<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 JUNE 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 AUGUST 5, 1996, THERE WERE 24,183,116 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 21
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FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 1996 (UNAUDITED) AND
DECEMBER 31, 1995.................................................. 3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995........................................... 4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE SIX
MONTH PERIOD ENDED JUNE 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 20
SIGNATURES................................................................................ 21
</TABLE>
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- -----------
<S> <C> <C>
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 979 $ 2,387
Accounts receivable, less
allowance for doubtful accounts of
$3,607 ($3,342 at December 31, 1995) 27,901 62,967
Income tax receivable 8,958 1,340
Inventories (Note 2) 77,773 68,081
Deferred taxes 7,182 7,182
Other assets 2,336 2,479
-------- --------
Total current assets 125,129 144,436
Property, plant and equipment, net of
accumulated depreciation of $19,743
($17,525 at December 31, 1995) 32,905 32,150
Other Assets:
Goodwill, net of accumulated
amortization of $2,497 ($2,178 at December 31, 1995) 23,001 23,320
Other intangibles, net of accumulated amortization
of $2,539($2,680 at December 31, 1995) 6,231 7,087
-------- --------
Total assets $187,266 $206,993
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,369 $ 21,586
Accrued expenses 18,637 21,798
Short-term Credit Facility (Note 3) 59,800 32,200
-------- --------
Total current liabilities 85,806 75,584
Long-term Credit Facility (Note 3) -- 20,000
Other long-term liabilities 71 72
Deferred taxes 4,293 4,293
-------- --------
Total liabilities 90,170 99,949
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,183,116 issued and
outstanding as of June 30, 1996, 24,043,116 issued and
outstanding as of December 31, 1995) 242 240
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
June 30, 1996 and December 31, 1995) - -
Paid in capital 71,614 71,137
Stockholder loans (5) (16)
Retained earnings 25,245 35,683
-------- --------
Total stockholders' equity 97,096 107,044
-------- --------
Total liabilities and stockholders' equity $187,266 $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>
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $28,981 $34,920 $84,470 $97,734
Operating expenses:
Cost of sales, excluding depreciation 22,402 21,973 62,540 54,887
Selling, general and administrative 14,406 12,839 34,147 31,532
Depreciation and amortization 1,440 1,677 2,967 3,376
------- ------- ------- -------
Operating income (loss) (9,267) (1,569) (15,184) 7,939
Other (income) expenses:
Interest expense 787 182 1,506 345
Miscellaneous, net (162) (66) 704 (352)
------- ------- ------- -------
Income (loss) before taxes (9,892) (1,685) (17,394) 7,946
Income tax provision (benefit) (3,955) (673) (6,956) 3,179
------- ------- -------- -------
Net income (loss) (5,937) (1,012) (10,438) 4,767
Retained earnings, beginning of period 31,182 30,025 35,683 24,246
------- ------- -------- -------
Retained earnings, end of period $25,245 $29,013 $25,245 $29,013
======= ======= ======== =======
Net income (loss) per share $ (0.24) $ (0.04) $ (0.42) $ 0.19
======= ======= ======== =======
Weighted average shares outstanding 24,508 24,927 24,567 24,845
</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>
SIX MONTH PERIOD
ENDED JUNE 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
- --------------------
NET (LOSS) INCOME $(10,438) $ 4,767
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME
TO NET CASH AND CASH EQUIVALENTS (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 2,967 3,376
Write off of intangible asset 554 --
Decrease in accounts receivable 35,066 28,727
Increase in income tax receivable (7,618) --
Increase in inventories (9,692) (13,128)
Decrease in other assets 143 32
Decrease in accounts payable/accrued expenses (17,125) (17,525)
Other (16) --
-------- --------
NET CASH AND CASH EQUIVALENTS (USED IN) PROVIDED
BY OPERATING ACTIVITIES (6,159) 6,249
-------- --------
INVESTING ACTIVITIES
- --------------------
Capital expenditures (3,297) (5,066)
Disposal of property, plant & equipment 211 4,146
Other -- (314)
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (3,086) (1,234)
-------- --------
FINANCING ACTIVITIES
- --------------------
Proceeds from sale of common stock 226 28
Borrowings under revolving loan 33,300 6,300
Payments under revolving loan (25,700) (10,000)
Proceeds from stockholder loans 11 43
-------- --------
NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,837 (3,629)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,408) 1,386
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,387 1,131
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 979 $ 2,517
======== ========
INTEREST PAID $ 1,412 $ 518
INCOME TAXES PAID $ 1 $ 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 six months ended June 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>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Raw materials $26,834 $32,423
Work-in-process 6,193 7,451
Finished goods 46,693 33,325
Obsolescence reserve (1,947) (5,118)
------- --------
Total $77,773 $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 three month period ended March 31, 1996.
NOTE 3 - REVOLVING CREDIT AGREEMENT:
<TABLE>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Revolving Credit Facility $59,800 $52,200
Less: Short Term Portion 59,800 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. Under the
Credit Facility, BRK Brands, Inc. is subject to a commitment fee of 0.25% per
annum on the unused portion of the commitment. The Credit Facility carries an
interest rate of LIBOR + 0.5% on LIBOR based loans and the higher of the
lender's corporate borrowing rate and the Federal Funds Rate plus 0.5% 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 June 30, 1996, BRK Brands, Inc. was not in compliance with the interest
coverage ratio covenant. The Company has chosen to not request a waiver from
the lender at June 30, 1996 and has included the revolving credit facility
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balance as a current liability at June 30, 1996. The Company intends to seek
to amend the Credit Facility with the lender to remedy current non-compliance,
change certain of the restrictive covenants and increase the amount of the
Credit Facility. There can be no assurance that the Company will be able to
amend the Credit Facility to accomplish these objectives on terms acceptable to
the Company.
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
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 First Alert(R) Carbon Monoxide Detector design and the
manner in which the detector was marketed. The Company does not believe the
plaintiffs
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<PAGE> 9
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") and (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. 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 or results of operations.
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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 second quarter of 1996 were $29.0 million, a decrease of $5.9
million or 17.0% from net sales of $34.9 million for the second quarter of
1995. This decrease in net sales was due primarily to lower domestic net sales
of carbon monoxide detectors which were partially offset by higher net sales of
smoke detectors. Net sales of carbon monoxide detectors in the second quarter
of 1995 were favorably impacted by shipments of the Company's first generation
carbon monoxide detector which were sold to selected accounts prior to the
amendment of the Underwriters Laboratories Inc. ("UL") Standard for residential
carbon monoxide detectors which was effective October 1, 1995. Net sales for
the six months ended June 30, 1996 were $84.5 million, a decrease of $13.3
million or 13.6% from net sales of $97.7 million for the six months ended June
30, 1995. The decrease in net sales for the six month period resulted
primarily from lower net sales of domestic carbon monoxide detectors and smoke
detectors and of lower net sales of carbon monoxide detectors in 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.
Gross Profit
Gross profit, excluding depreciation, for the second quarter of 1996 was $6.6
million, a decrease of $6.4 million or 49.2% compared with gross profit,
excluding depreciation, of $12.9 million in the second quarter of 1995. Gross
profit, excluding depreciation for the six months ended June 30, 1996 was $21.9
million, a decrease of $20.9 million or 48.8% compared with gross profit,
excluding depreciation, of $42.8 million for the six months ended June 30,
1995. As a percent of net sales, gross profit, excluding depreciation, was
22.7% and 37.1% for the second quarter of 1996 and 1995, respectively, and
26.0% and 43.8% for the six months ended June 30, 1996 and 1995,
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<PAGE> 11
respectively. Gross profit in the second quarter of 1996 was affected by lower
net sales levels, particularly of carbon monoxide detectors and by higher
material costs associated with new carbon monoxide detectors which were
introduced in August 1995 to comply with the UL amended standard for
residential carbon monoxide detectors. Gross profit in the second quarter was
also adversely affected by operations related costs reflecting efforts to
reduce inventory levels and to position manufacturing for efficient production
in the second half of 1996. Gross profit in the six months ended June 30, 1996
was affected by lower net sales levels, particularly of carbon monoxide and
smoke detectors, by generally lower selling prices for carbon monoxide
detectors, by higher material costs associated with new carbon monoxide
detectors and by the operations costs referred to above. Gross profit in the
six months ended June 30, 1996 was also adversely affected 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 second quarter of
1996 were $14.4 million, an increase of $1.6 million, or 12.2% compared with
S,G&A expenses of $12.8 million for the second quarter of 1995. S,G&A expenses
for the six months ended June 30, 1996 were $34.1 million, an increase of $2.6
million, or 8.3% compared with S,G&A expenses of $31.5 million for the six
months ended June 30, 1995. S,G&A expenses in the second quarter of 1996
compared to 1995 increased as a result of certain one-time legal and public
relation costs, higher outside service costs and certain new product
development costs. These costs exceeded the lower variable selling expenses
directly related to lower net sales. S,G&A expenses in the six months ended
June 30, 1996 compared to 1995 were also affected by a charge for severance
costs relating to the departure of certain employees during the 1996 first
quarter.
Interest Expense
Interest expense for the second quarter of 1996 was $0.8 million, an increase
of $0.6 million, or 332.4% from interest expense of $0.2 million for the second
quarter of 1995, while interest expense for the six month period ended June 30,
1996 was $1.5 million, an increase of $1.2 million or 336.5% from interest
expense of $0.3 million for the six month period ended June 30, 1995. The
increase in interest expense was due to the higher debt levels carried by the
Company during the first six months of 1996 compared to the first six months of
1995.
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Miscellaneous Income (Expense)
Miscellaneous income (expense) includes realized and unrealized gains/losses on
foreign exchange and non-operating related costs. In the six months ended June
30, 1996, miscellaneous expense includes a write-off of certain 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 loss for the second quarter of 1996 was $5.9 million, a decrease of $4.9
million from the net loss of $1.0 million for the second quarter of 1995. The
net loss for the six months ended June 30, 1996 was $10.4 million, a decrease
of $15.2 million from net income of $4.8 million for the six months ended June
30, 1995. The decrease in income in the second quarter of 1996 compared to the
second quarter of 1995 was due to lower net sales, particularly of carbon
monoxide detectors, lower gross profit on carbon monoxide detector sales,
higher operations related costs and higher general and administrative costs in
the 1996 second quarter compared to the 1995 second quarter. The decrease in
income in the six months ended June 30, 1996 compared to the six months ended
June 30, 1995 is due to lower net sales of domestic carbon monoxide detectors
and smoke detectors and of carbon monoxide detectors in Canada, 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 half of 1996 compared to
the first half of 1995. An income tax benefit of $7.0 million was recorded in
the 1996 first half as the loss before taxes should reduce the Company's tax
liability.
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 six months ended June 30, 1996, the Company's net cash used in
operations decreased to $6.2 million from cash provided by operations of $6.2
million in the corresponding period in 1995. This decrease was due to a
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<PAGE> 13
decrease in net sales and gross profit. Net cash (used in)/provided by
operations was negatively affected by increased inventory levels.
At June 30, 1996, the total indebtedness of the Company was $59.8 million under
the Credit Facility. Management anticipates that in order to provide
sufficient liquidity to meet the Company's short-term working capital and
capital expenditure requirements, the existing Credit Facility will need to be
amended to provide additional liquidity. The Company intends to seek to amend
the Credit Facility with the lender to remedy current non-compliance with
respect to the interest coverage ratio covenant, change certain of the
restrictive covenants and increase the amount of the Credit Facility. There can
be no assurance that the Company will be able to amend the Credit Facility to
accomplish these objectives on terms acceptable to the Company.
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,
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<PAGE> 14
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 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
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<PAGE> 15
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 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.
- 15 -
<PAGE> 16
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 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 six months ended June 30, 1996, net sales to Wal-Mart and Sam's in the
aggregate, represented approximately 12% 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.
- 16 -
<PAGE> 17
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.
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
- 17 -
<PAGE> 18
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 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.
- 18 -
<PAGE> 19
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, 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 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 June 30, 1996, BRK Brands, Inc. was not in compliance
with the interest coverage ratio covenant of its Credit
Facility. The Company has chosen to not request
a waiver from the lender at June 30, 1996 as the Company
intends to seek amendment of the interest coverage ratio
covenant with the lender to remedy current non-compliance.
There can be no assurance that the Company will be able to
amend the Credit Facility to remedy current non-compliance
on terms acceptable to the Company.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders
on May 7, 1996.
(c) The matters voted upon at the meeting and the votes
cast for, against or withheld, as well as the number
of abstentions and broker nonvotes, as to each such
- 19 -
<PAGE> 20
matter, were as follows:
(i) The election of Gary L. Lederer to serve as a director
for a term of three years.
<TABLE>
<S> <C>
For 18,136,131
Withheld 198,982
</TABLE>
(ii) The election of Scott A. Schoen to serve as a director
for a term of three years.
<TABLE>
<S> <C>
For 17,936,869
Withheld 398,244
</TABLE>
(iii) A proposal to ratify, confirm and approve the First
Alert, Inc. Nonqualified Stock Option Plan for Non-
Employee Directors.
<TABLE>
<S> <C>
For 16,917,584
Against 1,140,580
Abstain 154,932
No vote 122,017
</TABLE>
(iv) A proposal to ratify, confirm and approve the
selection of Price Waterhouse, LLP as the
independent certified public accountants for the
Company for the fiscal year 1996.
<TABLE>
<S> <C>
For 18,175,936
Against 52,943
Abstain 106,234
</TABLE>
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
There were no reports on Form 8-K filed by the Company
during the quarter ended June 30, 1996
- 20 -
<PAGE> 21
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: August 5, 1996
----------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer of the Registrant)
- 21 -
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