-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGcNA0jHLakEj6/fN2vtA/vybW2c5AhT7ImD7jrt2ajac7daqozIplBPUl0fm9mx 15qotmT8y3Ap90slOkm7Vw== 0000912057-96-005774.txt : 19960402 0000912057-96-005774.hdr.sgml : 19960402 ACCESSION NUMBER: 0000912057-96-005774 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEST FRANK E INC CENTRAL INDEX KEY: 0000011806 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 351142810 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01490 FILM NUMBER: 96542880 BUSINESS ADDRESS: STREET 1: P O BOX 50444 CITY: INDIANAPOLIS STATE: IN ZIP: 46250 BUSINESS PHONE: 3178492250 MAIL ADDRESS: STREET 1: P O BOX 50444 CITY: INDIANAPOLIS STATE: IN ZIP: 46250 10-K 1 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the securities exchange act of 1934 For the transition period from ___________________ to ___________________ Commission file number 0-1490 FRANK E. BEST, INC. (Exact name of registrant as specified in its charter) DELAWARE 35-1142810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. BOX 50444, INDIANAPOLIS, INDIANA 46250 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (317) 849-2250 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK PAR VALUE $1.00 (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (Any sales of the registrant's stock by nonaffiliates within 60 days prior to the date of filing would have sold at a price unknown to the registrant.) Indicate the number of shares outstanding of each of the registrant's classes of common, as of February 9, 1996. COMMON STOCK 598,710 SHARES Documents incorporated by reference: List the following documents if incorporated by reference and the part of the form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1993. The listed documents should be clearly described for identification purposes. NONE FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) FORM 10-K ANNUAL REPORT INDEX
Item Number Page and Title No. ----------- ---- 1 Description of Business 3 2 Properties 6 3 Pending Legal Proceedings 6 4 Submission of Matters to a Vote of Security Holders 7 5 Market for the Registrant's Common Stock and Related Security- Holder Matters 8 6 Selected Financial Data 9 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 8 Financial Statements and Supplementary Data 16 9 Disagreements on Accounting and Financial Disclosure 44 10 Directors and Executive Officers of the Registrant 44 11 Executive Compensation 46 12 Security Ownership of Certain Beneficial Owners and Management 50 13 Certain Relationships and Related Transactions 52 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 53 Signatures 54 Index to Exhibits 55
2 PART I ITEM 1. DESCRIPTION OF BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Registrant was organized in 1920 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. Thereafter, the rights to the said inventions and corporation's property and equipment were transferred to registrant's subsidiary, Best Universal Lock Co., in exchange for controlling stock in said subsidiary. About 1928 registrant's subsidiary 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 and its majority owned subsidiary, Best Universal Lock Co., are nonoperating parents 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, 3 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 1995 1994 1993 ------------- ---- ---- ---- Door Security Products 68% 67% 67% All Others 32 33 33
There have not been any significant changes in the kinds of products produced or products or services sold since the beginning of the fiscal year. Lock is continuing its program of selling to contract hardware houses in an attempt to enlarge its sales to new construction projects. (ii) There has not been any public announcement of a new product or industry segment which would require the investment of a material amount of the assets of Lock during the next fiscal year. (iii) The raw materials essential to Lock's manufacturing business are standard metals in bar stock of various cross- sectional shapes. Approximately 80% of the shapes are standard and approximately 20% are specially made. The majority of essential raw materials are purchased from three midwestern suppliers. There are no significant problems related to the procurement of raw materials for Lock's manufacturing business, other than the normal forces of supply and demand, possible strikes or other production factors of the suppliers. (iv) Patents and patent rights have been and are a significant factor in Lock's business. Lock has a substantial number of licenses and patent rights relating to the locking art and other mechanical fields, and has engaged in substantial experimental and developmental work in connection with such licenses and patent rights. The first patent rights 4 acquired were related to the Best Universal removable core. A number of the early patent rights licensed or otherwise acquired have expired. Continuing research and development results in patents being issued to Lock on various aspects of its product line. Legal action related to a recent patent was pursued to trial in early 1995, involving design and utility patents on a patented keying system. Reference is made to Item 3 for further discussion. Registrant has several registered trademarks regarding the use of the word 'Best' in association with security products. These are considered important and valuable assets of the company. (v) While there is no particular seasonal factor in Lock's business, a backlog for its manufacturing business exists for production planning. (vi) There is no unusual working capital requirement by Lock. Normal working capital requirements for inventory and accounts receivable are met through internal funding or borrowings from outside bank sources. (vii) The manufacturing, sourcing, distribution or selling business of Lock is not dependent upon any one single customer, or very few customers, the loss of which would have a material adverse effect on Lock. (viii) Lock's backlog of orders as of the dates shown below are believed to be firm: February 9, 1996 $ 4,219,942 March 15, 1995 6,417,949
It is expected that 100% of Lock's backlog on February 9, 1996 will be filled within the current fiscal year. Lock's sales and order flow do not generally reflect any seasonal fluctuations. (ix) It is not believed that any material portion of the business of Lock is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. (x) The business of Lock is highly competitive. The principal methods of competition are in the areas of price, product performance, delivery and service. There are ten to fifteen major lock manufacturing companies in the United States, some of which have substantially greater sales and resources than Lock. These companies manufacture and sell a wide variety of locks and locking hardware or other access control products. The major companies also sell masterkeyed systems of locks in competition with Lock's lock systems. Due to the fact that registrant and Lock have been engaged in business for more than sixty-five years and have specialized in the sale of masterkeyed systems of locks, it believes that Lock is a significant factor in this specialized field. Since industry statistics are not available, registrant is not able to state Lock's relative standing in the overall lock market or in the more specialized masterkeyed system of locks market. (xi) Registrant did not expend any funds on research. Lock expended approximately $3,055,000, $3,050,000 and $2,345,000 on research activities relating to the development of new products or the improvement of existing products in the years ending December 31, 1995, 1994 and 1993, respectively. Lock has not engaged in any material customer sponsored research during the past three fiscal years. 5 (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 $299,507 during its current and succeeding fiscal year to continue to enhance the Company's overall environmental standards. This amount includes capital expenditures ($30,000) and operating expenses of environmental protection facilities. (xiii) The staff of registrant, being a nonoperating holding corporation, consisted of its directors, officers and their assistants, being five in number. The staff of Lock as of the close of its fiscal year consisted of approximately 497 production and maintenance employees; and 698 office, sales and executive employees. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Lock is engaged, through its totally-held subsidiary, Best Universal Locks Limited, in sales in Canada. There are other foreign sales throughout the world. The total of all such foreign sales amounted to approximately 6%, 7% and 7% of Lock's total sales during 1995, 1994 and 1993, respectively. The risk and profitability of such business does not differ substantially from domestic sales. ITEM 2. PROPERTIES. Registrant and its subsidiary, Best Universal Lock Co., do not own or operate any plants, manufacturing or physical properties. The following is a description of the properties of registrant's subsidiary, Best Lock Corporation and its subsidiary. Manufacturing facilities and engineering and executive offices of Lock are located in multi-purpose brick and masonry buildings containing a total of approximately 215,000 square feet of manufacturing space, 30,000 square feet of warehouse space and 57,000 square feet of office space at 6161 East 75th Street, Indianapolis, Indiana. The buildings were built specifically for Lock's use in four major phases in 1958, 1965, 1977 and 1989. Lock is using the majority of the floor space in the premises. The production facilities located on the premises include stamping, drilling, broaching, automatic screw machines and all other equipment used by registrant in its manufacturing business. Lock also maintains an engineering department, masterkey department, general accounting, marketing and executive offices in the office portion of the buildings. These buildings are located on an approximately 50 acre tract of real estate owned in fee simple by Lock. Lock and its totally-held subsidiary also occupy corporate sales distribution offices, six of which are owned in fee simple and 24 of which are leased. All properties, both owned and leased, together with the related machinery and equipment contained therein, are considered to be well maintained, in good operating condition and suitable and adequate for present and foreseeable future needs. ITEM 3. PENDING LEGAL PROCEEDINGS. Best Lock Corporation vs. ILCO - Unican Corporation (Federal District Court, Indianapolis, Cause No. IP 93-1092C). This action by Lock against ILCO, a North Carolina corporation, charged ILCO with infringement of Lock's patent, trade dress and trademark right in certain patented keys and other keys, and with unfair competition. On August 18, 1995, the court entered an "Order on Joint Motion to Amend the Final Judgment and for dismissal of Remaining Claims" finding for the defendant, Ilco Unican 6 Corporation, relating to the validity of U.S. Patent No. 5,136,869 and U.S. Design patent No. 327, 636; stipulating infringement if the patents had not been invalid; dismissing with prejudice with respect to Ilco Unican Corporation the remaining claims pertaining to trademark, trade dress and unfair competition brought by Lock; dismissing without prejudice the remaining trademark, trade dress and unfair competition declaratory judgment counterclaims brought by Ilco Unican Corporation and awarding no monetary damages. On September 18, 1995, Lock filed Notice of Appeal with the Court of Appeals for the Federal Circuit. If the Court of Appeals for the Federal Circuit upholds the trial court, Lock believes there will be no material adverse impact on the consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Election of Directors at Annual Shareholder Meeting on October 30, 1995: (A total of 492,293 shares were represented by owner or proxy).
Votes For --------- Russell C. Best 460,317 Mariea L. Best 460,267 Gregg A. Dykstra 460,284 Martin O. Nelson 95,637
A proposal to accept an Agreement and Plan of Merger to effect a reincorporation in the State of Delaware. For Against Abstain --- ------- ------- 460,295 31,953 45 A proposal to ratify and approve the selection of Arthur Andersen LLP as auditors for the year 1995. For Against Abstain --- ------- ------- 477,638 13,076 45 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY-HOLDER MATTERS. The registrant's 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 shares as of December 27, 1995 and December 31, 1994 was $27.94 and $29.36 per share respectively. There are 587 shareholders of record of registrant's stock as of February 9, 1996. Dividends have been declared and paid annually in the respective amounts of $.53 and $.52 per share. There is no known restriction on registrant's present or future ability to pay such dividends other than the availability of sufficient funds. There is a present expectation that dividends will continue to be paid in the future. Registrant is utilizing an independent clearinghouse to facilitate submission of stock deemed to be "abandoned property" under various state laws. During 1995, 1994, and 1993, 507, 0 and 362 shares respectively, were submitted to the appropriate state authorities through this clearinghouse. Such property will be held for various periods of time as required by each state prior to being placed on the market for disposition. 8 ITEM 6. Selected Financial Data. Page 1 of 2 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1995 THROUGH 1991 - ------------------------------------------------------------------------------- The following consolidated summary of selected financial data should be read in conjunction with the accompanying notes to consolidated financial statements:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Net sales $ 118,546,487 $104,669,003 $98,895,807 $84,865,287 $74,752,175 Net income (loss) before cumulative effect of change in accounting principle (2,752,138) 1,153,290 497,628 1,358,354 2,378,473 Net income (2,752,138) 1,153,290 865,024 1,358,354 2,378,473 Total assets 67,832,095 70,961,235 64,132,055 62,290,288 61,911,630 Long-term obligations (excluding deferred taxes) 19,067,424 4,444,971 4,745,065 4,552,378 2,228,349 Common stock redeemable under Stock Bonus Plan - 2,288,171 - - -
Earnings and dividends per common share - see page 2 of 2. 9 ITEM 6 Page 2 of 2 BEST LOCK COMPANIES Best Lock Corporation and Subsidiary Best Universal Lock Co. (a nonoperating holding company) and Subsidiaries Frank E. Best, Inc. (a nonoperating holding company) and Subsidiaries CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1995 THROUGH 1991 - ------------------------------------------------------------------------------
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Earnings (loss) per share of common stock: Best Lock Corporation and Subsidiary (121,653.85 shares outstanding in 1995; 131,185.85 shares outstanding in 1994; 131,238.85 shares outstanding each year 1993-1991) - Net income (loss) before cumulative effect of change in accounting principle $ (33.88) $ 16.83 $ 8.76 $ 18.73 $ 32.32 Cumulative effect of SFAS 109 Accounting for Income Taxes $ 0.00 $ 0.00 $ 4.95 $ 0.00 $ 0.00 ---------- --------- -------- --------- --------- Net income (loss) $ (33.88) $ 16.83 $ 13.71 $ 18.73 $ 32.32 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Best Universal Lock Co. and Subsidiaries (Series A - 86,469 shares and Series B - 300,000 shares outstanding each year) - Series A - Net income (loss) $ (9.95) $ 3.92 $ 3.30 $ 4.57 $ 7.95 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Series B - Net income (loss) $ (9.95) $ 3.92 $ 3.30 $ 4.57 $ 7.95 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Frank E. Best, Inc. and Subsidiaries (598,710 shares outstanding each year) - Net income (loss) $ (6.43) $ 1.93 $ 1.45 $ 2.27 $ 3.97 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Dividends per share: Best Lock Corporation, common $ 5.41 $ 5.40 $ 5.00 $ 4.90 $ 4.70 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Best Universal Lock Co. Preferred (7% cumulative) $ 7.00 $ 7.00 $ 7.00 $ 7.00 $ 7.00 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Series A Common (Note 2) 1.67 1.66 1.63 1.61 1.59 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Series B Common (Note 2) 1.10 1.09 1.06 1.04 1.02 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- --------- Frank E. Best, Inc. Common $ 0.53 $ 0.52 $ 0.51 $ 0.49 $ 0.47 ---------- --------- -------- --------- --------- ---------- --------- -------- --------- ---------
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Since Frank E. Best, Inc. and Best Universal Lock Co. are non-operating parents of Best Lock Corporation, a discussion of Best Lock Corporation's business is necessary in order to understand the character and development of the total enterprise. As the variations between the financial statements of these three companies are not significant, the discussion and analysis of Best Lock Corporation is representative of all. The following, therefore, is a discussion of the business of Best Lock Corporation. RESULTS OF OPERATIONS - 1995 VS. 1994 The Company experienced record sales of $118.5 million in 1995, up 13% from 1994. Improved sales volume both at the Best Locking Systems Division and at the Best Lock Manufacturing Division, as well as a decrease in the backlog at Best Lock Manufacturing, attributed to the increase in sales. Higher material costs significantly impacted the gross margin for 1995, which decreased from 47.5% of sales to 40.6%. Approximately $1.8 million of the increase in material costs was related to the redesign of the Company's 9K lever handle lock, which occurred in late 1994. The Company did not increase the price of this product to its customers, even though the standard cost per unit increased by approximately 18% due to the redesign. A task force has been formed for the purpose of decreasing costs related to the production of the 9K lock by mid- 1996. Higher scrap rates in the production of this product were also experienced during 1995, which increased costs by approximately $1.0 million. In addition, the Company disposed of obsolete inventory during the year of approximately $2.1 million. Salaries, wages and fringe benefits associated with the manufacture of products increased by approximately $1.9 million during 1995. Selling, general and administrative, and engineering costs increased by $7.3 million over 1994. During the fourth quarter, the Company announced a restructuring plan with the goal of significantly reducing payroll-related expenses. The provisions of the plan include early retirement as well as voluntary and involuntary separation for employees in certain job classifications, mostly non-production related. The Company recorded a $3.1 million restructuring charge for anticipated separation and facilities closing costs associated with this plan. Professional fees were higher than the prior year by $3.0 million, mainly attributable to assistance required for the development and installation of new software for the order fulfillment, accounts payable, and general ledger functions. This software was put into production during the third quarter of 1995 and the first quarter of 1996. Higher sales commissions of $485,000, due to higher sales and a change in commission rates, and increased travel expenses of $366,000 accounted for the remainder of the increase in selling, general and administrative and engineering expenses. Research and development expenditures totaled $3.1 million during 1995, a slight increase over 1994. The Company began marketing its electronic access security product during the fourth quarter of the year. Other research and development expenditures related to the development of computer software for internal use. As a result of the factors described above, operating income decreased by $8.9 million, or 7.5% of sales, to a loss of $6.1 million for 1995. Interest expense increased by $863,000, due to borrowings against a bank line of credit. Proceeds from the borrowings were used to finance the purchase of an interest in Best Lock Partnership (a newly-formed partnership created for the purpose of acquiring shares of Best and Universal from Walter E. Best and certain other family members and trusts) and for the payment of severance, vacation and bonus payments to Walter E. Best, Robert W. Best, Richard E. Best, Marshall W. Best and Edwina McLemore in exchange for their resignations. $1.2 million of the proceeds from the borrowings was also 11 used for payment in exchange for covenants not to compete from Walter E. Best, Robert W. Best, Richard E. Best, and Marshall W. Best. Other income increased by $748,000 from 1994 to 1995. During 1994, the Company accrued $701,000 of professional fees relating to the settlement of claims arising from a derivative action against it by a director, as well as all claims against the Chief Executive Officer and another officer. These expenses were reflected in other income (expense) in 1994. Net income decreased by $6.4 million to a loss of $4.2 million, or 3.5% of sales in 1995. Income tax benefit was 35.9% of the loss before tax in 1995. For 1994, income tax expense was 8.1% of the income before tax, mainly due to the generation of tax credits during 1993 that the company recognized in 1994. RESULTS OF OPERATIONS - 1994 VS. 1993 The Company's net sales for 1994 increased 6% over 1993, primarily due to improved sales volume related to the recognition of a full year of sales for sales offices that began operations during 1993. The gross margin improved to 47.5% of sales from 43.0% in 1993, due to the overall higher level of retail sales at the distribution level. The Company also negotiated a three year purchase agreement with its major brass supplier to keep materials costs consistent with 1993 while the market price for brass, the largest raw material component of its products, increased approximately 11%. Salaries and wages were $4.3 million higher than 1993 levels, due primarily to a charge of $2.3 million in the fourth quarter for anticipated employee-related expenses related to restructuring plans. The restructuring, which was partially completed on February 15, 1995, included the resignation of Walter E. Best, Chairman of the Board and President, as well as the resignations of Richard E. Best and Marshall W. Best, both Vice Presidents of the Company. Expansion of the Company's sales distribution offices during 1993, when only a partial year of operating expenses were recognized, also resulted in an increase in salaries and wages during 1994. Employee benefit costs increased $2 million over 1993 due to (1) higher health insurance claims costs, a portion of which the company is self-funding; (2) a change in the assumptions used in calculating the present value of the retirement benefit for the former President, Walter E. Best, which increased expense by $900,000; and (3) a change in the discount rate used to calculate the actuarial present value of the accumulated retirement benefit obligation. This change in the discount rate, from 7 1/2% in 1993 to 8% in 1994, resulted in a reduction in expense of $434,000. Total selling, general and administrative and engineering expenses increased $6.3 million, or 15.5% over 1993. Reductions in bad debt expense of $500,000 and lower repairs and utilities expenditures of $500,000 partially offset the increase in salaries and benefits costs described above. Professional fees increased by $1.1 million as the Company sought assistance in selecting software for the order processing, inventory management, and accounting functions as well as for other special projects. Net income of $2.2 million increased 23% over 1993 to 2% of sales. Income taxes decreased by $686,000 to 8% of income before taxes, due to the generation during 1993 of certain tax credits of approximately $656,000 that the Company recorded in 1994. On February 15, 1995, the Company settled a derivative action that had been threatened by a director during the third quarter of 1994. Expenses related to the settlement of the threatened litigation increased other non-operating expenses by $701,000 during 1994. 12 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's current ratio was 2.0 at December 31, 1995, compared to 2.6 at December 31, 1994. Cash and cash equivalents decreased by $3.4 million during 1995, as excess cash was used to purchase treasury stock and for increased levels of capital expenditures. The current ratio was also affected by an increase in current liabilities of $2.2 million due to the $3.1 million charge for restructuring expenses. The Company's continued emphasis on inventory management and backlog reduction resulted in a decrease in inventory of $3.2 million. Finished goods inventory in the corporate owned sales distribution facilities and at the manufacturing plant decreased by $1.6 million from 1994. Raw material and work-in-process inventory at the manufacturing plant also decreased by $1.6 million. Property, plant and equipment additions increased by $1.7 million to $5.6 million in 1995 from the 1994 total of $3.9 million. Approximately $3.7 million of the 1995 capital expenditures related to the installation of enhanced computer systems and related software. Capital expenditures for 1996 are expected to be in the $4 million range, which includes approximately $2.3 million for improvements to manufacturing equipment. Total liabilities increased by $16.7 million from 1994 to 1995, mainly due to increased borrowings of $15.2 million. Other accrued expenses decreased by $626,000 due to the payment of professional fees related to the settlement of a derivative action against the Company by a director. The Company desires to retain its strong credit rating, and therefore pays all vendors according to terms and takes all discounts offered. Cash provided by operating activities decreased to $1.4 million in 1995, compared with $11.0 million in 1994 and $5.4 million in 1993. The $9.6 million decrease was due primarily to the decrease in net income of $6.4 million. The remainder of the decrease was a result of the change in cash used for working capital purposes. During 1995, the Company negotiated a $25 million bank line of credit for the purpose of acquiring an interest in Best Lock Partnership. On February 15, 1995, $12.0 million was borrowed under the line of credit in order to finance this transaction. As of December 31, 1995, $15.0 million was outstanding. The additional $3.0 million borrowed during 1995 was used to purchase treasury stock. The remainder of the line remains available for additional funds, if required. The Company expects to repay the loan from current operating funds. The Company also believes that the amounts available from operating cash flows and under the line of credit will be sufficient to meet its expected cash needs, including planned capital expenditures. While not having a material impact on the current level of sales, the growth potential of future sales may be affected by the outcome of the following action. Best Lock Corporation vs. ILCO - Unican Corporation (Federal District Court, Indianapolis, Cause No. IP 93-1092C). This action by the Company against ILCO, a North Carolina corporation, charged ILCO with infringement of the Company's trade dress and trademark right in certain patented keys and other keys, and with unfair competition. On August 18, 1995, the Court entered an "Order on Joint Motion to Amend the Final Judgment and for Dismissal of Remaining Claims" finding for the defendant, Ilco Unican Corporation, relating to the validity of U.S. Patent No. 5,136,869 and U.S. Design Patent No. 327,636; stipulating infringement if the patents had not been held invalid; dismissing with prejudice with respect to Ilco Unican Corporation the remaining claims pertaining to trademark, trade dress and unfair competition brought by the Company; 13 dismissing without prejudice the remaining trademark, trade dress and unfair competition declaratory judgment counterclaims brought by Ilco Unican Corporation and awarding no monetary damages. On September 18, 1995, the Company filed Notice of Appeal with the Court of Appeals for the Federal Circuit. OTHER Foreign sales decreased to approximately 6% of total sales during 1995, from 7% in 1994 and 1993. The profit on these sales improved by approximately $250,000 during 1995. The firm backlog of approximately $4.2 million as of February 9, 1996 is $2.2 million lower than the prior year. The Company significantly reduced its backlog during 1995 by re-engineering certain processes in the manufacturing, assembly and shipping areas. The Company is continuing to focus on customer satisfaction in the areas of delivery and service, which will result in shorter lead times. The Company has not experienced any unusual inflation in its purchases or sales for the years 1995, 1994, or 1993. The Company has not had and does not expect to incur any significant future environmental liability. 14 This page not used. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) 1. Financial Statements: Report of Independent Public Accountants Corporate Balance Sheets, December 31, 1995 and 1994 Corporate Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheets, December 31, 1995 and 1994 Consolidated Statements of Income (Loss) for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Schedules Supporting Consolidated Financial Statements Schedule Number -------- II Valuation and Qualifying Accounts - Corporate and Consolidated - for the Years Ended December 31, 1995, 1994 and 1993 III Investments in, Equity in Earnings of, and Dividends Received From Affiliates and Other Persons - for the Years Ended December 31, 1995, 1994 and 1993 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shareholders of Frank E. Best, Inc.: We have audited the accompanying corporate balance sheets of FRANK E. BEST, INC. (a Delaware corporation) as of December 31, 1995 and 1994, and the related corporate statements of cash flows for each of the three years in the period ended December 31, 1995 and the accompanying consolidated balance sheets of FRANK E. BEST, INC. AND SUBSIDIARIES as of December 31, 1995 and 1994, and the related consolidated statements of income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FRANK E. BEST, INC. and FRANK E. BEST, INC. AND SUBSIDIARIES as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. Our audits were made for the purpose of forming an opinion on the consolidated statements taken as a whole. The schedules listed under Item 8 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied to the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Indianapolis, Indiana, March 11, 1996. 17 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) CORPORATE BALANCE SHEETS - --------------------------------------------------------------------------------
December 31 -------------------------------- 1995 1994 ----------- ------------ ASSETS Current assets Cash $ 23,545 $ 27,731 Other assets 1 1 ------------ ------------ Total current assets 23,546 27,732 Investment in subsidiary at underlying book value, eliminated in consolidation (Note 1) (Schedule III) 25,087,699 28,142,427 ------------ ------------ $ 25,111,245 $ 28,170,159 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ - $ - Other liabilities 27,643 18,070 Advances from subsidiary, eliminated in consolidation 111,803 95,396 ------------ ----------- Total liabilities 139,446 113,466 SHAREHOLDERS' EQUITY Common stock, $1 par value, 600,000 shares authorized and issued, 598,710 shares outstanding 598,710 598,710 Capital surplus 77,972 77,972 ------------ ----------- Total capital stock 676,682 676,682 ------------ ----------- Accumulated earnings Balance at beginning of year 27,491,946 26,688,607 ------------ ----------- Net income Equity in income (loss) of Universal Consolidated, eliminated in consolidation (Note 1) (3,212,290) 1,175,699 Corporate expense, net (42,848) 22,409 ------------ ----------- Total net income (loss) (3,255,138) 1,153,290 ------------ ----------- Cash dividends paid ($.53 in 1995 and $.52 in 1994) (317,316) (311,330) Difference between dividends of Series A and Series B common shareholders of Best Universal Lock Co. (Note 2) (38,622) (38,621) ------------ ----------- Balance at end of year 23,880,870 27,491,946 ------------ ----------- Cumulative translation adjustment (88,753) (111,935) ------------ ----------- Total shareholders' equity 24,468,799 28,056,693 ------------ ----------- Total liabilities and shareholders' equity $24,608,245 $28,170,159 ------------ ----------- ------------ -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) CORPORATE STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
----------------------------------------------------- Year Ended December 31 ------------------------------------------------------ 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ - $ - $ - Cash paid to suppliers (16,870) (22,032) (106,448) Dividend received from subsidiary 330,000 327,000 318,000 Interest received - - - Interest paid - - - Income taxes paid - (24,500) (9,323) ------------- ------------ ------------- Net cash provided by operating activities 313,130 280,468 202,229 ------------- ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES Note receivable from subsidiary - - - Dividend payments (317,316) (311,330) (305,342) ------------- ------------ ------------- Net cash used in financing activities (317,316) (311,330) (305,342) ------------- ------------ ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (4,186) (30,862) (103,113) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 27,731 58,593 161,706 ------------- ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,545 $ 27,731 $ 58,593 ------------- ------------ ------------- ------------- ------------ ------------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income (loss) $ (42,848) $ (22,409) $ (125,438) Adjustments- Dividend received from subsidiary 330,000 327,000 318,000 Changes in assets and liabilities- Increase (decrease) in Accounts payable and accrued expenses 9,562 (17,323) 1,526 Income taxes payable 16,416 (6,800) 8,141 ------------- ------------ ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 313,130 $ 280,468 $ 202,229 ------------- ------------ ------------- ------------- ------------ -------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 19 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
December 31 ---------------------------- 1995 1994 ------------ ------------ CURRENT ASSETS Cash and cash equivalents (Note 1) $ 1,413,372 $ 4,843,579 Trade receivables Direct 11,878,119 11,680,289 Sales representatives and other 1,893,871 12,688,434 Allowance for uncollectible accounts (263,559) (244,829) Estimated refundable income taxes 2,628,103 141,708 Current portion of notes receivable (Note 15) 14,895 81,987 Inventories (Notes 1 and 4) 11,383,058 14,579,058 Deferred income taxes (Notes 1 and 5) 4,239,578 3,566,922 Other prepaid expenses 379,906 152,342 ------------- ------------- Total current assets 33,567,343 37,489,490 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 1 and 3) Land and buildings 14,037,266 13,770,826 Machinery and equipment 28,694,247 29,478,143 Tooling 8,423,818 8,090,184 Furniture, fixtures and other 9,927,645 8,342,633 Construction work-in-progress 2,473,290 975,301 ------------- ------------- 63,556,266 60,657,087 Less - accumulated depreciation (33,734,786) (30,519,725) ------------- ------------- Total property, plant and equipment 29,821,480 30,137,362 ------------- ------------- OTHER ASSETS Long-term notes receivable (Note 15) 3,358,972 3,280,333 Other assets 1,084,300 54,050 ------------- ------------- Total assets $ 67,832,095 $70,961,235 ------------- ------------- ------------- -------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 -------------------------------------- 1995 1994 --------------- ---------------- CURRENT LIABILITIES Notes payable $ 2,500 $ 2,500 Current portion of retirement benefit obligations 1,362,431 1,381,967 Trade accounts payable 3,487,402 1,641,302 Customer advances 1,433,801 1,501,304 Accrued liabilities Income taxes 478,185 941,064 Property and other taxes 976,765 960,153 Payroll and vacation pay 4,225,317 3,918,751 Accrued restructuring (Note 14) 3,462,508 2,394,593 Accrued medical claims 970,000 850,000 Other 219,252 862,044 -------------- -------------- Total current liabilities 16,618,161 14,453,678 -------------- -------------- LONG-TERM DEBT (Note 7) 15,197,079 - RETIREMENT BENEFIT OBLIGATION (Note 10) 3,870,345 4,444,971 DEFERRED INCOME TAXES (Notes 1 and 5) 2,120,957 2,269,369 -------------- -------------- Total liabilities 37,806,592 21,168,018 -------------- -------------- MINORITY INTEREST IN SUBSIDIARIES 14,503,728 21,736,524 -------------- -------------- COMMON STOCK REDEEMABLE UNDER STOCK BONUS PLAN (Note 8) - 2,288,171 -------------- --------------- SHAREHOLDERS' EQUITY Common stock, $1 par value, 600,000 shares authorized and issued, 598,710 outstanding 598,710 598,710 Capital surplus 77,972 77,972 -------------- -------------- Total capital stock 676,682 676,682 Accumulated earnings 23,880,870 27,491,946 Cumulative translation adjustment (Note 1) (88,753) (111,935) Common stock redeemable under Stock Bonus Plan (Note 8) - (2,288,171) Treasury stock (8,946,974) - -------------- -------------- Total shareholders' equity 15,521,825 25,768,522 -------------- -------------- Total liabilities and shareholders' equity $ 67,832,095 $ 70,961,235 -------------- -------------- -------------- --------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 21 BEST LOCK COMPANIES BEST LOCK CORPORATION AND SUBSIDIARY BEST UNIVERSAL LOCK CO. ( A NON-OPERATING HOLDING COMPANY) AND SUBSIDIARIES FRANK E. BEST, INC. (A NON-OPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Year Ended December 31 ------------------------------------------------------ 1995 1994 1993 --------------- --------------- -------------- NET SALES $ 118,546,487 $ 104,669,003 $ 98,895,807 OPERATING EXPENSES Cost of Goods Sold 70,380,467 54,913,711 56,361,196 Selling 30,349,379 26,766,914 24,919,160 General and Administrative 21,554,232 16,434,727 12,661,743 Engineering, research and development 2,336,673 3,775,743 3,085,631 --------------- -------------- ------------- Total operating expenses 124,620,751 101,891,095 97,027,730 --------------- -------------- ------------- OPERATING INCOME (LOSS) (6,074,264) 2,777,908 1,868,077 Interest expense (870,062) (6,809) (47,510) Other income (expense), net 380,427 (367,685) 210,609 --------------- -------------- ------------- INCOME (LOSS) before provision for income taxes (6,563,899) 2,403,414 2,031,176 Provision (benefit) for income taxes (Note 5) (2,359,401) 195,259 881,658 --------------- -------------- ------------- NET INCOME (LOSS) before cumulative effect of change in accounting principle (4,204,498) 2,208,155 1,149,518 Cumulative effect of change in accounting principle (Note 1) - - 650,000 --------------- -------------- ------------- NET INCOME (LOSS), Best Lock Corporation and Subsidiary (4,204,498) 2,208,155 1,799,518 Minority interest in net (income) loss, Best Lock Corporation and Subsidiary 521,623 (653,892) (489,289) Corporate - Best Universal Lock Co. expense (55,600) (39,332) (34,352) --------------- -------------- ------------- NET INCOME (LOSS), Best Universal Lock Co. and Subsidiaries (3,738,475) 1,514,931 1,275,877 Minority interest in net (income) loss, Best Universal Lock Co. and Subsidiaries 1,029,185 (339,232) (285,415) Corporate - Frank E. Best, Inc. expense (42,848) (22,409) (125,438) --------------- -------------- ------------- NET INCOME (LOSS), Frank E. Best, Inc. and Subsidiaries $ (2,752,138) $ 1,153,290 $ 865,024 --------------- -------------- ------------- --------------- -------------- -------------
Best Universal Lock Co. Best Lock ------------------------- Frank E. Earnings (loss) per common share: Corporation Series A Series B Best, Inc. ------------ ------------- ---------- ----------- 1995 $ (33.88) $ (9.95) $ (9.95) $ (6.43) ------------ ------------ ---------- ------------ ------------ ------------ ---------- ------------ 1994 $ 16.83 $ 3.92 $ 3.92 $ 1.93 ------------ ------------ ---------- ------------ ------------ ------------ ---------- ------------ 1993: Income before cumulative effect of change in accounting principle $ 8.76 $ 2.08 $ 2.08 $ 0.83 Cumulative effect on prior years of adopting SFAS 109 "Accounting for Income Taxes" 4.95 1.22 1.22 0.62 ------------ ------------ ---------- ------------ NET INCOME (LOSS) $ 13.71 $ 3.30 $ 3.30 $ 1.45 ------------ ------------ ---------- ------------ ------------ ------------ ---------- ------------ Weighted average shares outstanding: 1995 124,114.13 75,669.87 300,000.00 427,806.72 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- 1994 131,235.37 86,469.00 300,000.00 598,710.00 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- 1993 131,238.85 86,469.00 300,000.00 598,710.00 ------------ ------------ ----------- ----------- ------------ ------------ ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 22 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
December 31 ------------------------------------------------------ 1995 1994 1993 ------------ -------------- -------------- COMMON STOCK, $1 par value, 600,000 shares authorized and issued, 598,710 shares outstanding $ 598,710 $ 598,710 $ 598,710 CAPITAL SURPLUS 77,972 77,972 77,972 ------------- ------------- -------------- Total capital stock 676,682 676,682 676,682 ------------- ------------- -------------- ACCUMULATED EARNINGS Balance at beginning of year 27,491,946 26,688,607 26,167,544 Net income (loss) (2,752,138) 1,153,290 865,024 (503,000) - - Cash dividends (see below) (317,316) (311,330) (305,340) Difference between dividends of Series A and Series B common shareholders of Best Universal Lock Co. (38,622) (38,621) (38,621) ------------- ------------- -------------- Balance at end of year 23,880,870 27,491,946 26,688,607 ------------- ------------- -------------- CUMULATIVE TRANSLATION ADJUSTMENT (88,753) (111,935) (61,363) COMMON STOCK REDEEMABLE UNDER STOCK BONUS PLAN (Note 8) - (2,288,171) - TREASURY STOCK Balance at beginning of year - - - Shares purchased (8,946,974) - - ------------- ------------- -------------- Balance at end of year (8,946,974) - - ------------- ------------- -------------- Total shareholders' equity $ 15,521,825 $ 25,768,522 $ 27,303,926 ------------- ------------- -------------- ------------- ------------- -------------- Cash dividends per share: $ 0.53 $ 0.52 $ 0.51 ------------- ------------- --------------- ------------- ------------- ---------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 23 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 -------------------------------------------------------- 1995 1994 1993 ----------------- ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 119,115,865 $ 103,456,897 $ 95,602,653 Cash paid to suppliers and employees (117,097,616) (92,594,751) (88,750,517) Interest received 494,908 137,171 78,190 Interest paid (761,831) (3,353) (48,065) Income taxes (paid) refunded (1,460,682) (53,856) (1,636,768) ----------------- ---------------- ---------------- Net cash provided by operating activities 290,644 10,942,108 5,245,493 ----------------- ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Dividend receipts - - - Proceeds from sale of property, plant and equipment 88,383 167,790 34,654 Capital expenditures (4,543,267) (3,895,823) (4,738,876) Note receivable from an officer - (3,400,000) - ----------------- ---------------- ---------------- Net cash used in investing activities (4,454,884) (7,128,258) (4,704,222) ----------------- ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings against unsecured line of credit 29,064,607 - - Payments on unsecured line of credit (14,100,000) - - Purchase of treasury stock (13,793,834) (20,405) - Redemption of preferred stock (6,300) - - Dividend payments (437,904) (647,995) (625,139) Premium paid on redemption of preferred stock (315) - - ----------------- ---------------- ---------------- Net cash provided by (used in) financing activities 726,254 (668,400) (625,139) ----------------- ---------------- ---------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,779 (6,860) (24,894) ----------------- ---------------- ---------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (3,430,207) 3,138,590 (108,762) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,843,579 1,704,989 1,813,751 ----------------- ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,413,372 $ 4,843,579 $ 1,704,989 ----------------- ---------------- ---------------- ----------------- ---------------- ---------------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income (loss) $ (2,752,138) $ 1,153,290 $ 865,024 Adjustments- Depreciation and amortization 4,904,810 4,364,558 4,057,571 Provision for losses on accounts receivable 117,417 38,413 503,023 (Gain) loss on sale of property, plant and equipment 83,408 (4,875) 18,304 Minority interest related to current year earnings (1,550,808) 993,124 774,701 Changes in assets and liabilities- (Increase) decrease in Accounts and notes receivable 600,453 (703,419) (3,071,111) Refundable income taxes 2,559,696 1,484,991 (887,465) Inventories 3,226,858 (139,575) 1,843,195 Prepaid and other expenses (900,220) (1,860,533) 99,677 Other assets (1,453,288) 127,582 (37,461) Increase (decrease) in Accounts payable, customer advances and accrued liabilities 1,707,866 4,968,206 912,317 Income taxes payable (391,444) 676,421 97,963 Deferred income taxes (148,412) (125,857) (406,307) Retirement benefit and benefit obligation (594,162) (30,218) 476,062 ----------------- ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 290,644 $ 10,942,108 $ 5,245,493 ----------------- ---------------- ---------------- ----------------- ---------------- ----------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 24 BEST LOCK COMPANIES BEST LOCK CORPORATION AND SUBSIDIARY BEST UNIVERSAL LOCK COMPANY (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS The principal business of the Best Lock Companies is the manufacture or sourcing, distribution and sale of access control products and services. b. PRINCIPLES OF CONSOLIDATION The consolidated financial statements for each parent company in the Best Lock Companies include their respective subsidiaries as indicated below: Percent Parent Company Subsidiaries Owned -------------- ------------ ----- Frank E. Best, Inc. Best Universal Lock Co. 83% (Best) Best Universal Lock Best Lock Corporation 79% Co. (Universal) Best Lock Best Universal Locks Limited (Canada) 100% Corporation (Lock or the Company) All significant intercompany accounts, investments and transactions have been eliminated in the consolidations. Best and Universal, other than their investment in subsidiaries, have no significant assets or liabilities. Best, Universal and Lock file separate federal income tax returns, as these entities are not eligible to file on a consolidated basis. c. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash equivalents consist of government securities. 25 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED d. INVENTORIES Inventories are valued using the last-in, first-out (LIFO) method for approximately 95% of consolidated inventories. The remaining inventories are valued at the lower of cost, first-in, firstout (FIFO) or market. e. REVENUE RECOGNITION Sales are recognized when product is shipped to customers or when service or installation is complete. f. DEPRECIATION Depreciation is provided on the straight-line method for book purposes and on an accelerated method for income tax purposes. g. AMORTIZATION During 1995, the Company purchased covenants not to compete for $1,240,000 which are being amortized ratably over the life of the covenants. Amortization expense was $206,667 in 1995. h. INCOME TAXES The Company adopted the provisions of Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" (SFAS 109) effective January 1, 1993. SFAS 109 requires a change from the deferral method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under the deferral method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. The effect of adopting SFAS 109 has been reflected in the Consolidated Statement of Income (Loss) for the year ended December 31, 1993 as a cumulative effect of a change in accounting principle of $650,000. i. RESEARCH AND DEVELOPMENT Research and development costs related to products are expensed as incurred. Development costs related to software for internal use are expensed or capitalized as incurred, depending on the useful life of the expenditure. The total amounts expensed were approximately $3,055,000, $3,050,000 and $2,345,000 in 1995, 1994, and 1993, respectively. 26 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED j. CURRENCY TRANSLATION The accounts of Lock's Canadian subsidiary are translated in accordance with Financial Accounting Standards Board Statement No. 52, whereby the balance sheet accounts are translated at the exchange rate in effect at period end, income accounts are translated at the average rate of exchange during the period, and translation gains and losses are excluded from net earnings by being recorded as a component of shareholders' equity (Cumulative Translation Adjustment). The Company's consolidated financial statements include translation gains (losses) of $56,459, ($89,392) and ($93,199) in 1995, 1994 and 1993, respectively, all of which are reflected as a component of shareholders' equity. k. NONCASH TRANSACTION The Company financed the purchase of $348,702 of treasury stock during 1995 by issuing a note payable. l. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. DIVIDENDS The Articles of Incorporation of Universal require that dividends on common stock be distributed as follows: a) the first approximately $138,000 in dividends are to be distributed equally to Series A holders and to Series B holders and, b) the remainder is distributed on an equal per share basis to Series A and B holders (on a noncumulative basis). These disproportionate distributions are reflected in calculating the minority interest of Best. 27 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. PROPERTY, PLANT AND EQUIPMENT For financial reporting purposes, depreciation is provided using the following straight-line rates: Buildings 2-1/2%, 3% & 5% Land Improvements 6-2/3% & 10% Machinery and equipment 8-1/3% Tooling 12-1/2% & 20% Furniture and fixtures 10% to 33% Vehicles 20% to 50% A 3-year depreciation life was adopted in 1995 for certain items such as computers, fax machines, copiers and telephone systems, to reflect a decreased useful life resulting from accelerating technology changes. Depreciation life for additions of this type was 5 years in 1994 and years prior. Computer software is being depreciated using a 5 year life. Expenditures for property, plant and equipment are reflected as construction work-in-progress until they are placed into service. The type and nature of the costs capitalized include only costs from unrelated third parties for equipment and installation. Maintenance and repairs are expensed as incurred. Replacements and betterments which extend the useful life of an asset are capitalized in the property accounts. Retirements are removed from property accounts at cost and the related depreciation is removed from the accumulated depreciation accounts. Gains or losses on dispositions of property and equipment are reflected in other income (expense) in the consolidated statements of income (loss). 4. INVENTORIES FIFO cost of inventories approximates replacement cost and exceeds LIFO inventory by $8,597,000, $7,616,000 and $7,562,000 in 1995, 1994 and 1993, respectively. 28 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Inventories reflected at LIFO cost were as follows:
December 31 ----------- 1995 1994 1993 ---- ---- ---- Finished goods $ 4,958,614 $ 6,526,239 $ 6,691,204 Work-in-process 6,182,505 7,816,878 7,546,117 Raw material 241,939 235,941 252,207 ----------- ----------- ----------- Total Inventory $11,383,058 $14,579,058 $14,489,528 ----------- ----------- ----------- ----------- ----------- -----------
The cost of materials, direct labor and manufacturing overhead associated with the production of inventories is included in the valuation of inventory. During 1995 and 1993, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 1995 and 1993 purchases. The effect of these liquidations increased net income by approximately $480,000 and $40,000 or $3.87 and $.31 per share of common stock in 1995 and 1993, respectively. 5. INCOME TAXES The provision (benefit) for income taxes consisted of the following:
Year Ended December 31 ---------------------- 1995 1994 1993 ---- ---- ---- U. S. Federal - Current $(1,293,028) $ 1,688,594 $ 726,795 Deferred (646,845) (1,847,248) 39,772 Foreign - Current 203,810 12,880 (49,569) Deferred 4,902 17,694 36,105 State - Current (515,232) 462,885 122,590 Deferred (113,008) (139,546) 5,965 ----------- ---------- --------- $(2,359,401) $ 195,259 $ 881,658 ----------- ---------- --------- ----------- ---------- ---------
29 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Earnings (loss) before income taxes were as follows:
Year Ended December 31 ---------------------- 1995 1994 1993 ---- ---- ---- Domestic $ (7,060,863) $ 2,335,442 $ 2,063,230 Foreign 496,964 67,972 (32,054) ------------ ---------- ----------- $(6,563,899) $ 2,403,414 $ 2,031,176 ------------ ----------- ----------- ------------ ----------- -----------
The effective rate of income taxes provided (benefited) varied from the U.S. Federal statutory rate for the following reasons:
Year Ended December 31 ---------------------- 1995 1994 1993 ---- ---- ---- Statutory Federal tax rate (34.0)% 34.0% 34.0% The statutory rate of tax provided was increased (decreased) by: State income taxes, net of Federal income tax benefit (6.3) 8.8 4.0 Foreign tax credit - (27.3) - Foreign income taxes 0.6 0.3 9.2 Other credits - (10.8) (5.0) Nondeductible expenses 5.5 5.0 2.1 Other (1.7) (1.9) (.9) -------- -------- ------- Effective rate of tax provided (benefited) (35.9)% 8.1% 43.4% -------- -------- ------- -------- -------- -------
The Company has $816,000 of unutilized foreign tax credits available to offset certain future U. S. tax obligations. These credits expire in 1998. The Company believes these foreign tax credits will be utilized during the carryover period and thus has recorded the benefit of the item as a reduction to the provision for income taxes for the year ended December 31, 1994. The Company also has alternative minimum tax credits available to offset certain future U. S. tax obligations. These credits have no expiration date and were generated as a result of the carryback of the 1995 net operating loss to 1992 and 1993. The benefit of these credits has been reflected as a reduction to the provision for income taxes for year ended December 31, 1995. 30 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The tax effect of temporary differences giving rise to the Company's consolidated current and noncurrent deferred income taxes are as follows:
Asset (Liability) ----------------- as of December 31, ----------------- 1995 1994 ---- ---- Current deferred income taxes: Vacation accrual $ 768,760 $ 759,511 Inventory capitalized for tax purposes, expensed for book purposes 209,286 256,711 Current portion of pension and qualified retirement benefit obligations 625,097 598,462 Restructuring accrual 1,382,926 1,071,003 Medical claims accrual 301,547 248,274 Inventory reserve 119,820 283,475 Current portion of foreign tax credit 307,467 142,609 Current portion of AMT credit 287,037 - Other 237,638 206,877 ------------ ------------ $ 4,239,578 $ 3,566,922 ------------ ------------ ------------ ------------ Noncurrent deferred income taxes: Excess tax over book depreciation $(4,366,125) $(4,154,697) Noncurrent portion of foreign tax credit 508,612 513,391 Noncurrent portion of AMT credit 345,788 - Noncurrent portion of pension and quali- fied retirement benefit obligations 1,337,114 1,371,937 Other 53,654 - ------------ ------------ $(2,120,957) $(2,269,369) ------------ ------------ ------------ ------------
31 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. LICENSE AGREEMENT Under the terms of a 1928 license agreement between Lock and its parent companies (Universal and Best), Lock agreed to issue a companion share of stock to Universal for each share of voting stock sold or otherwise disposed of during the full period of the corporate existence. 7. DEBT The Company has an agreement with a financial institution for letters of credit available primarily for issuance to a foreign vendor. At December 31, 1995, the Company had no outstanding letters of credit. The Company entered into a $25,000,000 line of credit agreement on February 15, 1995, which was amended effective December 31, 1995. The agreement expires on May 5, 1998 and bears interest at a variable rate, based upon the prime rate or LIBOR, at the Company's election. The line of credit is secured by a blanket lien on all accounts and notes receivable, inventory, machinery and equipment, and intangible assets with a negative pledge on real estate. The agreement contains financial covenants including those relating to debt service coverage, tangible net worth, and liabilities to tangible net worth. As of December 31, 1995, the Company was in compliance with all required covenants. The Company borrowed $12,000,000 under this agreement on February 15, 1995. The highest amount outstanding during 1995 was $15,300,000. The interest on these borrowings is based on LIBOR. The interest rate at December 31, 1995 was 7.06%. Interest expense on the 1995 borrowings was $809,242. 8. STOCK BONUS PLAN The Best Lock Corporation Stock Bonus Plan (Stock Bonus Plan) is available to Lock employees meeting certain eligibility requirements. The Stock Bonus Plan is noncontributory and is qualified pursuant to the applicable provisions of the Internal Revenue Code. Lock's cash contributions to the Stock Bonus Plan were zero in 1995 and 1994 and $250,000 in 1993, which amounts have been charged to expense in the accompanying financial statements. Contributions are determined by Lock's Board of Directors. The Stock Bonus Plan was amended in 1994. Under the amended plan, participants, upon reaching certain eligibility requirements, may receive cash or shares of Lock, Universal and/or Best common stock. In the event the participants elect or are required to receive shares, the participants have the right to require Lock to repurchase such shares in cash at its fair market value. As a result, the fair market value of the shares, determined based on an independent appraisal, held by the Stock Bonus Plan, has been reflected in the accompanying consolidated balance sheets as "Common stock and common stock of Universal and Best, redeemable under Stock Bonus Plan." On December 28, 1995, Lock purchased all of the common stock of Best held by the Stock Bonus Plan at an independently appraised value as of December 27, 1995, of $29.74 per share. The purpose of this transaction was to provide liquidity to the Stock Bonus Plan in anticipation of payments out of the plan pursuant to the early retirement plan discussed in Note 14. 32 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The fair market value of the shares held by the Stock Bonus Plan at December 31, 1995, was $5,931,931; however, the Company has calculated the present value of the potential future cash payments (net of cash held) by the Company under the Stock Bonus Plan payable in years 1996 through 2021 to be approximately $350,000. The significant assumptions used to calculate the present value of the potential future cash payments referred to above are as follows: 1) The fair market value of Lock (10,539.19 common shares) and Universal (27,262 common shares) shares held by the Stock Bonus Plan will not appreciate or depreciate in future periods. 2) Annual cash dividends per share are assumed to continue to be paid as follows: Lock $5.41, Universal $1.67. The calculation assumes the cash dividend received by the Stock Bonus Plan will be available for cash distributions to retirees from the Plan. Thus, the present value of the potential future cash payments by the Company has been reduced by the cash dividends received by the Plan. 3) All payments with the exception of certain known future terminations are assumed to occur one year after the participant's retirement. Retirement is assumed to be in the year the participant reaches age 65. 4) The discount rate used to calculate the present value of Lock's potential future cash payments was 8.25%. 5) It is assumed that an additional $750,000 will be paid out of the Plan during 1996 and $750,000 will be paid out of the Plan during 2001 as a result of the early retirement and voluntary separation plan discussed in Note 14. 9. SEGMENT REPORTING The Best Lock Companies are engaged in the manufacture and sale of access control products and services only, and as such do not report on a segment basis. Foreign sales amounted to approximately 6% of total sales during 1995 and 7% of total sales during 1994 and 1993. 10. RETIREMENT PLANS Effective September 1, 1989, the Company adopted a noncontributory defined benefit Employees' Pension Plan (the Plan) to provide retirement benefits to substantially all current and retired U. S. employees as of September 1, 1989. The Company has received a favorable determination letter for the Plan from the Internal Revenue Service. The Plan provides benefits for past service only. The monthly benefit is based on the employee's years of service and compensation as of September 1, 1989. The benefits for retired employees were based upon amounts specified in the Plan. Under the Plan's provisions, all participants were 100% vested at September 1, 1989. Normal retirement age is 65 with provisions for earlier retirement with reduced benefits. After several years of accelerated funding, the Company is currently making quarterly contributions to the Plan in amounts necessary to meet minimum governmental funding requirements. Company 33 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED contributions are made to a trust fund whose assets consist of investments in high-quality short-term money market instruments. The Plan's funded status is as follows:
December 31 ----------- 1995 1994 ---- ---- Actuarial present value of the accumulated benefit obligation $7,447,021 $7,246,736 Plan assets at fair value 5,669,032 4,938,080 ----------- ---------- Retirement benefit obligation included in the consolidated balance sheets $1,777,989 $2,308,656 ---------- ----------
The discount rate used to calculate the actuarial present value of the accumulated benefit obligation was 8% in 1995 and 1994 and 7.5% in 1993. The long-term rate of return on plan assets was 8% in 1995 and 1994 and 7.5% in 1993. The changes in the discount rate for 1994 and 1993 resulted in a reduction in pension expense in 1994 of $434,000, and an increase in pension expense in 1993 of $431,000. Net periodic pension cost including interest totaled $340,592 in 1995, $31,842 in 1994 and $865,485 in 1993. In addition to the Plan adopted on September 1, 1989, the Company executed supplemental retirement benefit agreements with certain retirees and officers. For financial reporting purposes, the actuarial present value (discounted at 8% in 1995 and 1994 and 7.5% in 1993) of the benefits to be provided under the terms of these agreements were recognized in 1989 and subsequent years, except for the agreement with the Company's former President, which, prior to 1994, was amortized over his estimated remaining service life. Effective in 1994, the actuarial present value of the benefit to be provided to the Company's former President under the terms of the agreement was fully recognized. This change in assumptions resulted in an increase in expense of approximately $800,000. The Company recognized costs related to these agreements of $356,758, $1,030,833, and $365,533 in 1995, 1994 and 1993, respectively. The retirement benefit obligation for supplemental benefits included in the consolidated balance sheets totaled $3,035,429 and $3,104,885 at December 31, 1995 and 1994, respectively. The benefits under these agreements will be paid monthly by the Company over the lifetime of the recipients and, upon their death, 50% of the scheduled amount for the lifetime of the surviving spouse. These agreements may be amended by the Company. During 1992, the Company adopted a retirement benefit program in its Canadian subsidiary, Best Universal Locks, Limited, to become effective January 1, 1993. This Registered Retirement Savings Plan (the RRSP), which conforms to Canadian pension law, will be funded for all current employees based on years of service and compensation as of December 31, 1992. Under the RRSP provisions, the accounts of all participants are 100% vested, and are registered in their own names. This individual savings plan allows employee and Company contributions up to annual limits specified by Canadian law. The Company expensed the past service obligation (excluding interest) in 1992. The Company is funding the past service obligation over approximately four 34 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED years, beginning in 1993. The expenses related to this benefit were $26,380, $15,817 and $22,721 in 1995, 1994, and 1993, respectively. The retirement benefit obligation for the RRSP included in the consolidated balance sheets totaled $39,774 and $35,563 at December 31, 1995 and 1994, respectively. In addition, the Company executed supplemental retirement benefit agreements with present Canadian retirees beginning January 1, 1993. For financial reporting purposes, the actuarial present value (discounted at 7.5% in 1995, 1994 and 1993) of the benefits to be provided under the terms of these agreements was charged to expense in the amounts of $34,463, $34,359 and $62,379 in 1995, 1994 and 1993, respectively. The retirement benefit obligation for the Canadian agreements included in the consolidated balance sheets totaled $379,584 and $377,834 at December 31, 1995 and 1994, respectively. The benefits under these agreements will be paid monthly by the Company over the lifetime of the recipients and, upon their death, 50% of the scheduled amount for the lifetime of the surviving spouse. A summary of the retirement benefit obligations included in the consolidated balance sheets is presented below:
1995 1994 ---- ---- Defined Benefit Employees Pension Plan $ 1,777,989 $ 2,308,656 Supplemental Retirement Benefit Agreements 3,035,429 3,104,885 Registered Retirement Savings Plan (Canada) 39,774 35,563 Supplemental Retirement Benefit Agreements (Canada) 379,584 377,834 ----------- ----------- $ 5,232,776 $ 5,826,938 ----------- ----------- Current Portion $ 1,362,431 $ 1,381,967 Non-current Portion 3,870,345 4,444,971 ----------- ----------- $ 5,232,776 $ 5,826,938 ----------- -----------
The Company implemented a 401(k) profit sharing plan (the 401(k) Plan) during 1994. Employees are eligible after reaching age 21 and completing one year of continuous service as of the enrollment dates each year. Employer contributions to the 401(k) Plan are determined by the Company's Board of Directors. Participants begin vesting in the employer contributions after 1 year of service at which time they are 20% vested. Employees become 100% vested after 5 years of service. Company contributions to the 401(k) Plan amounted to $571,000 and $221,000 in 1995 and 1994. 35 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. CONTINGENCIES From time to time the Company may be a party to litigation incidental to its business. Management is of the opinion that the ultimate resolution of any known claims will not have a material adverse impact on the Company's financial position or results of operations. The Company leases various office and warehouse facilities and other vehicles under noncancelable lease arrangements. Lease terms are from one to ten years and most provide options to renew. Future minimum lease payments under noncancelable operating leases as of December 31, 1995 are as follows:
Amount ------ 1996 $ 636,909 1997 546,014 1998 399,837 1999 183,576 2000-2005 469,425 ----------- $ 2,235,761 -----------
Rent expense charged to operations totaled $761,024, $852,565 and $935,645 in 1995, 1994, and 1993, respectively. 12. UNDISTRIBUTED EARNINGS In general, it is Lock's intention to reinvest the earnings of its foreign subsidiary in its operations and to repatriate these earnings only when it is advantageous to do so. Also, it is Universal's and Best's intention to minimize, if not eliminate, any income taxes associated with amounts distributed by its domestic subsidiaries. As a result, it is expected that the amount of income taxes resulting from a repatriation will not be significant. Accordingly, deferred tax amounts are not being recorded related to undistributed earnings. The cumulative amounts of undistributed earnings on which income taxes have not been recognized are as follows:
December 31 ----------- 1995 1994 ---- ---- Best $26,000,000 $27,200,000 Universal $31,300,000 $35,000,000 Lock $ 1,934,000 $ 1,600,000
36 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. RECLASSIFICATIONS Certain reclassifications have been made in the consolidated balance sheets and statements of income (loss) for the years ended December 31, 1994 and 1993 to conform to the current year presentation. 14. RESTRUCTURING In the fourth quarter of 1995, the Company accrued $3.1 million in connection with the announcement of a board approved early retirement, voluntary and involuntary separation plan to reduce the work force by approximately 340 people. The Company plans to reduce payroll-related expenses by consolidating certain functions in the distribution division and by consolidating or eliminating certain internal processes in the manufacturing and support functions. The restructuring charge includes estimated employee-related and facilities expenses associated with the consolidation and termination of certain operations and employees. The plan is expected to be substantially completed during 1996. On February 15, 1995, the Company settled all claims arising from a derivative action threatened against it by a director, as well as all claims against Lock's Chief Executive Officer and another officer. The material components of the settlement include: (i) the resignation of Walter E. Best from the Board of Directors and as President of each of Lock, Universal, Best, and Walter E. Best Company, Inc.; (ii) the resignation of Richard E. Best and Marshall W. Best as officers and employees of Lock and the resignation of Robert W. Best and Marshall W. Best as officers and employees of Lock and the resignation of Robert W. Best as an employee; (iii) the payment of the total sum of $2,134,349 as severance, vacation and bonus payments to Walter E. Best, Robert W. Best, Rich E. Best, Marshall W. Best and Edwina McLemore, an employee of Lock; (iv) the payment of the total sum of $1,240,000 in exchange for covenants not to compete from Walter E. Best, Robert W. Best, Richard E. Best and Marshall W. Best; and (v) the payment of the total sum of $8,178, 296 for the acquisition of shares of Lock and interests in a partnership as described below. At December 31, 1994, the Company had accrued all costs associated with the severance, vacation and bonus payments referred to above. In addition, the Company accrued $701,060 of professional fees incurred related to the settlement of the claims referred to above, which has been reflected in other income (expense) in the consolidated statements of income (loss). On February 15, 1995, Lock purchased for cash an 87% non-voting interest in a partnership for $5,582,626. The purpose of the partnership, which was newly formed, is to acquire and hold securities for investment purposes. The purchase price of the shares was based on the appraised value of such shares as of December 31, 1993 as determined by an independent appraiser. An opinion that the transactions were fair to the Company was rendered by Merrill Lynch, Pierce, Fenner & Smith Incorporated to the Company's Board of Directors. The partnership purchased directly or indirectly 204,053 shares of Best common stock, 8,787 shares of Universal Series A common stock and 11.25 shares of Universal preferred stock. In addition, on February 15, 1995, Lock acquired 6,742 shares of its own common stock at an appraised value of $385.00 per share or $2,595,670. 37 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Lock's acquisition of its interest in the partnership and its redemption of its own common shares were funded through the utilization of a portion of the line of credit of $25,000,000 as discussed in Note 7. The Company accounted for the purchase of the Lock shares and the 87% partnership interest as treasury stock, which resulted in a reduction to shareholders' equity of Lock of $8,178,296, Universal of $5,582,626 and Best of $5,077,403. As a result of these transactions, the minority interest of Universal decreased from 27% to 23% and the minority interest of Best decreased from 22% to 21%. During 1995, in addition to the above transactions, the Company acquired shares of Lock, Universal and Best which were accounted for as treasury stock. This treatment resulted in a reduction to shareholders' equity of Lock of $5,848,082, Universal of $4,773,932 and Best of $3,869,643. As a result of these transactions, the minority interest of Universal decreased from 23% to 21% and the minority interest of Best decreased from 21% to 17%. 15. RELATED PARTY TRANSACTIONS On May 5, 1994, Lock's Board of Directors approved a loan of $3.4 million to Russell C. Best, Chief Executive Officer, under the terms of an Employment Agreement entered into by Lock and Russell C. Best. On May 18, 1994, $3.4 million was borrowed, with interest at 7.2%, by Russell C. Best. The terms of the loan include repayment over a thirty (30) year period in equal annual installments of principal and interest totaling $279,519. The Company entered into a split dollar life insurance agreement as of December 29, 1995 with a trust established by Russell C. Best, pursuant to which the Company and the trust will share in the premium costs of a whole life insurance policy that has a face value death benefit of $5,000,000. Under the agreement, the Company will pay approximately $55,000 each policy year for the first 15 years of the policy. The Company is not obligated to make its share of the annual premium. Only the trustee may cancel or surrender the policy. Upon the death of Mr. Best, the Company will receive the cumulative amount of its premium payments. Prior to Mr. Best's death and prior to the 30th year of the policy, upon cancellation or surrender of the policy, the Company will receive the lesser of its cumulative premium payments or the cash surrender value of the policy. To the extent the policy is not canceled or surrendered in its first 30 years, the Company will receive its cumulative premium payments in the 30th year of the policy. Walter E. Best, former President of the Company, is the President and owns in excess of 10% of the stock of Best Aircraft Corporation. The Company leased automobiles from Best Aircraft Corporation, paying $30,030, $183,470 and $180,656 for such services in 1995, 1994, and 1993, respectively. Larry W. Rottmeyer, employed during 1994, became a Director and Vice President of the Company during 1995. Mr. Rottmeyer resigned as a Director on February 26, 1996 and was removed as a Vice President on March 5, 1996. During Mr. Rottmeyer's employment, he was also a Director and a greater than 10% equity owner of Marcon, Inc. until June 9, 1995. The Company purchased market research services from Marcon, Inc., during 1995 and 1994, paying $547,942 and $291,716 for such services, respectively. Eric M. Fogel, Director from October 30, 38 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1995 until March 1, 1996, is a partner in the law firm of Holleb & Coff. The Company paid Holleb & Coff $112,221 in 1995 for legal services. 16. REDEMPTION OF BEST UNIVERSAL LOCK CO. STOCK On July 1, 1995, Universal redeemed all 63 shares of its outstanding preferred stock at $105 per share plus cumulative dividend, for a total of $7,056. 17. OUTSTANDING SHARES The number of outstanding shares of Universal and Best used in the calculation of earnings per share differs from the number of outstanding shares shown on the cover page of the 10-K for each of the two companies. The cover page of the 10-K reflects all shares legally outstanding. The earnings per share disclosures reflect as treasury stock shares held by subsidiaries of Universal and Best that are still legally outstanding, in accordance with generally accepted accounting principles. 39 SCHEDULE II Page 1 of 3 BEST LOCK COMPANIES Best Lock Corporation and Subsidiary Best Universal Lock Co. (a nonoperating holding company) and Subsidiaries Frank E. Best, Inc. (a nonoperating holding company) and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED FOR THE YEAR ENDED DECEMBER 31, 1995 - --------------------------------------------------------------------------------
Collections Deductions Additions of Accounts For Accounts Balance Charged to Previously Receivable Balance Description January 1 Income Written off Written off December 31 - ----------------------------- ----------- ----------- ------------- ------------- ----------- CORPORATE Best Universal Lock Co. $ - $ - $ - $ - $ - ----------- ----------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- ----------- Frank E. Best, Inc. $ - $ - $ - $ - $ - ----------- ----------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- ----------- CONSOLIDATED (Best Lock Corporation and Subsidiaries) Allowance for uncollectible accounts receivable $ 244,829 $ 117,417 $ 28,522 $ (127,209) $ 263,559 ----------- ----------- ------------- ------------- ----------- ----------- ----------- ------------- ------------- -----------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating holding companies and do not have any significant assets or liabilities, other than their investment in subsidiaries. 40 SCHEDULE II Page 2 of 3 BEST LOCK COMPANIES Best Lock Corporation and Subsidiary Best Universal Lock Co. (a nonoperating holding company) and Subsidiaries Frank E. Best, Inc. (a nonoperating holding company) and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED FOR THE YEAR ENDED DECEMBER 31, 1994 - --------------------------------------------------------------------------------
Collections Deductions Additions of Accounts For Accounts Balance Charged to Previously Receivable Balance Description January 1 Income Written off Written off December 31 - ----------------------------- ----------- ----------- ------------ ------------- ------------- CORPORATE Best Universal Lock Co. $ - $ - $ - $ - $ - ----------- ----------- ------------ ------------- ------------- ----------- ----------- ------------ ------------- ------------- Frank E. Best, Inc. $ - $ - $ - $ - $ - ----------- ----------- ------------ ------------- ------------- ----------- ----------- ------------ ------------- ------------- CONSOLIDATED (Best Lock Corporation and Subsidiaries) Allowance for uncollectible accounts receivable $ 350,136 $ 38,413 $ 4,134 $ (147,854) $ 244,829 ----------- ----------- ------------ ------------- ------------- ----------- ----------- ------------ ------------- -------------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating holding companies and do not have any significant assets or liabilities, other than their investment in subsidiaries. 41 SCHEDULE II Page 3 of 3 BEST LOCK COMPANIES Best Lock Corporation and Subsidiary Best Universal Lock Co. (a nonoperating holding company) and Subsidiaries Frank E. Best, Inc. (a nonoperating holding company) and Subsidiaries VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED FOR THE YEAR ENDED DECEMBER 31, 1993
Collections Deductions Additions of Accounts For Accounts Balance Charged to Previously Receivable Balance Description January 1 Income Written off Written off December 31 - ----------------------------- ----------- ----------- ------------- -------------- ------------- CORPORATE Best Universal Lock Co. $ - $ - $ - $ - $ - ----------- ----------- ------------- -------------- ------------- ----------- ----------- ------------- -------------- ------------- Frank E. Best, Inc. $ - $ - $ - $ - $ - ----------- ----------- ------------- -------------- ------------- ----------- ----------- ------------- -------------- ------------- CONSOLIDATED (Best Lock Corporation and Subsidiaries) Allowance for uncollectible accounts receivable $ 249,969 $ 503,023 $ 275 $ (403,131) $ 350,136 ----------- ----------- ------------- -------------- ------------- ----------- ----------- ------------- -------------- -------------
Note: Best Universal Lock Co. and the Frank E. Best, Inc. are nonoperating holding companies and do not have any significant assets or liabilities, other than their investment in subsidiaries. 42 SCHEDULE III FRANK E. BEST, INC. (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, 1994, 1993 AND 1992 - --------------------------------------------------------------------------------
Name of Issuer and Title of Issue 1995 1994 1993 - --------------------------------- ------------- ------------- ------------- Frank E. Best, Inc. SUBSIDIARY CONSOLIDATED: Best Universal Lock Co. Series B common stock, no par value Year acquired: 1928 Through 1948 Consideration: Asset and Intangibles Number of shares 300,000 300,000 300,000 ------------- ------------- ------------- ------------- ------------- ------------- Balance, January 1 $ 28,142,427 $ 27,382,921 $ 26,801,759 Equity in net income of subsidiary consolidated (2,709,288) 1,175,699 990,462 Distribution of earnings by subsidiary (330,000) (327,000) (318,000) Transfer of minority interests' proportionate share (38,622) (38,621) (38,621) Change in cumulative translation adjustment 23,182 (50,572) (52,679) ------------- ------------- ------------- Balance, December 31 $ 25,087,699 $ 28,142,427 $ 27,382,921 ------------- ------------- ------------- ------------- ------------- -------------
43 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and officers have not been selected as such under any arrangement or understanding between them and any other person(s). (a) IDENTIFICATION OF DIRECTORS.
Tenure as Expiration Name Age Positions Director of Term ---- --- --------- -------- ------- Russell C. Best 34 President/CEO Since 1991 12/31/96 and Director Mariea L. Best 32 Director Since 1995 12/31/96 Gregg A. Dykstra 39 Secretary/Treasurer Since 1995 12/31/96 and Director Larry W. Rottmeyer* 40 Director Since 1995 12/31/96 Eric M. Fogel** 40 Director Since 1995 12/31/96
* Larry W. Rottmeyer resigned his position effective on February 26, 1996. **Eric M. Fogel resigned his position effective March 1, 1996. (b) IDENTIFICATION OF EXECUTIVE OFFICERS.
All Positions Period Served Expiration and Offices with in such Name Age of Office Registrant Position ---- --- --------- ---------- -------- Russell C. Best 34 12/31/96 President/CEO Since 1995 (Pres.) Since 1994 (CEO) Mariea L. Best 32 12/31/96 Vice President Since 1995 Gregg A. Dykstra 39 12/31/96 Secretary/Treasurer Since 1995
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES. None. (d) FAMILY RELATIONSHIPS. Mariea L. Best is the spouse of Russell C. Best. 44 (e) BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS DURING THE PAST FIVE YEARS. (1) Russell C. Best, President/Chief Executive Officer and Director, has served registrant and Best Universal Lock Co. as President since February 15, 1995; prior thereto Vice President of registrant and Best Universal Lock Co. from prior to 1990; Chairman of the Board of Lock since March 1995; President of Lock since February 15, 1995; Chief Executive Officer of Lock since May 1994; Executive Vice President of Lock from June 1992 to May 1994; Marketing Director of Lock from 1989-1992; Director of registrant, Best Universal Lock Co. and Lock since 1990. Mariea L. Best, Director, has served registrant in this capacity 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 Best Universal Lock Co. and Lock since 1995. Gregg A. Dykstra, Secretary/Treasurer, has served registrant and Best Universal Lock Co. as Secretary/Treasurer since March 1995; Treasurer of Lock since March 1995; Secretary of Lock from March 1995 to October 1995; Vice President of Lock since 1995; General Counsel of Lock from November 1989 to July 1995; Director of registrant, Best Universal Lock Co. and Lock since 1995. Larry W. Rottmeyer, Director, has served registrant, Best Universal Lock Co. and Lock in this capacity since 1995 until February 26, 1996; Vice President of Lock since September 1995 until March 5, 1996; Director of Business Development of Lock from May 1995 to September 1995; Vice President of Marketing of Lock from October 1994 to May 1995: Chief Executive Officer/President for Marcon Corporation, an independent marketing and research firm, from October 1994 to June 1995; Chief Executive Officer/President and senior marketing consultant for Marcon Corporation from 1987 to October 1994; Director of Reflectix, Inc. since January 1994. Eric M. Fogel, Director, has served registrant, Best Universal Lock Co. and Lock in this capacity since 1995 until March 1, 1996; partner in the law firm of Holleb & Coff, Chicago, Illinois, since December 1993; associate in the law firm of Sonnenschein Nath & Rosenthal, Chicago, Illinois, from July 1989 to November 1993. (2) Directorships. Russell C. Best who was a Director of registrant through December 31, 1995, was also a Director of Lock and Best Universal Lock Co. through December 31, 1995. Mariea L. Best, Gregg A. Dykstra, Larry W. Rottmeyer and Eric M. Fogel became Directors of registrant, Best Universal Lock Co. and Lock in 1995. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. To the knowledge of the registrant none of the directors within the previous five years has filed a petition under the Bankruptcy Act or any state insolvency law nor was a receiver, fiscal agent or similar officer appointed for such persons or any partnership to which they may have been general partners or any corporation of which they were executive officers. Furthermore, to the knowledge of the registrant no director or executive officer has been convicted in a criminal proceeding (except traffic violation or other minor offense) or is subject to a criminal proceeding presently pending, nor to the knowledge of management is any director subject to any order, judgment or decree by any Court of competent jurisdiction, permanently or temporarily enjoining such director from acting as an investment adviser, underwriter, broker or dealer in securities or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company or from engaging in or conducting any conduct or practice in connection with such activity or in connection with the purchase or sale of any security. 45 ITEM 11. EXECUTIVE COMPENSATION. (a) COMPENSATION. The information in the following table discloses all remuneration paid to the Chief Executive Officer and the other four most highly compensated executive officers or directors of registrant, for services in all capacities to the registrant and its subsidiaries during the fiscal years ended December 31, 1995, 1994 and 1993, all of such remuneration having been paid by Lock. (b) SUMMARY COMPENSATION TABLE
Position Year Total Salary(3) Total Bonus(4) Total Other(5) -------- ---- --------------- -------------- -------------- Russell C. Best 1995 $ 597,745 $ 0 $ 96,487 Chief Executive Officer 1994 406,657 343,665 13,562 1993 250,705 1,779 12,076 Gregg A. Dykstra 1995 260,687 100,000 9,581 Vice-President 1994 155,832 11,475 7,760 1993 147,148 1,779 8,515 Larry W. Rottmeyer(1) 1995 273,986 100,000 10,565 Vice-President 1994 41,539 270 43 1993 0 0 0 Walter E. Best(2) 1995 873,276 0 3,731 Chairman and President 1994 444,965 3,665 11,550 1993 435,668 1,779 11,637 Roger E. Beaverson(2) 1995 187,070 0 7,424 Secretary/Treasurer 1994 182,019 2,015 12,450 1993 189,777 1,779 11,564
(1) Removed as an officer March 5, 1996 (2) Walter E. Best resigned his positions effective February 15, 1995. Roger E. Beaverson resigned his position effective June 16, 1995. (3) In the case of Russell C. Best, the salary amount for 1995 includes $7,867 in taxes paid by the Company on the value of a trip paid by the Company. In the case of Gregg A. Dykstra, the salary amount for 1995 includes an auto stipend of $11,577. The 1995 salary amount for Gregg A. Dykstra also includes an amount equal to $80,033 as a retroactive base pay adjustment for 1995 which was paid in 1996. In the case of Larry W. Rottmeyer, the salary amount for 1995 includes an auto stipend of $17,300 and $7,228 in taxes paid by the Company on the value of a trip paid by the Company. The 1995 salary amount for Larry W. Rottmeyer also includes an amount equal to $64,584 as a retroactive base pay adjustment for 1995 which was paid in 1996. In the case of Walter E. Best, the salary amount for 1995 includes $121,275 paid pursuant to a supplemental retirement agreement, $500,000 paid as severance, $9,000 paid as consulting fees, and $4,250 in tax return preparation fees. In the case of Richard E. Best, the salary amount for 1995 includes $423,381 paid as severance and $1,770 in tax return preparation fees. (4) In 1995, the bonus payments were discretionary and were paid in 1996 in recognition of services provided in 1995. In the case of Russell C. Best, the bonus amount for 1994 includes an amount equal to $340,000 in recognition of services provided in calendar year 1994, payable in 46 accordance with the employment agreement with Russell C. Best. In 1994, the bonus payments consisted of a flat base amount plus a percentage based on the employee's achievement of certain business objectives. In 1993, the bonus payments were flat amounts. (5) In the case of Russell C. Best, this amount includes the value of group term life premiums in excess of $50,000 ($920, $459, and $213 respectively, in 1995, 1994 and 1993), the annual lease value of his company vehicle ($16,449, $12,316, and $9,583 respectively, in 1995, 1994 and 1993), the amount paid by the Company for tax return preparation and legal fees on his behalf ($14,882, $787 and $530 respectively in 1995, 1994 and 1993), contributions by the Company to the 401(k) plan on his behalf ($3,000 in 1995), $1,750 contributed by the Company to the Best Lock Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in 1993, $317 in disability insurance premiums paid on his behalf in 1995, $547 in spousal travel paid by the Company in 1995, $11,205 in value of a trip paid by the Company in 1995, and for 1995, $49,168 reflecting the present value of the economic benefit of the portion of a split dollar life insurance premium paid by the Company, based on the time period between the date the premium was paid and December 29, 2025, the earliest date the Company could receive a refund, without interest, of the premium paid. In the case of Gregg A. Dykstra, this amount includes the value of group term life premiums in excess of $50,000 ($149, $218, and $185 respectively, in 1995, 1994 and 1993), the annual lease value of his company vehicle ($6,100, $6,100, and $5,517 respectively, in 1995, 1994 and 1993), the value of spousal travel paid by the Company ($332 in 1995 and $1,339 in 1993), the amount paid by the Company for tax return preparation fees on his behalf ($375 in 1994 and 1993), contributions by the Company to the 401(k) plan on his behalf ($3,000 and $1,067 respectively in 1995 and 1994), and $1,099 contributed by the Company to the Best Lock Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in 1993. In the case of Larry W. Rottmeyer, this amount includes the value of group term life premiums in excess of $50,000 ($190 and $43 respectively, in 1995 and 1994), $332 in spousal travel paid by the Company in 1995, and $10,043 in value of a trip paid by the Company in 1995. In the case of Walter E. Best, this amount includes the annual lease value of his company vehicle ($731, $5,850, and $5,850 respectively, in 1995, 1994 and 1993), the amount paid by the Company for tax return preparation fees on his behalf ($4,250 and $3,970 respectively, in 1994 and 1993), contributions by the Company to the 401(k) plan on his behalf ($3,000 and $1,450 respectively in 1995 and 1994), and $1,817 contributed by the Company to the Best Lock Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in 1993. In the case of Roger E. Beaverson, this amount includes the value of group term life premiums in excess of $50,000 ($400, $1,599, and $1,496 respectively, in 1995, 1994 and 1993), the annual lease value of his company vehicle ($1,917, $7,225, and $7,750 respectively, in 1995, 1994 and 1993), the excess of market value over purchase price of his company vehicle of $1,333 in 1995, the value of spousal travel paid by the Company ($626 and $881 respectively, in 1994 and 1993), the amount paid by the Company for tax return preparation fees on his behalf ($775 in 1995), contributions by the Company to the 401(k) plan on his behalf ($3,000 in both 1995 and 1994), and $1,438 contributed by the Company to the Best Lock Corporation Stock Bonus Plan, a defined contribution plan, on his behalf in 1993. (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 Summary Compensation Table are less than $50,000 in each year presented. 47 (2) Russell C. Best, along with other employees, participates in a qualified noncontributory defined benefit pension plan approved by Lock's Board of Directors in 1989. The monthly benefit payable thereunder is based on the employee's compensation and years of past service as of September 1, 1989. Normal retirement age is 65, with provisions for earlier retirement with reduced benefits. Such payments are to be made for their lifetime, following which 50% of the monthly amount will be provided for the lifetime of a surviving spouse. The monthly benefit payable to Russell C. Best under this Plan is $490. (d)(e)(f) OTHER COMPENSATION. There was no other compensation paid to the named individuals exceeding 10% of the compensation reported for such individual. (g) COMPENSATION OF DIRECTORS. Directors are paid $25,000 per calendar year for services rendered, effective April 1, 1995. (h) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENT. On May 5, 1994, Lock and Russell C. Best entered into an Employment Agreement (the "Agreement") pursuant to which Russell C. Best assumed the duties of Chief Executive Officer of Lock. The initial term of the Agreement expires December 31, 1998; however, the term is automatically extended by one additional year on December 31 of each year unless earlier terminated such as by notice by either party to the other at least thirty (30) days prior to December 31 of such year. The Agreement provides for a base salary of $425,000 per year, subject to increases for inflation and other factors, plus the participation of Russell C. Best in all general and executive compensation and benefit plans of Lock, including any incentive or bonus plans. The Agreement further provides for a loan of up to $3,400,000 to Russell C. Best, to be repaid to Lock over a thirty year period with interest at 7.2% per annum. Such loan must be secured by acceptable collateral, but in any event by all assets acquired with the proceeds of the loan. The loan is secured by a pledge of certain of the shares of registrant acquired with its proceeds and certain shares of Best Universal Lock Co. 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 registrant owned by him at the time of 48 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. (l) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. There are no interlock or insider participation arrangements involving any executive or board member of registrant. 49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following information is given as of February 9, 1996.
Title of Name and Type of Amount Percent Class Address Ownership Owned of Class ----- ------- --------- ----- ------- Common stock, Russell C. Best Of Record 463,139.00 (1) 70% $1 par value c/o Best Lock and Corporation Beneficial P. O. Box 50444 Indianapolis, Indiana 46250 Common stock, Best Lock Of Record 204,053.00 45% $1 par value Partnership c/o Best Lock Corporation P. O. Box 50444 Indianapolis, Indiana 46250
(b) SECURITY OWNERSHIP OF MANAGEMENT AND ITS SUBSIDIARIES BY MANAGEMENT. The following information is given as of February 9, 1996:
Amount Percent Title of Class Beneficially Owned of Class -------------- ------------------ -------- Common stock, $1 par value, of registrant (Owned by Russell C. Best, Director and CEO/President) 463,139.00 (1) 70% (Owned by Mariea L. Best, Director and Vice President) 1.00 0% (Owned by Gregg A. Dykstra, Director and Secretary) 1.00 0% (Owned by Directors and Officers of regis- trant, as a group, 3 in number) 463,141.00 70%
50
Series A, common stock, no par value, of Best Universal Lock Co., (registrant's subsidiary) (Owned by Russell C. Best, Director and CEO/President) 56,261.00 (2) 56% (Owned by Mariea L. Best, Director and Vice President) 1.00 0% (Owned by Gregg A. Dykstra, Director and Secretary) 27,263.00 (2) 40% (Owned by Larry W. Rottmeyer, Director) 27,262.00 (2) 40% (Owned by Directors and Officers of the registrant, as a group, 3 in number) 56,263.00 56% Series B, common stock, no par value, of Best Universal Lock Co., (registrant's subsidiary) (Owned by Russell C. Best, Director and CEO/President) 300,000.00 (3) 100% Common stock, no par value, of Lock, (registrant's subsidiary) (Owned by Russell C. Best, Director and CEO/President) 107,779.53 (4) 89% (Owned by Mariea L. Best, Director) 1.00 0% (Owned by Gregg A. Dykstra, Director and Vice President) 10,537.19 (4) 9% (Owned by Larry W. Rottmeyer, Director and Vice President) 10,537.19 (4) 9% (Owned by Directors and Officers of the registrant, as a group, 3 in number) 107,780.53 89%
(1) This figure represents Russell C. Best's direct and beneficial ownership by virtue of his power to vote or direct the voting of 113,311 shares held by him and 204,053 shares held by Best Lock Partnership and his power to dispose of 145,775 shares held by Best Lock Corporation. (2) 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 (and in the case of Russell C. Best, 8,787 shares owned by Best Lock Partnership and his power to dispose of 18,085 shares held by Best Lock Corporation), and shared power to direct the disposition of 27,262 shares held by the Best Lock Corporation Stock Bonus Plan. (3) This figure represents Russell C. Best's beneficial ownership by virtue of his power to vote or to direct the voting of 300,000 shares held by the registrant, of which he has voting control. 51 (4) This figure represents the named individual's direct and beneficial ownership by virtue of his power to vote or to direct the voting of shares held in his own name (or in the case of Russell C. Best, 95,556.34 shares owned by Best Universal Lock Co., of which he has voting control), and shared power to direct the disposition of 10,537.19 shares held by the Best Lock Corporation Stock Bonus Plan. (c) CHANGES IN CONTROL. There are no arrangements known to registrant, the operation of which may at a subsequent date result in a change in control of the registrant. (d) SECTION 16(A) REPORTING DELINQUENCIES. Based solely upon a review of Forms 3 and 4 and amendments thereto provided to the Corporation during the most recent fiscal year and Form 5 and amendments thereto furnished to the Corporation with respect to its most recent fiscal year and written representations from its directors, officers and more than 10% shareholders, the following sets forth certain information concerning Section 16(a) reporting delinquencies by the above-referenced persons during the Corporation's most recently completed fiscal year. With respect to Section 16(a) of the Exchange Act, the following insider filings were delinquent: Mariea L. Best, Form 3 and Form 5 (reporting one transaction); Russell C. Best, Form 5 (reporting one transaction); Gregg A. Dykstra, Form 3 and Form 5 (reporting one transaction); Eric M. Fogel, Form 3; Larry W. Rottmeyer, Form 3 and Form 5 (reporting one transaction); Best Lock Corporation, Form 3 and Form 5 (reporting one transaction); Best Lock Corporation Stock Bonus Plan, Form 5 (reporting one transaction); and Best Lock Partnership, Form 3. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. On May 5, 1994, Best Lock Corporation's Board of Directors approved a loan of $3.4 million to Russell C. Best, Chief Executive Officer, under the terms of an Employment Agreement entered into by Best Lock Corporation and Russell C. Best. On May 18, 1994, $3.4 million was borrowed by Russell C. Best under the terms of the loan, which include repayment over a thirty (30) year period in equal annual installments of $279,519, including interest at 7.2%. (b) CERTAIN BUSINESS RELATIONSHIPS. Walter E. Best, former President of registrant, is the President and owns in excess of 10% of the stock of Best Aircraft Corporation. The registrant leased automobiles from Best Aircraft Corporation, paying $30,030, $183,470 and $180,656 for such services in 1995, 1994, and 1993, respectively. Larry W. Rottmeyer became a Director of registrant in 1995. Mr. Rottmeyer resigned as a Director on February 26, 1996. During Mr. Rottmeyer's directorship, he was also a Director and a greater than 10% equity owner of Marcon, Inc. until June 9, 1995. Lock purchased market research services from Marcon, Inc., during 1995 and 1994, paying $547,942 and $291,716 for such services, respectively. Eric M. Fogel, Director from October 30, 1995 until March 1, 1996, is a partner in the law firm of Holleb & Coff. Registrant paid Holleb & Coff $112,221 in 1995 for legal services. (c) INDEBTEDNESS OF MANAGEMENT. There was no indebtedness to the registrant at any time since the beginning of the registrant's last fiscal year in an amount in excess of $60,000 by any (1) executive officer, director, nominee for director, or immediate family member of the preceding; (2) any 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) any trust or estate in which any executive officer or director has a substantial beneficial interest or as to which he serves as a trustee or in a similar capacity, other than the indebtedness described in (a) above. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS: All required financial statements and schedules are included in Item 8 of this Form 10-K. (b) REPORTS ON FORM 8-K: None filed in the last quarter of 1995. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized and representing a majority of the Board of Directors. Date: March 30, 1996 FRANK E. BEST, INC. By: /s/ Russell C. Best By: /s/ Gregg A. Dykstra --------------------- --------------------- Russell C. Best Gregg A. Dykstra Chief Executive Officer Director and Director By: /s/ Paula J. Tinkey ------------------- Paula J. Tinkey Principal Accounting Officer 54 INDEX TO EXHIBITS Exhibit 3(A) CERTIFICATE OF INCORPORATION 3(B) BY-LAWS 10(A) CREDIT AGREEMENT 10(B) SPLIT DOLLAR INSURANCE AGREEMENT 21 SUBSIDIARIES (INCORPORATED BY REFERENCE IN NOTE 1 TO THE CONSOLIDATED FINANCIAL STATEMENTS) 55 EX-3.A 2 EXHIBIT 3(A) CERTIFICATE OF INCORPORATION OF FRANK E. BEST, INC. ARTICLE I The name of this corporation is Frank E. Best, Inc. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address if The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV The Corporation shall have one class of stock, namely common capital stock and shall have authority to issue 600,000 shares of Common Stock, par value $1.00 per share. ARTICLE V The name and mailing address of the incorporator is Gregg A. Dykstra, 6161 E. 75th Street, Indianapolis, Indiana 46250 ARTICLE VI The Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation. ARTICLE VII No director shall be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided, however, that this Article VII shall not limit or eliminate the liability of a director, to the extent provided by applicable law: (i) for any breach of the duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. It is the intention of this Article VII to eliminate the liability of the corporation's directors to the corporation or its shareholders to the fullest extent permitted by Section 102(b)(7) of the Delaware General Corporation Law (or any successor provision). 1 Any repeal or modification of the foregoing provisions of this Article VII by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE VIII The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon shareholders herein are granted subject to this reservation. IN WITNESS WHEREOF, the undersigned has signed this Certificate this 12th day of October, 1995. Frank E. Best, Inc. /s/ Gregg A. Dykstra -------------------- Gregg A. Dykstra 2 EX-3.B 3 EXHIBIT 3(B) December 15, 1995 BYLAWS OF FRANK E. BEST, INC. 1 TABLE OF CONTENTS Page ARTICLE 1. OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 MEETINGS BY COMMUNICATION EQUIPMENT . . . . . . . . . . . . . . . 1 2.4 DATE, TIME AND PLACE OF MEETING . . . . . . . . . . . . . . . . . 1 2.5 NOTICE OF MEETING . . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS. . . . . . . . 2 2.8 VOTING RECORD . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.9 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.10 MANNER OF ACTING. . . . . . . . . . . . . . . . . . . . . . . . . 3 2.11 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.12 VOTING OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 4 2.13 VOTING FOR DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . 4 2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING. . . . . . . . . . . . . 4 ARTICLE 3. BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 GENERAL POWERS. . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 NUMBER AND TENURE . . . . . . . . . . . . . . . . . . . . . . . . 5 3.3 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . 5 3.4 ANNUAL AND REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . 6 3.5 SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT. . . . . . . . . . . . . . . 6 3.7 NOTICE OF SPECIAL MEETINGS. . . . . . . . . . . . . . . . . . . . 6 3.7.1 PERSONAL DELIVERY. . . . . . . . . . . . . . . . . . . . . 6 3.7.2 DELIVERY BY MAIL . . . . . . . . . . . . . . . . . . . . . 6 3.7.3 DELIVERY BY PRIVATE CARRIER. . . . . . . . . . . . . . . . 7 3.7.4 FACSIMILE NOTICE . . . . . . . . . . . . . . . . . . . . . 7 3.7.5 ORAL NOTICE. . . . . . . . . . . . . . . . . . . . . . . . 7 3.8 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . 7 3.8.1 IN WRITING . . . . . . . . . . . . . . . . . . . . . . . . 7 3.8.2 BY ATTENDANCE. . . . . . . . . . . . . . . . . . . . . . . 7 3.9 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.10 MANNER OF ACTING. . . . . . . . . . . . . . . . . . . . . . . . . 8 3.11 PRESUMPTION OF ASSENT . . . . . . . . . . . . . . . . . . . . . . 8 3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING . . . . . . . . . 8 3.13 RESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.14 REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.15 VACANCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.16 EXECUTIVE AND OTHER COMMITTEES9 3.16.1 CREATION OF COMMITTEES. . . . . . . . . . . . . . . . . . 9 3.16.2 AUTHORITY OF COMMITTEES . . . . . . . . . . . . . . . . . 9 3.16.3 QUORUM AND MANNER OF ACTING . . . . . . . . . . . . . . . 9 3.16.4 MINUTES OF MEETINGS . . . . . . . . . . . . . . . . . . . 10 2 3.16.5 RESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . 10 3.16.6 REMOVAL. . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.17 COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 4. OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 APPOINTMENT AND TERM. . . . . . . . . . . . . . . . . . . . . . . 10 4.2 RESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.3 REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.4 CONTRACT RIGHTS OF OFFICERS . . . . . . . . . . . . . . . . . . . 11 4.5 CHIEF EXECUTIVE OFFICER . . . . . . . . . . . . . . . . . . . . . 11 4.6 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.7 VICE PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.8 SECRETARY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.9 TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.10 GENERAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.11 SALARIES AND OTHER COMPENSATION . . . . . . . . . . . . . . . . . 13 ARTICLE 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS . . . . . . . . . . . . . . 13 5.1 CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.2 LOANS TO THE CORPORATION. . . . . . . . . . . . . . . . . . . . . 13 5.3 CHECKS AND DRAFTS . . . . . . . . . . . . . . . . . . . . . . . . 13 5.4 DEPOSITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER. . . . . . . . . . . . 14 6.1 ISSUANCE OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . 14 6.2 CERTIFICATES FOR SHARES . . . . . . . . . . . . . . . . . . . . . 14 6.3 STOCK RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.4 TRANSFER OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . 14 6.5 LOST OR DESTROYED CERTIFICATES. . . . . . . . . . . . . . . . . . 14 ARTICLE 7. BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 8. ACCOUNTING YEAR . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 9. SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE 10. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . 16 10.1 RIGHT TO INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 16 10.2 PREPAYMENT OF EXPENSES. . . . . . . . . . . . . . . . . . . . . . 16 10.3 CLAIMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 10.4 NON-EXCLUSIVITY OF RIGHTS . . . . . . . . . . . . . . . . . . . . 17 10.5 OTHER INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 17 10.6 AMENDMENT OR REPEAL . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 11. INTERESTED DIRECTOR CONTRACTS AND TRANSACTIONS . . . . . . . . . 17 ARTICLE 12. AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3 BYLAWS OF FRANK E. BEST, INC. ARTICLE 1. OFFICES The principal office of the corporation shall be located at the principal place of business or such other place as the Board of Directors ("Board") may designate. The corporation may have such other offices, either within or without the State of Delaware, as the Board may designate or as the business of the corporation may require from time to time. ARTICLE 2. SHAREHOLDERS 2.1 ANNUAL MEETING. The annual meeting of the shareholders shall be held on the fourth Saturday in June of each year at the principal office of the Corporation or at such other location as the Board may designate, at a time to be determined by the Board, for the purpose of electing Directors and transacting such other business as may properly come before the meeting. 2.2 SPECIAL MEETINGS. The Chairman of the Board, the President or the Board may call special meetings of the shareholders for any purpose. Further, a special meeting of the shareholders shall be held if the holders of not less than 50% of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary one or more written demands for such meeting, describing the purpose or purposes for which it is to be held. 4 2.3 MEETINGS BY COMMUNICATION EQUIPMENT. Shareholders may participate in any meeting of the shareholders by any means of communication by which all persons participating in the meeting can hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 2.4 DATE, TIME AND PLACE OF MEETING. Except as otherwise provided herein, all meetings of shareholders, including those held pursuant to demand by shareholders as provided herein, shall be held on such date and at such time and place, within or without the State of Delaware, designated by or at the direction of the Board. 2.5 NOTICE OF MEETING. Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be given by or at the direction of the Board, the Chairman of the Board, the President or the Secretary to each shareholder entitled to notice of or to vote at the meeting not less than 10 nor more than 60 days before the meeting. Such notice may be transmitted by mail, private carrier, personal delivery or communications equipment which transmits a facsimile of the notice to like equipment which receives and reproduces such notice. If such notice is mailed, it shall be deemed effective when deposited in the official government mail, first-class postage prepaid, properly addressed to the shareholder at such shareholder's address as it appears in the corporation's current record of shareholders. Notice given in any other manner shall be deemed effective when dispatched to the shareholder's address, telephone number or other number appearing on the records of the corporation. 5 2.6 WAIVER OF NOTICE. Whenever any notice is required to be given to any shareholder under the provisions of these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law, a waiver thereof in writing, signed by the person or persons entitled to such notice and delivered to the corporation, whether before or after the date and time of the meeting, shall be deemed equivalent to the giving of such notice. Further, notice of the time, place and purpose of any meeting will be deemed to be waived by any shareholder by attendance thereat in person or by proxy, unless such shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS. For the purpose of determining shareholders entitled (a) to notice of or to vote at any meeting of shareholders or any adjournment thereof, (b) to demand a special meeting, or (c) to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the Board may fix a future date as the record date for any such determination. Such record date shall be not more than 60 days, and in case of a meeting of shareholders not less than 10 days prior to the date on which the particular action requiring such determination is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting, the record date shall be the day immediately preceding the date on which notice of the meeting is first given to shareholders. Such a determination shall apply to any adjournment of the meeting unless the Board fixes a new record date. If no record date is set for the determination of shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, the record date shall be the date the Board adopted the resolution relating thereto or authorized such action. 2.8 VOTING RECORD. At least 10 days before each meeting of shareholders, an alphabetical list of the shareholders entitled to notice of such meeting shall be made, with the address of and number of shares held by each shareholder. This record shall be kept at the principal office of the corporation for 10 days prior to such meeting, and shall be kept open at such meeting, for the inspection of any shareholder or any shareholder's agent. 6 2.9 QUORUM. A majority of the votes entitled to be cast on a matter by the holders of shares that, pursuant to the Certificate of Incorporation or the Delaware General Corporation Law, are entitled to vote and be counted collectively upon such matter, represented in person or by proxy, shall constitute a quorum of such shares at a meeting of shareholders. If less than a majority of such votes are represented at a meeting, a majority of the votes so represented may adjourn the meeting from time to time without further notice if the new date, time or place is announced at the meeting before adjournment. Any business may be transacted at a reconvened meeting that might have been transacted at the meeting as originally called, provided a quorum is present or represented thereat. Once a share is represented for any purpose at a meeting other than solely to object to holding the meeting or transacting business thereat, it is deemed present for quorum purposes for the remainder of the meeting and any adjournment thereof (unless a new record date is or must be set for the adjourned meeting) notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 2.10 MANNER OF ACTING. If a quorum is present, action on a matter shall be approved if the votes cast in favor of the action by the shares entitled to vote and be counted collectively upon such matter exceed the votes cast against such action by the shares entitled to vote and be counted collectively thereon, unless the Certificate of Incorporation or the Delaware General Corporation Law requires a greater number of affirmative votes. 2.11 PROXIES. A shareholder may vote by proxy executed in writing by the shareholder or by his or her attorney-in-fact or agent. Such proxy shall be effective when received by the Secretary or other officer or agent authorized to tabulate votes. A proxy shall become invalid 3 years after the date of its execution, unless otherwise provided in the proxy. A proxy with respect to a specified meeting shall entitle the holder thereof to vote at any reconvened meeting following adjournment of such meeting but shall not be valid after the final adjournment thereof. 7 2.12 VOTING OF SHARES. Except as otherwise provided in the Certificate of Incorporation, each outstanding share entitled to vote with respect to a matter submitted to a meeting of shareholders shall be entitled to one vote upon such matter. 2.13 VOTING FOR DIRECTORS. Each shareholder entitled to vote at an election of Directors may vote, in person or by proxy, the number of shares owned by such shareholder for as many persons as there are Directors to be elected and for whose election such shareholder has a right to vote. Unless otherwise provided in the Certificate of Incorporation, the candidates elected shall be those receiving the largest number of votes cast, up to the number of Directors to be elected. Cumulative voting for Directors is prohibited. 2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which could be taken at a meeting of the shareholders may be taken without a meeting if one or more written consents setting forth the action so taken are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and delivered to the corporation. If not otherwise fixed by the Board, the record date for determining shareholders entitled to take action without a meeting is the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by this chapter, the record date for determining shareholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. Action taken by written consent of shareholders without a meeting is effective when all required consents are in the possession of the corporation, unless the consent specifies a later effective date. Any such consent shall be inserted in the minute book as if it were the minutes of a meeting of the shareholders. Prompt notice of the taking of the corporate action without a meeting by LESS THAN UNANIMOUS WRITTEN CONSENT shall be given to those shareholders or members, as the case may be, who have not consented in writing. 8 ARTICLE 3. BOARD OF DIRECTORS 3.1 GENERAL POWERS. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board, except as may be otherwise provided in these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law. 3.2 NUMBER AND TENURE. The Board shall be composed of five Directors. The number of Directors may be changed from time to time by amendment to these Bylaws, but no decrease in the number of Directors shall have the effect of shortening the term of any incumbent Director. Unless a Director dies, resigns, or is removed, his or her term of office shall expire at the next annual meeting of shareholders; provided, however, that a Director shall continue to serve until his or her successor is elected and qualified or until there is a decrease in the authorized number of Directors. Directors need not be shareholders of the corporation or residents of the State of Delaware and need not meet any other qualifications. 3.3 CHAIRMAN OF THE BOARD. The Board shall elect a director as chairman, which director shall be known as the Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board, and in addition, shall perform the following functions: a. general planning and management of all functions of the Board of Directors; b. organization of Board committees and assignments thereto; c. recruitment and nomination of additional or successor directors; d. determining the agenda for all Board meetings; and e. development of Board members as appropriate for effectiveness on behalf of shareholders. The Chairman of the Board shall serve for a term of one (1) year and shall be elected at the annual meeting; PROVIDED, HOWEVER, that the initial Chairman of the Board shall be elected by Written Consent of the Board of Directors and shall serve until the next ensuing annual meeting. 9 3.4 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall be held without notice immediately after and at the same place as the annual meeting of shareholders. By resolution, the Board, or any committee thereof, may specify the time and place either within or without the State of Delaware for holding other regular meetings thereof without notice other than such resolution. 3.5 SPECIAL MEETINGS. Special meetings of the Board or any committee designated by the Board may be called by or at the request of the Chairman of the Board, the President, or, in the case of special Board meetings, any three Directors and, in the case of any special meeting of any committee designated by the Board, by the Chairman thereof. The person or persons authorized to call special meetings may fix any place either within or without the State of Delaware as the place for holding any special Board or committee meeting called by them. 3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT. Members of the Board or any committee designated by the Board may participate in a meeting of such Board or committee by, or conduct the meeting through the use of, any means of communication by which all Directors participating in the meeting can hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 3.7 NOTICE OF SPECIAL MEETINGS. Notice of a special Board or committee meeting stating the place, day and hour of the meeting shall be given to a Director in writing or orally. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice of such meeting. 3.7.1PERSONAL DELIVERY. If notice is given by personal delivery, the notice shall be effective if delivered to a Director at least two days before the meeting. 10 3.7.2DELIVERY BY MAIL. If notice is delivered by mail, the notice shall be deemed effective if deposited in the official government mail at least five days before the meeting, properly addressed to a Director at his or her address shown on the records of the corporation, with postage thereon prepaid. 3.7.3DELIVERY BY PRIVATE CARRIER. If notice is given by private carrier, the notice shall be deemed effective when dispatched to a Director at his or her address shown on the records of the corporation at least three days before the meeting. 3.7.4FACSIMILE NOTICE. If notice is delivered by wire or wireless equipment which transmits a facsimile of the notice, the notice shall be deemed effective when dispatched at least two days before the meeting to a Director at his or her telephone number or other number appearing on the records of the corporation. 3.7.5ORAL NOTICE. If notice is delivered orally, by telephone or in person, the notice shall be deemed effective if personally given to the Director at least two days before the meeting. 3.8 WAIVER OF NOTICE. 3.8.1IN WRITING. Whenever any notice is required to be given to any Director under the provisions of these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law, a waiver thereof in writing, signed by the person or persons entitled to such notice and delivered to the corporation, whether before or after the date and time of the meeting, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board or any committee designated by the Board need be specified in the waiver of notice of such meeting. 11 3.8.2BY ATTENDANCE. A Director's attendance at or participation in a Board or committee meeting shall constitute a waiver of notice of such meeting, unless the Director at the beginning of the meeting, or promptly upon his or her arrival, objects to holding the meeting or transacting business thereat and does not thereafter vote for or assent to action taken at the meeting. 3.9 QUORUM. A majority of the number of Directors fixed by or in the manner provided in these Bylaws shall constitute a quorum for the transaction of business at any Board meeting but, if less than a majority are present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. 3.10 MANNER OF ACTING. If a quorum is present when the vote is taken, the act of the majority of the Directors present at a Board meeting shall be the act of the Board, unless the vote of a greater number is required by these Bylaws, the Certificate of Incorporation or the Delaware General Corporation Law. 3.11 PRESUMPTION OF ASSENT. A Director of the corporation who is present at a Board or committee meeting at which any action is taken shall be deemed to have assented to the action taken unless (a) the Director objects at the beginning of the meeting, or promptly upon the Director's arrival, to holding the meeting or transacting any business thereat, (b) the Director's dissent or abstention from the action taken is entered in the minutes of the meeting, or (c) the Director delivers written notice of the Director's dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation within a reasonable time after adjournment of the meeting. The right of dissent or abstention is not available to a Director who votes in favor of the action taken. 12 3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING. Any action which could be taken at a meeting of the Board or of any committee created by the Board may be taken without a meeting if one or more written consents setting forth the action so taken are signed by each of the Directors or by each committee member either before or after the action is taken and delivered to the corporation. Action taken by written consent of Directors without a meeting is effective when the last Director signs the consent, unless the consent specifies a later effective date. Any such written consent shall be inserted in the minute book as if it were the minutes of a Board or a committee meeting. 3.13 RESIGNATION. Any Director may resign at any time by delivering written notice to the Chairman of the Board, the President or the Secretary. Any such resignation is effective upon delivery thereof unless the notice of resignation specifies a later effective date and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 3.14 REMOVAL. At a meeting of shareholders called expressly for that purpose, one or more members of the Board, including the entire Board, may be removed with or without cause by the holders of a majority of the shares then entitled to vote at an election of Directors. 3.15 VACANCIES. Unless the Certificate of Incorporation provides otherwise, any vacancy occurring on the Board may be filled by the shareholders or the remaining numbers of the Board. A Director elected to fill a vacancy shall serve only until the next election of Directors by the shareholders. 13 3.16 EXECUTIVE AND OTHER COMMITTEES. 3.16.1 CREATION OF COMMITTEES. The Board, by resolution adopted by a majority of the members, may create standing or temporary committees, including an Executive Committee, and appoint members thereto from its own number and invest such committees with such powers as it may see fit, subject to such conditions as may be prescribed by the Board, these Bylaws and applicable law. Each committee must have one or more members, who shall serve at the pleasure of the Board. 3.16.2 AUTHORITY OF COMMITTEES. Each committee shall have and may exercise all of the authority of the Board to the extent provided in the resolution of the Board creating the committee and any subsequent resolutions pertaining thereto and adopted in like manner, except that no such committee shall have the authority to: (1) adopt, amend or repeal Bylaws, (2) amend the Certificate of Incorporation, (3) adopt an agreement of merger or consolidation under Sections 251, 252, 254, 255, 256, 257, 158, 263 or 264 of the Delaware General Corporation Law, (4) recommend to the shareholders the sale, lease, or exchange of all or substantially all of the corporation's property or assets; or (5) recommend to the shareholders a dissolution of the corporation or a revocation of a dissolution. 3.16.3 QUORUM AND MANNER OF ACTING. A majority of the number of Directors composing any committee of the Board, as established and fixed by resolution of the Board, shall constitute a quorum for the transaction of business at any meeting of such committee but, if less than a majority are present at a meeting, a majority of such Directors present may adjourn the meeting from time to time without further notice. Except as may be otherwise provided in the Delaware General Corporation Law, if a quorum is present when the vote is taken, the act of a majority of the members present shall be the act of the committee. 3.16.4 MINUTES OF MEETINGS. All committees shall keep regular minutes of their meetings and shall cause them to be recorded in books kept for that purpose. 14 3.16.5 RESIGNATION. Any member of any committee may resign at any time by delivering written notice thereof to the Chairman of the Board, the President, the Secretary or the Board. Any such resignation is effective upon delivery thereof, unless the notice of resignation specifies a later effective date, and the acceptance of such resignation shall not be necessary to make it effective. 3.16.6 REMOVAL. The Board may remove any member of any committee elected or appointed by it but only by the affirmative vote of a majority of the members. 3.17 COMPENSATION. By Board resolution, Directors and committee members may be paid their expenses, if any, of attendance at each Board or committee meeting, or a fixed sum for attendance at each Board or committee meeting, or a stated salary as Director or a committee member, or a combination of the foregoing. No such payment shall preclude any Director or committee member from serving the corporation in any other capacity and receiving compensation therefor. 14 ARTICLE 4. OFFICERS 4.1 APPOINTMENT AND TERM. The officers of the corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, a General Counsel, and any other officers appointed from time to time by the Board or by any other officer empowered to do so. The Board shall have sole power and authority to appoint executive officers. As used herein, the term "executive officer" shall mean the Chief Executive Officer, the President, any Vice President in charge of a principal business unit, division or function or any other officer who performs a policy-making function. The Board or the President may appoint such other officers and assistant officers to hold office for such period, have such authority and perform such duties as may be prescribed. The Board may delegate to any other officer the power to appoint any subordinate officers and to prescribe their respective terms of office, authority and duties. Any two or more offices may be held by the same person. Unless an officer dies, resigns or is removed from office, he or she shall hold office until his or her successor is appointed. 4.2 RESIGNATION. Any officer may resign at any time by delivering written notice thereof to the corporation. Any such resignation is effective upon delivery thereof, unless the notice of resignation specifies a later effective date; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 4.3 REMOVAL. Any officer may be removed at any time, with or without cause, by the Board or by a signed writing delivered to the Secretary of the Corporation by the holders of a majority of the Corporation's outstanding common stock. An officer or assistant officer, if appointed by another officer, may be removed by any officer authorized to appoint officers or assistant officers. 4.4 CONTRACT RIGHTS OF OFFICERS. The appointment of an officer does not itself create contract rights. 15 4.5 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall perform such duties as shall be assigned to him or her by the Board from time to time. 4.6 PRESIDENT. The President shall be the chief executive officer of the corporation unless some other officer is so designated by the Board, shall preside over meetings of the Board and shareholders in the absence of a Chairman of the Board, and, subject to the Board's control, shall supervise and control all of the assets, business and affairs of the corporation. In general, the President shall perform all duties incident to the office of President and such other duties as are prescribed by the Board from time to time. Unless the Board expressly directs otherwise, the President shall have the duty and the authority to cast the corporation's vote with respect to any shares of the stock or securities of any other corporation or entity which are held by the corporation. If no person is serving as Secretary, the President shall have responsibility for the preparation of minutes of meetings of the Board and shareholders and for authentication of the records of the corporation. 4.7 VICE PRESIDENT. In the event of the death of the President or his or her inability to act, the Vice President (or if there is more than one Vice President, the Vice President who was designated by the Board as the successor to the President, or if no Vice President is so designated, the Vice President first elected to such office) shall perform the duties of the President, except as may be limited by resolution of the Board, with all the powers of and subject to all the restrictions upon the President. Vice Presidents shall perform such other duties as from time to time may be assigned to them by the President or by or at the direction of the Board. 17 4.8 SECRETARY. The Secretary shall be responsible for preparation of minutes of the meetings of the Board and shareholders, maintenance of the corporation's records and stock registers, and authentication of the corporation's records and shall in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the President or by or at the direction of the Board. In the absence of the Secretary, an Assistant Secretary may perform the duties of the Secretary. 4.9 TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation, receive and give receipts for moneys due and payable to the corporation from any source whatsoever, and deposit all such moneys in the name of the corporation in banks, trust companies or other depositories selected in accordance with the provisions of these Bylaws, and in general perform all of the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the President or by or at the direction of the Board. In the absence of the Treasurer, an Assistant Treasurer may perform the duties of the Treasurer. If required by the Board, the Treasurer or any Assistant Treasurer shall give a bond for the faithful discharge of his or her duties in such amount and with such surety or sureties as the Board shall determine. 4.10 GENERAL COUNSEL. The General Counsel shall be responsible for all legal matters and affairs affecting the business of the corporation, and shall have such additional duties and responsibilities as from time to time may be assigned to him or her by the President or by or at the direction of the Board. 4.11 SALARIES AND OTHER COMPENSATION. The salaries and other compensation of the officers shall be fixed from time to time by the Board or by any person or persons to whom the Board has delegated such authority. No officer shall be prevented from receiving such salary by reason of the fact that he or she is also a Director of the corporation. 18 ARTICLE 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS 5.1 CONTRACTS. The Board may authorize any officer or officers, or agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. 5.2 LOANS TO THE CORPORATION. No significant loans shall be contracted on behalf of the corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be general or confined to specific instances. 5.3 CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, or agent or agents, of the corporation and in such manner as is from time to time determined by resolution of the Board. 5.4 DEPOSITS. All funds of the corporation, except for petty cash, not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositories as the Board may select. ARTICLE 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER 6.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued unless authorized by the Board, or by a committee designated by the Board to the extent such committee is empowered to do so. 19 6.2 CERTIFICATES FOR SHARES. All stock certificates shall be signed by the Secretary and any one of the following officers: (i) the Chairman of the Board of Directors, (ii) the President, or (iii) any Vice President. Any or all signatures on a certificate may be a facsimile. A record of each certificate shall be kept with the stub, and a stock record book shall be kept showing the holders of all outstanding certificates of stock. 6.3 STOCK RECORDS. The stock transfer books shall be kept at the principal office of the corporation or at the office of the corporation's transfer agent or registrar. The name and address of each person to whom certificates for shares are issued, together with the class and number of shares represented by each such certificate and the date of issue thereof, shall be entered on the stock transfer books of the corporation. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. 6.4 TRANSFER OF SHARES. The transfer of shares of the corporation shall be made only on the stock transfer books of the corporation pursuant to authorization or document of transfer made by the holder of record thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney-in-fact authorized by power of attorney duly executed and filed with the Secretary of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificates for a like number of shares shall have been surrendered and canceled. 6.5 LOST OR DESTROYED CERTIFICATES. In the case of a lost, destroyed or mutilated certificate, a new certificate may be issued therefor upon such terms and indemnity to the corporation as the Board may prescribe. 20 ARTICLE 7. BOOKS AND RECORDS The corporation shall: (a) Keep as permanent records minutes of all meetings of its shareholders and the Board, a record of all actions taken by the shareholders or the Board without a meeting, and a record of all actions taken by a committee of the Board exercising the authority of the Board on behalf of the corporation. (b) Maintain appropriate accounting records. (c) Maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each; provided, however, such record may be maintained by an agent of the corporation. (d) Maintain its records in written form or in another form capable of conversion into written form within a reasonable time. (e) Keep a copy of the following records at its principal office: 1. the Certificate of Incorporation and all amendments thereto as currently in effect; 2. the Bylaws and all amendments thereto as currently in effect; 3. the minutes of all meetings of shareholders and records of all action taken by shareholders without a meeting, for the past three years; 4. financial statements for the past three years; 5. all written communications to shareholders generally within the past three years; 6. a list of the names and business addresses of the current Directors and officers; and 7. the most recent annual report delivered to the Delaware Secretary of State. 21 ARTICLE 8. ACCOUNTING YEAR The accounting year of the corporation shall be the calendar year, provided that if a different accounting year is at any time selected by the Board for purposes of federal income taxes, or any other purpose, the accounting year shall be the year so selected. ARTICLE 9. SEAL The Board may provide for a corporate seal which shall consist of the name of the corporation, the state of its incorporation and the year of its incorporation. ARTICLE 10. INDEMNIFICATION 10.1 RIGHT TO INDEMNIFICATION. The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative, or investigative (a "Proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust enterprise or non-profit entity, including service with respect to employee benefits plans, against all liability and loss suffered and expenses reasonably incurred by such person. The corporation shall be required to indemnify a person in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the corporation. 22 10.2 PREPAYMENT OF EXPENSES. The corporation shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expenses incurred by a director, officer or employee in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director, officer or employee to repay all amounts advanced if it should be ultimately determined that the director, officer or employee is not entitled to be indemnified under this Article or otherwise. 10.3 CLAIMS. If a claim for indemnification or payment of expenses under this Article is not paid in full with sixty days after a written claim therefore has been received by the corporation, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. 10.4 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these by-laws, agreement, vote of shareholders or disinterested directors or otherwise. 10.5 OTHER INDEMNIFICATION. The corporation's obligation, if any, to indemnify any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification from such other corporation, partnership, joint venture, trust, enterprise or nonprofit enterprise. 23 10.6 AMENDMENT OR REPEAL. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. ARTICLE 11. INTERESTED DIRECTOR CONTRACTS AND TRANSACTIONS No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the shareholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE 12. AMENDMENTS These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board. The shareholders may also alter, amend and repeal these Bylaws or adopt new Bylaws. All Bylaws made by the Board may be amended, repealed, altered or modified by the shareholders. 24 The foregoing Bylaws were adopted by the Board on December 15, 1995. By: /s/ Russell C. Best --------------------- Russell C. Best Chairman of the Board 25 EX-10.A 4 EXHIBIT 10(A) CREDIT AGREEMENT BY AND BETWEEN THE HUNTINGTON NATIONAL BANK OF INDIANA AND BEST LOCK CORPORATION FEBRUARY 15, 1995 (AMENDED AND RESTATED AS OF DECEMBER 31, 1995) CREDIT AGREEMENT THIS CREDIT AGREEMENT, made and entered into to be effective as of the 15th day of February, 1995, and amended and restated as of December 31, 1995, by and between BEST LOCK CORPORATION, a Delaware corporation having its principal office at 6151 East 75th Street, Indianapolis, Indiana 46250, and THE HUNTINGTON NATIONAL BANK OF INDIANA, a national banking association having its principal banking office at 201 North Illinois Street, Suite 1800, Indianapolis, Indiana 46204. WITNESSES THAT: WHEREAS, Borrower has applied to Lender for a revolving line of credit and letters of credit; and WHEREAS, Lender has agreed to establish such line of credit and issue such letters of credit on the condition, among others, that this Agreement be executed. NOW, THEREFORE, in consideration of these premises and the agreements and undertakings set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Borrower and Lender agree as follows: DEFINITIONS AND TERMS All accounting calculations and reports shall be prepared and all accounting terms shall be defined in accordance with generally accepted accounting principles for financial accounting purposes unless otherwise hereinafter specified. The following terms shall have the meaning indicated when capitalized and used herein: "AFFILIATE" means any Person who is a director, shareholder, officer, partner or employee of Borrower or the spouse, child, nominee or agent thereof or who, directly or indirectly, is in control of, is controlled by, or is under common control with, Borrower. For purposes of this definition, a Person shall be deemed to be "controlled by" Borrower if Borrower or a director, officer, shareholder, partner or employee of Borrower or the spouse, child, nominee or agent thereof possesses, directly or indirectly, power either to (i) vote 10% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) directs or causes the direction of the management and policies of such Person whether by contract or otherwise, and the legal representative, successor or assign of any such Person. "AGREEMENT" means this Credit Agreement as from time to time amended or modified. "AVAILABLE AMOUNT" means, at any particular time, the positive difference, if any, between the Credit Line Maximum Amount at such time minus the outstanding principal amount of the Line of Credit at such time. "BEST UNIVERSAL" means Best Universal Lock Co., a Delaware corporation. "BORROWER" means Best Lock Corporation, a Delaware corporation. "CREDIT LINE MAXIMUM AMOUNT" means, at any particular time, the positive difference, if any, between Twenty-Five Million and no/100 Dollars ($25,000,000.00) (the "Facility Maximum Amount"), minus the aggregate amounts of all Letters of Credit outstanding at such time. "DEFAULT" means an event or condition which with the giving of notice or lapse of time or both would become an Event of Default. "FAMILY AGREEMENT" means the fully executed definitive agreement and related documents which incorporate the terms and conditions of the Letter of Intent. "EVENT OF DEFAULT" means the occurrence of any event or condition under Section 8.1 and the failure to cure/eliminate such event or condition within the time, if any, provided therefor herein. "FEB" means Frank E. Best, Inc., a Delaware corporation. "GUARANTOR" and "GUARANTORS" means individually and collectively Best Universal and FEB. "GUARANTY" and "GUARANTIES" means individually and collectively that certain Continuing Guaranty executed or to be executed by each Guarantor in connection with this Agreement as such guaranties may be modified or amended from time to time and/or any guaranty or guaranties which replace or restate such continuing guaranty or guaranties. "HAZARDOUS MATERIALS" means asbestos, ureaformaldehyde foamed in place insulation, polychlorinated biphenyls, and all other materials (i) containing any "Hazardous Substance" as defined under the Comprehensive Environmental Response, Compensation and Liability Act, 42 USC 9601 et seq. and the regulations promulgated thereunder (as amended from time to time) and/or (ii) termed hazardous wastes or hazardous substances as defined in the Solid Waste Disposal Act of 1985, as from time to time amended). "INDEBTEDNESS" means all obligations and liabilities of Borrower to pay money to any Person (including without limitation all debts, claims and indebtedness) whether primary, secondary, direct, contingent, fixed or payable, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether secured or unsecured, whether under written or oral agreement, operation of law, or otherwise. Indebtedness includes, without limiting the generality of the foregoing: (a) obligations or liabilities of any Person that are secured by any lien, claim, encumbrance, or security interest upon property owned by Borrower even though Borrower has not assumed or become liable for the payment therefore; and (b) obligations or liabilities created or arising under any lease of real or personal property, or conditional sale or other title retention agreement with respect to property used and/or acquired by Borrower, even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property. "LENDER" means The Huntington National Bank of Indiana or its successors and assigns. "LETTER OF INTENT" means that certain Letter of Intent, dated November 29, 1994, executed by and among Borrowers, Walter E. Best, Dona J. Best. Robert W. Best, Denise Best, Richard E. Best, Amber Best, Marshall W. Best, Tracey Best, Russell C. Best and Gregg A. Dykstra, a copy of which has heretofore been delivered to Lender. "LETTERS OF CREDIT" means one or more commercial or standby letters of credit issued by Lender for the account of Borrower pursuant to the terms of Section 2.7 of this Agreement. "LINE OF CREDIT" means the advance or advances to be made from time to time by Lender to Borrower pursuant to the terms of Article III of this Agreement. "LINE OF CREDIT NOTE" means that certain Promissory Note of Borrower dated February 15, 1995, as amended and restated of even date herewith, executed by Borrower and payable to the order of Lender in the principal amount of Twenty-Five Million and no/100 Dollars ($25,000,000.00), as such promissory note may be amended from time to time and/or any promissory note which is a direct or remote renewal, extension, amendment or replacement of such promissory note. "OBLIGORS" means individually and collectively Borrower and Guarantors. "PERSON" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, federal, state, county, city, municipal or otherwise, including without limitation, any instrumentality, division, agency, body or department thereof). "PRIOR CREDIT AGREEMENT" means that certain Credit Agreement between Borrower and Lender, executed to be effective as of February 15, 1995 (which is amended and restated hereby). "SECURITY AGREEMENT" means the Security Agreement to be executed and delivered by Borrower in favor of Lender concurrently with the execution of this Agreement, in form and substance acceptable to Lender, as the same may be amended and/or restated from time to time. "TANGIBLE NET WORTH" means the sum of shareholder's equity, plus retained earnings, MINUS the following: (i) franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, good will, research, development, experimental and organizational expense and all other assets which would be classified as intangible assets under generally accepted accounting principles, including without implied limitation Borrower's covenant-not-to-compete from Walter E. Best and Borrower's (and Walter E. Best Company, Inc.'s) covenants-not-to- compete from Robert W. Best, Richard E. Best and Marshall W. Best; (ii) all investments in other entities; and loans/advances to officers, directors, shareholders, subsidiaries, affiliates or related parties. "WORKING CAPITAL" means working capital as defined by generally accepted accounting principles, except that the first advancement under the Line of Credit (as described in Section 3.1) to the extent it does not exceed Twelve Million and no/100 Dollars ($12,000,000.00), shall be treated as long-term debt. The Line of Credit Note and the Letters of Credit, and the terms and conditions thereof, are hereby incorporated by reference and made a part of this Agreement. ARTICLE II LINE OF CREDIT AND LETTERS OF CREDIT SECTION 2.1. LINE OF CREDIT. Lender shall, subject to the terms and conditions of this Agreement, establish for the benefit of Borrower a revolving Line of Credit in the maximum principal amount outstanding at any time equal to the Credit Line Maximum Amount. The Line of Credit shall be advanced as provided in Article III of this Agreement and shall have a maturity of May 5, 1998. The Maturity Date may be extended, at the sole option of Lender, for one (1) or more consecutive one (1)-year extension terms. Each such one (1)-year extension shall require the prior request of Borrower and, if approved by Lender, shall be on such terms and conditions as Borrower and Lender shall mutually approve. If such an extension request is made by Borrower prior to the June 1 immediately preceding, as applicable, the Maturity Date or the Maturity Date as previously extended, then, if Lender approves such request, Lender and Borrower shall use their respective best efforts to consummate such extension no later than the June 30 following such June 1. The Line of Credit shall bear interest, be evidenced by and be payable as specified in the Line of Credit Note. SECTION 2.2. TERM LOANS - CANCELLATION. Under the Prior Credit Agreement Borrower had options (i) to convert any principal amounts outstanding under the Line of Credit into amortizing Term Loans and (ii) to borrow amounts as amortizing Term Loans. Borrower has not exercised any such option. All such options are hereby cancelled, null, void and of no further force or effect. SECTION 2.3. PURPOSES. The Line of Credit shall be used by Borrower for financing usual and customary working capital needs, purchase of manufacturing machinery, purchase and/or construction of manufacturing facilities, product development and permitted acquisitions. In addition, the proceeds of the Line of Credit may be used by Borrower to finance the purchase of certain capital stock and certain expenses as set forth in the Family Agreement. SECTION 2.4. REQUIRED PAYMENT TERMS. The unpaid principal balance of the Line of Credit shall be repaid from time to time so that at all times the unpaid principal balance of the Line of Credit is not greater than the Credit Line Maximum Amount. Interest accrued on the Line of Credit shall be payable at the times specified in the Line of Credit Note. In the event that Borrower fails to make any such required payment when due (or within the applicable cure period), then Lender shall have the right, among other things, to set-off the required amount from any funds of Borrower on deposit with Lender. SECTION 2.5. PREPAYMENT. Borrower may prepay, in part or in full, without fee, premium or penalty, any principal of the Line of Credit which is accruing interest at (or at an increment above) the Prime Interest Rate (as such term is defined in the Line of Credit Note) at the time of such prepayment. Borrower may prepay, in part or in full, any principal of the Line of Credit which, at the time of such prepayment, is accruing interest at a rate other than at (or at an increment above) the Prime Interest Rate, provided that Borrower gives to Lender at least fourteen (14) days' prior notice of Borrower's intent to prepay such principal and provided that Borrower pays, at the time of the prepayment, a prepayment fee as set forth in, as applicable, the Line of Credit Note. Borrower shall have the right to have any prepayments of the Line of Credit readvanced pursuant to the terms of this Agreement provided that the unpaid principal balance of the Line of Credit Note shall never exceed the Credit Line Maximum Amount and that the amount of each such readvancement shall not exceed the then-applicable Available Amount. SECTION 2.6. UNUSED FEE. Quarterly, commencing on May 15, 1995, Borrower shall pay to Lender (with respect to each quarter-period ending on May 15, August 15, November 15 and February 15), a fee equal to the product of (A) 20 basis points and (B) the amount equal to: the average daily Facility Maximum Amount during the particular quarter-period; minus the sum of (i) the average daily outstanding principal balance of the Line of Credit during such quarter and (ii) the average daily outstanding amount of the Letters of Credit issued at any time during such quarter. SECTION 2.7. LETTERS OF CREDIT. Lender shall, upon request of Borrower, issue one or more commercial (i.e., sight-draft and time-draft) or standby Letters of Credit for the account of Borrower, each having a term ending not later than the maturity of the Line of Credit; provided, however, the term of any commercial Letter of Credit shall be less than or equal to 180 days. The Letters of Credit shall be issued pursuant to Lender's standard letter-of-credit terms and conditions and subject to Lender's standard application/agreement forms. The aggregate amount of the Letters of Credit outstanding at any time shall not exceed Five Million and no/100 Dollars ($5,000,000.00). In addition, the amount of each Letter of Credit shall not exceed the Available Amount immediately prior to the issuance of such Letter of Credit. The rates charged by Lender to Borrower (I) for the issuance of each standby Letter of Credit shall be 1.0% per annum for a term of one year or less and 1.25% per annum for a term exceeding one year and (II) for the issuance of each commercial Letter of Credit shall be .25% per annum plus an issuance fee, an amendment fee (if applicable) and reimbursement of telecommunications costs and of any other expenses incurred by Lender in connection with the issuance of such commercial Letter of Credit. II ADVANCEMENTS AND REPAYMENTS OF THE LINE OF CREDIT SECTION 3.1. DEPOSIT IN BORROWER'S ACCOUNT. Advancements of the Line of Credit shall be made from time to time by deposit to an account or accounts of Borrower with Lender upon receipt by Lender of a current written request in form and substance as Lender may reasonably require, provided that no Default or Event of Default has occurred and is then continuing. Each request for an advancement under the Line of Credit shall be in an amount equal to or greater than Ten Thousand and no/100 Dollars ($10,000.00); provided, however, no advancement under the Line of Credit shall exceed the then-applicable Available Amount and, provided further, the first advancement under the Line of Credit shall be in the amount necessary to permit consummation of the acquisitions/expense payments and other transactions contemplated by the Family Agreement. In the event that Lender makes an advance based upon a telephonic request, then Borrower upon request shall deliver a confirming written receipt to Lender. No advancement shall be made within the seven (7)-day period prior to maturity of the Line of Credit. SECTION 3.2. STATEMENT OF ACCOUNT. Each statement of account, if any, delivered by Lender to Borrower shall be presumed correct and accurate and shall constitute an account stated between Lender and Borrower unless, within thirty (30) days after receipt of such statement, Borrower shall deliver to Lender notice specifying the error or errors, if any, contained in such statements. SECTION 3.3. POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes and appoints Lender as Borrower's true and lawful attorney with irrevocable power, upon the occurrence of an Event of Default hereunder and the election by Lender to accelerate pursuant to Section 8.2, to withdraw any monies of Borrower on deposit with Lender in any account for application to the liabilities of Borrower to Lender. Borrower releases Lender from any liability or responsibility to Borrower for acting in accordance with this authorization provided, however, that Borrower does not release Lender from liability or responsibility for Lender's intentional misconduct. The authorization and appointment of Lender shall be considered a power coupled with an interest. ARTICLE II GUARANTIES/COLLATERAL Payment when due of the indebtedness and obligations of Borrower to Lender under this Agreement, the Line of Credit, the Letters of Credit and under any other agreement, instrument or document executed in connection with this Agreement shall be unconditionally guaranteed by each Guarantor pursuant to the Guaranties executed or to be executed by each Guarantor to Lender. All indebtedness and obligations of Borrower to Lender, whether hereunder, under the Line of Credit Note, under any Letter(s) of Credit or under any agreement, application or other document executed in connection herewith, shall be secured pursuant to the Security Agreement. ARTICLE V GENERAL CONDITIONS PRECEDENT Each of the following shall be a condition precedent to the disbursement of the first advancement under the Line of Credit and the effectiveness (vis a vis Lender) of this Agreement and the conditions set forth at items (j), (k) and (l) shall be conditions to each subsequent advancement of the Line of Credit, and to each issuance of a Letter of Credit; provided, however, any condition not satisfied at the time of any advancement under the Line of Credit or any issuance of a Letter of Credit shall not, absent agreement of Lender to the contrary, be deemed waived but shall be satisfied as Lender may later require: (a) LOAN DOCUMENTS. Borrower shall execute and deliver to Lender the Line of Credit Note and the Security Agreement (and related financing statement). The Guaranties shall be executed and delivered to Lender. In addition, each Guarantor shall execute and deliver to Lender a Guarantor's Consent and Confirmation in form and substance acceptable to Lender (hereinafter referred to individually as a "Guarantor's Consent" and collectively as the "Guarantor's Consents"). (b) BOARD RESOLUTIONS. Borrower, Best Universal and FEB shall furnish to Lender a certified copy of the resolutions of their Board of Directors approving and authorizing their credit arrangements with Lender hereunder and the execution and delivery of this Agreement, the Guaranties, the Guarantor's Consents and all instruments, agreement and documents in connection herewith. (c) CERTIFICATE OF EXISTENCE. Each of Borrower, Best Universal and FEB shall furnish Lender a copy of a current certificate of existence issued by the Secretary of State of its State of Incorporation. (d) ARTICLES AND BY-LAWS. Each of Borrower, Best Universal and FEB shall furnish Lender copies of its Articles of Incorporation and By-Laws, certified by one of its authorized officers. (e) OPINION OF COUNSEL. Lender shall be furnished an opinion of the Obligors' counsel, which is acceptable to Lender and Lender's counsel, to the effect that: (i) Each of Borrower, Best Universal and FEB are incorporated and validly existing under the laws of the state of its incorporation, is duly qualified and in good standing as a foreign corporation under the laws of the State of Indiana and has the power to carry on its businesses as now conducted in the State of Indiana; (ii) the execution by each Obligor of all documentation required of such Obligor hereunder or in connection herewith has been duly authorized by all action necessary with respect to such Obligor and such documentation constitutes legal, valid and binding obligations of such Obligor, enforceable against such Obligor in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, moratorium, liquidation, fraudulent transfer, reorganization laws or other similar laws affecting the rights or remedies of creditors generally, which limitations should not prevent the practical realization of the benefits intended to be conferred by such documents; (iii) no obligation of any Obligor under or with respect to this Agreement or any related note, guaranty or other document violates any usury law or other limitation on loan charges; (iv) to the best of counsel's knowledge after having made due inquiry, there is no litigation pending or threatened against or otherwise affecting any Obligor or any of its properties or assets which, if adversely determined, would have a material adverse effect on the financial condition or business operations of such Obligor; and (v) neither any agreement of any Obligor nor compliance with the terms thereof will result in a breach of, or constitute a default under, any of the terms, conditions or provisions of, such Obligor's governing documents, any law, regulation or ordinance applicable to such Obligor or, to the best of counsel's knowledge after having made due inquiry, any agreement to which such Obligor is a party or by which such Obligor is bound or any order, writ, injunction or decree of any court or governmental agency or instrumentality having jurisdiction. (f) CERTIFICATE OF INCUMBENCY. Each of Borrower, Best Universal and FEB shall furnish to Lender a current certificate of incumbency for its officers. (g) ROPERTY INSURANCE COVERAGE. Each Obligor shall provide Lender with evidence of all-risk insurance (e.g., fire, flood and casualty) covering such Obligor's real and personal property, with insurance companies acceptable to Lender, and with limits and deductibles in such reasonable amounts as a prudent owner and operator of such property would maintain. (h) LIABILITY INSURANCE COVERAGE. Each Obligor shall provide Lender with evidence of public liability insurance with insurance companies and in an amounts acceptable to Lender and with limits and deductibles in such reasonable amounts as would be maintained by a prudent owner and operator of a business similar to Borrower's business. (i) FAMILY AGREEMENT. Borrower shall furnish to Lender a copy of the fully executed Family Agreement. The Family Agreement shall incorporate the terms and conditions of the Letter of Intent on a basis satisfactory to Lender and shall otherwise be satisfactory to Lender. (j) CERTIFICATION. Borrower shall furnish to Lender a certification that the warranties and representations in this Agreement are true and correct, that there has been full compliance with the covenants of this Agreement, that there has been no material deterioration of any Obligor's financial condition since the date of the last quarterly/annual (as applicable) financial reports [provided to Lender pursuant to the provisions of subparagraph 7.1(d) (i) or (ii), as applicable, hereof] and that Borrower has the financial capacity and is otherwise able to repay all amounts owing or to be owed by Borrower hereunder in accordance with the terms hereof. (k) LETTER OF CREDIT APPLICATIONS/AGREEMENTS. As applicable, with respect to each issuance of a Letter of Credit, Borrower shall execute and deliver to Lender an appropriate Letter of Credit application/agreement form. (l) OTHER DOCUMENTATION. Obligors shall execute or deliver, or cause to be executed or delivered, to Lender such other agreements, documents or instruments as may be required by Lender in connection herewith. (m) FIRST DRAW/CONSUMMATION OF FAMILY AGREEMENT. The first advancement under the Line of Credit (as referenced in Section 3.1) shall be made not later than February 22, 1995 and the transactions contemplated by the Family Agreement shall be consummated not later than February 22, 1995 in accordance with the terms and conditions of the Family Agreement. The foregoing conditions are not in lieu of other conditions in this Agreement, and the waiver of any of the foregoing conditions by Lender at any time shall not relieve any Obligor from the need of later satisfying the conditions. In addition to all of the other terms and conditions to be performed by any Obligor under this Agreement, Obligors shall deliver to Lender such other documents as may from time to time be reasonably required by Lender to carry out the terms and provisions of this Agreement. IIII REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender that: (a) VALIDITY AND EXISTENCE. Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware, is duly qualified and in good standing as a foreign corporation under the laws of the State of Indiana, has full power under its Articles of Incorporation and By-Laws and any amendments thereto, and under all applicable provisions of law, to enter into the credit arrangements contemplated hereby and to consummate all transactions connected herewith and is duly qualified and in good standing as a foreign corporation authorized to do business in each state where, because of the nature of its activities or properties, such qualification is required (except where the failure to so qualify would not have a material adverse effect on the financial condition or business operations of Borrower); (b) EXECUTION OF DOCUMENTS. The execution of this Agreement and all other agreements, instruments and documents executed by Borrower in connection herewith, and the consummation of all transactions connected herewith, have been duly authorized by all necessary action on the part of Borrower; (c) NO LITIGATION. There is no litigation or proceeding pending or, to the knowledge of Borrower, threatened against or otherwise affecting Borrower or any of the properties or assets of Borrower, before any court or before or by any governmental agency which if adversely determined would have a material adverse effect on the financial condition or business operations of Borrower and its subsidiary (i.e., Best Universal Locks Limited), taken as a whole; (d) TAX RETURNS. All required federal, state and other tax returns have been filed by or on behalf of Borrower and the taxes in connection therewith paid to date, except for taxes, if any, which are being contested in good faith by appropriate proceedings and as to which adequate reserves have been provided; (e) ACCURACY OF DOCUMENTS. Borrower has provided true and accurate copies of all documents and agreements relating to Borrower and its shareholders and there are no agreements existing between Borrower and its shareholders, except as provided to Lender; (f) COMPLIANCE WITH ARTICLES AND BY-LAWS. Neither the execution of this Agreement (or the consummation of the transactions contemplated hereby) nor compliance with the terms and provisions hereof or of any agreements, documents and instruments required of Borrower hereunder conflict with, result in a breach of or constitute a default under the terms, conditions or provisions of its (i) Articles of Incorporation or By-Laws or any amendments thereto, (ii) any agreement to which Borrower is a party or by which Borrower is bound or (iii) any law, regulation, order, writ, injunction or decree of any court or governmental agency or instrumentality having jurisdiction, which, with respect to (ii) and/or (iii) above, would have a material adverse effect on the financial condition or business operations of Borrower and its subsidiary, taken as a whole; (g) STATUTES. To the best of Borrower's knowledge after diligent inquiry, Borrower is in compliance in all material respects with all federal, state and local health, safety, building, zoning, environmental and other statutes, regulations and ordinances; (h) EMPLOYEE PENSION PLANS. To the best of Borrower's knowledge after diligent inquiry, any and all employee pension plans of Borrower are in compliance in all material respects with the terms and provisions of the Employee Retirement Income Security Act of 1974 and all other federal, state and local statutes, regulations and ordinances governing the establishment and administration of pension plans; (i) SUFFICIENCY OF REPRESENTATIONS AND WARRANTIES. None of Borrower's representations or warranties set forth in this Agreement or in any document or certificate taken together with any related document or certificate furnished pursuant to this Agreement or in connection with the transactions contemplated hereby contains or will contain any untrue statements of a material fact or omits or will omit to state a material fact necessary to make any statement of fact contained herein or therein, in light of the circumstances under which it was made, not materially misleading; (j) SOLVENCY. Upon the execution and delivery of this Agreement and the consummation of any transactions contemplated herein, Borrower (i) will be able to pay its debts as they become due, (ii) will have funds and capital sufficient to carry on its business and all businesses in which it is about to engage, and (iii) will own property having a value both at fair valuation and at fair saleable value in the ordinary course of Borrower's business greater than the amount required to pay its Indebtedness, including for this purpose, unliquidated and disputed claims; (k) NO REQUIRED APPROVALS. There are no governmental authorizations, permits, certificates, licenses, filings, registrations, approvals or consents or approvals or consents of or from the holder of any security of Borrower which must be obtained, received or made by Borrower for it lawfully to (i) make, execute and deliver this Agreement; or (ii) perform all of its obligations under this Agreement; (l) REGULATIONS G, U AND X. (i) Borrower is not now engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System); (ii) no part of the proceeds of any credit hereunder has been or will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock; and (iii) no part of the proceeds of any credit hereunder has been or will be used for any purpose that violates or which is inconsistent with the provisions of Regulations G, U or X of said Board of Governors; (m) FINANCIAL STATEMENTS AND PROJECTIONS. To the best of Borrower's knowledge, as of the date hereof, (i) the historical financial statements of Borrower and Guarantors, consisting of balance sheets as of December 31, 1991, December 31, 1992, December 31, 1993 and December 31, 1994 and related statements of income and expense for the fiscal years then ended, and the balance sheet of Borrower and Guarantors as of September 30, 1995 and related statement of income and expense for the 9-month period then ended, and (ii) the projected financial statements of Borrower and Guarantors for the fiscal year ending in 1996, copies of each of which have heretofore been delivered to Lender, present fairly the historical financial condition and performance of Borrower and Guarantors as set forth therein and the projected financial condition of Borrower and Guarantors based upon Borrower's and Guarantors' anticipated financial performance for such periods projected; provided however that, with respect to the projected financial statements, Borrower and Guarantors make no guarantee or promise that the projected financial results will occur and the projections are based upon certain assumptions which, although reasonable, may prove to be inaccurate; (n) NO TRADE NAMES. Borrower does not utilize any trade names, except as specified in EXHIBIT "A" attached hereto; and (o) TITLE. Borrower holds good and valid title to all of its real, personal and intangible property, free from any liens, mortgages, security interests and other similar encumbrances, except as permitted under subclauses 7.2(a)(i) and 7.2(a)(iii) hereof. ARTICLE III COVENANTS SECTION 7.1. AFFIRMATIVE COVENANTS. Borrower covenants to Lender that so long as Borrower has any liability to Lender hereunder or under or with respect to the Line of Credit, the Letters of Credit, or any agreement, instrument or document executed in connection herewith or therewith, or so long as Lender may be obligated to make any advancement to Borrower, Borrower will: (a) PAYMENT OF DEBTS. Promptly pay and discharge, or cause to be paid and discharged, all taxes, assessments and governmental charges which may be lawfully levied, imposed or assessed upon Borrower or the properties, assets, income or profits of Borrower; provided, however, that Borrower shall have the right to contest in good faith any such tax, assessment, charge or levy by appropriate proceedings; (b) MAINTENANCE OF BOOKS. Keep accurate and complete books and records, and maintain the same at Borrower's principal office; (c) DEFENSE OF CLAIMS. Defend, or cause to be defended, at all times any adverse claim by a third party relating to the possession of or any interest in the assets of Borrower; (d) FINANCIAL/GOVERNMENTAL REPORTINGS. Furnish, or cause to be furnished, to Lender the following financial statements and other information at the indicated times: (i) ANNUAL FINANCIALS. As soon as available and in any event within ninety (90) days after the end of each fiscal year of Borrower and Guarantors, one (1) copy of the annual balance sheet, profit and loss statements, accounts receivable and accounts payable aging, reconciliations of net worth and a statement of changes in the financial position of Borrower and Guarantors, on consolidated and consolidating basis, as of and for the year then ended prepared and audited in accordance with generally accepting accounting principles applied on a consistent basis throughout the periods involved by an independent certified public account selected by Borrower and approved by Lender and accompanied by a standard unqualified opinion regarding such financial statements. Each annual audit shall be accompanied by a loan compliance certificate executed by each Obligor's Treasurer; (ii) QUARTERLY REPORTS. As soon as available and in any event within forty-five (45) days after the end of each quarter, one (1) copy of the balance sheet, accounts receivable and accounts payable summary aging, reconciliations of net worth and profit and loss statements of Borrower and Guarantors, on consolidated and consolidating basis, as of the end of and for each such quarter prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved by the Treasurer of each Obligor and certified by the chief financial officers of each Obligor; (iii) ADDITIONAL REPORTS. From time to time upon request by Lender, as Lender may require, such further information regarding the business affairs, operations and financial conditions of any Obligor, including but not limited to accounting and management recommendations, if any, and certificates of no default under this Agreement; (iv) SEC FILINGS/PUBLIC STATEMENTS. Furnish to Lender copies of reports, registration statements and prospectuses filed by any Obligor with any securities exchange or with the Securities and Exchange Commission, or any governmental authority succeeding to any of its functions, and of all press releases and other statements made available generally by any Obligor to the public concerning material developments in the business of such Obligor. (e) AUDITS BY LENDER. Permit any authorized representative of Lender or its attorneys or accountants to make audits of Borrower and at reasonable times during normal business hours to inspect, examine or make copies of extracts of the books of account or records of Borrower; provided, however, so long as no Default or Event of Default has occurred and is continuing, Lender shall not make more than two (2) such audits during any twelve (12)-month period; (f) NOTICE OF THIRD PARTY CLAIMS. Give prompt written notice to Lender of any process or action taken or pending whereby a third party is claiming any adverse interest in excess of a value of One Million and no/100 Dollars ($1,000,000.00) in any of the assets of Borrower; (g) MAINTENANCE OF INSURANCE. Maintain the insurance required by this Agreement and, upon request by Lender, furnish to Lender evidence of such insurance coverage and payment of premiums therefor; (h) RECORDS MAINTENANCE. Store all valuable papers and records in a safe manner; i.e. in a manner designed to provide reasonable protection from theft, fire and other damage/destruction/loss; (i) PAYMENT OF LIABILITIES. Pay when due all Indebtedness in accordance with regular terms, except for claims contested in good faith by appropriate proceedings; (j) MAINTENANCE OF EXISTENCE. Maintain Borrower's existence in good standing in its state of incorporation and in each state in which Borrower believes it is required to be qualified as a foreign corporation; (k) COPIES OF MATERIAL AGREEMENTS. Provide to Lender, promptly upon its execution, a copy of each contract executed by Borrower which is material to the operation of Borrower's businesses and which is not executed in the ordinary course of Borrower's day-to-day business operations, and give prompt written notice to Lender of (I) any act of default by Borrower under any existing or future contract, which default could have a material adverse effect on the financial condition or business operations of Borrower, or (II) any acceleration of any Indebtedness caused thereby; (l) COMPLIANCE WITH STATUTES. Comply with all applicable federal, state and local health, safety, building, zoning, environment and other statutes, regulations and ordinances in all material respects; (m) MAINTENANCE OF PROPERTY. Maintain Borrower's property, both real and personal, including plant and equipment, in as good a physical condition as it is in at the time of the execution of this Agreement, subject to ordinary wear and tear; (n) FURTHER ASSURANCES. From time to time upon the request of Lender, furnish to Lender information regarding arrangements involving transactions aggregating in excess of One Million and no/100 Dollars ($1,000,000.00) per year between Borrower and any of its suppliers and further assurances that Borrower has the financial and operational ability and capacity to perform its obligations thereunder; (o) PAYMENT OF COSTS AND EXPENSES. Pay Lender upon Lender's demand all reasonable costs and expenses incurred by Lender in connection with the preparation, negotiation, closing, administration and enforcement and collection of this Agreement and related instruments, agreements and documents, including but not limited to recording and UCC filing fees, UCC search fees, the fees and out-of-pocket expenses of Lender's legal counsel, and all audits (provided, however, so long as no Event of Default or Default has occurred and is continuing, such audit expense reimbursement shall be limited to one audit per 12-month period). (p) GENERAL INDEMNITIES. Indemnify and save Lender harmless from and against any and all claims, losses, damages, set-offs, counter-claims and expenses (including but not limited to attorneys' fees and costs) which Lender may sustain as a result of the transactions contemplated by this Agreement or because of the breach of or inaccuracy in any of the representations and warranties contained in this Agreement, in any other document executed in connection herewith or in any other written communication of Borrower to Lender in connection with the transactions contemplated hereby, whether or not any such inaccuracy was known by Borrower to be incorrect; provided, however, excluded from this indemnification are any and all such claims, losses, damages, set offs, counter-claims and expenses resulting from Lender's gross negligence or willful misconduct; (q) ENVIRONMENTAL INDEMNITY. Indemnify and save Lender harmless from and against any and all claims, losses damages, set-offs, counterclaims and expenses (including but not limited to attorneys' fees and costs) which Lender may sustain as a result of the breach of any covenant of Borrower contained in this Agreement with respect to compliance with environmental statutes, ordinances and regulations; (r) DEPOSITORY ACCOUNTS. Maintain Borrower's primary depository accounts with Lender; (s) INSOLVENCY. Maintain the financial condition of Borrower at all times at a level such that (i) Borrower would not be rendered insolvent if required to perform under the terms of the documentation evidencing the Line of Credit and Letters of Credit, (ii) Borrower's cash flow is adequate to perform its obligations under the documentation evidencing the Line of Credit and Letters of Credit and pay all other Indebtedness of Borrower as they become due, except any such Indebtedness being contested in good faith, and (iii) the assets of Borrower, valued on a fair saleable basis, are equal to or greater than the sum of all liabilities and contingent liabilities of Borrower; (t) NOTIFICATION OF CRIMINAL INVESTIGATION OR PROCEEDINGS. Notify Lender immediately in writing of the initiation of any criminal investigation or proceeding initiated by any federal, state or local agency, department, or instrumentality against (i) Borrower or (ii) any employee of Borrower, if such investigation or proceeding could have a material adverse effect on the financial condition, business operations or assets of Borrower; (u) DEBT SERVICE COVERAGE. Maintain, on a consolidated basis for Borrower and its subsidiary, a ratio of (A) net income; plus interest expense, depreciation and amortization; minus distributions to shareholders; to (B) interest expense; plus Two Million Five Hundred Thousand and no/100 Dollars ($2,500,000.00); calculated as of the end of each applicable calendar year, with respect to the twelve (12)-month period ending with such year-end, as follows: CALENDAR YEAR ENDING MINIMUM RATIO -------------------- ------------- December 31, 1995 .3 to 1.0 December 31, 1996 1.2 to 1.0 and December 31, 1997 (a) MINIMUM TANGIBLE NET WORTH. Maintain, on a consolidated basis for Borrower and its subsidiary, a Tangible Net Worth, as of the end of each calendar quarter, of at least the applicable amount indicated below: CALENDAR QUARTER ENDING AMOUNT ----------------------- ------ December 31, 1995 through September 30, 1996 $19,000,000 October 1, 1996 through September 30, 1997 $23,500,000 October 1, 1997 through March 31, 1998 $28,500,000 (w) MAXIMUM TOTAL LIABILITIES TO TANGIBLE NET WORTH. Maintain, on a consolidated basis for Borrower and its subsidiary, as of the end of each calendar quarter, a ratio of (A) all liabilities to (B) Tangible Net Worth of not more than the applicable ratio indicated below: CALENDAR QUARTER ENDING AMOUNT ----------------------- ------ December 31, 1995 through September 30, 1996 2.3 to 1 October 1, 1996 through September 30, 1997 2.0 to 1 October 1, 1997 through March 31, 1998 1.5 to 1 (x) MATERIAL INDIVIDUAL ACQUISITION AND PROJECT DEVELOPMENT EXPENDITURE. Permit Lender to review, prior to Borrower's incurring any liability therefor, each proposed material [i.e., involving in excess of One Million and no/100 Dollars ($1,000,000.00)] individual acquisition (excepting purchases of inventory and equipment in the ordinary course of business) or project development expenditure; and (y) COMMITMENT/FACILITY FEE. On the date of execution hereof, pay to Lender Twenty-Five Thousand and no/100 Dollars ($25,000.00) as a facility fee with respect to the amended and restated financing facility governed hereby. Such payment shall be in addition to the commitment/facility fee paid by Borrower to Lender pursuant to the Prior Credit Agreement. 1. NEGATIVE COVENANTS. In addition to the Affirmative Covenants in Section 7.1 of this Agreement, Borrower covenants to Lender that so long as Borrower has any liability to Lender hereunder or under or with respect to the Line of Credit, Letters of Credit or any agreement, instrument or document executed in connection herewith or therewith, or so long as Lender may be obligated to make any advancement to Borrower, then Borrower will not, without the written consent of Lender: (a) NO OTHER LIENS. Create or permit to exist any lien, mortgage, pledge, security interest or other encumbrance on any property, right or asset now owned or hereafter acquired by Borrower, except for (i) liens of taxes and assessments not delinquent or contested in good faith (with appropriate reserves maintained by Borrower therefor), (ii) any liens and security interests which may be held by Lender and (iii) purchase-money security interests with respect to equipment acquisitions [subject to the limitations set forth in paragraph 8.1(m) and 8.1(n)]. In addition, Borrower agrees that Borrower shall execute, upon request of Lender, and Lender may record or file in the public records, such additional written evidence of this negative covenant as Lender may from time to time deem necessary or advisable; (b) NO TITLE RETENTION AGREEMENTS. Acquire or agree to acquire any kind of property under conditional sales or other title retention agreements, except as permitted under subclause (iii) of paragraph 7.2(a). (c) NO DISPOSITION OF ASSETS. Sell, assign, lease or otherwise transfer any of its assets, except in the ordinary course of business; (d) NO GIFTS. Directly or indirectly make (i) any loan, gift, distribution, transfer or advance of cash or other real, personal or intangible property, except for charitable contributions not inconsistent with historic practices of Borrower, or (ii) any transfer of any other benefit or thing of value to any Person except for fair value received by Borrower; (e) PAYMENTS TO AFFILIATES. Directly or indirectly make any payment or transfer to any Affiliate, except for dividend payments and except for the reasonable, ordinary and necessary salaries, wages, commissions and fringe benefits paid to officers and employees of Borrower; (f) NO EQUITY REDEMPTION. Make any payment for the purchase, redemption or retirement of any equity interest in Borrower, except pursuant to the Family Agreement and except pursuant to Borrower's Stock Bonus Plan; (g) NO INDEBTEDNESS. Except to the extent no default would result under Section 8.1(m) hereof, incur any Indebtedness other than (I) the accrual of normal operating expenses and taxes or (II) the incurrence of trade payables, all in the incurrence of indebtedness in the ordinary course of business consistent with historical practices of Borrower; (h) NO SURETY OBLIGATIONS. Assume, guarantee or otherwise become liable as a guarantor or surety for the obligation of any Person except in connection with the endorsement of checks for deposit in the ordinary course of business and other similar collection transactions in the ordinary course of business and except as a guarantor of obligations of the majority-owned subsidiary of Borrower incurred by such subsidiary in the ordinary course of business; (i) NO ADVERSE CHANGE. Take any action, allow any event to occur or permit a condition to exist which could materially and adversely effect any Borrower's ability to complete its obligations under the terms of this Agreement and related documentation; (j) NO CHANGE IN BUSINESS. Make any material change in the nature of each Borrower's current business; (k) NO INVESTMENTS. Make investments (whether by acquiring stock, debentures or other instruments), in any Person, except (I) for investments in money-market funds, treasury bills and other government securities with a maturity of not more than one hundred eighty (180) days, (II) direct or indirect investments in corporate stock pursuant to the Family Agreement; (III) stock purchases pursuant to the Borrower's Stock Bonus Plan; (IV) investment in the Partnership pursuant to the Family Agreement; (V) investment in Borrower's majority-owned subsidiary; (VI) investments made through Lender's investment services/arrangements; and (VII) investments made with the prior written consent of Lender; or (l) NO OTHER NEGATIVE PLEDGE. Make any negative pledge agreement or covenant [similar or identical to any one or more of the covenants set forth in paragraph 7.2(a) above] in favor of or enforceable by any Person other than Lender. ARTICLE III EVENTS OF DEFAULT AND REMEDIES SECTION 8.1. EVENTS OF DEFAULT. Any one (l) or more of the following shall constitute an Event of Default: (a) PAYMENT DEFAULT. Failure to pay when due, or within ten (10) days thereafter, any principal of or interest on the Line of Credit or any Letter of Credit; (b) OTHER PAYMENT DEFAULTS. A failure to pay or cause to be paid, as applicable, upon demand or when due, or within ten (10) days thereafter, any other amount payable under or with respect to any of the Line of Credit Note, Letters of Credit application/agreements, Guaranties or this Agreement or any other documents executed in connection therewith or herewith; (c) COVENANT DEFAULT. Failure to observe or perform any agreement or covenant contained in this Agreement or the Guaranties that does not constitute an Event of Default under another paragraph of this Section 8.1; provided, however, if such nonobservance or nonperformance is of a nature which , in the reasonable determination of Lender, can be cured within a thirty (30)-day period, then Borrower shall have thirty (30) days, after receipt from Lender of notice of such nonperformance or nonobservance, to cure such nonobservance or nonperformance. (d) REPRESENTATIONS AND WARRANTIES. Untruth, in any material respect and at the time made, of any warranty, representation, certification or statement contained in this Agreement, in any Guaranty or in any promissory note, certification or other agreement or document executed or delivered in connection herewith; (e) DISSOLUTION. Dissolution, liquidation or termination of the business of any Obligor; (f) ASSIGNMENT FOR BENEFIT OF CREDITORS. Assignment by any Obligor for the benefit of its creditors; (g) APPOINTMENT OF RECEIVER. Appointment of a receiver or a trustee for any Obligor or any of its assets; (h) INVOLUNTARY BANKRUPTCY. The filing of an involuntary petition for relief under the United States Bankruptcy Code against any Obligor and the failure of such Obligor to obtain a dismissal of such petition within sixty (60) days; (i) VOLUNTARY BANKRUPTCY. The filing by any Obligor of a voluntary petition for relief under the United States Bankruptcy Code; (j) DEFAULT UNDER SECURITY AGREEMENT OR OTHER AGREEMENTS. The occurrence of any default [other than a payment default described under paragraph 8.1(b) above] under the Security Agreement or any other agreement, instrument or document executed in connection herewith, and a failure to cure such default within the applicable cure period specified therein, if any; (k) MATERIAL ADVERSE CHANGE. Any adverse change in the financial or operating condition of any Obligor which could reasonably be expected to have a material adverse effect on the ability of such Obligor to meet its obligations under or with respect to the Line of Credit or any Letter of Credit; (l) CHANGE IN CONTROL. The majority voting control of Borrower no longer being vested in Russell C. Best; (m) OTHER INDEBTEDNESS. The incurring by any Obligor(s) of any indebtedness (e.g., for borrowed money or lease obligations) to any Person(s) other than Lender, without the prior written consent of Lender, if at any time the outstanding amount of such indebtedness (e.g., principal and accrued interest) for all Obligors in the aggregate exceeds Two Million and no/100 Dollars ($2,000,000.00); (n) CAPITAL EXPENDITURES. The making by any Obligor(s) of capital expenditures in any fiscal year, without the prior written consent of Lender, if the aggregate capital expenditures for all Obligors with respect to such fiscal year exceeds Seven Million Five Hundred Thousand and no/100 Dollars ($7,500,000.00); and (o) REVOCATION OF ANY GUARANTY. The revocation by any Guarantor of its Guaranty. SECTION 8.2. REMEDIES OF LENDER. After an Event of Default, at the option of Lender and without notice or demand to Borrower, the Line of Credit and all amounts payable with respect to the Letters of Credit shall become immediately due and payable and Lender shall be entitled to exercise, in addition to other available rights and remedies, its rights as a secured party under the Security Agreement. If any Default occurs and is continuing, then Lender shall not be required to make any further advancement under the Line of Credit, or to issue any additional Letter of Credit, anything contained herein to the contrary notwithstanding. SECTION 8.1. INJUNCTIVE RELIEF. Borrower recognizes that in the event Borrower fails to perform, observe or discharge any of its obligations under this Agreement or any other documents executed in connection herewith, remedies at law may not provide complete and adequate relief to Lender, and Borrower agrees that Lender, in such case, shall be entitled to temporary and permanent injunctive relief without the necessity of proving actual damages. SECTION 8.4. REMEDIES CUMULATIVE. All rights and remedies of Lender herein specified are cumulative and in addition to, not in limitation of, any rights and remedies which it may have by law or at equity. ARTICLE IX GENERAL PROVISIONS SECTION 9.1. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and assignors of Lender and Borrower provided that no assignment or alienation of any rights or obligations of Borrower against Lender hereunder shall be effective without the prior written consent of Lender. SECTION 9.2. NO THIRD-PARTY BENEFICIARIES. Nothing contained herein shall be deemed or construed to create an obligation on the part of Lender to any third party, and no third party shall have a right to enforce against Lender any rights which Borrower may have under this Agreement. SECTION 9.3. NO WAIVER. No waiver by Lender of the breach of any term, condition, warranty, representation, covenant or agreement contained herein or in any agreement, instrument, guaranty or document delivered in connection herewith shall be considered as a waiver of the same default in the future or any other default and no delay or omission by Lender in exercising any right or remedy hereunder shall impair any such right or remedy or be construed as a waiver of any default notwithstanding any other act taken or not taken by Lender after such delay or omission. The inclusion of deadlines and the reference to dates later than the maturity of any obligation shall not by implication or otherwise obligate Lender to renew or extend any maturity. SECTION 9.4. WAIVER OF PRESENTMENT. Borrower waives presentment, demand and protest and notice of presentment, maturity, release, compromising settlement, extension or renewal of any or all commercial paper, accounts receivable, contract rights, documents, instruments, chattel paper and guaranties at anytime held by Lender on which Borrower may be liable in any way. SECTION 9.5. AMENDMENTS. Any modification of or amendment to this Agreement shall be ineffective unless in writing and signed by the duly authorized representative of the party against whom the modification or amendment is sought to be enforced. SECTION 9.6. RIGHTS OF LENDER. Lender shall have no obligation with respect to the application of the proceeds of the Line of Credit, and Lender may from time to time without notice to or the consent of Borrower (a) release any collateral, (b) release any guaranty, (c) release, modify or compromise any liability of any Obligor(s) the terms thereof, and (d) apply any amounts paid to Lender in such order of application and with such marshalling of security as Lender may, in its sole discretion, determine appropriate. The liability of Borrower shall not be released in part or in whole by reason of the foregoing, the addition of co-makers, endorsers, guarantors or sureties, or a failure to perfect any security interest or lien in any collateral or a failure to proceed in any particular manner with respect to any collateral. SECTION 9.7. SURVIVAL OF INDEMNITIES. All indemnities from Borrower to Lender shall survive any termination of this Agreement. SECTION 9.8. INVALIDITY OF ANY PROVISION. If any provision of this Agreement or of any other document executed in connection herewith is held invalid or unenforceable, the remainder of this Agreement or such other documents and the application of such provisions to other persons or circumstances will not be affected hereby and the provisions of this Agreement and such other documents will be severable in such instance. SECTION 9.9. NOTICES. Unless otherwise specific any notice, demand, waiver or other communication required or permitted hereunder shall be in writing and shall be deemed effective when (a) mailed by certified or regular United States mail, postage prepaid with return receipt requested or (b) sent by an overnight carrier which provides for a return receipt, if to Borrower at 6161 East 75th Street, Indianapolis, Indiana 46250, Attention: Russell C. Best, or to Lender at 1800 Capital Center South, 201 North Illinois Street, Indianapolis, Indiana 46204, Attention: D. Brett Bontrager, or at such other addresses as either Borrower or Lender may from time to time specify by written notice to the other. Any written notice required to be given by Lender of a sale, lease, other disposition of any collateral or any other intended action by Lender, deposited in the United States Mail postage prepaid duly addressed as specified above not less that ten (10) days prior to such proposed action or, if sent by overnight carrier, five (5) days prior to such proposed action, shall constitute commercially reasonable and fair notice to Borrower of same. SECTION 9.10. PRIOR AGREEMENTS. This Agreement replaces and supersedes any inconsistent provisions of any agreements heretofore made by Lender and Borrower. In the event of any conflict between the terms of this Agreement and any other agreement, instrument or document executed in connection herewith, such terms shall, to the fullest extent reasonably possible, be construed to be complementary. However, if such terms cannot be construed as complementary, then the terms of this Agreement shall govern. SECTION 9.11. GOVERNING LAW. This Agreement has been entered into and shall be governed by and construed in accordance with the laws of the State of Indiana. SECTION 9.12. CAPTIONS. The captions or headings herein have been inserted solely for the convenience of reference and in no way define or limit the scope, intent or substance of any provision of this Agreement. Whenever the context requires or permits the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. SECTION 9.13. AMENDMENT/RESTATEMENT. As of the effective date hereof, this Agreement amends, restates, supersedes and replaces the Prior Credit Agreement. Performance required of any party under the Prior Credit Agreement with respect to the period prior to such effective date shall not be affected or waived hereby. The representations and warranties of Borrower hereunder shall be deemed made as of each of February 15, 1995, December 31, 1995 and the date of execution hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed effective as of the day and the year first above written. BEST LOCK CORPORATION By:/s/ Stephen J. Cooper, Treasurer "Borrower" THE HUNTINGTON NATIONAL BANK OF INDIANA By:/s/ D. Brett Bontrager Assistant Vice President "Lender" STATE OF INDIANA ) ) SS: COUNTY OF MARION ) Before me, a Notary Public in and for such County and State, personally appeared Stephen J. Cooper, the Treasurer of Best Lock Corporation, who, after having been duly sworn, acknowledged the execution of the foregoing Credit Agreement as the duly authorized officer of, and for and on behalf of, such corporation. WITNESS, my hand and Notarial Seal this 11th day of March, 1996. /s/ Charlene F. Lawhorn Notary Public My Commission Expires: My County of Residence: ___10/16/96____________________ __Marion__________________ STATE OF INDIANA ) ) SS: COUNTY OF MARION ) Before me, a Notary Public in and for such County and State, personally appeared D. Brett Bontrager, an Assistant Vice-President of The Huntington National Bank of Indiana, who, after having been duly sworn, acknowledged the execution of the foregoing Credit Agreement as a duly authorized officer, and for and on behalf of, such banking association. WITNESS, my hand and Notarial Seal this 11th day of March, 1996. /s/ Charlene F. Lawhorn Notary Public My Commission Expires: My County of Residence: ___10/16/96____________________ __Marion__________________ EX-10.B 5 EXHIBIT 10(B) SPLIT DOLLAR INSURANCE AGREEMENT THIS SPLIT DOLLAR INSURANCE AGREEMENT (the "Agreement") is entered into effective as of the 29th day of December, 1995, by and between Best Lock Corporation, a Delaware corporation (hereinafter referred to as "Best Lock"), and Arlen Helterbrand, not individually, but solely as Trustee of the Russell C. Best Irrevocable Trust under agreement dated October 11, 1995 (hereinafter referred to as the "Trustee"). WITNESSETH: WHEREAS, Best Lock recognizes that Russell C. Best, the Chief Executive Officer of Best Lock, has contributed substantially to the success of Best Lock over the last several years: and WHEREAS, Best Lock desires that Russell C. Best continue in the employ of Best Lock; and WHEREAS, to further encourage Russell C. Best to remain in Best Lock's employ, Best Lock desires to assist him in establishing and maintaining an adequate life insurance program; WHEREAS, the Trustee is the owner of life insurance policy number 3811706 (hereinafter referred to as the "Policy") on the life of Russell C. Best (hereinafter referred to as the "Insured") issued by The Guardian Life Insurance Company (hereinafter referred to as the "Insurer"), in the face amount of Five Million Dollars ($5,000,000.00); and WHEREAS, Best Lock and the Trustee have agreed upon a plan for the payment of the premiums due or to become due on the Policy and for the mode of payment of death benefits thereunder; and WHEREAS, for protection of their mutual interests, the parties hereto desire and intend to set forth all their agreements relating thereto herein. NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. OWNERSHIP OF POLICY. The Trustee shall be the sole and absolute owner of the Policy, and may exercise all ownership rights granted to the owner by the terms of the Policy. Best Lock acknowledges that the Trustee is the owner of the Policy, and Best Lock shall not have nor exercise any right in and to the Policy except as otherwise provided herein. It is the express intention of the parties hereto that Best Lock shall not possess any right which would result in Best Lock being deemed to be in possession of any incident of ownership as described in Section 2042 of the Internal Revenue Code of 1986, as amended (or any Treasury Regulations promulgated thereunder), or any similar provision of subsequent law. 2. PAYMENT OF PREMIUMS AND INTEREST. Premiums and interest on the Policy shall be paid in accordance with and subject to the following terms and conditions: 1 a) Premiums and interest on the Policy shall be payable annually or more frequently, as the Trustee may elect, and in accordance with such bills therefor as shall be transmitted to the Trustee by the Insurer from time to time; b) Each premium elected by the parties to be paid on the Policy (and any interest due on policy loans) shall be paid by the parties as follows: i) an amount to be contributed by the Trustee (less any dividend applied toward the payment of the premium as elected by the Trustee) equal to the value of the economic benefit attributable to the life insurance protection provided on the life of the Insured under this Agreement, calculated by using the lower of (A) the P.S. 58 rates or (B) the Insurer's term rates for one-year term life insurance available on the life of the Insured at all standard risks; and ii) an amount to be contributed by the Trustee equal to the portion of the premium for the policy year attributable to the Duo- Guard rider forming part of the Policy; and iii) an amount to be contributed by Best Lock equaling the difference, if any, between the amounts required to be contributed by the Trustee during such policy year, as described in subparagraphs (i) and (ii) of this paragraph, and the total premium for such policy year; and iv) an amount to be contributed by the Trustee equal to the interest on all policy loans made by the Trustee with respect to the Policy. c) The amounts to be contributed by the parties as set forth above shall be paid by each party directly to the Insurer on or before the required due date; and each such payment shall identify the policy number of the Policy. The Trustee shall be responsible for informing Best Lock as to all payment due dates with respect to the Policy. d) Best Lock hereby covenant and agrees to make the contribution described in subparagraph 2(b)(iii) toward the premium for the first year of coverage of the Insured under the Policy. Any additional contributions of Best Lock shall be made in the sole discretion of Best Lock. 3. INVESTMENTS BY BEST LOCK. The amounts described in subparagraph 2(b)(iii) contributed by Best Lock shall constitute investments by Best Lock, and the cumulative total of all such investments shall be referred to herein as the "Cumulative Investment Amount." The amount which is equal to the lesser of (i) the Cumulative Investment Amount, or (ii) the then cash surrender value of the Policy at the relevant time for determination, is herein referred to as Best Lock's "Net Interest." In consideration of Best Lock's payment of its share of the premiums on the Policy pursuant to subparagraph 2(b)(iii) above, the Trustee has, contemporaneously herewith, assigned the Policy to Best Lock as collateral under the Assignment of Life Insurance Policy as Collateral (the "Assignment") which gives Best Lock the limited power to enforce its right to recover Best Lock's Net Interest or the Cumulative Investment Amount, as the case may be. The interest of Best Lock in and to the Policy 2 shall be specifically limited to the following rights in and to the cash surrender value thereof or a portion of the death benefit thereof: a) The right to be paid an amount equal to Best Lock's Net Interest in the Policy in the event the Policy is totally surrendered or canceled by the Trustee pursuant to paragraph 6 below; and b) The right to be paid an amount equal to the Cumulative Investment Amount in the event of the death of the Insured; and c) The right to be paid an amount equal to Best Lock's Net Interest or the Cumulative Investment Amount, as the case may be, in the event this Agreement is terminated pursuant to the provisions of paragraph 7 below. The foregoing Assignment shall be subject to all of the terms and conditions of the Policy and to all superior liens, if any, which the Trustee may have against the policy. 4. DESIGNATION OF BENEFICIARIES. As long as this Agreement shall remain in effect, Best Lock and the Trustee agree that the Trustee shall designate the Trustee as the beneficiary of the Policy, and that upon the death of the Insured while the Policy and this Agreement shall remain in force, the Trustee, upon receipt of the proceeds of the Policy, shall divide such proceeds into two (2) parts as follows: a) One such part shall be payable in a lump sum to Best Lock and shall be an amount equal to the Cumulative Investment Amount determined as of the date of the death of the Insured; and b) The other such part shall consist of the entire balance of the proceeds of the Policy and shall be retained by the Trustee. The Trustee may make any change of beneficiary or any election of an optional mode of settlement desired with respect to that portion of the proceeds of the Policy referred to in subparagraph (b) of this paragraph 4. 5. PROCEEDS UPON DEATH OF INSURED. Upon the death of the Insured while the Policy and this Agreement shall be in force, Best Lock and the Insured's legal representatives shall promptly take all necessary steps, including rendering such assistance as may reasonably be required by the other party, to obtain payment from the Insurer of the amounts payable under the Policy. The Insurer shall be bound only by the provisions of the Policy, and any payments made or action taken by it in accordance therewith shall fully discharge it from all claims, suits and demands of all persons whatsoever. Except as specifically provided by endorsement on the Policy, the Insurer shall in no way be bound by the provisions of this Agreement. Written receipt by the Trustee for all death benefit proceeds received as the sole beneficiary shall be a full discharge and release of the Insurer. 6. SURRENDER OR CANCELLATION OF POLICY, TERMINATION OF AGREEMENT. The Trustee shall have the sole right to surrender or cancel the Policy for the cash surrender value thereof. The Trustee 3 and Best Lock agree that on any such surrender or cancellation of the Policy, or upon the termination of this Agreement by the mutual consent of the parties hereto, the Trustee shall pay to Best Lock an amount equal to Best Lock's Net Interest determined as of the date of such surrender, cancellation or termination. 7. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the first to occur of any of the following events: a) Surrender or cancellation of the Policy by the Trustee, or the termination of this Agreement by the mutual consent of the parties hereto in which event the provisions of paragraph 6 shall be operative; b) The death of the Insured in which event the provisions of paragraph 4 and paragraph 5 shall be operative; or c) Failure by Best Lock or the Trustee for any reason to make the contribution due toward any premiums payable on the Policy, resulting in the lapse of the Policy. Upon occurrence of any failure described in item (c) above, the Trustee shall remit to Best Lock an amount equal to Best Lock's Net Interest with respect to the Policy; PROVIDED, HOWEVER, that if only the Trustee (and not Best Lock) fails to make a contribution due toward any premium payable on the Policy, the Trustee shall remit to Best Lock an amount equal to the Cumulative Investment Amount. Thereafter, the Trustee shall become the absolute owner of the Policy. 8. GENERAL PROVISIONS. a) In the event of the termination of this Agreement pursuant to the provisions of paragraph 7 hereinabove, Best Lock shall release the Assignment of the Policy made to it, upon performance of all obligations of the Trustee hereunder. b In the event that any party to this Agreement shall pay some portion of the premiums or interest due on the policy which such party shall not be obligated to pay, such amount or amounts shall become part of the amount due and owing to such party with respect to the Policy. c) All previous agreements, if any, between the parties hereto with reference to the Policy are superseded by this Agreement. d) This Agreement shall be binding upon the parties hereto and their successors, assigns, executors and administrators and beneficiaries. This Agreement may be amended in writing only by the mutual consent of the parties hereto. e) The Trustee shall have the right to assign all or any part of the Trustee's interest in this Agreement, and/or the Policy (including any and all of the Trustee's ownership rights in the Policy) to such other person, persons, entity or entities as the Trustee may desire. Any assignee of the Trustee shall succeed to all of the rights, privileges, duties and obligations of the 4 Trustee as set forth herein. f) This Agreement shall be subject to and construed according to the laws of the State of Indiana. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates indicated below, but effective as of the date first above written. BEST LOCK CORPORATION Attest: /S/ MARK G. AHEARN By: /S/GREGG A. DYKSTRA ------------------- -------------------- Mark G. Ahearn, Secretary Gregg A. Dykstra, General Manager/Vice President Date: March 25, 1996 Date: March 25, 1996 TRUSTEE /S/ARLEN HELTERBRAND -------------------- Arlen Helterbrand, not individually, but solely as Trustee of the Russell C. Best Irrevocable Trust U/A dated October 11, 1995 Date: March 25, 1996 5 EX-27 6 EXHIBIT 27
5 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,413,372 0 13,786,885 (263,559) 11,383,058 33,567,343 63,556,266 (33,734,786) 67,832,095 16,618,161 15,197,079 0 0 676,682 14,845,143 67,832,095 118,546,487 118,546,487 70,380,467 70,380,467 54,338,732 117,417 870,062 (5,111,539) (2,359,401) (2,752,138) 0 0 0 (2,752,138) (6.43) (6.43)
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