-----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, HVCkLxemEuSDZteQUHOgdN5ya4jY9Vn7iRygNVTYVFEVi7lz7XHcuqqfwsQhfkCP 0Msm+9H+iAsSOC//iTcn1w== 0000912057-97-011302.txt : 19970401 0000912057-97-011302.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011302 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 001-11695 FILM NUMBER: 97570236 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 FORM 10K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the securities exchange act of 1934 For the transition period from to ------------------- ------------------- Commission file number 0-1490 FRANK E. BEST, INC. (Exact name of registrant as specified in its charter) DELAWARE 35-1142810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. BOX 50444, INDIANAPOLIS, INDIANA 46250 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (317) 849-2250 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 7, 1997. COMMON STOCK 598,710.00 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 6 5 Market for the Registrant's Common Stock and Related Security- Holder Matters 7 6 Selected Financial Data 8 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 8 Financial Statements and Supplementary Data 13 9 Disagreements on Accounting and Financial Disclosure 38 10 Directors and Executive Officers of the Registrant 38 11 Executive Compensation 40 12 Security Ownership of Certain Beneficial Owners and Management 42 13 Certain Relationships and Related Transactions 45 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 45 Signatures 46 Index to Exhibits 47 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, 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 3 and sold by Lock through sales representatives throughout the United States, Canada and other countries. Lock's representatives are independent representatives maintaining separate inventories, or corporate-owned sales offices, both selling directly to end-users. Lock does not manufacture all of the access control products it sells, but purchases a number of such items from other manufacturers. Lock is not exclusively represented by any regional hardware house as are most of the large lock manufacturers but its products are sold through many regional hardware houses as a modification of their regular lines. In connection with the sale of its system of locks, Lock assists in maintaining and setting up for its customers a masterkey plan for proper control and security of the customer's locking system. Lock sells its products in the United States and abroad. Some of its foreign sales are made by its agent and totally-held subsidiary, Best Universal Locks Limited, of the Province of Ontario, Canada. Lock's sales have generally increased during the past five years. Information as to approximate percentage of total sales revenue of classes of similar products for each of the specified fiscal years is as follows. It is not believed that the changes in percentages represent a material change in the mix of the product line. Name of Class 1996 1995 1994 ------------- ---- ---- ---- Door Security Products 71% 68% 67% All Others 29 32 33 There have not been any significant changes in the kinds of products produced or products or services sold since the beginning of the fiscal year. Lock is continuing its program of selling to contract hardware houses in an attempt to enlarge its sales to new construction projects. (ii) There has not been any public announcement of a new product or industry segment which would require the investment of a material amount of the assets of Lock during the next fiscal year. (iii) The raw materials essential to Lock's manufacturing business are standard metals in bar stock of various cross-sectional shapes. Approximately 80% of the shapes are standard and approximately 20% are specially made. The majority of essential raw materials are purchased from three midwestern suppliers. There are no significant problems related to the procurement of raw materials for Lock's manufacturing business, other than the normal forces of supply and demand, possible strikes or other production factors of the suppliers. (iv) Patents and patent rights have been and are a significant factor in Lock's business. Lock has a substantial number of licenses and patent rights relating to the locking art and other mechanical fields, and has engaged in substantial experimental and developmental work in connection with such licenses and patent rights. The first patent rights acquired were related to the Best Universal removable core. A number of the early patent rights licensed or otherwise acquired have expired. Registrant has several registered trademarks regarding the use of the word 'Best' in association with security products. These are considered important and valuable assets of the company. (v) While there is no particular seasonal factor in Lock's business, a backlog for its manufacturing business exists for production planning. 4 (vi) There is no unusual working capital requirement by Lock. Normal working capital requirements for inventory and accounts receivable are met through internal funding or borrowings from outside bank sources. (vii) The manufacturing, sourcing, distribution or selling business of Lock is not dependent upon any one single customer, or very few customers, the loss of which would have a material adverse effect on Lock. (viii) Lock's backlog of orders as of the dates shown below are believed to be firm: February 7, 1997 $4,702,439 February 9, 1996 4,219,942 It is expected that 100% of Lock's backlog on February 7, 1997 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 $769,000, $3,055,000 and $3,050,000 on research activities relating to the development of new products or the improvement of existing products in the years ending December 31, 1996, 1995 and 1994, respectively. Lock has not engaged in any material customer sponsored research during the past three fiscal years. (xii) Lock does not believe there will be any material effect that compliance with Federal, state or local provisions regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have upon the capital expenditures, earnings and competitive position of Lock or its subsidiary. Lock estimates it will voluntarily invest approximately $336,802 during its current and succeeding fiscal year to continue to enhance the Company's overall environmental standards. This amount includes capital expenditures ($78,000) and operating expenses of environmental protection facilities. 5 (xiii) The staff of registrant, being a nonoperating holding corporation, consisted of its directors, officers and their assistants, being five in number. The staff of Lock as of the close of its fiscal year consisted of approximately 448 production and maintenance employees; and 714 office, sales and executive employees. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES. Lock is engaged, through its totally-held subsidiary, Best Universal Locks Limited, in sales in Canada. There are other foreign sales throughout the world. The total of all such foreign sales amounted to approximately 6%, 6% and 7% of Lock's total sales during 1996 1995 and 1994, respectively. The risk and profitability of such business does not differ substantially from domestic sales. ITEM 2. 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. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 6 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, the value of registrant's shares as of December 31, 1996 and 1995 was $30.51 and $30.13 per share respectively. There are 557 shareholders of record of registrant's stock as of February 7, 1997. Dividends have been declared and paid annually in the respective amounts of $.54 and $.53 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 1996, 1995, and 1994, 127, 507 and 0 shares respectively, were submitted to the appropriate state authorities through this clearinghouse. Such property will be held for various periods of time as required by each state prior to being placed on the market for disposition. 7 ITEM 6. Selected Financial Data. FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1996 THROUGH 1992 - -------------------------------------------------------------------------------- The following consolidated summary of selected financial data should be read in conjunction with the accompanying notes to consolidated financial statements:
1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------ ------------ Net sales $ 122,358,592 $ 117,705,629 $ 103,954,763 $ 98,895,807 $ 84,865,287 Net income (loss) before cumulative effect of change in accounting principle 2,486,397 (3,255,138) 1,153,290 497,628 1,358,354 Net income 2,486,397 (3,255,138) 1,153,290 865,024 1,358,354 Total assets 67,915,682 67,832,095 70,961,235 64,132,055 62,290,288 Long-term obligations (excluding deferred taxes) 18,213,399 19,067,424 4,444,971 4,745,065 4,552,378 Common stock redeemable under Stock Bonus Plan - - 2,288,171 - -
Earnings and dividends per common share - see page 9 8 BEST LOCK COMPANIES BEST LOCK CORPORATION AND SUBSIDIARY BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA FOR THE YEARS ENDED DECEMBER 31, 1996 THROUGH 1992 - --------------------------------------------------------------------------------
1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- Earnings (loss) per share of common stock: Best Lock Corporation and Subsidiary Weighted average shares outstanding: 121,517.24 124,144.13 131,235.37 131,238.85 131,238.85 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net income (loss) before cumulative effect of change in accounting principle $ 28.43 $ (33.88) $ 16.83 $ 8.76 $ 18.73 Cumulative effect of SFAS 109 "Accounting for Income Taxes" $ 0.00 $ 0.00 $ 0.00 $ 4.95 $ 0.00 ------------- ------------- ------------- ------------- ------------- Net income (loss) $ 28.43 $ (33.88) $ 16.83 $ 13.71 $ 18.73 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Best Universal Lock Co. and Subsidiaries Series A weighted average shares outstanding: 60,588.76 75,669.87 86,469.00 86,469.00 86,469.00 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Series A - Net income (loss) $ 8.11 $ (9.95) $ 3.92 $ 3.30 $ 4.57 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Series B weighted average shares outstanding: 300,000.00 300,000.00 300,000.00 300,000.00 300,000.00 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Series B - Net income (loss) $ 8.11 $ (9.95) $ 3.92 $ 3.30 $ 4.57 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Frank E. Best, Inc. and Subsidiaries Weighted average shares outstanding: 274,999.05 427,806.72 598,710.00 598,710.00 598,710.00 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net income (loss) $ 9.04 $ (7.61) $ 1.93 $ 1.45 $ 2.27 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Dividends per share: Best Lock Corporation, common $ 5.42 $ 5.41 $ 5.40 $ 5.00 $ 4.90 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Best Universal Lock Co. - Preferred (7% cumulative) $ - $ 7.00 $ 7.00 $ 7.00 $ 7.00 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Series A Common (Note 2) 1.68 1.67 1.66 1.63 1.61 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Series B Common (Note 2) 1.11 1.10 1.09 1.06 1.04 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Frank E. Best, Inc. Common $ 0.54 $ 0.53 $ 0.52 $ 0.51 $ 0.49 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Since Frank E. Best, Inc. and Best Universal Lock Co. are non-operating parents of Best Lock Corporation, a discussion of Best Lock Corporation's business is necessary in order to understand the character and development of the total enterprise. As the variations between the financial statements of these three companies are not significant, the discussion and analysis of Best Lock Corporation is representative of all. The following, therefore, is a discussion of the business of Best Lock Corporation. RESULTS OF OPERATIONS - 1996 VS. 1995 Sales grew modestly in 1996, increasing 4.0% over 1995 to a record of $122 million. The majority of the increase was generated from improved sales volumes in the Best Locking Systems (distribution) Division. A price increase on selected product lines, which became effective late in the third quarter of 1996, also improved sales slightly. The gross margin improved significantly over 1995, to 47.7% of sales, compared to 41.0% in the prior year. The Company experienced a number of cost increases in 1995 which were either reduced or not experienced during 1996. These costs were for higher scrap rates (approximately $1.0 million), disposition of obsolete inventory (approximately $2.1 million), and higher salaries, wages, and fringe benefits associated with the manufacture of products ($1.9 million). During 1996, a task force completed a project of decreasing manufacturing costs associated with the production of the 9K lever handle lock. In 1995, the Company experienced approximately $1.8 million in increased material costs associated with the 9K lock, due to a redesign of the product which occurred in late 1994. During the third quarter of 1996, the Company discovered that mortise locksets manufactured since December of 1995 did not meet stated standards and could, in certain situations, cause a security breach. A $1.0 million charge to product service expense was recorded during the third quarter of 1996 as a result. Operating expenses decreased by $3.0 million from 1995, the majority which is attributable to the following reasons. Salaries, wages and fringe benefits were $2.9 million lower than 1996, due to the 1995 $3.1 million restructuring charge associated with an early retirement, voluntary and involuntary separation plans for employees in certain job classifications, which was completed in 1996. The Company also made changes to the restructuring plan during 1996, which resulted in a reduction in expense of $800 thousand. Professional fees decreased $1.9 million from 1995, due to costs associated with development and installation of new software for the order processing accounts payable and general ledger functions which were incurred in 1995. These decreases were partially offset by increases in certain other expenses. Depreciation expense associated with non-production assets increased by $500 thousand, mainly due to depreciation on approximately $4.4 million of computer equipment placed into service during 1995, the majority of which is being depreciated over three years. Telephone, rent, seminars and training, and dues, fees, and subscriptions increased $900 thousand over 1995. The Company began leasing personal computers during 1996 which had previously been purchased, and a full year of costs associated with a corporate computer network, which was installed during 1995, were recognized. Operating income increased by $13.0 million, to 5.7% of sales, due to the improved margins and lower operating expenses described above. Interest expense increased by $325 thousand in 1996, due to a full year of borrowing against a bank line of credit which was established on February 15, 1995. Net income increased by $7.7 million to $3.5 million, or 2.8% of sales in 1996. Income tax expense was 42.8% of the income before tax in 1996, compared to a benefit of 35.9% of the loss before tax in 1995. The increase in the effective tax rate is due to an increase in state tax expense. 10 RESULTS OF OPERATIONS - 1995 VS. 1994 Sales for 1995 were $117.7 million, which was a record, and was 13.2% higher than 1994. Improved sales volumes both at the Best Locking Systems Division and at the Best Lock Manufacturing Division, as well as a decrease in the backlog at Best Lock Manufacturing, attributed to the increase in sales. The 1995 gross margin decreased from 47.9% to 41.0% of sales, mainly due to increased material costs. Approximately $1.8 million of the increase in material costs was related to the redesign of the Company's 9K lever handle lock, which occurred in late 1994. The Company did not increase the price of this product to its customers, even though the standard cost per unit increased by approximately 18% due to the redesign. Higher scrap rates in the production of this product were also experienced during 1995, which increased costs by approximately $1.0 million. In addition, the Company disposed of obsolete inventory during the year of approximately $2.1 million. Salaries, wages and fringe benefits associated with the manufacture of products increased by approximately $1.9 million during 1995. Selling, general and administrative, and engineering costs were $7.3 million higher than 1994 levels. During the fourth quarter of 1995, the Company announced a restructuring plan with the goal of significantly reducing payroll-related expenses. The provisions of the plan included early retirement as well as voluntary and involuntary separation for employees in certain job classifications, mostly non-production related. The Company recorded a $3.1 million restructuring charge in the fourth quarter of 1995 for costs associated with this plan. Professional fees were $3.0 million higher than 1994, mainly due to assistance required for the development and installation of new software for the order fulfillment, accounts payable, and general ledger functions. This software was put into production during the third quarter of 1995 and the first quarter of 1996. Sales commissions were $485,000 higher than 1994, due to higher sales and a change in commission rates. The remainder of the increase in selling, general and administrative, and engineering expenses was mainly due to higher travel expenses of $366,000. Research and development expenditures for 1995 were approximately the same level as 1994, at $3.1 million. The Company began marketing its electronic access security product during the fourth quarter of 1995. Other research and development expenditures related to the development of computer software. As a result of the factors described above, operating income decreased by $8.9 million, or 7.6% of sales, to a loss of $6.1 million for 1995. Interest expense increased by $863 thousand, due to borrowings against a bank line of credit. Proceeds from the borrowings were used to finance the purchase of an interest in Best Lock Partnership (a newly-formed partnership created for the purpose of acquiring shares of Best and Universal from Walter E. Best and certain other family members and trusts) and for the payment of severance, vacation and bonus payments to Walter E. Best, Robert W. Best, Richard E. Best, Marshall W. Best and Edwina McLemore in exchange for their resignations. $1.2 million of the proceeds from the borrowings was also used for payment in exchange for covenants not to compete from Walter E. Best, Robert W. Best, Richard E. Best, and Marshall W. Best. Other income increased by $748,000 from 1994 to 1995. During 1994, the Company accrued $701,000 of professional fees relating to the settlement of claims arising from a derivative action against it by a director, as well as all claims against the Chief Executive Office and another officer. These expenses were reflected in other income (expense) in 1994. Net income decreased by $6.4 million to a loss of $4.2 million, or 3.6% of sales in 1995. Income tax benefit was 35.9% of the loss before tax in 1995. For 1994, income tax expense was 8.1% of the income before tax, mainly due to the generation of tax credits during 1993 that the company recognized in 1994. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 11 The Company's current ratio was 2.5 at December 31, 1996, compared to 2.0 at December 31, 1995. Current assets increased by $3.9 million during 1996, due to higher receivables. These higher receivables are associated with higher sales during the fourth quarter of 1996 of approximately $5.1 million. Inventories increased by $2.4 million, mainly at the manufacturing division, due to higher order volume in the fourth quarter of 1996. Estimated refundable income taxes decreased $2.6 million due to the receipt of refunds associated with the 1995 net loss. Property, plant and equipment additions decreased by $4.2 million to $1.4 million in 1996 from the 1995 total of $5.6 million. Approximately $3.4 million of the 1995 capital expenditures related to the installation of enhanced computer systems and related software. Capital expenditures for 1997 are expected to be in the $3.5 million range, which includes approximately $1.5 million for improvements to manufacturing equipment and tooling. Total liabilities decreased by $2.2 million from 1995 to 1996. Approximately $1.5 million of the decrease was in current liabilities. Accrued restructuring expense decreased $2.5 million, due to payouts of amounts expensed during 1995 and changes to the plan described in Note 14 to the consolidated financial statements. Accounts payable decreased approximately $802 thousand. Accrued income taxes increased $492 thousand, due to higher taxable income in 1996. The warranty accrual, established during 1996, increased $999 thousand. This accrual is for the estimated material, labor and travel costs to replace certain parts in mortise locksets manufactured from December of 1995 through September of 1996, as discussed above. The Company desires to retain its strong credit rating, and therefore pays all vendors according to terms and takes all discounts offered. Cash provided by operating activities increased to $3.3 million in 1996, compared with $1.4 million in 1995. The $1.9 million increase was partially due to the increase in net income of $7.7 million, offset by a $4.5 million increase in accounts and notes receivable, and a $2.0 million decrease in accounts payable, customer advances, and other liabilities. During 1995, the Company negotiated a $25 million bank line of credit for the purpose of acquiring an interest in Best Lock Partnership. On February 15, 1995, $12.0 million was borrowed under the line of credit in order to finance this transaction. As of December 31, 1996, $15.0 million was outstanding. The remainder of the line remains available for additional funds, if required. The Company expects to repay the loan from future operating cash flows. The Company also believes that the amounts available from operating cash flows and under the line of credit will be sufficient to meet its expected cash needs, including planned capital expenditures. OTHER Foreign sales were approximately 6% of sales during 1996, which was the same percentage as 1995 and a slight decrease from the 7% level in 1994. The firm backlog of approximately $4.7 million as of February 7, 1997 is approximately $500 thousand higher than the prior year. The increase is primarily due to a higher volume of orders in January 1997 compared with January 1996. The Company has not experienced any unusual inflation in its purchases or sales for the years 1996, 1995, or 1994. The Company has not had and does not expect to incur any significant future environmental liability. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) 1. Financial Statements: Report of Independent Public Accountants Corporate Balance Sheets, December 31, 1996 and 1995 Corporate Statements of Cash Flows for the Years Ended December 31, 1996, 1996 and 1995 Consolidated Balance Sheets, December 31, 1996 and 1995 Consolidated Statements of Income (Loss) for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Schedules Supporting Consolidated Financial Statements- Schedule Number II Valuation and Qualifying Accounts - Corporate and Consoli- dated - for the Years Ended December 31, 1996 through 1994 III Investments in, Equity in Earnings of, and Dividends Received From Affiliates and Other Persons - for the Years Ended December 31, 1996 through 1994 13 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, 1996 and 1995, and the related corporate statements of cash flows for each of the three years in the period ended December 31, 1996 and the accompanying consolidated balance sheets of FRANK E. BEST, INC. AND SUBSIDIARIES as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the consolidated statements taken as a whole. The schedules listed under Item 8 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied to the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Indianapolis, Indiana, February 6, 1997. 14 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) CORPORATE BALANCE SHEETS
- ------------------------------------------------------------------------------------------- December 31 ------------------------------ 1996 1995 ------------ ------------ ASSETS Current assets Cash $ 14,208 $ 23,545 Other assets 1 1 ------------ ------------ Total current assets 14,209 23,546 Investment in subsidiary at underlying book value, eliminated in consolidation (Note 1) (Schedule III) 17,436,124 15,607,328 ------------ ------------ $ 17,450,333 $ 15,630,874 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 13,077 $ 27,641 Advances from subsidiary, eliminated in consolidation 152,960 111,803 ------------ ------------ Total liabilities 166,037 139,444 SHAREHOLDERS' EQUITY Common stock, $1 par value, 600,000 shares authorized and issued, 598,710 shares outstanding 598,710 598,710 Capital surplus 77,972 77,972 ------------ ------------ Total capital stock 676,682 676,682 ------------ ------------ Accumulated earnings Balance at beginning of year 23,880,870 27,491,946 ------------ ------------ Net income Equity in income (loss) of Universal Consolidated, eliminated in consolidation (Note 1) 2,412,249 (3,212,290) Corporate income (expense), net 74,148 (42,848) ------------ ------------ Total net income (loss) 2,486,397 (3,255,138) ------------ ------------ Cash dividends paid ($.54 in 1996 and $.53 in 1995) (323,303) (317,316) Difference between dividends of Series A and Series B common shareholders of Best Universal Lock Co. (Note 2) (38,622) (38,622) Additional minimum liability for pension (178,939) - ------------ ------------ Balance at end of year 25,826,403 23,880,870 ------------ ------------ Cumulative translation adjustment (151,029) (88,753) Treasury Stock (9,067,760) (8,977,369) ------------ ------------ Total shareholders' equity 17,284,296 15,491,430 ------------ ------------ Total liabilities and shareholders' equity $ 17,450,333 $ 15,630,874 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) CORPORATE STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------- --------------------------------------- Year Ended December 31 --------------------------------------- 1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Cash paid to suppliers $ (36,738) $ (16,870) $ (22,032) Cash received from subsidiary 41,157 - - Income taxes paid (23,453) - (24,500) --------- --------- --------- Net cash provided by operating activities (19,034) ($16,870) (46,532) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Dividend payments (323,303) (317,316) (311,330) Dividend received from subsidiary 333,000 330,000 327,000 --------- --------- --------- Net cash used in financing activities 9,697 12,684 15,670 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (9,337) (4,186) (30,862) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 23,545 27,731 58,593 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,208 $ 23,545 $ 27,731 --------- --------- --------- --------- --------- --------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income (loss) $ 74,148 $ (42,848) $ (22,409) Changes in assets and liabilities- Increase (decrease) in Accounts payable and accrued expenses (79,397) 9,562 (17,323) Income taxes payable (13,785) 16,416 (6,800) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ (19,034) $ (16,870) $ (46,532) --------- --------- --------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. 16 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------ December 31 -------------------------- 1996 1995 ----------- ----------- CURRENT ASSETS Cash and cash equivalents (Note 1) $ 2,114,084 $ 1,413,372 Trade receivables Direct 15,453,983 11,878,119 Sales representatives and other 2,486,882 1,893,871 Allowance for uncollectible accounts (244,866) (263,559) Estimated refundable income taxes 51,632 2,628,103 Current portion of notes receivable (Note 16) 64,909 14,895 Inventories (Notes 1 and 4) 13,779,015 11,383,058 Deferred income taxes (Note 5) 3,224,592 4,239,578 Prepaid expenses and other 355,050 379,906 ----------- ----------- Total current assets 37,421,103 33,567,343 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 1 and 3) Land and buildings 13,802,456 14,037,266 Machinery and equipment 27,173,450 28,694,247 Tooling 8,417,048 8,423,818 Furniture, fixtures and other 12,092,891 9,927,645 Construction work-in-progress 184,311 2,473,290 ----------- ----------- 61,670,156 63,556,266 Less - accumulated depreciation (35,515,151) (33,734,786) ----------- ----------- Total property, plant and equipment 26,155,005 29,821,480 ----------- ----------- OTHER ASSETS Long-term notes receivable (Note 16) 3,303,799 3,358,972 Other assets 1,035,775 1,084,300 ----------- ----------- Total assets $ 67,915,682 $ 67,832,095 ----------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 17 FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------- December 31 -------------------------------- 1996 1995 ------------ ------------ CURRENT LIABILITIES Notes payable $ 2,500 $ 2,500 Current portion of retirement benefit obligation 1,364,671 1,362,431 Trade accounts payable 2,685,231 3,517,797 Customer advances 1,849,175 1,433,801 Accrued liabilities Income taxes 932,055 478,185 Property and other taxes 876,670 976,765 Payroll and vacation pay 4,413,772 4,225,317 Accrued restructuring (Note 14) 999,111 3,462,508 Accrued medical claims 750,000 970,000 Accrued warranty 998,835 - Other 177,102 219,252 ------------ ------------ Total current liabilities 15,049,122 16,648,556 ------------ ------------ LONG-TERM DEBT (Note 7) 15,000,000 15,197,079 RETIREMENT BENEFIT OBLIGATION (Note 10) 3,213,399 3,870,345 DEFERRED INCOME TAXES (Note 5) 2,305,265 2,120,957 ------------ ------------ Total liabilities 35,567,786 37,836,937 ------------ ------------ MINORITY INTEREST IN SUBSIDIARIES 15,063,600 14,503,728 ------------ ------------ 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 25,826,403 23,880,870 Cumulative translation adjustment (Note 1) (151,029) (88,753) Treasury stock (9,067,760) (8,977,369) ------------ ------------ Total shareholders' equity 17,284,296 15,491,430 ------------ ------------ Total liabilities and shareholders' equity $ 67,915,682 $ 67,832,095 ------------ ------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 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 ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- NET SALES $ 122,358,592 $ 117,705,629 $ 103,954,763 COST OF GOODS SOLD 64,006,688 69,400,346 54,111,283 ------------- ------------- ------------- GROSS MARGIN 58,351,904 48,305,283 49,843,480 OPERATING EXPENSES Selling 33,230,790 30,656,814 26,997,950 General and Administrative 17,153,433 21,386,060 16,291,879 Engineering, research and development 997,249 2,336,673 3,775,743 ------------- ------------- ------------- Total operating expenses 51,381,472 54,379,547 47,065,572 ------------- ------------- ------------- OPERATING INCOME (LOSS) 6,970,432 (6,074,264) 2,777,908 Interest expense (1,194,986) (870,062) (6,809) Other income (expense), net 272,102 380,427 (367,685) ------------- ------------- ------------- INCOME (LOSS) before provision for income taxes 6,047,548 (6,563,899) 2,403,414 Provision (benefit) for income taxes (Note 5) 2,592,935 (2,359,401) 195,259 ------------- ------------- ------------- NET INCOME (LOSS), Best Lock Corporation and Subsidiary 3,454,613 (4,204,498) 2,208,155 Minority interest in net (income) loss, Best Lock Corporation and Subsidiary (479,160) 521,623 (653,892) Corporate - Best Universal Lock Co. expense (50,133) (55,600) (39,332) ------------- ------------- ------------- NET INCOME (LOSS), Best Universal Lock Co. and Subsidiaries 2,925,320 (3,738,475) 1,514,931 Minority interest in net (income) loss, Best Universal Lock Co. and Subsidiaries (513,071) 526,185 (339,232) Corporate - Frank E. Best, Inc. expense 74,148 (42,848) (22,409) ------------- ------------- ------------- NET INCOME (LOSS), Frank E. Best, Inc. and Subsidiaries $ 2,486,397 $ (3,255,138) $ 1,153,290 ------------- ------------- ------------- ------------- ------------- ------------- Best Universal Lock Co. Best Lock --------------------------- Frank E. Earnings (loss) per common share: Corporation Series A Series B Best, Inc. ------------- ----------- ------------ ------------ 1996 $ 28.43 $ 8.11 $ 8.11 $ 9.04 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- 1995 $ (33.88) $ (9.95) $ (9.95) $ (7.61) ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- 1994 $ 16.83 $ 3.92 $ 3.92 $ 1.93 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Weighted average shares outstanding: 1996 121,517.24 60,588.76 300,000.00 274,999.05 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- 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 ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
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 STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------- December 31 ------------------------------------------ 1,996 1,995 1,994 ------------ ------------ ------------ 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 23,880,870 27,491,946 26,688,607 Net income (loss) 2,486,397 (3,255,138) 1,153,290 Cash dividends (see below) (323,303) (317,316) (311,330) Additional minimum liability for pensions (178,939) - - Difference between dividends of Series A and Series B common shareholders of Best Universal Lock Co. (38,622) (38,622) (38,621) ------------ ------------ ------------ Balance at end of year 25,826,403 23,880,870 27,491,946 ------------ ------------ ------------ CUMULATIVE TRANSLATION ADJUSTMENT (151,029) (88,753) (111,935) COMMON STOCK REDEEMABLE UNDER STOCK BONUS PLAN (Note 8) - - (2,288,171) TREASURY STOCK Balance at beginning of year - - - Shares purchased (9,067,760) (8,977,369) - ------------ ------------ ------------ Balance at end of year (9,067,760) (8,977,369) - ------------ ------------ ------------ Total shareholders' equity $ 17,284,296 $ 15,491,430 $ 25,768,522 ------------ ------------ ------------ ------------ ------------ ------------ Cash dividends per share: $ 0.54 $ 0.53 $ 0.52 ------------ ------------ ------------ ------------ ------------ ------------
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 STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31 --------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 118,027,816 $ 119,115,865 $ 103,456,897 Cash paid to suppliers and employees (115,354,393) (117,097,616) (92,594,751) Interest received 190,183 494,908 137,171 Interest paid (1,208,188) (761,831) (3,353) Income taxes refunded (paid) 1,619,861 (1,460,682) (53,856) ------------ ------------ ------------ Net cash provided by operating activities 3,275,279 290,644 10,942,108 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment 50,433 88,383 167,565 Capital expenditures (1,430,687) (4,543,267) (3,895,823) Note receivable from an officer - - (3,400,000) ------------ ------------ ------------ Net cash used in investing activities (1,380,254) (4,454,884) (7,128,258) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowings against unsecured line of credit 30,300,000 29,064,607 - Payments on unsecured line of credit (30,497,079) (14,100,000) - Purchase of treasury stock (559,973) (13,793,834) (20,405) Redemption of preferred stock - (6,300) - Dividend receipts 211,859 - - Dividend payments (604,594) (437,904) (647,995) Premium paid on redemption of preferred stock - (315) - ------------ ------------ ------------ Net cash provided by (used in) financing activities (1,149,787) 726,254 (668,400) ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (44,524) 7,779 (6,860) ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 700,714 (3,430,207) 3,138,590 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,413,372 4,843,579 1,704,989 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,114,086 $ 1,413,372 $ 4,843,579 ------------ ------------ ------------ ------------ ------------ ------------ RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income (loss) $ 2,486,397 $ (3,255,138) $ 1,153,290 Adjustments- Depreciation and amortization 5,464,788 4,904,810 4,364,558 Provision for losses on accounts receivable 128,006 117,417 38,413 Loss (gain) on sale of property, plant and equipment 125,232 83,408 (4,875) Minority interest related to current year earnings 992,231 (1,047,808) 993,124 Deferred income taxes (credit) 1,199,294 (148,412) (125,857) Changes in assets and liabilities- (Increase) decrease in Accounts and notes receivable (4,482,755) 600,453 (703,419) Refundable income taxes 2,576,471 (2,559,696) 1,484,991 Inventories (2,431,366) 3,226,858 (139,575) Prepaid expenses and other 24,856 (900,220) (1,860,533) Other assets (452,224) (1,453,288) 127,582 Increase (decrease) in Accounts payable, customer advances and accrued liabilities (1,895,169) 1,707,866 4,968,206 Income taxes payable 465,076 (391,444) 676,421 Additional minimum liability for pension (270,852) - - Retirement benefit and benefit obligation (654,706) (594,162) (30,218) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,275,279 $ 290,644 $ 10,942,108 ------------ ------------ ------------ ------------ ------------ ------------
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 COMPANY (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES a. NATURE OF BUSINESS The principal business of the Best Lock Companies is the manufacture or sourcing, distribution and sale of access control products and services. b. PRINCIPLES OF CONSOLIDATION The consolidated financial statements for each parent company in the Best Lock Companies include their respective subsidiaries as indicated below: Percent Parent Company Subsidiaries Owned -------------- ------------ ------- Frank E. Best, Inc. Best Universal Lock Co. 83% (Best) Best Universal Lock Co. (Universal) Best Lock Corporation 79% Best Lock Corporation (Lock or the Company) Best Universal Locks Limited (Canada) 100% All significant intercompany accounts, investments and transactions have been eliminated in the consolidations. Best and Universal, other than their investment in subsidiaries, have no significant assets or liabilities. c. CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. d. INVENTORIES Inventories are valued using the last-in, first-out (LIFO) method for approximately 97% of consolidated inventories. The remaining inventories are valued at the lower of cost, first-in, first-out (FIFO) or market. e. REVENUE RECOGNITION Sales are recognized when product is shipped to customers or when service or installation is complete. 22 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) f. DEPRECIATION Depreciation is provided on the straight-line method for book purposes and on an accelerated method for income tax purposes. g. AMORTIZATION During 1995, the Company purchased covenants not to compete for $1,240,000 which are being amortized ratably over the life of the covenants. Amortization expense was $248,000 in 1996 and $206,667 in 1995. h. RESEARCH AND DEVELOPMENT Research and development costs related to products are expensed as incurred. Development costs related to software for internal use are expensed or capitalized as incurred, depending on the useful life of the expenditure. The total amounts expensed were approximately $769,000, $3,055,000 and $3,050,000 in 1996, 1995, and 1994, respectively. i. CURRENCY TRANSLATION The accounts of Lock's Canadian subsidiary are translated whereby the balance sheet accounts are translated at the exchange rate in effect at period end, income accounts are translated at the average rate of exchange during the period, and translation gains and losses are excluded from net earnings by being recorded as a component of shareholders' equity (Cumulative Translation Adjustment). The consolidated financial statements include translation (losses) gains of ($87,109), $56,459 and ($89,392) in 1996, 1995 and 1994, respectively, all of which are reflected as a component of shareholders' equity. j. NONCASH TRANSACTION The Company financed the purchase of $348,702 of treasury stock during 1995 by issuing a note payable. k. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. DIVIDENDS The Articles of Incorporation of Universal require that dividends on common stock be distributed on a noncumulative basis as follows: a) the first approximately $138,000 in dividends are to be distributed equally to Series A holders and to Series B holders and, b) the remainder is distributed on an equal per share basis to Series A and B holders. These disproportionate distributions are reflected in calculating the minority interest of Best. 23 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, PLANT AND EQUIPMENT For financial reporting purposes, depreciation is provided using the following straight-line rates: Buildings 2.50%, 3% & 5% Land Improvements 6.67% & 10% Machinery and equipment 8.33% Tooling 12.50% & 20% Furniture and fixtures 10% to 33% Vehicles 20% to 50% A 3-year depreciation life was adopted in 1995 for certain items such as computers, fax machines, copiers and telephone systems, to reflect a decreased useful life resulting from accelerating technology changes. The depreciable life for additions of this type was 5 years in 1994 and years prior. Computer software is being depreciated using a 5 year life. Expenditures for property, plant and equipment are reflected as construction work-in-progress until they are placed into service. The type and nature of the costs capitalized include only costs from unrelated third parties for equipment and installation. Maintenance and repairs are expensed as incurred. Replacements and betterments which extend the useful life of an asset are capitalized in the property accounts. Retirements are removed from property accounts at cost and the related depreciation is removed from the accumulated depreciation accounts. Gains or losses on dispositions of property and equipment are reflected in other income (expense), net in the consolidated statements of income (loss). 4. INVENTORIES FIFO cost of inventories approximates replacement cost and exceeds LIFO inventory by $7,923,000, $8,597,000, and $7,616,000 in 1996, 1995 and 1994, respectively. Inventories reflected at LIFO cost were as follows: December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ------------ Finished goods $5,327,940 $4,958,614 $6,526,239 Work-in-process 8,171,868 6,182,505 7,816,878 Raw material 279,207 241,939 235,941 ----------- ----------- ------------ Total Inventory $13,779,015 $11,383,058 $14,579,058 ----------- ----------- ------------ ----------- ----------- ------------ 24 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The cost of materials, direct labor and manufacturing overhead associated with the production of inventories is included in the valuation of inventory. During 1995, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of 1995 purchases. The effect of this liquidation increased net income by approximately $480,000 or $3.87 per share of common stock in 1995. 5. INCOME TAXES The provision (benefit) for income taxes consisted of the following:
Years Ended December 31 --------------------------------------- 1996 1995 1994 ---------- ------------ ----------- U.S. Federal - Current $ 686,229 $(1,293,028) $1,688,594 Deferred 1,101,944 (646,845) (1,847,248) Foreign - Current 144,207 203,810 12,880 Deferred -- 4,902 17,694 State - Current 563,205 (515,232) 462,885 Deferred 97,350 (113,008) (139,546) ---------- ------------ ----------- $2,592,935 $(2,359,401) $195,259 ---------- ------------ ----------- ---------- ------------ -----------
Earnings (loss) before income taxes were as follows: Years Ended December 31 --------------------------------------- 1996 1995 1994 ---------- ------------ ----------- Domestic $5,704,209 $(7,060,863) $2,335,442 Foreign 343,339 496,964 67,972 ---------- ------------ ----------- $6,047,548 $(6,563,899) $2,403,414 ---------- ------------ ----------- ---------- ------------ ----------- 25 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effective income tax rate varied from the U.S. Federal statutory rate for the following reasons:
Years Ended December 31 --------------------------------------- 1996 1995 1994 ---------- ------------ ----------- 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 7.2 (6.3) 8.8 Foreign tax credit (7.4) - (27.3) Foreign income taxes 0.5 0.6 0.3 Alternative minimum tax credits and research and development tax credits - - (10.8) Nondeductible expenses 7.5 5.5 5.0 Other 1.1 (1.7) (1.9) ---------- ------------ ----------- Effective rate of tax provided (benefited) 42.9% (35.9)% 8.1% ---------- ------------ ----------- ---------- ------------ -----------
At December 31, 1996, the Company had $605,000 of unutilized foreign tax credits. Of this amount, approximately $158,000 must be used by 1998; the balance expires in 2001. The Company believes these foreign tax credits will be utilized during the carryover period and thus has recorded the benefit of the credits as a reduction to the provision for income taxes for the year ended December 31, 1996. The Company also has alternative minimum tax credits available to offset future U.S. tax obligations. These credits have no expiration date and were generated as a result of the carryback of the 1995 net operating loss to 1992 and 1993. The benefit of the balance of these credits of $147,000 has been reflected as a reduction to the provision for income taxes for the year ended December 31, 1996. 26 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 ----------------------------------- 1996 1995 ---------- ----------- Current deferred income taxes: Vacation accrual $819,419 $768,760 Inventory capitalized for tax purposes, expensed for book purposes 228,699 209,286 Current portion of pension and qualified retirement benefit obligations 692,502 625,097 Restructuring accrual 398,029 1,382,926 Medical claims accrual 213,679 301,547 Inventory reserve 119,820 119,820 Current portion of foreign tax credit 202,990 307,467 Current portion of AMT credit 147,155 287,037 Warranty accrual 265,956 -- Other 136,343 237,638 ---------- ----------- $3,224,592 $4,239,578 ---------- ----------- ---------- ----------- Noncurrent deferred income taxes: Excess tax over book depreciation $(3,811,799) $(4,366,125) Noncurrent portion of foreign tax credit 401,769 508,612 Noncurrent portion of AMT credit -- 345,788 Noncurrent portion of pension and qualified retirement benefit obligations 1,094,384 1,337,114 Other 10,381 53,654 ---------- ----------- $(2,305,265) $(2,120,957) ---------- ----------- ---------- -----------
27 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LICENSE AGREEMENT Under the terms of a 1928 license agreement between Lock and its parent companies (Universal and Best), Lock agreed to issue a companion share of stock to Universal for each share of voting stock sold or otherwise disposed of during the full period of the corporate existence. 7. DEBT The Company has an agreement with a financial institution for letters of credit available primarily for issuance to a foreign vendor. At December 31, 1996, the Company had no outstanding letters of credit. The Company entered into a $25.0 million line of credit agreement on February 15, 1995, which was amended effective December 31, 1996 and December 31, 1995. The agreement expires on May 5, 1998 and bears interest at a variable rate, based upon the prime rate or LIBOR, at the Company's election. The line of credit is secured by a blanket lien on all accounts and notes receivable, inventory, machinery and equipment, and intangible assets with a negative pledge on real estate. The agreement contains financial covenants including those relating to debt service coverage, tangible net worth, and liabilities to tangible net worth. As of December 31, 1996, the Company was in compliance with all required covenants. 8. STOCK BONUS PLAN The Best Lock Corporation Stock Bonus Plan (Stock Bonus Plan) is available to Lock employees meeting certain eligibility requirements. The Stock Bonus Plan is noncontributory and is qualified pursuant to the applicable provisions of the Internal Revenue Code. Lock did not contribute to the Stock Bonus Plan in 1996, 1995, and 1994. Contributions are determined by Lock's Board of Directors. Plan participants, upon reaching certain eligibility requirements, may receive cash or shares of Lock, Universal and/or Best common stock. In the event the participants elect or are required to receive shares, the participants have the right to require Lock to repurchase such shares in cash at its fair market value. As a result, the fair market value of the shares, determined based on an independent appraisal, held by the Stock Bonus Plan, has been reflected in the accompanying consolidated balance sheets as "Common stock and common stock of Universal, redeemable under Stock Bonus Plan." The Stock Bonus Plan was amended in 1996 to allow 1996 retirees to receive distributions earlier than the plan previously provided. The accelerated payout for the 1996 retirees is based on a formula which considers age and years of service. On December 28, 1995, Lock purchased all of the common stock of Best held by the Stock Bonus Plan at an independently appraised value as of December 27, 1995, of $29.74 per share. The purpose of this transaction was to provide liquidity to the Stock Bonus Plan in anticipation of payments out of the plan pursuant to the early retirement plan discussed in Note 14. 28 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SEGMENT REPORTING The Best Lock Companies are engaged in the manufacture and sale of access control products and services only, and as such do not report on a segment basis. Sales outside the U.S. amounted to approximately 6% of total sales during 1996 and 1995 and 7% of total sales during 1994. 10. RETIREMENT PLANS Effective September 1, 1989, the Company adopted a noncontributory defined benefit Employees' Pension Plan (the Plan) to provide retirement benefits to substantially all current and retired U.S. employees as of September 1, 1989. The Company has received a favorable determination letter for the Plan from the Internal Revenue Service. The Plan provides benefits for past service only. The monthly benefit is based on the employee's years of service and compensation as of September 1, 1989. The benefits for retired employees were based upon amounts specified in the Plan. Under the Plan's provisions, all participants were 100% vested at September 1, 1989. Normal retirement age is 65 with provisions for earlier retirement with reduced benefits. After several years of accelerated funding, the Company is currently making quarterly contributions to the Plan in amounts necessary to meet minimum governmental funding requirements. Company contributions are made to a trust fund whose assets consist of investments in high-quality short-term money market instruments. A summary of the components of net periodic pension cost in 1996, 1995 and 1994 for the Plan follows: 1996 1995 1994 --------- -------- -------- Interest cost on projected benefit obligation $557,686 $691,987 $230,566 Actual return on plan assets (277,736) (351,395) (198,724) Net amortization and deferral (204,119) -- -- --------- -------- -------- Net periodic pension costs $75,831 $340,592 $31,842 --------- -------- -------- --------- -------- -------- Plan assumptions in 1996, 1995 and 1994 were: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . 8.0% Expected long-term rate of return on Plan assets. . . . . . . 8.0% 29 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the Plan's funded status and amounts recognized in the consolidated balance sheet at December 31, 1996: Actuarial present value of benefit obligation $7,631,924 Plan assets at fair value 6,298,993 ---------- Projected benefit obligation in excess of plan assets 1,332,931 Unrecognized net gain (loss) (376,747) Prior service cost not yet recognized (164,879) Remaining net asset at transition 259,065 Intangible asset 164,879 Charge to equity 117,682 ---------- Net pension liability $1,332,931 ---------- ----------
In addition to the Plan adopted on September 1, 1989, the Company executed supplemental retirement benefit agreements with certain retirees and officers. For financial reporting purposes, the actuarial present value (discounted at 8%) of the benefits to be provided under the terms of these agreements were recognized in 1989 and subsequent years. Prior to 1995, the agreement with the Company's former President was amortized over his estimated remaining service life. Effective in 1994, the actuarial present value of the benefit to be provided to the Company's former President under the terms of the agreement was fully recognized. This change in assumptions resulted in an increase in 1994 expense of approximately $800,000. The benefits under these agreements will be paid monthly by the Company over the lifetime of the recipients and, upon their death, 50% of the scheduled amount for the lifetime of the surviving spouse. A summary of the components of net periodic pension cost in 1996, 1995 and 1994 for the supplemental retirement benefit agreements follows:
1996 1995 1994 -------- -------- ---------- Interest cost on projected benefit obligation $226,858 $356,758 $1,030,833 Actual return on plan assets -- -- -- Net amortization and deferral 4,325 -- -- -------- -------- ---------- Net periodic pension costs $231,183 $356,758 $1,030,833 -------- -------- ---------- -------- -------- ----------
30 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Supplemental retirement benefit agreement assumptions in 1996, 1995 and 1994 were: Discount rate. . . . . . . . . . . . . . . . . . . . . 8.0% Expected long-term rate of return on assets. . . . . . 8.0% The following table sets forth the funded status of the supplemental retirement benefit agreements and amounts recognized in the consolidated balance sheet at December 31, 1996: Actuarial present value of benefit obligation $2,991,444 Plan assets at fair value 114,311 ----------- Projected benefit obligation in excess of plan assets 2,877,133 Unrecognized net gain (loss) (153,170) Remaining net asset (obligation) at transition (34,596) Intangible asset 34,596 Charge to equity 153,170 ----------- Net pension liability $2,877,133 ----------- ----------- A summary of the retirement benefit obligations included in the consolidated balance sheets is presented below: 1996 1995 ---------- ---------- Defined Benefit Employees Pension Plan $1,332,931 $1,777,989 Supplemental Retirement Benefit Agreements 2,877,133 3,035,429 Other 368,453 419,358 ---------- ---------- $4,578,517 $5,232,776 ---------- ---------- ---------- ---------- Current Portion $1,365,118 $1,362,431 Noncurrent Portion 3,213,399 3,870,345 ---------- ---------- $4,578,517 $5,232,776 ---------- ---------- ---------- ---------- The Company implemented a 401(k) profit sharing plan (the 401(k) Plan) during 1994. Employees are eligible after reaching age 21 and completing one year of continuous service as of the enrollment dates each year. Employer contributions to the 401(k) Plan are determined by the Company's Board of Directors. Participants begin vesting in the employer contributions after 1 year of service at which time they are 20% vested. Employees become 100% vested after 5 years of service. Company contributions to the 401(k) Plan amounted to $541,000, $571,000 and $221,000 in 1996, 1995 and 1994, respectively. 31 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. CONTINGENCIES From time to time the Company is a party to litigation incidental to its business. Management is of the opinion that the ultimate resolution of known claims will not have a material adverse impact on the Company's financial position or results of operations. The Company leases various office and warehouse facilities and other vehicles under noncancelable lease arrangements. Lease terms are from one to ten years and most provide options to renew. Future minimum lease payments under noncancelable operating leases as of December 31, 1996 are as follows: Amount ---------- 1997 $ 991,592 1998 774,249 1999 452,072 2001 223,066 2001-2005 448,784 ---------- $2,889,763 ---------- ---------- Rent expense charged to operations totaled $956,413, $761,024 and $852,565 in 1996, 1995, and 1994, respectively. 12. UNDISTRIBUTED EARNINGS In general, it is Lock's intention to reinvest the earnings of its foreign subsidiary in its operations and to repatriate these earnings only when it is advantageous to do so. Also, it is Universal's and Best's intention to minimize, if not eliminate, any income taxes associated with amounts distributed by its domestic subsidiaries. As a result, it is expected that the amount of income taxes resulting from a repatriation will not be significant. Accordingly, deferred tax amounts are not being recorded related to undistributed earnings. The cumulative amounts of undistributed earnings on which income taxes have not been recognized are as follows: December 31 ----------- ----------- 1996 1995 ----------- ----------- Best $17,436,000 $15,607,000 Universal 21,920,000 19,954,000 Lock 2,056,000 1,934,000 32 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated statements of income (loss) and balance sheet for the prior years to conform to the current year presentation. 14. RESTRUCTURING During 1995, the Company recorded a restructuring charge of $3.1 million in connection with the announcement of a board approved early retirement, voluntary and involuntary separation plan. The Company's plan was to reduce the number of employees in all divisions and centralize certain functions in the distribution division. As of December 31, 1996, 63 employees had separated or agreed to separate under the voluntary separation or early retirement provisions of the plan. In conjunction with the acceptances, the Company accrued approximately an additional $1 million in restructuring expenses during 1996, due to the additional expenses associated with voluntary separation and early retirement. The total number of anticipated separations was reduced from approximately 340 in the original plan to 63, resulting in an approximate $1.8 million reduction in the reserve. The number of anticipated separations was reduced due to a change in the management of the sales and marketing areas of the Company, which resulted in a revision to the plan to eliminate positions in those areas. 15. PARTNERSHIP INTEREST On February 15, 1995, the Company settled all claims arising from a derivative action threatened against it by a director, as well as all claims against Lock's Chief Executive Officer and another officer. The material components of the settlement included: (i) the resignation of Walter E. Best from the Board of Directors and as President of each of Lock, Universal, Best, and Walter E. Best Company, Inc.; (ii) the resignation of Richard E. Best and Marshall W. Best as officers and employees of Lock and the resignation of Robert W. Best and Marshall W. Best as officers and employees of Lock and the resignation of Robert W. Best as an employee; (iii) the payment of the total sum of $2,134,349 as severance, vacation and bonus payments to Walter E. Best, Robert W. Best, Rich E. Best, Marshall W. Best and Edwina McLemore, an employee of Lock; (iv) the payment of the total sum of $1,240,000 in exchange for covenants not to compete from Walter E. Best, Robert W. Best, Richard E. Best and Marshall W. Best; and (v) the payment of the total sum of $8,178,296 for the acquisition of shares of Lock and interests in a partnership as described below. On February 15, 1995, Lock purchased for cash an 87% non-voting interest in a partnership for $5,582,626. The purpose of the partnership, which was newly formed, is to acquire and hold securities for investment purposes. The partnership purchased directly or indirectly 204,053 shares of Best common stock, 8,787 shares of Universal Series A common stock and 11.25 shares of Universal preferred stock. In addition, Lock acquired 6,742 shares of its own common stock at an appraised value of $385.00 per share or $2,595,670. Lock's acquisition of its interest in the partnership and its redemption of its own common shares were funded through the utilization of a portion of the line of credit of $25,000,000 as discussed in Note 7. 33 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company accounted for the purchase of the Lock shares and the 87% partnership interest as treasury stock, which resulted in a reduction to shareholders' equity of Lock of $8,178,296, Universal of $5,582,626 and Best of $5,077,403. As a result of these transactions, the minority interest of Universal decreased from 27% to 23% and the minority interest of Best decreased from 22% to 21%. During 1995, in addition to the above transactions, the Company acquired shares of Lock, Universal and Best which were accounted for as treasury stock. This treatment resulted in a reduction to shareholders' equity of Lock of $5,848,082, Universal of $4,773,932 and Best of $3,869,643. As a result of these transactions, the minority interest of Universal decreased from 23% to 21% and the minority interest of Best decreased from 21% to 17%. 16. RELATED PARTY TRANSACTIONS On May 5, 1994, Lock's Board of Directors approved a loan of $3.4 million to Russell C. Best, Chief Executive Officer, under the terms of an Employment Agreement entered into by Lock and Russell C. Best. On May 18, 1994, $3.4 million was borrowed, with interest at 7.2%, by Russell C. Best. The terms of the loan include repayment over a thirty (30) year period in equal annual installments of principal and interest totaling $279,519. The Company entered into a split dollar life insurance agreement as of December 29, 1995 with a trust established by Russell C. Best, pursuant to which the Company and the trust will share in the premium costs of a whole life insurance policy that has a face value death benefit of $5,000,000. Under the agreement, the Company will pay approximately $55,000 each policy year for the first 15 years of the policy. The Company is not obligated to make its share of the annual premium. Only the trustee may cancel or surrender the policy. Upon the death of Mr. Best, the Company will receive the cumulative amount of its premium payments. Prior to Mr. Best's death and prior to the 30th year of the policy, upon cancellation or surrender of the policy, the Company will receive the lesser of its cumulative premium payments or the cash surrender value of the policy. To the extent the policy is not canceled or surrendered in its first 30 years, the Company will receive its cumulative premium payments in the 30th year of the policy. Walter E. Best, former President of the Company, is the President and owns in excess of 10% of the stock of Best Aircraft Corporation. The Company leased automobiles from Best Aircraft Corporation during 1995 and 1994, paying $30,030 and $183,470 for such services, respectively. Larry W. Rottmeyer, employed during 1994, became a Director and Vice President of the Company during 1995. Mr. Rottmeyer resigned as a Director on February 26, 1996 and was removed as a Vice President on March 5, 1996. During Mr. Rottmeyer's employment, he was also a Director and a greater than 10% equity owner of Marcon, Inc. until June 9, 1995. The Company purchased market research services from Marcon, Inc., during 1995, paying $547,942 for such services. Eric M. Fogel, Director from October 30, 1995 until March 1, 1996, is a partner in the law firm of Holleb & Coff. The Company paid Holleb & Coff $438,399 and $112,221 in 1996 and 1995 for legal services. 34 BEST LOCK COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. REDEMPTION OF BEST UNIVERSAL LOCK CO. STOCK On July 1, 1995, Universal redeemed all 63 shares of its outstanding preferred stock at $105 per share plus cumulative dividend, for a total of $7,056. 18. OUTSTANDING SHARES The number of outstanding shares of Universal and Best used in the calculation of earnings per share differs from the number of outstanding shares shown on the cover page of the 10-K for each of the two companies. The cover page of the 10-K reflects all shares legally outstanding. The earnings per share disclosures reflect as treasury stock shares held by subsidiaries of Universal and Best that are still legally outstanding, in accordance with generally accepted accounting principles. 35 SCHEDULE II BEST LOCK COMPANIES BEST LOCK CORPORATION AND SUBSIDIARY BEST UNIVERSAL LOCK CO. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES FRANK E. BEST, INC. (A NONOPERATING HOLDING COMPANY) AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS - CORPORATE AND CONSOLIDATED FOR THE YEARS ENDED DECEMBER 31, 1996 THROUGH 1994
- ----------------------------------------------------------------------------------------------------------------------------------- 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. - 1996 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Best Universal Lock Co. - 1995 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Best Universal Lock Co. - 1994 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Frank E. Best, Inc. - 1996 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Frank E. Best, Inc. - 1995 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Frank E. Best, Inc. - 1994 $ - $ - $ - $ - $ - ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- CONSOLIDATED (Best Lock Corporation and Subsidiaries) Allowance for uncollectible accounts receivable - 1996 $ 263,559 $ 128,006 $ 41,820 $ (188,519) $ 244,866 ------- ------- ------- --------- ------- ------- ------- ------- --------- ------- Allowance for uncollectible accounts receivable - 1995 $ 244,829 $ 117,417 $ 28,522 $ (127,209) $ 263,559 ------- ------- ------- --------- ------- ------- ------- ------- --------- ------- Allowance for uncollectible accounts receivable - 1994 $ 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.
36 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, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------------------------- Name of Issuer and Title of Issue 1996 1995 1994 - --------------------------------- ------------ ------------ ------------ 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 $ 15,607,328 $ 28,142,427 $ 27,382,921 Equity in net income of subsidiary consolidated 2,412,249 (3,212,290) 1,175,699 Distribution of earnings by subsidiary (333,000) (330,000) (327,000) Additional minimum liabitlity for pension (178,939) - - Transfer of minority interests' proportionate share (38,622) (38,622) (38,621) Amortization of basis difference 119,735 - - Change in cumulative translation adjustment (62,276) 23,182 (50,572) Change in treasury stock (90,351) (8,977,369) - ------------ ------------ ------------ Balance, December 31 $ 17,436,124 $ 15,607,328 $ 28,142,427 ------------ ------------ ------------ ------------ ------------ ------------
37 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. Russell C. Best, 35, holds the position of Director, Chief Executive Officer and President. He has served as a director since 1991. Mariea L. Best, 33, Director, has served in this position since 1995. Gregg A. Dykstra, 40, served as Director and Vice President until February 17, 1997 when he resigned his officer and director positions. He has served as a director since 1995. All directors serve until the next annual meeting or until their successor is elected and qualified. (b) IDENTIFICATION OF EXECUTIVE OFFICERS. Russell C. Best, 35, has served as Chief Executive Officer since 1994 and as President since 1995. Gregg A. Dykstra, 40, served as Vice President from 1995 until February 17, 1997, when he resigned his officer position. Mark G. Ahearn, 42, has served as Secretary since 1996. Stephen J. Cooper, 49, has served as Treasurer since 1996. Paula J. Tinkey, 39, has served as Controller since 1996. All officers serve until their successor is appointed. (c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES. None. (d) FAMILY RELATIONSHIPS. Mariea L. Best is the spouse of Russell C. Best. (e) BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS DURING THE PAST FIVE YEARS. (1) Russell C. Best, President/Chief Executive Officer and Director, has served registrant and Best Universal Lock Co. as President since 1995; prior thereto Vice President of registrant and Best Universal Lock Co. since 1990; Chairman of the Board of Lock since March 1995; President of Lock since February 15, 1995; CEO of Lock since May, 1994; Executive Vice President of Lock from June 1992 to May 1994; Marketing Director of Lock from 1989-1992; Director of registrant, Best Universal Lock Co. and Lock since 1991. Mariea L. Best, Director, has served as a Director of registrant since 1995; Vice President of registrant and Best Universal Lock Co. since 1995; sole shareholder and president of Best Event and Travel, Inc. from 1991-1994; Special Event Coordinator for Wiersma from 1987-1990; Director of registrant, Best Universal Lock Co. and Lock since 1995. Gregg A. Dykstra, Vice President, has served registrant and Best Universal Lock Co. in this capacity since May 1996 until February 17, 1997; Secretary of registrant and Best Universal Lock Co. from March 1995 to April 1996; Treasurer of registrant, Best Universal Lock Co. and Lock from March 1995 to March 1996; Secretary of Lock from March 1995 to October 1995; Vice President of Lock since 1995 until February 17, 1997; General Counsel of Lock 38 from November 1989 to July 1995; Director of registrant, Best Universal Lock Co. and Lock since 1995 until February 17, 1997. Mark G. Ahearn, Secretary, has served Lock as General Counsel since July of 1995; Secretary of registrant and Best Universal Lock Co. since April 1996; Secretary of Lock since March 1996; Associate Counsel for Lock from April 1994 to July 1995; Staff Attorney for Lock from August 1992 to April 1994; self employed private legal practice from July 1991 to August 1992; State Director for United States Senator Dan Coats of Indiana from January 1989 to June 1991. Stephen J. Cooper, Treasurer, has served registrant, Best Universal Lock Co. and Lock as Treasurer since March of 1996; Senior Manager of Finance of Lock from June 1992 to March 1996; Controller of Lock from October 1986 to June 1992. Paula J. Tinkey, Controller, has served registrant, Best Universal Lock Co. and Lock as Controller since May of 1996; Manager of General Accounting of Lock from June 1992 to May 1996; Manager of Accounting for Hook Drugs Division, Hook-SupeRx, Inc. from April 1987 to April 1992. (2) Directorships. Russell C. Best, who was a Director of registrant thorough December 31, 1996, was also a Director of Best Lock Corporation and Best Universal Lock Co. through December 31, 1996. Mariea L. Best and Gregg A. Dykstra became Directors of registrant, Best Lock Corporation and Best Universal Lock Co. in 1995. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. To the knowledge of the registrant, none of the directors within the previous five years has filed a petition under the Bankruptcy Act or any state insolvency law nor was a receiver, fiscal agent or similar officer appointed for such persons or any partnership in which they may have been general partners or any corporation of which they were executive officers. Furthermore, to the knowledge of the registrant no director or executive officer has been convicted in a criminal proceeding (except traffic violation or other minor offense) or is subject to a criminal proceeding presently pending, nor to the knowledge of management is any director subject to any order, judgment or decree by any Court of competent jurisdiction, permanently or temporarily enjoining such director from acting as an investment adviser, underwriter, broker or dealer in securities or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company or from engaging in or conducting any conduct or practice in connection with such activity or in connection with the purchase or sale of any security. 39 ITEM 11. EXECUTIVE COMPENSATION. (a) COMPENSATION. The information in the following table discloses all remuneration paid to the Chief Executive Officer and the other most highly compensated executive officers or directors of registrant whose total annual salary and bonus exceeds $100,000, for services in all capacities to the registrant and its subsidiary during the fiscal years ended December 31, 1996, 1995 and 1994, all of such remuneration having been paid by Lock. (b) SUMMARY COMPENSATION TABLE
Name & Principal ---------------- Position Year Total Salary(3) Total Bonus(4) Total Other(5) -------- ---- --------------- -------------- -------------- Russell C. Best 1996 $629,942 $ 0 $138,945 Chief Executive Officer 1995 597,745 0 96,487 1994 406,657 343,665 13,562 Gregg A. Dykstra(1) 1996 265,196 0 19,093 Vice-President 1995 260,687 100,000 9,581 1994 155,832 11,475 7,760 Larry W. Rottmeyer(2) 1996 210,794 0 8,655 Vice-President 1995 273,986 100,000 10,565 1994 41,539 270 43
(1) Resigned as an officer effective February 17, 1997. (2) Removed as an officer effective March 5, 1996. (3) In the case of Russell C. Best, the salary amount includes $735 and $7,867 in taxes paid by the Company on the value of a trip paid by the Company in 1996 and 1995, respectively. In the case of Gregg A. Dykstra, the salary amount includes an auto stipend of $11,380 and $11,577 in 1996 and 1995, respectively. The 1996 salary amount for Gregg A. Dykstra also includes $735 in taxes paid by the Company on the value of a trip paid by the Company. The 1995 salary amount for Gregg A. Dykstra also includes an amount equal to $80,033 as a retroactive base pay adjustment for 1995 which was paid in 1996. In the case of Larry W. Rottmeyer, the salary amount includes an auto stipend of $3,602 and $17,300 in 1996 and 1995, respectively, and $735 and $7,228 in taxes paid by the Company on the value of a trip paid by the Company in 1996 and 1995, respectively. The 1995 salary amount for Larry W. Rottmeyer also includes an amount equal to $64,584 as a retroactive base pay adjustment for 1995 which was paid in 1996. (4) In 1995, the bonus payments were discretionary and were paid in 1996 in recognition of services provided in 1995. In the case of Russell C. Best, the bonus amount for 1994 includes an amount equal to $340,000 in recognition of services provided in calendar year 1994, payable in accordance with the employment agreement between the Company and Mr. Best. In 1994, the bonus payments consisted of a flat base amount plus a percentage based on the employee's achievement of certain business objectives. (5) In the case of Russell C. Best, this amount includes the value of group term life premiums in excess of $50,000 ($746, $920, and $459 respectively, in 1996, 1995 and 1994), the annual lease value of his company vehicle ($15,250, $16,449, and $12,316 respectively, in 1996, 1995 and 1994), the amount paid by the Company for tax return preparation and legal fees on his behalf ($7,268, $14,882, and $787 respectively in 1996, 1995 and 1994), contributions by the Company to the 401(k) 40 plan on his behalf ($3,000 each in 1996 and 1995), $10,130 and $317 in disability insurance premiums paid on his behalf in 1996 and 1995, respectively, $547 in spousal travel paid by the Company in 1995, $3,100 and $11,205 in value of a trip paid by the Company in 1996 and 1995, respectively, $5,000 in value of a home security system paid by the Company on his behalf in 1996, and $94,451 and $49,168 in 1996 and 1995, respectively, reflecting the present value of the economic benefit of the portion of a split dollar life insurance premium paid by the Company, based on the time period between the date the premiums were paid and December 29, 2025, the earliest date the Company could receive a refund, without interest, of the premium paid. In the case of Gregg A. Dykstra, this amount includes the value of group term life premiums in excess of $50,000 ($436, $149, and $218 respectively, in 1996, 1995 and 1994), the annual lease value of his company vehicle ($6,100 each in 1995 and 1994), the excess of market value over purchase price of his company vehicle of $12,557 in 1996, the value of spousal travel paid by the Company ($332 in 1995), $3,100 in value of a trip paid by the company 1996, the amount paid by the Company for tax return preparation fees on his behalf ($375 in 1994), and contributions by the Company to the 401(k) plan on his behalf ($3,000, $3,000 and $1,067 respectively in 1996, 1995 and 1994). In the case of Larry W. Rottmeyer, this amount includes the value of group term life premiums in excess of $50,000 ($340, $190 and $43 respectively, in 1996, 1995 and 1994), the excess of market value over purchase price of a computer purchased by the company of $1,720 in 1996, $332 in spousal travel paid by the Company in 1995, $3,100 and $10,043 in value of a trip paid by the Company in 1996 and 1995, respectively, and contributions by the company to the 401(k) plan on his behalf of $699 in 1996. (c) COMPENSATION PURSUANT TO PLANS. (1) The Best Lock Corporation Stock Bonus Plan is a qualified noncontributory defined contribution plan available to all employees above the age of 21 with one year of full-time service. Voluntary contributions by Lock to the plan are made upon the authority of the Board of Directors, and are allocated on the basis of annual compensation and years of service. The funds of the Plan are to be invested primarily in securities of the Registrant or its affiliates. Amounts are distributed from the Plan upon the resignation, retirement, termination, or death of the employee in accordance with Plan provisions. Employer contributions for the account of the individuals named in the Summary Compensation Table are less than $50,000 in each year presented. (2) Russell C. Best, along with other employees, participates in a qualified noncontributory defined benefit pension plan approved by Lock's Board of Directors in 1989. The monthly benefit payable thereunder is based on the employee's compensation and years of past service as of September 1, 1989. Normal retirement age is 65, with provisions for earlier retirement with reduced benefits. Such payments are to be made for their lifetime, following which 50% of the monthly amount will be provided for the lifetime of a surviving spouse. The monthly benefit payable to Russell C. Best under this Plan is $490. (d)(e)(f) OTHER COMPENSATION. There was no other compensation paid to the named individuals exceeding 10% of the compensation reported for such individual. (g) COMPENSATION OF DIRECTORS. Directors are paid $5,000 per calendar year for services rendered, effective April 1, 1995. (h) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENT. On May 5, 1994, Lock and Russell C. Best entered into an Employment Agreement (the "Agreement") pursuant to which Russell C. Best assumed the duties of Chief Executive Officer of Lock. The initial term of the Agreement expires December 31, 1998; however, the term is automatically extended by one additional year on December 31 of each year unless earlier terminated such as by notice by either party to the other at least thirty (30) days prior to December 31 of such year. 41 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 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The following information is given as of February 7, 1997. 42
(1) (2) (3) (3) (4) Title of Name and Type of Amount Percent Class Address Ownership Owned of Class ----- ------- --------- ----- -------- Common stock, Russell C. Best Of Record 317,364.00 (1) 71% $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 7, 1997: 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) 317,364.00(1) 71% (Owned by Mariea L. Best, Director and Vice President) 1.00 0% (Owned by Gregg A. Dykstra, Director and Vice President)(2) 1.00 0% (Owned by Directors and Officers of regis- trant, as a group, 3 in number) 317,366.00 71% Series A, common stock, no par value, of Best Universal Lock Co., (registrant's subsidiary) (Owned by Russell C. Best, Director and President) 38,176.00(3) 57% (Owned by Mariea L. Best, Director and Vice President) 1.00 0% 43 (Owned by Gregg A. Dykstra, Director and Vice President)(2) 27,263.00(3) 41% (Owned by Directors and Officers of the registrant, as a group, 3 in number) 38,178.00 57% Series B, common stock, no par value, of Best Universal Lock Co., (registrant's subsidiary) (Owned by Russell C. Best, Director and President) 300,000.00(4) 100% Common stock, no par value, of Lock, (registrant's subsidiary) (Owned by Russell C. Best, Director and President) 107,779.53(5) 89% (Owned by Mariea L. Best, Director) 1.00 0% (Owned by Gregg A. Dykstra, Director and Vice President) 10,537.19(5) 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. (2) Gregg A. Dykstra resigned his Director and Vice President positions effective February 17, 1997. (3) This figure represents the named individual's direct and beneficial ownership by virtue of his power to vote or to direct the voting of shares held in his own name (or in the case of Russell C. Best, 8,787 shares owned by Best Lock Partnership), and shared power to direct the disposition of 27,262 shares held by the Best Lock Corporation Stock Bonus Plan. (4) This figure represents Russell C. Best's beneficial ownership by virtue of his power to vote or to direct the voting of 300,000 shares held by the registrant, of which he has voting control. (5) This figure represents the named individual's direct and beneficial ownership by virtue of his power to vote or to direct the voting of shares held in his own name (or in the case of Russell C. Best, 95,556.34 shares owned by 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% 44 shareholders, the following sets forth certain information concerning Section 16(a) reporting delinquencies by the above-referenced persons during the Corporation's most recently completed fiscal year. With respect to Section 16(a) of the Exchange Act, the following insider filings were delinquent: Mark G. Ahearn, Form 3; Paula J. Tinkey, Form 3; Best Lock Corporation, Form 5. 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 $438,399 in 1996 and $112,221 in 1995 for legal services. (c) Indebtedness of management. There was no indebtedness to the registrant at any time since the beginning of the registrant's last fiscal year in an amount in excess of $60,000 by any (1) executive officer, director, nominee for director, or immediate family member of the preceding; (2) 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. 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 1996. Exhibits are omitted because they are not required or because the required information is included in the notes to consolidated financial statements. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized and representing a majority of the Board of Directors. Date: March 31, 1997 FRANK E. BEST, INC. By: /s/ Russell C. Best By: /s/ Mariea L. Best --------------------- ------------------- Russell C. Best Mariea L. Best Chief Executive Officer Director and Director By: /s/ Paula J. Tinkey --------------------- Paula J. Tinkey Controller Principal Accounting Officer 46 INDEX TO EXHIBITS EXHIBIT 3(ii) Bylaws 21 Subsidiaries (incorporated by reference in Note 1 to the consolidated financial statements) 27 Financial Data Schedule 47 EX-3.(II) 2 EXHIBIT 3(II), BYLAWS AMENDED AND RESTATED BYLAWS OF FRANK E. BEST, INC. 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 COMMITTEES . . . . . . . . . . . . . . . . . 9 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 3.16.5 RESIGNATION . . . . . . . . . . . . . . . . . . . . . . . 10 3.16.6 REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.17 COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 10 i 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 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.6 CHIEF EXECUTIVE OFFICER. . . . . . . . . . . . . . . . . . . . . 11 4.7 VICE PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.8 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.9 TREASURER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.10 CONTROLLER . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 ii AMENDED AND RESTATED 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 at such date, time and location as the Board may designate, 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. 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. 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 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. 3 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. 4 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. 5 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 no fewer than three and no more than eleven 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. 6 3.4 ANNUAL AND REGULAR MEETINGS. An annual Board meeting shall be held at such date, time, and location as the board may designate. 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, 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. 3.7.1 PERSONAL 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. 3.7.2 DELIVERY 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. 7 3.7.3 DELIVERY 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. 3.7.4 FACSIMILE 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. 3.7.5 ORAL 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. 3.8.1 IN 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. 3.8.2 BY 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. 8 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. 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. 9 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, or in accordance with the provisions of Article 2.14 of these Bylaws, 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. 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. 10 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. 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. 11 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. ARTICLE 4. OFFICERS 4.1 APPOINTMENT AND TERM. The officers of the corporation shall be a President, a Chief Executive Officer, one or more Vice Presidents, a Secretary, a Treasurer, a Controller, 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 and remove executive officers. As used herein, the term "executive officer" shall mean the Chief Executive Officer, the President, any Vice President, the Secretary, the Treasurer, and the Controller. 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. 12 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. 4.5 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. In the event of the death of the President or his or her inability to act, the member of the Board of Directors with the longest continuous service on the Board of Directors; or in the event of his or her death or inability to act, the Chief Executive Officer; or in the event or his or her death or inability to act, the Vice President who is also the Chief Operating Officer, shall perform the duties of the President, except as may be limited by resolution of the Board of Directors, with all the powers of and subject to the restrictions upon the President. 4.6 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall perform such duties as shall be assigned to him or her by the President or Board from time to time. 13 4.7 VICE PRESIDENT. Vice Presidents shall perform such duties as from time to time may be assigned to them by the President or by or at the direction of the Board. 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. 14 4.10 CONTROLLER The Controller shall be responsible for the preparation and distribution of all financial statements and other such information as may necessarily accompany financial statements both internally to the corporation and to such external entities as are required by law or otherwise, and in general perform all of the duties incident to the Office of Controller 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. 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. 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. 15 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. 6.2 CERTIFICATES FOR SHARES. All stock certificates shall be signed in the name of the corporation by the chairman or vice chairman of the board of directors, or the president or vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary. 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. 16 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. 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: 17 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. 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. 18 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. 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. 19 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. 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. 20 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. The foregoing Bylaws were adopted by the Board on May 31, 1996. FRANK E. BEST, INC. /s/ Russell C. Best ------------------- Chairman of the Board 21 EX-27 3 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2114084 0 18081949 244866 13779015 37421103 61670156 35515151 67915682 15049122 15000000 0 0 676682 16607614 67915682 122358592 122358592 64006688 115388160 1891100 128006 1194986 5031302 2592935 2486397 0 0 0 2486397 9.04 9.04
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