries 15,146 (225,318)
Corporate - Frank E. Best, Inc. expense (77) (1,563)
----------- -----------
NET INCOME (LOSS), Frank E. Best, Inc. and Subsidiaries $ (60,847) $ 780,359
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Best Universal Lock, Co.
Best Lock ------------------------
Corporation Series A Series B Best, Inc.
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings (loss) per common share, three months ended:
September 30, 1995 $ (0.62) $ (0.20) $ (0.20) $ (0.15)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
September 30, 1994 $ 6.41 $ 1.58 $ 1.58 $ 0.79
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average shares outstanding, three months ended:
September 30, 1995 122,797.47 78,498.31 300,000.00 418,457.89
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
September 30, 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>
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
NET SALES $91,708,756 $76,941,471
OPERATING EXPENSES
Cost of goods sold 52,605,555 40,991,067
Selling 22,062,420 19,458,948
General and administrative 13,127,002 9,989,523
Engineering, research and development 1,862,879 3,024,089
----------- -----------
Total operating expenses 89,657,856 73,463,627
----------- -----------
OPERATING INCOME 2,050,900 3,477,844
Interest expense (590,605) (6,760)
Other income, net 306,516 170,730
----------- -----------
INCOME before provision for income taxes 1,766,811 3,641,814
Provision for income taxes 722,143 947,062
----------- -----------
NET INCOME, Best Lock Corporation and Subsidiary 1,044,668 2,694,752
Minority interest in net income, Best Lock Corporation and Subsidiary (213,716) (732,703)
Corporate - Best Universal Lock Co. expense (10,492) (3,634)
----------- -----------
NET INCOME, Best Universal Lock Co. and Subsidiaries 820,460 1,958,415
Minority interest in net income, Best Universal Lock Co. and Subsidiaries (230,191) (438,096)
Corporate - Frank E. Best, Inc. expense (12,479) (3,017)
----------- -----------
NET INCOME, Frank E. Best, Inc. and Subsidiaries $ 577,790 $ 1,517,302
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Best Universal Lock Co.
Best Lock ------------------------ Frank E.
Corporation Series A Series B Best, Inc.
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings per common share, nine months ended:
September 30, 1995 $ 8.36 $ 2.16 $ 2.16 $ 1.28
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
September 30, 1994 $ 9.97 $ 2.46 $ 2.46 $ 1.23
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average shares outstanding, nine months ended:
September 30, 1995 124,943.23 79,985.85 300,000.00 450,038.27
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
September 30, 1994 131,238.85 86,469.00 300,000.00 598,710.00
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30 December 31
1995 1994
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,576,122 $ 4,815,847
Trade receivables:
Direct 14,470,565 11,680,289
Sales representatives and other 3,315,233 2,688,434
Allowance for uncollectible accounts (282,589) (244,829)
Estimated refundable income taxes 951,276 141,708
Current portion of notes receivable 34,108 81,987
Inventories 13,846,430 14,579,058
Prepaid income taxes 3,172,754 3,566,922
Other prepaid expenses 127,893 152,342
------------ ------------
Total current assets 38,211,792 37,461,758
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and buildings 13,952,022 13,770,826
Machinery and equipment 28,804,646 29,478,143
Tooling 8,273,079 8,090,184
Furniture, fixtures and other 10,971,032 8,342,408
Construction work-in-progress 2,372,215 975,301
------------ ------------
64,372,994 60,656,862
Less - accumulated depreciation (33,308,349) (30,519,725)
------------ ------------
Total property, plant and equipment 31,064,645 30,137,137
------------ ------------
OTHER ASSETS
Long-term notes receivable 3,324,013 3,280,332
Other assets 1,278,362 149,447
------------ ------------
Total assets $ 73,878,812 $ 71,028,674
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30 December 31
1995 1994
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt $ 2,500 $ 2,500
Current portion of retirement benefit obligations 1,372,134 1,381,967
Accounts payable 2,753,430 1,641,302
Customer advances 1,356,683 1,501,304
Accrued liabilities:
Income taxes 287,826 941,490
Property and other taxes 1,192,617 960,153
Payroll and vacation pay 3,713,220 3,918,751
Accrued severance 309,031 2,394,593
Accrued medical claims 940,000 850,000
Other 284,506 843,321
----------- -----------
Total current liabilities 12,211,947 14,435,381
----------- -----------
LONG-TERM DEBT 13,932,472 --
RETIREMENT BENEFIT OBLIGATION 3,628,263 4,444,971
DEFERRED INCOME TAXES 2,499,351 2,269,369
----------- -----------
Total liabilities 32,272,033 21,149,721
----------- -----------
MINORITY INTEREST IN SUBSIDIARIES 10,168,861 13,620,212
----------- -----------
COMMON STOCK AND COMMON STOCK OF BEST,
REDEEMABLE UNDER STOCK BONUS PLAN 4,089,536 4,087,473
----------- -----------
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred stock, 7% cumulative, $100 par value, callable at $105
500 shares authorized -- 6,300
Series A common stock, no par value, 100,000 shares authorized;
86,469 shares issued 1,102,579 1,102,579
Series B common stock, no par value, 300,000 shares authorized
and issued 1 1
----------- -----------
Total capital stock 1,102,580 1,108,880
Accumulated earnings 36,113,755 35,294,051
Cumulative translation adjustment (94,253) (144,190)
Common stock and common stock of Best,
redeemable under Stock Bonus Plan (4,089,536) (4,087,473)
Treasury stock; includes 25,279.69 shares of Universal (5,684,164) -
----------- -----------
Total shareholders' equity 27,348,382 32,171,268
----------- -----------
Total liabilities and shareholders' equity $73,878,812 $71,028,674
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
September 30 December 31
1995 1994
------------ -----------
<S> <C> <C>
CAPITAL STOCK:
Preferred stock, 7% cumulative, $100
par value, callable at $105, 500 shares authorized $ -- $ 6,300
Series A common stock, no par value,
100,000 shares authorized; 86,469 shares issued 1,102,579 1,102,579
Series B common stock, no par value,
300,000 shares authorized and issued 1 1
------------ -----------
Total capital stock 1,102,580 1,108,880
------------ -----------
ACCUMULATED EARNINGS:
Balance at beginning of year 35,294,051 34,250,100
Net income (nine months ended September 30, 1995
and twelve months ended December 31, 1994) 820,460 1,514,931
Cash dividends (441) (470,980)
Premium on redemption of preferred stock (315) --
------------ -----------
Balance at end of year 36,113,755 35,294,051
------------ -----------
COMMON STOCK AND COMMON STOCK OF BEST,
REDEEMABLE UNDER STOCK BONUS PLAN (4,089,536) (4,087,473)
------------ -----------
CUMULATIVE TRANSLATION ADJUSTMENT (94,253) (144,190)
------------ -----------
TREASURY STOCK
Balance at beginning of year -- --
Shares purchased; includes 25,729.69 shares of Universal (5,684,164) --
------------ -----------
Balance at end of period (5,684,164) --
------------ -----------
Total shareholders' equity $27,348,382 $32,171,268
------------ -----------
------------ -----------
Cash dividends per share:
Preferred $ 7.00 $ 7.00
Series A common 0.00 1.66
Series B common 0.00 1.09
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
BEST UNIVERSAL LOCK CO. (a nonoperating holding company) AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
---------------------------------
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 88,087,728 $ 76,159,675
Cash paid to suppliers and employees (88,947,610) (68,861,390)
Interest received 298,324 90,909
Interest paid (225,301) (6,647)
Income taxes paid (refunded) (1,563,424) 18,340
------------ ------------
Net cash provided (used) by operating activities (2,350,283) 7,400,887
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 16,061 153,611
Capital expenditures (4,496,903) (2,490,165)
Net from long-term investments -- (3,400,000)
------------ ------------
Net cash used in investing activities (4,480,842) (5,736,554)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings against unsecured line of credit, net of repayments 13,700,000 --
Other borrowings 232,472 --
Purchase of treasury stock and stock of subsidiary (9,353,984) --
Redemption of preferred stock (6,300) --
Dividends paid (441) --
Premium paid on redemption of preferred stock (315) --
------------ ------------
Net cash provided by financing activities 4,571,432 --
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 19,968 17,557
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,239,725) 1,681,890
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,815,847 1,646,396
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,576,122 $ 3,328,286
------------ ------------
------------ ------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 820,460 $ 1,958,415
Adjustments-
Depreciation and amortization 3,572,293 3,442,251
Provision for losses on accounts receivable 98,618 58,892
Gain on sale of property, plant and equipment 30,966 (3,960)
Minority interest related to current year earnings 213,716 732,703
Changes in assets and liabilities-
(Increase) decrease in:
Accounts and notes receivable (3,388,405) (857,657)
Refundable income taxes (882,869) 1,553,398
Inventories 769,021 287,933
Prepaid income taxes and other expenses 418,617 (206,208)
Other assets (1,235,099) 3,848
Increase (decrease) in:
Accounts payable, customer advances and accrued liabilities (1,588,480) 1,286,983
Income taxes payable (582,562) 108,598
Deferred income taxes 229,982 (470,000)
Retirement benefit and benefit obligation (826,541) (494,309)
------------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $(2,350,283) $ 7,400,887
------------- ------------
------------- ------------
</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 nine month periods
ended September 30, 1995 and 1994, the Company's financial position at
September 30, 1995 and December 31, 1994, and the cash flows for the nine
month periods ended September 30, 1995 and 1994.
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 nine months ended September 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:
Percent Owned
Parent Company Subsidiaries as of September 30, 1995
-------------- ------------ ------------------------
Frank E. Best, Inc. Best Universal Lock Co. 79%
(Best)
Best Universal Lock Best Lock Corporation 79%
Co. (Universal)
Best Lock Best Universal Locks Limited (Canada) 100%
Corporation (Lock)
2. INCOME TAXES
The effective tax rates for the nine months ended September 30, 1995 and
1994 were 40.9 and 26.0 percent, respectively. The effective tax rate in the
nine months ended September 30, 1995 is higher than the U.S. Federal
statutory rate of 34% due to a higher tax rate in Canada and state income
taxes. The lower effective tax rate in the nine months ended September 30,
1994 is primarily due to the generation during 1993 of excess foreign tax
credit and certain other credits generated but not used during 1993.
9
<PAGE>
The Company became aware of the availability of these credits during the
three months ended September 30, 1994 as a result of the finalization of the
1993 U.S. Federal income tax return. Accordingly, in the three months and
nine months ended September 30, 1994, income tax expense was reduced and a
deferred tax asset recorded for these credits which the Company expects to
utilize prior to their expiration date.
3. FINANCING AND RELATED PARTY ARRANGEMENTS
The Company entered into an unsecured line of credit agreement on
February 15, 1995. The 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 highest amount
outstanding during 1995 has been $14,300,000 on September 28, 1995. The
interest on these borrowings is based on LIBOR. The weighted average
interest rate since February 15, 1995 has been 7.257%.
4. 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.
5. 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-Q for each of the two companies.
The cover page of the 10-Q 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.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the condensed consolidated
balance sheet and statement of income for the three and nine months ended
September 30, 1994 to conform to the current year presentation.
7. 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
10
<PAGE>
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. As of
February 15, 1995, the partnership owned directly or indirectly 204,053
shares of Best common stock, 8,787 shares of Universal Series A common stock
and 11.25 shares of Universal preferred stock. In addition, on February 15,
1995, Lock acquired 6,742 shares of its own common stock at an appraised
value of $385.00 per share or $2,595,670.
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%.
8. OTHER TREASURY STOCK
During 1995 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 $1,175,688, Universal of
$101,538 and Best of $80,035. As a result of these transactions, the
minority interest of Universal decreased from 23% to 21%.
9. SUBSEQUENT EVENT
On October 12, 1995, the Company purchased 17,759 shares of Best
Universal Lock Co. and 65,114 shares of Frank E. Best, Inc. for $879,071 and
$1,465,065 respectively, from a shareholder of Best Universal Lock Co. and
Frank E. Best, Inc. in a privately negotiated transaction. The funds used in
making these purchases were borrowed against the unsecured line of credit
described in Note 3.
The Company will account for the purchase of the Universal and Best
shares as treasury stock, which will result in a reduction to shareholders'
equity of Universal of $2,344,136 and Best of $1,465,065. As a result of
these transactions, the minority interest of Best will decrease from 21% to
17%.
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 third quarter of 1995 increased $4.7 million (17%) over the
same period of 1994. Year to date sales for 1995 are 19% higher than 1994.
Sales for the third quarter from the company's distribution division (BLS)
increased by approximately $2 million. Increased sales from the
manufacturing division (BLM) to independent distributors and Authorized
Contract Construction Dealers accounted for the remainder of the third
quarter increase. The firm backlog as of September 30, 1995 decreased to $2
million from approximately $6 million at December 31, 1994, as a result of
increased emphasis on customer satisfaction and shorter lead times. The
decrease in backlog also partially contributed to the $14.8 million increase
in sales for the nine months.
The gross profit on sales for the third quarter of 1995 was $500,000 higher
than the third quarter of 1994, but decreased to 39.9% of sales, compared to
45.0% in the prior year. The year to date gross profit percentage was 42.6%
in 1995 and 46.7% in 1994. Increased sales accounted for approximately
$880,000 of the $4.3 million increase in the cost of goods sold for the
quarter and $2.9 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 redesign of the Company's
lever-handle cylindrical lock, accounted for the remainder of the increase in
costs.
Operating income in the third quarter of 1995 declined by $1.2 million (97%)
to .1% of net sales from 4.5% for the same period in 1994, mainly due to
increases in the cost of goods sold as described above. Selling and
administrative expenses increased by $2.2 million, or 21.4%, in the third
quarter. The Company has incurred approximately $1.8 million of professional
fees in the first nine months of 1995 associated with the implementation of
software for the order processing, inventory management, and accounting
functions.
Engineering expenses decreased by $522,000 (44.7%) from the third 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 effective tax rates for the nine months ended September 30, 1995 and 1994
were 40.9 and 26.0 percent, respectively. The effective tax in the nine
months ended September 30, 1995 is higher than the U.S. Federal statutory
rate of 34% due to a higher tax rate in Canada and state income taxes. The
lower effective tax rate in the nine months ended September 30, 1994 is
primarily due to the generation during 1993 of excess foreign tax credit and
certain other credits generated but not used during 1993. The Company became
aware of the availability of these credits during the three months ended
September 30, 1994 as a result of the finalization of the 1993 U.S. Federal
income tax return. Accordingly, in the three
12
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months and nine months ended September 30, 1994, income tax expense was
reduced and a deferred tax asset recorded for these credits which the Company
expects to utilize prior to their expiration date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased by $3.0 million, primarily due to the
utilization of the unsecured line of credit to fund severance payments
related to the resignations discussed in Note 7 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 3.1:1 at September 30, 1995.
Days sales outstanding decreased to 52 days at September 30, 1995 from 55
days at December 31, 1994 due to an improvement in collections. Inventory
turns of 5.6 in 1995 improved significantly from 3.8 turns in 1994.
Inventory levels decreased by $2.5 million in the third quarter of 1995,
mainly attributable to decreased quantities on hand.
Capital expenditures for the first nine months of 1995 were $4.5 million.
Capital spending is projected to total between $5.0 and $6.0 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 and to pay severance and accrued vacation as described above. During
the third quarter, the Company borrowed an additional $1.7 million. This
amount was used to acquire approximately $800,000 of treasury stock and the
remainder was borrowed to fund working capital requirements.
The Company plans to meet the remainder of its 1995 working capital and
capital expenditure requirements through funds from operations and borrowings
under 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 right in
certain patented keys and other keys, and with unfair competition.
On August 18, 1995, the Court entered an "Order on Joint Motion to Amend the
Final Judgment and for Dismissal of Remaining Claims" finding for the
defendant, Ilco Unican Corporation, relating to the validity of U.S. Patent
No. 5,136,869 and U.S. Design Patent No. 327,636; stipulating infringement if
the patents had not been held invalid; dismissing with prejudice with respect
to Ilco Unican Corporation the remaining claims pertaining to trademark,
trade dress and unfair competition brought by the Company; dismissing without
prejudice the remaining trademark, trade dress and unfair competition
declaratory judgment counterclaims brought by Ilco Unican Corporation and
awarding no monetary damages.
On September 18, 1995, the Company filed Notice of Appeal with the Court of
Appeals for the Federal Circuit.
If the Court of Appeals for the Federal Circuit upholds the trial court, the
Company believes there will be no material adverse impact on the consolidated
financial position or results of operations.
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 7.
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.
BEST UNIVERSAL LOCK CO.
-------------------------
(Registrant)
Date: November 14, 1995 By: /s/ Gregg A. Dykstra
---------------------
Secretary/Treasurer
/s/ Paula J. Tinkey
---------------------
Manager of Accounting
15
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