<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 28, 1997 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 (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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 7, 1997, THERE WERE 24,335,112 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 24
<PAGE> 2
FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 28, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 28, 1997 (UNAUDITED) AND
DECEMBER 31, 1996...........................................3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 28, 1997 AND SEPTEMBER 30, 1996...................4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE NINE MONTH
PERIODS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 30, 1996.....5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........13
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................22
SIGNATURES...................................................................24
<PAGE> 3
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,061 $ 6,846
Accounts receivable, less
allowance for doubtful accounts of
$3,692 ($3,820 at December 31, 1996) 43,048 40,617
Income tax receivable 4,112 8,503
Inventories (Note 3) 43,182 58,222
Deferred taxes 10,510 10,510
Other assets 3,132 3,249
-------- -------
Total current assets 106,045 127,947
Property, plant and equipment, net of
accumulated depreciation of $21,622
($22,763 at December 31, 1996) 28,669 29,803
Other Assets:
Goodwill, net of accumulated
amortization of $3,294 ($2,815 at December 31, 1996) 22,205 22,683
Other intangibles, net of accumulated amortization
of $3,235 ($2,905 at December 31, 1996) 6,686 6,058
-------- -------
Total assets $163,605 $186,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,603 $7,304
Accrued expenses 20,372 26,395
Short-term Credit Facility (Note 4) 45,198 20,500
-------- --------
Total current liabilities 80,173 54,199
Long-term Credit Facility (Note 4) -- 40,000
Other long-term liabilities 71 71
Deferred taxes 3,369 3,369
Contingencies (Note 5) -- --
-------- --------
Total liabilities 83,613 97,639
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,335,112 issued and
outstanding as of September 28, 1997, and 24,183,116
issued and outstanding as of December 31, 1996) 243 242
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
September 28, 1997 and December 31, 1996) - -
Paid in capital 71,989 71,637
Stockholder loans -- (8)
Retained earnings 7,760 16,981
-------- --------
Total stockholders' equity 79,992 88,852
-------- --------
Total liabilities and stockholders' equity $163,605 $186,491
======== ========
</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 NINE MONTH
PERIOD ENDED PERIOD ENDED
------------ -------------
September 28, September 30, September 28, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $50,774 $60,860 $115,668 $145,330
Operating expenses:
Cost of sales, excluding depreciation 36,611 36,584 83,872 99,124
Selling, general and administrative 13,887 18,141 39,280 52,288
Depreciation and amortization 1,808 1,463 5,197 4,430
------- ------- -------- --------
Operating income (loss) (1,532) 4,672 (12,681) (10,512)
Other (income) expenses:
Interest expense 790 1,066 2,519 2,572
Miscellaneous, net 249 (66) 168 638
------- ------- -------- --------
Income (loss) before taxes (2,571) 3,672 (15,368) (13,722)
Income tax provision (benefit) (1,028) 1,469 (6,147) (5,487)
------- ------- -------- --------
Net income (loss) (1,543) 2,203 (9,221) (8,235)
Retained earnings, beginning of period 9,303 25,245 16,981 35,683
------- ------- -------- -------
Retained earnings, end of period $ 7,760 $27,448 $ 7,760 $27,448
======= ======= ======== =======
Net income (loss) per share $ (0.06) $ 0.09 $ (0.38) $ (0.34)
======= ======= ======== =======
Weighted average shares outstanding 24,535 24,611 24,471 24,582
</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 28, September 30,
1997 1996
---- ----
OPERATING ACTIVITIES
- --------------------
<S> <C> <C>
NET LOSS $(9,221) $(8,235)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Depreciation and amortization 5,197 4,430
Write off of intangible asset -- 554
(Increase) decrease in accounts receivable (2,431) 6,650
Decrease (increase) in income tax receivable 4,391 (6,155)
Decrease (increase) in inventories 15,040 (7,163)
Decrease (increase) in other assets 117 (1,428)
Increase (decrease) in accounts payable/accrued expenses 1,276 (5,617)
Other (130) (62)
------- -------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
(USED IN) OPERATING ACTIVITIES 14,239 (17,026)
------- --------
INVESTING ACTIVITIES
- --------------------
Capital expenditures (3,108) (4,410)
Disposal of property, plant & equipment 255 211
Other (1,230) --
------- -------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (4,083) (4,199)
------- -------
FINANCING ACTIVITIES
- --------------------
Proceeds from sale of common stock 353 226
Payment of Former Credit Facility (36,896) --
Proceeds from Credit Facility 36,896 --
Borrowings under revolving loan 19,568 53,600
Payments under revolving loan (34,870) (31,800)
Proceeds from stockholder loans 8 11
------- -------
NET CASH AND CASH EQUIVALENTS (USED IN)
PROVIDED BY FINANCING ACTIVITIES (14,941) 22,037
------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,785) 812
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,846 2,387
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,061 $ 3,199
======= =======
INTEREST PAID $ 3,090 $ 2,293
INCOME TAXES PAID $ 17 $ 0
</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 (collectively, 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, 1996 included in the Company's 1996 Annual Report to Stockholders.
The results of operations for the nine month period ended September 28, 1997,
are not necessarily indicative of the results to be expected for the entire
fiscal year.
During 1997, the Company adopted a 4-4-5 accounting calendar for periods ending
during the fiscal year. However, the Company's fiscal year end will continue
to be December 31.
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.
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<PAGE> 7
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.
NOTE 2 - RESTRUCTURING CHARGE
During the fourth quarter of 1996, the Company adopted a plan to revitalize the
Company's core product lines of smoke and carbon monoxide detectors and
discontinue, reposition or outsource non-performing product lines, right-size
and consolidate manufacturing operations, reduce the Company's selling, general
and administrative cost structures and aggressively address inventory levels.
As a result of this plan, the Company recorded a pre-tax restructuring charge
of $4,497 during the fourth quarter of 1996. The following table sets forth
the details of activity in the related accruals for the first nine month period
of 1997.
<TABLE>
<CAPTION>
Charges During the Nine
Balance at Month Period Ended Balance at
December 31, 1996 September 28, 1997 September 28, 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Manufacturing equipment
write-down $1,789 -- $1,789
Inventory write-down 1,998 $412 1,586
Severance 93 58 35
Plant restoration 300 -- 300
------ ------ ------
Total $4,180 $470 $3,710
====== ====== ======
</TABLE>
NOTE 3 - INVENTORIES:
The components of inventory are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Raw materials $20,719 $25,575
Work-in-process 4,086 3,656
Finished goods 21,551 33,497
Obsolescence reserve (3,174) (4,506)
------- -------
Total $43,182 $58,222
======= =======
</TABLE>
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<PAGE> 8
NOTE 4 - REVOLVING CREDIT AGREEMENT:
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revolving Credit Facility $45,198 $60,500
Less: Short Term Portion 45,198 20,500
------- -------
Long-Term Revolving Credit Facility $ 0 $40,000
======= =======
</TABLE>
On May 14, 1997, the Company entered into an $80.0 million revolving credit
facility (the "Credit Facility") with an agent financial institution. Advances
under the Credit Facility are limited to (a) 85% of eligible accounts
receivable plus (b) the lesser of 60% of eligible inventory or $35.0 million.
During the period of May 1997 through October 1997, $10.0 million in additional
borrowing is available and from June 1998 through September 1998, $5.0 million
in additional borrowing is available. All obligations under the Credit
Facility are secured by first priority liens upon certain of the Company's
assets. Amounts outstanding under the Credit Facility bear interest at prime
rate plus 1/2% or the London Interbank Offered Rate plus 2%. The Company is
subject to a commitment fee of 0.375% per annum on the unused portion of the
Credit Facility less $2.0 million. The Credit Facility agreement contains
covenants for, among other things, total liabilities to tangible net worth and
fixed charge ratios; maintenance of tangible net worth; and restrictions on
additional indebtedness, capital expenditures and payment of dividends.
At September 28, 1997, the Company was not in compliance with the fixed charge
coverage ratio and minimum tangible net worth covenants set forth in the Credit
Facility. However, on November 4, 1997, a waiver was obtained from the lender
for the existing noncompliance with these covenants. The Company will likely
attempt to either amend the Credit Facility or obtain another waiver from its
lender in the event that the Company is in default under the Credit Facility in
the future. There can be no assurance that the Company will be able to obtain
either such an amendment or waiver, if necessary.
At December 31, 1996, under the terms of the Company's former revolving credit
facility (the "Former Credit Facility"), the Company was able to borrow up to
$77.5 million until January 31, 1997, when the amount available was reduced to
$70.0 million. In connection with a September 4, 1996 amendment, the Company
granted a security interest in all of its assets which included the stock of
wholly-owned subsidiaries to secure the obligations to the lenders under the
Former Credit Facility. Similarly, Electronica BRK de Mexico S.A. de C.V., a
wholly owned subsidiary, agreed to pledge all of its assets to secure repayment
of advances under the Former Credit Facility.
- 8 -
<PAGE> 9
Under the Former Credit Facility, the Company was subject to a commitment fee
of 0.35% per annum on the unused portion of the Former Credit Facility. The
Former Credit Facility carried an interest rate of LIBOR plus 1.5% for amounts
up to $70.0 million (LIBOR plus 2.0% for amounts in excess of $70.0 million) on
the LIBOR based portion of the Former Credit Facility and the higher of the
lender's corporate borrowing rate or the Federal Funds Rate plus 0.75% for
amounts up to $70.0 million (Federal Funds Rate plus 1.25% for amounts in
excess of $70.0 million) on the remaining balance. Additionally the Former
Credit Facility contained covenants restricting, among other things, the
payment of dividends, the sale of assets, mergers and acquisitions and required
maintenance of interest coverage ratios, leverage ratios and a minimum tangible
net worth. At December 31, 1996, the Company was not in compliance with the
interest coverage ratio and the leverage ratio covenants. On May 14, 1997,
proceeds from the Credit Facility were used to fully reduce the Company's
indebtedness under the Former Credit Facility.
NOTE 5 - 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 these actions, 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 sought 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. The new
class was 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 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.
- 9 -
<PAGE> 10
The Company vigorously contested all claims and denied liability. Nevertheless,
to avoid further expense and the burdens of litigation, in November 1996,
the Company agreed to a tentative settlement of the consolidated class actions.
An executed settlement agreement was filed with the Court on February 11, 1997
and the Court entered an order on February 25, 1997, giving preliminary approval
to the settlement.
Pursuant to the Court's February 25, 1997, order, members of the class had
until May 12, 1997, to opt out of the class and until July 28, 1997, to file
proofs of claim if they wished to receive a share of the settlement amount.
The Court held a hearing on June 20, 1997, to consider the fairness of the
settlement and, at that time, the Court gave its final approval of the
settlement.
Under the terms of the settlement agreement, defendants will pay a fixed amount
per share to class members, depending on when they bought or sold their shares,
with a maximum amount of $3.0 million (including attorney's fees and costs for
class counsel) to be paid out in settlement. The majority of the settlement
amount is being paid by the Company's directors and officers liability
insurance carrier. The pendency of the Gilbert complaint has not had a
material effect on the Company's financial results for any period and adequate
reserves exist at September 28, 1997, for the Company's share of the settlement
amount.
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 and its wholly-owned subsidiary, BRK Brands, Inc.,
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 that the
plaintiffs claim any personal injuries or property damage; nor do the
plaintiffs claim that 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 state in
their complaint to be 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 that the product met Underwriters Laboratories' listing criteria
for residential carbon monoxide detectors in effect at the time the Model FACO
was manufactured. The plaintiffs 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.
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<PAGE> 11
In February 1997, the Company and its wholly-owned subsidiary, BRK Brands, Inc.,
were named as defendants in a purported class action lawsuit entitled Houlihan
et al. vs. First Alert, Inc. et al. ("Houlihan") in the Circuit Court of Cook
County, Illinois, alleging breach of express warranty and statutory violations
of various states' consumer protection statutes due to alleged
misrepresentations and product defects involving First Alert(R) Carbon Monoxide
Detectors. The Company does not believe the plaintiff claimed any
personal injuries or property damage; nor did he claim specifically that his
detector failed to detect dangerous levels of carbon monoxide. Rather, the
plaintiff sought "rescissionary damages" and attorneys' fees. The plaintiff's
original complaint was stricken by the Court on April 9, 1997, but the Court
gave the plaintiff leave to re-plead the case which was done. The Company filed
a Motion to Dismiss the amended complaint and that motion was granted on August
22, 1997. The case has now been settled by refunding the plaintiff's purchase
price of the detector.
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, including investigations
regarding environmental matters. 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.
NOTE 6 - NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15 (APB 15), "Earnings per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to APB 15.
- 11 -
<PAGE> 12
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS 128 requires restatement of all prior-period EPS data
presented.
Adoption of SFAS 128 is expected to have little or no impact on the Company's
future or previously reported EPS.
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997 and are effective for fiscal years
beginning after December 15,1997. SFAS 130 establishes standards for the
reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to, stockholders. SFAS 131 establishes standards for disclosures related to
business operating segments. The Company is currently evaluating the impact
that these statements will have on the consolidated financial statements.
- 12 -
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains certain forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from the results anticipated in those forward-looking
statements as a result of certain factors set forth below.
RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter of 1997 were $50.8 million, a decrease of $10.1
million or 16.6% from net sales of $60.9 million for the third quarter of 1996.
This decrease in net sales was due primarily to lower net sales of retail
smoke detectors and carbon monoxide detectors in the U.S.A. partially offset by
higher net sales in Europe, Canada, Australia and in export markets and in the
electrical contractor market in the United States. Net sales in the third
quarter were unfavorably impacted by delays in ramping up of our manufacturing
facilities due to new product introductions, certain material shortages and
production inefficiencies. Additionally, the Company is continuing its efforts
to receive UL listing for its new combination smoke and carbon monoxide
detector. Net sales for the nine month period ended September 28, 1997 were
$115.7 million, a decrease of $29.7 million or 20.4% from net sales of $145.3
million for the nine month period ended September 30, 1996. This decrease in
net sales was due primarily to lower net sales of retail smoke detectors and
carbon monoxide detectors in the U.S.A. and lower net sales in Australia,
Canada and other export markets partially offset by higher net sales in Europe
and in the electrical contractor market in the U.S.A. Domestic net sales in
the first nine month period of 1997 were adversely impacted by production
shortfalls, delays in obtaining UL listing, the loss of distribution at a
significant customer during the second half of 1996, by other competitive
activity and general softness in certain of the Company's markets.
Gross Profit
Gross profit, excluding depreciation ("Gross Profit"), for the third quarter of
1997 was $14.2 million, a decrease of $10.1 million or 41.7%, compared with
Gross Profit of $24.3 million in the third quarter of 1996. As a percent of
net sales, Gross Profit was 27.9% and 39.9% for the third quarter of 1997 and
1996, respectively. Gross profit for the nine month period ended September 28,
1997, was $31.8 million, a decrease of $14.4 million or 31.2%, compared with
gross profit of $46.2 million for the nine month period ended September 30,
1996. As a percent of net sales, gross profit was 27.5% and 31.8% for
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<PAGE> 14
the first nine month periods of 1997 and 1996, respectively. Gross profit in
the third quarter of 1997 was adversely affected by lower sales volume,
particularly of higher margin carbon monoxide and smoke detectors and a decline
in the average net selling price of carbon monoxide detectors, by unfavorable
production variances in our manufacturing facilities and by the sale of certain
obsolete or excess products at reduced margins. Gross profit in the first nine
month period of 1997 was also adversely impacted by these factors, partially
offset by the fact that allowances granted to customers for consumer product
returns were lower in the first nine month period of 1997 than in the first
nine month period of 1996.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the third quarter of
1997 were $13.9 million, a decrease of $4.3 million or 23.5%, compared with
SG&A expenses of $18.1 million for the third quarter of 1996. SG&A expenses
for the nine month period ended September 28, 1997 were $39.3 million, a
decrease of $13.0 million or 24.9%, compared with SG&A expenses of $52.3
million for the nine month period ended September 30, 1996. As a percent of net
sales, SG&A expenses were 27.4% in the third quarter of 1997 as compared to
29.8% in the third quarter of 1996 and 34.0% in the first nine month period of
1997 as compared to 36.0% in the first nine month period of 1996. SG&A
expenses in the third quarter of 1997 compared to 1996 decreased primarily as a
result of lower variable selling expenses due to lower sales volumes, lower
public relations costs and collateralized material and display costs, lower
employee insurance and consulting expenses. SG&A expenses in the first nine
month period of 1997 compared to 1996 decreased primarily as a result of lower
variable selling expenses due to lower net sales and generally lower spending
consistent with the Company's plan to reduce the SG&A cost structure as
publicly announced in January 1997. Additionally, SG&A expenses in the first
nine month period of 1996 included certain unusual items including a charge for
severance costs relating to the departure of certain employees during the first
quarter of 1996 and certain marketing allowances.
Interest Expense
Interest expense for the third quarter of 1997 was $0.8 million, a decrease of
$0.3 million or 25.9% from interest expense of $1.1 million for the third
quarter of 1996 while interest expense for the first nine month period of 1997
was $2.5 million, a decrease of $0.1 million or 2.1% from interest expense of
$2.6 million for the first nine month period of 1996. The decrease in interest
expense was due mostly to lower net borrowing levels in 1997 partially offset
by higher interest rates under the Credit Facility and Former Credit Facility.
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<PAGE> 15
Miscellaneous Income (Expense)
Miscellaneous income (expense) includes realized and unrealized gains/losses on
foreign exchange and non-operating related costs. In the first quarter of
1996, miscellaneous expense included 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 third quarter of 1997 was $1.5 million, compared to net income
of $2.2 million for the third quarter of 1996 while net loss for the first nine
month period of 1997 was $9.2 million compared to a net loss of $8.2 million
for the first nine month period of 1996. The increase in the net loss for the
first nine month period of 1997 compared to the first nine month period of 1996
is due mostly to lower net sales partially offset by lower spending in
manufacturing and SG&A costs. An income tax benefit of $6.1 million was
recorded in the first nine month period of 1997, with a 40% effective tax rate,
consistent with the first nine month period of 1996.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's operations are seasonal in nature with the months of September,
October and November historically being the strongest sales months. In the
year ended December 31, 1996, approximately 58.9% of the Company's net sales
were generated in the last six months of the year.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ended September 28, 1997, the Company's net cash
provided by operations increased to $14.2 million from cash used in operations
of $17.0 million in the corresponding period in 1996. At September 28, 1997,
the total indebtedness of the Company was $45.2 million under the Credit
Facility. Management anticipates that cash generated from operations, together
with current working capital and the Company's available credit facility, will
provide sufficient liquidity to meet the Company's near term working capital
and capital expenditure requirements. At September 28, 1997, the Company was
not in compliance with the fixed charge coverage ratio and minimum tangible net
worth covenants set forth in the Credit Facility. However, on November 4,
1997, a waiver was obtained from the lender for the existing noncompliance with
these covenants. The Company will likely attempt to either amend the Credit
Facility or obtain another waiver from its lender in the event that the Company
is in default under the Credit Facility in the future. There can be no
- 15 -
<PAGE> 16
assurance that the Company will be able to obtain either such an amendment or
waiver, if necessary.
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 of operations and
could cause the Company's actual financial condition or results of operations
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 of operations to differ materially from those contained in
any forward-looking statement. 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 a license from Quantum Group, Inc. ("Quantum"), its sole
supplier of this component. Commencing on January 1, 1997, Quantum was
permitted to begin selling 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
- 16 -
<PAGE> 17
Company's products, or a reduction in their quality or reliability, would have
an adverse effect on the Company's business and results of operations.
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 Lowe's, Builders Square, Home Depot, 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 1996, net sales to Wal-Mart and Sam's, in
the aggregate, represented approximately 15% of the Company's net sales. In
the nine month period ended September 28, 1997, net sales to Wal-Mart and Sam's
in the aggregate, represented approximately 13% 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 could have a material adverse effect on the Company's
financial condition and/or 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
Company's 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
- 17 -
<PAGE> 18
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 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 product 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
- 18 -
<PAGE> 19
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 future introduction of new products 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.
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 the manufacturing of fire extinguishers, 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.
- 19 -
<PAGE> 20
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 has cooperated 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 has not been
formally closed 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. The Company believes that it has
complied in all material respects with all such laws and regulations, however,
there can be no assurance that the Company will not be required to make
expenditures relating to environmental compliance.
- 20 -
<PAGE> 21
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.
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains product liability
insurance and aggressively defends itself against all such claims. The
Company's insurance coverage and the insurance coverage maintained by Pittway
Corporation ("Pittway") in connection with Pittway's previous ownership of the
Company's business is on an occurrence basis covering losses attributable to
injury to person or property during the policy period. The Company is required
to indemnify Pittway to the extent that Pittway's available insurance for
claims made after the disposition of Pittway's BRK Electronics Division in July
1992 (the "Disposition") relating to occurrences prior to the Disposition is
insufficient to satisfy such claims. The Company believes that Pittway's
insurance coverage in effect for periods prior to the Disposition is no less
favorable in the aggregate than the insurance maintained by the Company since
the Disposition; however Pittway's insurance coverage also covers the business
of Pittway unrelated to the Predecessor Company and claims asserted prior to
the Disposition.
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
- 21 -
<PAGE> 22
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; FOREIGN OPERATIONS 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 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 assets, import/export
controls, political instability and variations in the protection of
intellectual property rights. In addition, 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 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
----------- -----
11.1 Statement re: computation of per
share earnings
27.0 Financial Data Schedule
- 22 -
<PAGE> 23
(b) Reports on Form 8-K
There were no reports on Form 8K filed by the
Company during the quarter ended September 28,
1997.
- 23 -
<PAGE> 24
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 7, 1997
--------------------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer
of the Registrant)
- 24 -
<PAGE> 1
Exhibit 11.1
FIRST ALERT, INC. AND SUBSIDIARIES
Calculation of Shares Used In Determining Net Income Per Share
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
------------------------ ------------------------
Sept. 28, Sept. 30, Sept. 28, Sept. 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 24,265,664 24,183,116 24,210,632 24,096,962
Weighted average common share equivalents
outstanding during the period computed in
accordance with the treasury stock method 269,549 428,032 260,665 484,644
---------- ---------- ---------- ----------
Total weighted average shares outstanding 24,535,213 24,611,148 24,471,297 24,581,606
========== ========== ========== ==========
</TABLE>
- 25 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-28-1997
<CASH> 2,061
<SECURITIES> 0
<RECEIVABLES> 46,740
<ALLOWANCES> 3,692
<INVENTORY> 43,182
<CURRENT-ASSETS> 106,045
<PP&E> 50,291
<DEPRECIATION> 21,622
<TOTAL-ASSETS> 163,605
<CURRENT-LIABILITIES> 80,173
<BONDS> 0
0
0
<COMMON> 243
<OTHER-SE> 79,749
<TOTAL-LIABILITY-AND-EQUITY> 163,605
<SALES> 115,668
<TOTAL-REVENUES> 115,668
<CGS> 83,872
<TOTAL-COSTS> 83,872
<OTHER-EXPENSES> 44,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,519
<INCOME-PRETAX> (15,368)
<INCOME-TAX> (6,147)
<INCOME-CONTINUING> (9,221)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,221)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
