<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 29, 1997 COMMISSION FILE NUMBER 0-23630
FIRST ALERT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3157075 .
- --------------------------------------------- --------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
</TABLE>
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 8, 1997, THERE WERE 24,255,114 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
<PAGE> 2
FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 29, 1997
INDEX
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<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
---------------------- ------
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 29, 1997 (UNAUDITED) AND
DECEMBER 31, 1996 ....................................... 3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 29, 1997 AND JUNE 30, 1996 ......................... 4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE SIX MONTH
PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996 ........... 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ........... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 12
PART II. OTHER INFORMATION
-----------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................... 22
SIGNATURES .................................................................. 23
</TABLE>
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 29, December 31,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,071 $ 6,846
Accounts receivable, less
allowance for doubtful accounts of
$3,696 ($3,820 at December 31, 1996) 25,732 40,617
Income tax receivable 2,783 8,503
Inventories (Note 3) 44,460 58,222
Deferred taxes 10,510 10,510
Other assets 3,209 3,249
--------- --------
Total current assets 89,765 127,947
Property, plant and equipment, net of
accumulated depreciation of $20,245
($22,763 at December 31, 1996) 29,014 29,803
Other Assets:
Goodwill, net of accumulated
amortization of $3,134 ($2,815 at December 31, 1996) 22,364 22,683
Other intangibles, net of accumulated amortization
of $3,050 ($2,905 at December 31, 1996) 6,655 6,058
--------- --------
Total assets $ 147,798 $186,491
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,596 $ 7,304
Accrued expenses 19,950 26,395
Short-term Credit Facility (Note 4) -- 20,500
-------- --------
Total current liabilities 25,546 54,199
Long-term Credit Facility (Note 4) 37,630 40,000
Other long-term liabilities 71 71
Deferred taxes 3,369 3,369
Contingencies (Note 5) -- --
-------- --------
Total liabilities 66,616 97,639
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,183,116 issued and
outstanding as of June 29, 1997, and
December 31, 1996) 242 242
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
June 29, 1997 and December 31, 1996) - -
Paid in capital 71,637 71,637
Stockholder loans -- (8)
Retained earnings 9,303 16,981
-------- --------
Total stockholders' equity 81,182 88,852
-------- --------
Total liabilities and stockholders' equity $147,798 $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)
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THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
------------------------ ----------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 27,481 $28,981 $ 64,894 $ 84,470
Operating expenses:
Cost of sales, excluding depreciation 20,384 22,402 47,261 62,540
Selling, general and administrative 11,916 14,406 25,393 34,147
Depreciation and amortization 1,692 1,440 3,389 2,967
--------- ------- -------- --------
Operating loss (6,511) (9,267) (11,149) (15,184)
Other (income) expenses:
Interest expense 861 787 1,729 1,506
Miscellaneous, net (32) (162) (81) 704
--------- ------- -------- --------
Loss before taxes (7,340) (9,892) (12,797) (17,394)
Income tax benefit (2,936) (3,955) (5,119) (6,956)
-------- ------- -------- --------
Net loss (4,404) (5,937) (7,678) (10,438)
Retained earnings, beginning of period 13,707 31,182 16,981 35,683
--------- ------- -------- --------
Retained earnings, end of period $ 9,303 $25,245 $ 9,303 $ 25,245
========= ======= ======== ========
Net loss per share $ (0.18) $ (0.24) $ (0.31) $ (0.42)
========= ======= ======== ========
Weighted average shares outstanding 24,432 24,508 24,439 24,567
</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 29, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
NET LOSS $ (7,678) $ (10,438)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH AND CASH EQUIVALENTS
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization 3,389 2,967
Write off of intangible asset -- 554
Decrease in accounts receivable 14,885 35,066
Decrease (Increase) in income tax receivable 5,720 (7,618)
Decrease (Increase) in inventories 13,762 (9,692)
Decrease in other assets 40 143
Decrease in accounts payable/accrued expenses (8,153) (17,125)
Other (48) (16)
---------- ---------
NET CASH AND CASH EQUIVALENTS PROVIDED
BY (USED IN) OPERATING ACTIVITIES 21,917 (6,159)
---------- ---------
INVESTING ACTIVITIES
Capital expenditures (2,070) (3,297)
Disposal of property, plant & equipment 255 211
Other (1,015) --
---------- ---------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (2,830) (3,086)
---------- ---------
FINANCING ACTIVITIES
Proceeds from sale of common stock -- 226
Payment of Former Credit Facility (36,896) --
Proceeds from Credit Facility 36,896 --
Borrowings under revolving loan 4,850 33,300
Payments under revolving loan (27,720) (25,700)
Proceeds from stockholder loans 8 11
---------- ---------
NET CASH AND CASH EQUIVALENTS (USED IN) PROVIDED BY
FINANCING ACTIVITIES (22,862) 7,837
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,775) (1,408)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,846 2,387
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,071 $ 979
========== =========
INTEREST PAID $ 2,250 $ 1,412
INCOME TAXES PAID $ 8 $ 1
</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, 1996 included in the Company's 1996 Annual Report to Stockholders.
The results of operations for the six month period ended June 29, 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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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 half of 1997.
<TABLE>
<CAPTION>
Charges During the
Balance at Six Month Period Balance at
December 31, 1996 Ended June 29, 1997 June 29, 1997
----------------------- ------------------- --------------
<S> <C> <C> <C>
Manufacturing equipment
write-down $1,789 -- $1,789
Inventory write-down 1,998 $412 1,586
Severance 93 41 52
Plant restoration 300 -- 300
-------- -------- -------
Total $4,180 $453 $3,727
======== ======== =======
</TABLE>
NOTE 3 - INVENTORIES:
The components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 29, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Raw materials $16,848 $25,575
Work-in-process 5,083 3,656
Finished goods 25,915 33,497
Obsolescence reserve (3,386) (4,506)
------- -------
Total $44,460 $58,222
======= =======
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NOTE 4 - REVOLVING CREDIT AGREEMENT:
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<CAPTION>
JUNE 29, 1997 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Revolving Credit Facility $37,630 $60,500
Less: Short Term Portion -- 20,500
------- -------
Long-Term Revolving Credit Facility $37,630 $40,000
======= =======
</TABLE>
On May 14, 1997, the Company entered into an $80.0 million revolving credit
facility (the "Credit Facility") with a 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 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.
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 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
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<PAGE> 9
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.
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 wish to receive a share of the settlement amount. The
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<PAGE> 10
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 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 June 29, 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 the plaintiffs
claim any personal injuries or property damage; nor do they claim their
detectors failed to detect dangerous levels of carbon monoxide. Instead, they
claim (i) that the Company failed to disclose that the product alarms in
non-life threatening conditions (which they say is a "nuisance"), (ii) that the
Company falsely proclaims the product resets "automatically" when, in fact, the
product can take several hours or days to reset after it has gone into alarm
and (iii) that the Company falsely claims the product met Underwriters
Laboratories' listing criteria for residential carbon monoxide detectors in
effect at the time the Model FACO was manufactured. They seek a refund of
their purchase price, other out-of-pocket expenses, punitive damages, and
attorneys' fees. The Company has raised numerous defenses to this claim and
will continue to oppose it forcefully.
In 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, he 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 has now been done. The Company has
filed a Motion to Dismiss the amended complaint and intends to defend the case
vigorously.
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<PAGE> 11
In addition to the Gilbert, Betley and Houlihan 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, Houlihan 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 - EFFECT OF CHANGING 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.
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.
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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 second quarter of 1997 were $27.5 million, a decrease of $1.5
million or 5.2% from net sales of $29.0 million for the second 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 and in the electrical contractor market in the
U.S.A. Net sales for the six month period ended June 29, 1997 were $64.9
million, a decrease of $19.6 million or 23.2% from net sales of $84.5 million
for the six month period ended June 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
half of 1997 were adversely impacted by the loss of distribution at a
significant customer during 1996, by other competitive activity and general
softness in the Company's market.
Gross Profit
Gross profit, excluding depreciation ("Gross Profit"), for the second quarter
of 1997 was $7.1 million, an increase of $0.5 million or 7.9%, compared with
Gross Profit of $6.6 million in the second quarter of 1996. As a percent of
net sales, Gross Profit was 25.8% and 22.7% for the second quarter of 1997 and
1996, respectively. Gross profit for the six month period ended June 29, 1997,
was $17.6 million, a decrease of $4.3 million or 19.6%, compared with gross
profit of $21.9 million for the six month period ended June 30, 1996. As a
percent of net sales, gross profit was 27.2% and 26.0% for the first half of
1997 and 1996, respectively. Gross profit in the second quarter of 1997 was
affected by lower spending in the Company's manufacturing facilities as it
realizes the benefits of its restructuring plan publicly announced in January
1997, partially offset by the sale of certain obsolete products at reduced
margins. The decline in gross profit dollars in the first half of 1997 is due
primarily to lower sales volume, particularly of carbon monoxide detectors.
- 12 -
<PAGE> 13
Gross profit as a percentage of net sales in the first half of 1997 was
increased primarily due to lower spending at the Company's manufacturing
facilities in the first half of 1997 compared to the first half of 1996.
Additionally, allowances granted to customers for consumer product returns were
lower in the first half of 1997 than in the first half of 1996. Gross profit
in the first half of 1997 was also adversely affected by generally lower
selling prices for carbon monoxide detectors.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the second quarter of
1997 were $11.9 million, a decrease of $2.5 million or 17.3%, compared with
SG&A expenses of $14.4 million for the second quarter of 1996. SG&A expenses
for the six month period ended June 29, 1997 were $25.4 million, a decrease of
$8.8 million or 25.6%, compared with SG&A expenses of $34.1 million for the six
month period ended June 30, 1996. As a percent of net sales, SG&A expenses were
43.4% in the second quarter of 1997 as compared to 49.7% in the second quarter
of 1996 and 39.1% in the first half of 1997 as compared to 40.4% in the first
half of 1996. SG&A expenses in the second quarter of 1997 compared to 1996
decreased primarily as a result of lower public relations costs, lower customer
service costs and lower legal expenses. SG&A expenses in the first half 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 half 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 second quarter of 1997 was $0.9 million, an increase
of $0.1 million or 9.4% from interest expense of $0.8 million for the second
quarter of 1996 while interest expense for the first half of 1997 was $1.7
million, an increase of $0.2 million or 14.8% from interest expense of $1.5
million for the first half of 1996. The increase in interest expense was due
mostly to higher interest rates under the Credit Facility and Former Credit
Facility partially offset by lower net borrowing levels in 1997.
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
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<PAGE> 14
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 1997 was $4.4 million, compared to a net
loss of $5.9 million for the second quarter of 1996 while net loss for the
first half of 1997 was $7.7 million compared to a net loss of $10.4 million for
the first half of 1996. The decrease in the net loss for the first half of 1997
compared to the first half of 1996 is due mostly to lower spending in
manufacturing and SG&A costs which more than offset the effects of reduced net
sales. An income tax benefit of $5.1 million was recorded in the first half of
1997, with a 40% effective tax rate, consistent with the first half of 1996.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's operations are seasonal in nature with the months of September,
October and November being the strongest sales months historically. In the
year ended December 31, 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 six month period ended June 29, 1997, the Company's net cash provided
by operations increased to $21.9 million from cash used in operations of $6.2
million in the corresponding period in 1996. At June 29, 1997, the total
indebtedness of the Company was $37.6 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.
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
- 14 -
<PAGE> 15
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 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 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 six month period ended June 29, 1997, net sales to Wal-Mart and Sam's in
the aggregate, represented approximately 9% 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
- 15 -
<PAGE> 16
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 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
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
- 16 -
<PAGE> 17
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
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
- 17 -
<PAGE> 18
no assurance that such coverage will continue to be available on terms
acceptable to the Company or that such coverage will be adequate for liability
actually incurred. The Company's insurance coverage is on an occurrence basis
covering losses attributable to injury to person or property during the policy
period. Although to date product liability claims have not had a material
adverse effect on the financial condition or results of operations of the
Company, there can be no assurance that the Company will not experience
materially adverse losses due to product liability claims in the future. A
successful claim brought against the Company in excess of available insurance
coverage or any claim that results in significant adverse publicity against the
Company, could have a material adverse effect on the Company's financial
condition or results of operations.
RELIANCE UPON CENTRALIZED MANUFACTURING FACILITIES; INTERRUPTION OF OPERATIONS
All of the Company's manufacturing occurs at its two facilities in Juarez,
Mexico, except fire extinguisher manufacturing which occurs at the Company's
Aurora, Illinois facility. The Company's manufacturing operations utilize
certain custom designed equipment which, if damaged or otherwise rendered
inoperable, could result in the disruption of the Company's manufacturing
operations. Although the Company maintains business interruption insurance in
amounts deemed adequate by management, any extended interruption of the
operations at any of these facilities could have a material adverse effect on
the Company's financial condition or results of operations.
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
- 18 -
<PAGE> 19
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.
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
- 19 -
<PAGE> 20
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
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
- 20 -
<PAGE> 21
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. 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 4 Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders
on May 6, 1997.
(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
matter, were as follows:
(i) The election of Malcolm Candlish to serve as a director
for a term of three years.
For 21,699,835
Withheld 393,282
(ii) The election of David V. Harkins to serve as a director
for a term of three years.
For 21,726,485
Withheld 366,632
(iii) The election of Albert L. Prillaman to serve as a
director for a term of three years.
For 21,730,065
Withheld 363,052
- 21 -
<PAGE> 22
(iv) A proposal to ratify, confirm and approve the First
Alert, Inc. 1997 Stock Option Plan.
For 16,717,906
Against 1,607,804
Abstain 135,318
No vote 3,632,089
(v) A proposal to ratify, confirm and approve the
selection of Price Waterhouse, LLP as the
independent accountants of the
Company for the fiscal year 1997.
For 21,854,088
Against 119,929
Abstain 119,100
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
(b) Reports on Form 8-K
On May 27, 1997, the Company filed a report on Form
8-K to report on the new $80.0 million revolving
credit facility that the Company entered into on May
14, 1997. The new revolving credit facility is
discussed in Note 4 - Revolving Credit Agreement
in the Notes to the Consolidated Financial Statements
- 22 -
<PAGE> 23
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 8, 1997
---------------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer
of the Registrant)
- 23 -
<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 Six Month Period Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 24,183,116 24,064,654 24,183,116 24,053,885
Weighted average common share equivalents
outstanding during the period computed in
accordance with the treasury stock method 248,518 443,688 256,223 512,951
----------- ---------- ----------- -----------
Total weighted average shares outstanding 24,431,634 24,508,342 24,439,339 24,566,836
=========== ========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-29-1997
<CASH> 3071
<SECURITIES> 0
<RECEIVABLES> 29428
<ALLOWANCES> 3696
<INVENTORY> 44460
<CURRENT-ASSETS> 89765
<PP&E> 49259
<DEPRECIATION> 20245
<TOTAL-ASSETS> 147798
<CURRENT-LIABILITIES> 25546
<BONDS> 0
0
0
<COMMON> 242
<OTHER-SE> 80940
<TOTAL-LIABILITY-AND-EQUITY> 147798
<SALES> 64894
<TOTAL-REVENUES> 64894
<CGS> 47261
<TOTAL-COSTS> 47261
<OTHER-EXPENSES> 28782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1729
<INCOME-PRETAX> (12797)
<INCOME-TAX> (5119)
<INCOME-CONTINUING> (7678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7678)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
