<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 COMMISSION FILE NUMBER 0-23630
FIRST ALERT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3157075
- --------------------------------------------- -----------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION
OR ORGANIZATION) NUMBER)
3901 LIBERTY STREET ROAD, AURORA, ILLINOIS 60504
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(630) 851-7330
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
--- ---
AT NOVEMBER 6, 1996, THERE WERE 24,183,116 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 20
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FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
--------------------------------------------------
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. FINANCIAL STATEMENTS
<S> <C> <C>
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1996 (UNAUDITED) AND
DECEMBER 31, 1995........................................... 3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1995................................. 4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE NINE
MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995............. 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS............... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 10
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................ 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 19
SIGNATURES...................................................................... 20
</TABLE>
<PAGE> 3
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION> September 30, December 31,
1996 1995
-------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,199 $ 2,387
Accounts receivable, less
allowance for doubtful accounts of
$3,500 ($3,342 at December 31, 1995) 56,317 62,967
Income tax receivable 7,748 1,340
Inventories (Note 2) 75,244 68,081
Deferred taxes 7,182 7,182
Other assets 3,907 2,479
-------- --------
Total current assets 153,597 144,436
Property, plant and equipment, net of
accumulated depreciation of $20,917
($17,525 at December 31, 1995) 32,821 32,150
Other Assets:
Goodwill, net of accumulated
amortization of $2,655 ($2,178 at December 31, 1995) 22,843 23,320
Other intangibles, net of accumulated amortization
of $2,684 ($2,680 at December 31, 1995) 6,169 7,087
-------- --------
Total assets $215,430 $206,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 13,913 $ 21,586
Accrued expenses 23,854 21,798
Short-term Credit Facility (Note 3) 74,000 32,200
-------- --------
Total current liabilities 111,767 75,584
Long-term Credit Facility (Note 3) -- 20,000
Other long-term liabilities 71 72
Deferred taxes 4,293 4,293
-------- --------
Total liabilities 116,131 99,949
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,183,116 issued and
outstanding as of September 30, 1996, 24,043,116 issued and
outstanding as of December 31, 1995) 242 240
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
September 30, 1996 and December 31, 1995) - -
Paid in capital 71,614 71,137
Stockholder loans (5) (16)
Retained earnings 27,448 35,683
-------- --------
Total stockholders' equity 99,299 107,044
-------- --------
Total liabilities and stockholders' equity $215,430 $206,993
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -----------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $60,860 $72,178 $145,330 $169,912
Operating expenses:
Cost of sales, excluding depreciation 36,584 38,268 99,124 93,155
Selling, general and administrative 18,141 17,559 52,288 49,091
Depreciation and amortization 1,463 1,510 4,430 4,886
------- ------- -------- --------
Operating income (loss) 4,672 14,841 (10,512) 22,780
Other (income) expenses:
Interest expense 1,066 396 2,572 741
Miscellaneous, net (66) (133) 638 (485)
------- ------- -------- --------
Income (loss) before taxes 3,672 14,578 (13,722) 22,524
Income tax provision (benefit) 1,469 5,831 (5,487) 9,010
------- ------- -------- --------
Net income (loss) 2,203 8,747 (8,235) 13,514
Retained earnings, beginning of period 25,245 29,013 35,683 24,246
------- ------- -------- --------
Retained earnings, end of period $27,448 $37,760 $ 27,448 $ 37,760
======= ======= ======== ========
Net income (loss) per share $ 0.09 $ 0.35 $ (0.34) $ 0.54
======= ======= ======== ========
Weighted average shares outstanding 24,611 24,965 24,582 24,885
</TABLE>
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER 30,
----------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
NET (LOSS) INCOME $ (8,235) $ 13,514
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH AND CASH EQUIVALENTS USED IN
OPERATING ACTIVITIES:
Depreciation and amortization 4,430 4,886
Write off of intangible asset 554 --
Decrease (increase) in accounts receivable 6,650 (11,230)
Increase in income tax receivable (6,155) --
Increase in inventories (7,163) (15,933)
Increase in other assets (1,428) (462)
Decrease in accounts payable/accrued expenses (5,617) (9,257)
Other (62) (50)
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
OPERATING ACTIVITIES (17,026) (18,532)
-------- --------
INVESTING ACTIVITIES
- --------------------
Capital expenditures (4,410) (8,592)
Disposal of property, plant & equipment 211 4,146
Other -- (329)
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (4,199) (4,775)
FINANCING ACTIVITIES
- ---------------------------------------------
Proceeds from sale of common stock 226 28
Borrowings under revolving loan 53,600 36,550
Payments under revolving loan (31,800) (12,450)
Proceeds from stockholder loans 11 43
-------- --------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
FINANCING ACTIVITIES 22,037 24,171
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 812 864
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,387 1,131
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,199 $ 1,995
======== ========
INTEREST PAID $ 2,293 $ 781
INCOME TAXES PAID $ 0 $ 11,059
</TABLE>
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands unless otherwise indicated, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated interim financial statements include the accounts of First
Alert, Inc. and its subsidiaries ("the Company"). These financial statements
are unaudited but, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial condition and results of operations of the Company.
The interim consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1995 included in the Company's 1995 Annual Report to Stockholders.
The results of operations for the nine months ended September 30, 1996, are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Certain amounts in the Consolidated Balance Sheet at December 31, 1995 have
been reclassified to conform to the current presentation.
Income Taxes
Income taxes of the Company are accounted for using Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Deferred
income tax assets and liabilities arise from recognition of foreign operating
losses and temporary differences between the income tax basis of assets and
liabilities and their reported amounts in the financial statements.
Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods
computed using the treasury stock method.
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NOTE 2 - INVENTORIES:
The components of inventory are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Raw materials $28,188 $32,423
Work-in-process 6,823 7,451
Finished goods 41,270 33,325
Obsolescence reserve (1,037) (5,118)
------- -------
Total $75,244 $68,081
======= =======
</TABLE>
During the three month period ended December 31, 1995, the Company increased
the obsolescence reserve by $3.5 million due to excessive inventory of first
generation carbon monoxide sensors. These sensors were substantially disposed
of in the nine month period ended September 30, 1996.
NOTE 3 - REVOLVING CREDIT AGREEMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Revolving Credit Facility $74,000 $52,200
Less: Short Term Portion 74,000 32,200
------- -------
Long-Term Revolving Credit Facility $ -- $20,000
======= =======
</TABLE>
On March 28, 1994, BRK Brands, Inc., a wholly owned subsidiary of the Company,
entered into a credit facility (the "Credit Facility") with a lender which
provided a revolving Credit Facility of $70,000 on April 5, 1994. On September
4, 1996, BRK Brands, Inc. amended the Credit Facility to increase the amount
available to be borrowed from $70,000 to $85,000 until January 31, 1997, when
the amount available to be borrowed returns to $70,000. BRK Brands, Inc. also
granted a security interest in all of its assets. In addition, the Company
pledged the stock of BRK Brands, Inc. and THL-FA IP Corp., another wholly owned
subsidiary of the Company, to secure the obligations of the Company under a
guaranty of the obligations of BRK Brands, Inc. to the lenders under the Credit
Agreement. Similarly, Electronica BRK de Mexico, SA de CV, a wholly owned
subsidiary of BRK Brands, Inc. agreed to pledge all of its assets to secure
repayment of advances under the Credit Facility.
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<PAGE> 8
Under the amended Credit Facility, BRK Brands, Inc. is subject to a commitment
fee of 0.35% per annum on the unused portion of the commitment. The amended
Credit Facility carries an interest rate of LIBOR plus 1.5% for amounts up to
$70,000 (LIBOR plus 2.0% for amounts in excess of $70,000) on LIBOR based loan
portion of the Credit Facility and the higher of the lender's corporate
borrowing rate and the Federal Funds Rate plus 0.75% for amounts up to $70,000
(Federal Funds Rate plus 1.25% for amounts in excess of $70,000) on remaining
balances. The Credit Facility matures on March 28, 1999. Additionally, the
agreement contains covenants restricting, among other things, the payment of
dividends, the sale of assets, mergers and acquisitions and requires
maintenance of interest coverage ratios, leverage ratios and a minimum tangible
net worth.
At September 30, 1996, BRK Brands, Inc. was not in compliance with the interest
coverage ratio covenant. The Company is currently working with the lender to
obtain a waiver. There can be no assurance that the Company will be able to
obtain a waiver on terms acceptable to the Company. The Company has included
the revolving credit facility balance as a current liability at September 30,
1996.
NOTE 4 - CONTINGENCIES:
In November 1994, the Company and certain of its officers and directors were
named as defendants in four purported class action lawsuits filed in the United
States District Court for the Northern District of Illinois, Eastern Division.
The plaintiffs in those actions have since, pursuant to a Court order, filed a
consolidated and amended complaint resulting in the consolidation of the four
actions. The consolidated case is entitled Gilbert et al. vs. First Alert,
Inc. et al. ("Gilbert"). The amended complaint seeks compensatory damages,
costs and attorneys' fees on behalf of the purchasers of the Company's Common
Stock during the period from October 12, 1994 through November 10, 1994. By
order dated August 21, 1995, the Court certified the class. Subsequently, the
plaintiff's motion to amend the complaint to expand the class period to
September 20, 1994 through December 7, 1994 was granted and a second
consolidated and amended complaint was filed on January 16, 1996 and the new
class has been certified by the Court. The complaint alleges generally that
the Company and other defendants disseminated false and misleading information
to the investing public regarding the First Alert(R) Carbon Monoxide Detector
in connection with an anticipated secondary public offering of the Company's
Common Stock in late 1994 in violation of various provisions of the Securities
Exchange Act of 1934 and the rules promulgated thereunder. The Company
disputes the allegations contained in the consolidated complaint and in a
plaintiff's expert report asserting damages of approximately $22.5 million.
The Company intends to defend this action vigorously. The Registration
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<PAGE> 9
Statement with respect to the proposed secondary public offering was declared
effective by the Securities and Exchange Commission on November 9, 1994, but
was subsequently withdrawn by the Company at the request of the selling
stockholders. The public offering was solely to facilitate the sale of shares
by certain selling stockholders and the Company would not have received any
proceeds therefrom.
A purported class action entitled Betley et al. vs. First Alert, Inc. et al.
("Betley") was filed in the Circuit Court of Cook County, Illinois on January
3, 1995 against the Company alleging common law fraud, breach of warranties,
and a statutory violation of the Illinois Consumer Fraud Act, all related to
alleged defects in the original First Alert(R) Carbon Monoxide Detector (Model
FACO) design and the manner in which the detector was marketed. The Company
does not believe the plaintiffs claim any personal injuries or property damage;
nor do they claim their detectors failed to detect dangerous levels of carbon
monoxide. Instead, they claim (i) that the Company failed to disclose that the
product alarms in non-life threatening conditions (which they say is a
"nuisance"), (ii) that the Company falsely proclaims the product resets
"automatically" when, in fact, the product can take several hours or days to
reset after it has gone into alarm and (iii) that the Company falsely claims
the product met Underwriters Laboratories' listing criteria for residential
carbon monoxide detectors in effect at the time the Model FACO was
manufactured. They seek a refund of their purchase price, other out-of-pocket
expenses, punitive damages, and attorneys' fees. The Company has raised
numerous defenses to this claim and will continue to oppose it forcefully.
In addition to the Gilbert and Betley actions, the Company and its
subsidiaries, including BRK Brands, Inc., are parties to various product
liability and other types of lawsuits and are from time to time subject to
investigations by various governmental agencies. Although the ultimate
liabilities, if any, arising out of the Gilbert, Betley and other pending legal
actions or investigations cannot presently be determined, based on its past
experience and assessment of such matters, the Company believes that the
outcome of these matters will not have a material adverse effect on the
Company's financial position.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors set forth below
and elsewhere in this Report.
RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter of 1996 were $60.9 million, a decrease of $11.3
million or 15.7% from net sales of $72.2 million for the third quarter of 1995.
This decrease in net sales was due primarily to lower net sales of smoke
detectors in the U.S.A. and Australia and lower net sales of carbon monoxide
detectors in the U.S.A. and Canada. Net sales for the nine months ended
September 30, 1996 were $145.3 million, a decrease of $24.6 million or 14.5%
from net sales of $169.9 million for the nine months ended September 30, 1995.
The decrease in net sales for the nine month period resulted primarily from
lower net sales of domestic smoke detectors and carbon monoxide detectors in
the U.S.A. and Canada. Smoke detector net sales in the U.S.A. were affected by
efforts of customers to reduce their inventories in light of the weaker overall
retail market and by higher shipments of smoke detectors by the Company at the
end of 1995. Net sales of carbon monoxide detectors in the third quarter of
1995 were favorably impacted by the introduction of second generation carbon
monoxide detectors which were introduced in August, 1995 to comply with the UL
amended standard for residential carbon monoxide detectors.
Gross Profit
Gross profit, excluding depreciation, for the third quarter of 1996 was $24.3
million, a decrease of $9.6 million or 28.4%, compared with gross profit,
excluding depreciation, of $33.9 million in the third quarter of 1995. Gross
profit, excluding depreciation, for the nine months ended September 30, 1996
was $46.2 million, a decrease of $30.6 million or 39.8%, compared with gross
profit, excluding depreciation, of $76.8 million for the nine months ended
September 30, 1995. As a percent of net sales, gross profit, excluding
depreciation, was 39.9% and 47.0% for the third quarter of 1996 and 1995,
respectively, and 31.8% and 45.2% for the nine months ended September 30, 1996
and 1995, respectively. Gross profit in the third quarter of 1996 was
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<PAGE> 11
afffected by lower net sales levels, particularly of carbon monoxide detectors
and smoke detectors, by generally lower selling prices for carbon monoxide
detectors, and by higher material costs associated with the new carbon monoxide
detectors. Gross profit in the nine months ended September 30, 1996 was affected
by these same factors and also by operations related costs in the second quarter
of 1996 reflecting efforts to reduce inventory levels and to position
manufacturing for efficient production in the second half of 1996 and by higher
than normal allowances granted to customers for consumer product returns, in
particular, carbon monoxide detectors, which were exacerbated by the amendment
to the UL standard.
Selling, General and Administrative Expenses
Selling, general and administrative (S,G&A) expenses for the third quarter of
1996 were $18.1 million, an increase of $0.6 million or 3.3%, compared with
S,G&A expenses of $17.6 million for the third quarter of 1995. S,G&A expenses
for the nine months ended September 30, 1996 were $52.3 million, an increase of
$3.2 million or 6.5%, compared with S,G&A expenses of $49.1 million for the
nine months ended September 30, 1995. S,G&A expenses in the third
quarter of 1996 compared to 1995 increased as a result of higher marketing
promotion costs due mostly to the accelerated timing of a smoke detector
promotion in 1996 and higher outside service costs. These costs exceeded the
lower variable selling expenses directly related to lower net sales. S,G&A
expenses in the nine months ended September 30, 1996 compared to 1995 were also
affected by certain one-time legal and public relation costs, certain new
product development costs and a charge for severance costs relating to the
departure of certain employees during the 1996 first quarter.
Interest Expense
Interest expense for the third quarter of 1996 was $1.1 million, an increase of
$0.7 million or 169.2% from interest expense of $0.4 million for the third
quarter of 1995, while interest expense for the nine month period ended
September 30, 1996 was $2.6 million, an increase of $1.8 million or 247.1% from
interest expense of $0.7 million for the nine month period ended September 30,
1995. The increase in interest expense was due mostly to the higher debt
levels carried by the Company during the first nine months of 1996 compared to
the first nine months of 1995.
Miscellaneous Income (Expense)
Miscellaneous income (expense) includes realized and unrealized gains/losses on
foreign exchange and non-operating related costs. In the nine months ended
September 30, 1996, miscellaneous expense includes a write-off of certain
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<PAGE> 12
capitalized product development costs due to permanent impairment of its value,
and the Company's rescission of future rights to the underlying product, of
$0.6 million.
Net Income (Loss)
Net income for the third quarter of 1996 was $2.2 million, a decrease of $6.5
million or 74.8% from net income of $8.7 million for the third quarter of 1995.
The net loss for the nine months ended September 30, 1996 was $8.2 million, a
decrease of $21.7 million from net income of $13.5 million for the nine months
ended September 30, 1995. The decrease in net income in the third quarter of
1996 compared to the third quarter of 1995 was due to lower net sales,
particularly of carbon monoxide and smoke detectors, lower gross profit on
carbon monoxide detector sales, and higher general and administrative costs in
the 1996 third quarter compared to the 1995 third quarter. The decrease in
income in the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995 is due to lower net sales of carbon monoxide and smoke
detectors, generally lower selling prices for carbon monoxide detectors and
higher material costs associated with new carbon monoxide detectors, higher
operations costs, higher than normal allowances granted to customers for
consumer product returns and higher general and administrative costs in the
first nine months of 1996 compared to the first nine months of 1995. An income
tax benefit of $5.5 million was recorded in the nine months ended September 30,
1996.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's operations are seasonal in nature with the months of September,
October and November being the strongest sales months historically. In the
year ended December 31, 1995, approximately 60% of the Company's net sales and
61% of operating income were generated in the last six months of the year.
LIQUIDITY AND CAPITAL RESERVES
For the nine months ended September 30, 1996, the Company's net cash used in
operations decreased to $17.0 million from $18.5 million in the corresponding
period in 1995. At September 30, 1996, the total indebtedness of the Company
was $74.0 million under the Credit Facility. Management anticipates that cash
generated from operations, together with current working capital and the
Company's amended Credit Facility, will provide sufficient liquidity to meet
the Company's near term working capital and capital expenditure requirements.
However, at September 30, 1996, BRK Brands, Inc. was not in compliance with the
interest coverage ratio covenant of the Credit Facility. The Company is
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<PAGE> 13
currently working with the lender to obtain a waiver. There can be no
assurance that the Company will be able to obtain a waiver on terms acceptable
to the Company. Should the Company require funding in the short term in
addition to its current credit arrangements, management believes such funding
can be obtained.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual financial condition or results and could cause the
Company's actual financial condition or consolidated results to differ
materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company. The factors included here are not
exhaustive. Further, any forward-looking statement speaks only as of the date
on which such statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time and
it is not possible for management to predict all of such factors, nor can it
assess the impact of each such factor on the business or the extent to which
any factor, or combination of factors, may cause the Company's actual financial
condition or results to differ materially from those contained in any
forward-looking statements. Therefore, forward-looking statements should not
be relied upon as a prediction of actual future financial condition or results.
DEPENDENCE UPON KEY SUPPLIERS
Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's smoke detectors and carbon monoxide
detectors, and certain other components used in the Company's products, from
single sources. The Company has recently developed an alternative source of
supply for these integrated circuit components. However, there can be no
assurance that the Company will be able to continue to obtain these components
on a timely basis given the unpredictability of the demand for carbon monoxide
detectors. In addition, the biomimetic sensor which is the key component used
in the Company's battery powered carbon monoxide detector is obtained by the
Company pursuant to an exclusive license from Quantum Group, Inc. ("Quantum"),
its sole supplier of this component. Commencing on January 1, 1997, however,
Quantum may begin to sell its sensors to other customers. There is no
alternative supply for the biomimetic sensor. An
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<PAGE> 14
extended interruption or termination in the supply of any of the components
used in the Company's products, or a reduction in their quality or reliability,
would have a material adverse effect on the Company's business and results of
operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations. In addition, the Company's business historically has been
seasonal, with the largest proportion of sales occurring in September, October
and November of each calendar year. Moreover, consistently low temperatures
and high levels of snowfall during the typical home heating months increase
the likelihood of improperly vented carbon monoxide gas emissions being trapped
inside a closed home or building, which may in turn increase the demand for the
Company's carbon monoxide detectors, and consequently cause the Company's
quarterly results to fluctuate in such months. Factors such as quarterly
variations in financial results could adversely affect the market price of the
Common Stock and cause it to fluctuate substantially. In addition, the Company
(i) may from time to time increase its operating expenses to fund greater
levels of research and development, increase its sales and marketing
activities, develop new distribution channels, improve its operational and
financial systems and broaden its customer support capabilities and (ii) may
incur significant operating expenses associated with any new acquisitions. To
the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition will be materially adversely affected.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company and
its competitors, market acceptance of new products, price reductions by the
Company or its competitors, mix of distribution channels through which products
are sold, level of product returns, mix of products sold, component pricing,
mix of international and North American revenues, and general economic
conditions. In addition, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing or
marketing decisions or acquisitions that could have a material adverse effect
on the Company's business, results of operations or financial condition. As a
result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. Due to all of the foregoing factors, it
is likely that in some future quarters the Company's operating results will be
below the
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<PAGE> 15
expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.
DEPENDENCE ON CONSUMER PREFERENCE
The Company is susceptible to fluctuations in its business based upon consumer
demand for carbon monoxide and smoke detectors, in part by publicized accounts
of deaths or serious injury due to carbon monoxide poisoning and/or fires. The
Company believes that its success depends in substantial part on its ability to
anticipate, gauge and respond to such fluctuation in consumer demand. However,
it is impossible to predict the occurrence and effect of any such event that
would cause such fluctuations in consumer demand for the Company's home safety
products.
DEPENDENCE UPON TIMELY PRODUCT INTRODUCTION
The Company's ability to remain competitive in the home safety products market
will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company
will be successful in developing and marketing new products or in enhancing its
existing products, that new products, such as its carbon monoxide detector,
will achieve ongoing consumer acceptance, that products developed by others
will not render the Company's products non-competitive or obsolete or that the
Company will be able to obtain or maintain the rights to use proprietary
technologies developed by others which are incorporated in the Company's
products. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's financial condition and results of operations.
The introduction of new products which the Company may introduce in the future
may require the expenditure of funds for research and development, tooling,
manufacturing processes, inventory and marketing. In order to achieve high
volume production of any new product, the Company may have to make substantial
investments in inventory and expand its production capabilities.
DEPENDENCE ON MAJOR RETAIL CUSTOMERS
The Company's performance is affected by the economic strength and weakness of
its worldwide retail customers. The Company sells its products to mass
merchants, such as Wal-Mart, Kmart, Target Stores and Sears; home center and
hardware chains, such as Home Depot, Lowe's, Builders Square, True Value/Cotter
and Ace Hardware; catalog showrooms, such as Service
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<PAGE> 16
Merchandise; warehouse clubs, such as Price Club and Sam's; and electrical
wholesale distributors such as Graybar, Wesco and Grainger. In 1995, net sales
to Wal-Mart and Sam's, in the aggregate, represented approximately 13% of the
Company's net sales. In the nine months ended September 30, 1996, net sales to
Wal-Mart and Sam's in the aggregate, represented approximately 14% of the
Company's net sales. The Company also supplies its products to its
wholly-owned, non-U.S. subsidiaries and to independent foreign distributors,
who in turn distribute the Company's products to over 500 customers in over 50
countries worldwide, with the United Kingdom, Canada, Australia and the
Scandinavian countries currently representing the Company's principal foreign
markets. The loss of any one or more of the Company's key retail customers
either in the United States or abroad due to their financial weakness or
bankruptcy could have a material adverse effect on the Company's financial
condition or results of operations.
PRODUCT LIABILITY RISKS
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains insurance against
product liability claims in amounts deemed adequate by management, but there
can be no assurance that such coverage will continue to be available on terms
acceptable to the Company or that such coverage will be adequate for liability
actually incurred. The Company's insurance coverage is on an occurrence basis
covering losses attributable to injury to person or property during the policy
period. Although to date product liability claims have not had a material
adverse effect on the financial condition or results of operations of the
Company, there can be no assurance that the Company will not experience
materially adverse losses due to product liability claims in the future. A
successful claim brought against the Company in excess of available insurance
coverage or any claim that results in significant adverse publicity against the
Company, could have a material adverse effect on the Company's financial
condition or results of operations.
RELIANCE UPON CENTRALIZED MANUFACTURING FACILITIES; INTERRUPTION OF OPERATIONS
All of the Company's manufacturing occurs at its two facilities in Juarez,
Mexico, except fire extinguisher manufacturing which occurs at the Company's
Aurora, Illinois facility. The Company's manufacturing operations utilize
certain custom designed equipment which, if damaged or otherwise rendered
inoperable, could result in the disruption of the Company's manufacturing
operations. Although the Company maintains business interruption insurance in
amounts deemed adequate by management, any extended interruption of the
operations at any of these facilities could have a material adverse effect on
the Company's financial condition or results of operations.
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<PAGE> 17
GOVERNMENT REGULATION; POTENTIAL PRODUCT RECALLS; ALLEGED NUISANCE ALARMS
The Company's products are subject to the provisions of the Federal Consumer
Product Safety Act (the "FCPS Act") and the rules and regulations promulgated
thereunder. The FCPS Act authorizes the Consumer Product Safety Commission
(the "CPSC") to protect the public against unreasonable risks of injury
associated with consumer products. The CPSC can require the repurchase or
recall by a manufacturer of its products and can impose fines or other
penalties in the event of violations of the FCPS Act. Similar laws exist in
states and municipalities and in foreign countries in which the Company markets
its products. There can be no assurance that the Company will not be required
to, or will not voluntarily, recall its products in the future. On September
8, 1995, the Company received a Special Order and Subpoena from the CPSC for
the production of certain records and answers to questions relating to the
sounding mechanisms in the Company's smoke detectors. The Company has
responded to these requests and is cooperating with the CPSC in its
investigation. Although the Company believes that the CPSC investigation into
smoke detectors will not have a material adverse effect on the Company's
financial condition or results of operations, this investigation is in an early
stage and there can be no assurance that this investigation will be resolved in
favor of the Company. If this investigation results in a recall of the
Company's products, such recall could have a material adverse effect on the
Company's financial condition or results of operations. Since the introduction
of the Company's carbon monoxide detector in 1993, there have been numerous
reports of incidences of alleged false or nuisance alarms regarding carbon
monoxide detectors, including those manufactured by the Company. Since March
1994, the Company has received two requests for information from the CPSC with
respect to these alleged false or nuisance alarms by the Company's carbon
monoxide detectors. Based on the nature of the alleged problem, the Company
does not believe that the CPSC investigation into carbon monoxide detectors
will have a material adverse effect on the Company's financial condition or
results of operations; however, there can be no assurance that this
investigation will be resolved in favor of the Company. If this investigation
results in a recall of the Company's products, such recall could have a
material adverse effect on the Company's financial condition or results of
operations.
The Company is subject to various federal, state and foreign laws and
regulations pertaining to the discharge of materials into the environment or
otherwise relating to the protection of the environment, which may require the
Company to allocate a portion of its operating budget for use in ensuring its
full compliance with such regulations. Because certain of the Company's
products use a minute quantity of radioactive material in the detection of the
presence of smoke, the Company also is subject to the oversight of the Nuclear
Regulatory
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<PAGE> 18
Commission ("NRC") and is subject to various other federal, state
and foreign laws and regulations pertaining to such use. The Company has
obtained a license from the NRC to handle radioactive material in the amounts
necessary to conduct its business in the ordinary course. In order to maintain
its license granted by the NRC, the Company is required to comply with certain
rules and regulations promulgated by the NRC. The Company believes that it has
complied in all material respects with the rules and regulations applicable to
it with respect to its use of radioactive material. Proper and full compliance
with the foregoing laws and regulations in the future could result in a
material financial burden on the Company or failure to so comply could have a
material adverse effect on the Company's financial condition or results of
operations.
COMPETITION
The home safety market is characterized by intense competition based
primarily on product availability, price, speed of delivery, ability to tailor
specific solutions to customer needs, quality and depth of product lines. The
Company's competition is fragmented across its product lines, and accordingly,
the Company does not compete with any one company across all product lines. The
Company competes with a variety of entities, some of which have greater
financial and other resources than the Company. The Company's ability to
remain competitive in the home safety market depends in part on its ability to
successfully identify new product opportunities and develop and introduce new
products and enhancements on a timely and cost effective basis. In addition,
the Company's products compete to some extent with higher priced AC powered
residential security systems. To the extent that the installation and
maintenance expenses associated with such systems decline, the Company may
experience increased competition for its products from manufacturers and
marketers which traditionally have not competed with the Company.
GENERAL ECONOMIC CONDITIONS AND LIQUIDITY
General economic conditions, both domestic and foreign, and sources and
availability of financing have an impact on the Company's business, financial
condition and results of operations. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
or the sources and availability of funding of the Company's operations, whether
or not under the Company's existing Credit Facility, such conditions could have
a material adverse effect on the Company's financial condition or results of
operations. Moreover, operating its business in countries outside of the
United States exposes the Company to fluctuations in foreign currency exchange
rates, exchange ratios, nationalization or expropriation of
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<PAGE> 19
assets, import/export controls, political instability, variations in
the protection of intellectual property rights, limitations on foreign
investments and restrictions on the ability to convert currency are risks
inherent in conducting operations in geographically distant locations, with
customers speaking different languages and having different cultural approaches
to the conduct of business, any one of which alone or collectively, could have
a material adverse effect on the Company's international operations, and
consequently on the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 3 Defaults Upon Senior Securities
At September 30, 1996, BRK Brands, Inc. was not in compliance
with the interest coverage ratio covenant of its Credit
Facility. The Company is currently working with the lender to
obtain a waiver. There can be no assurance that the Company
will be able to obtain a waiver on terms acceptable to the
Company.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
There are no Exhibits filed
with this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
On September 4, 1996, the Company filed a report on
Form 8-K to report on the amendment to the Credit Facility.
This amendment is discussed in Note 3 - Revolving Credit
Agreement in the Notes to the Consolidated Financial
Statements.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST ALERT, INC.
By: /S/ Michael A. Rohl Date: November 6, 1996
-----------------------------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer of the Registrant)
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