<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 MARCH 30, 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 MAY 12, 1997, THERE WERE 24,183,116 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 23
<PAGE> 2
FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 30, 1997 (UNAUDITED) AND
DECEMBER 31, 1996 3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED
MARCH 30, 1997 AND MARCH 31, 1996 4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE THREE MONTH
PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 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 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
<PAGE> 3
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 8,845 $ 6,846
Accounts receivable, less
allowance for doubtful accounts of
$3,850 ($3,820 at December 31, 1996) 29,260 40,617
Income tax receivable 9,645 8,503
Inventories (Note 3) 49,421 58,222
Deferred taxes 10,510 10,510
Other assets 3,365 3,249
--------- ---------
Total current assets 111,046 127,947
Property, plant and equipment, net of
accumulated depreciation of $24,105
($22,763 at December 31, 1996) 29,167 29,803
Other Assets:
Goodwill, net of accumulated
amortization of $2,975 ($2,815 at December 31, 1996) 22,524 22,683
Other intangibles, net of accumulated amortization
of $3,072 ($2,905 at December 31, 1996) 5,993 6,058
--------- ---------
Total assets $ 168,730 $ 186,491
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,963 $ 7,304
Accrued expenses 22,549 26,395
Short-term Credit Facility (Note 4) 11,200 20,500
--------- ---------
Total current liabilities 39,712 54,199
Long-term Credit Facility (Note 4) 40,000 40,000
Other long-term liabilities 71 71
Deferred taxes 3,369 3,369
Contingencies (Note 5) -- --
--------- ---------
Total liabilities 83,152 97,639
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,183,116 issued and
outstanding as of March 30, 1997, and
December 31, 1996) 242 242
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
March 30, 1997 and December 31, 1996) - -
Paid in capital 71,637 71,637
Stockholder loans (8) (8)
Retained earnings 13,707 16,981
--------- ---------
Total stockholders' equity 85,578 88,852
--------- ---------
Total liabilities and stockholders' equity $ 168,730 $ 186,491
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE> 4
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
---------------------------
March 30, March 31,
1997 1996
-------- --------
<S> <C> <C>
Net sales $ 37,413 $ 55,489
Operating expenses:
Cost of sales, excluding depreciation 26,877 40,138
Selling, general and administrative 13,477 19,741
Depreciation and amortization 1,697 1,527
-------- --------
Operating loss (4,638) (5,917)
Other (income) expenses:
Interest expense 868 719
Miscellaneous, net (49) 866
-------- --------
Loss before taxes (5,457) (7,502)
Income tax benefit (2,183) (3,001)
-------- --------
Net loss (3,274) (4,501)
Retained earnings, beginning of period 16,981 35,683
-------- --------
Retained earnings, end of period $ 13,707 $ 31,182
-------- --------
Net loss per share $ (0.13) $ (0.18)
======== ========
Weighted average shares outstanding 24,447 24,625
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE> 5
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Month Period Ended
------------------------
March 30, March 31,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
NET LOSS $ (3,274) $ (4,501)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH AND CASH EQUIVALENTS PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 1,697 1,527
Write off of intangible asset -- 554
Decrease in accounts receivable 11,357 23,921
Increase in income tax receivable (1,142) --
Decrease (increase) in inventories 8,801 (6,845)
Increase in other assets (116) (72)
Decrease in accounts payable/accrued expenses (5,187) (12,278)
Other (29) 198
-------- --------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
OPERATING ACTIVITIES 12,107 2,504
-------- --------
INVESTING ACTIVITIES
Capital expenditures (838) (1,457)
Disposal of property, plant & equipment 30 11
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (808) (1,446)
-------- --------
FINANCING ACTIVITIES
Borrowings under revolving loan 1,200 18,400
Payments under revolving loan (10,500) (20,600)
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
FINANCING ACTIVITIES (9,300) (2,200)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,999 (1,142)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,846 2,387
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,845 $ 1,245
======== ========
INTEREST PAID $ 1,172 $ 624
INCOME TAXES PAID $ 0 $ 0
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE> 6
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 three month period ended March 30, 1997, are
not necessarily indicative of the results to be expected for the entire fiscal
year.
During 1997, the Company has 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.
- 6 -
<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 quarter of 1997.
<TABLE>
<CAPTION>
Cash Charges
During the Three
Balance at Month Period Balance at
December 31, 1996 Ended March 30, 1997 March 30, 1997
----------------- -------------------- --------------
<S> <C> <C> <C>
Manufacturing equipment
write-down $1,789 -- $1,789
Inventory write-down 1,998 -- 1,998
Severance 93 $ 22 71
Plant restoration 300 -- 300
------ ----- ------
Total $4,180 $ 22 $4,158
====== ===== ======
</TABLE>
NOTE 3 - INVENTORIES:
The components of inventory are as follows:
<TABLE>
<CAPTION>
MARCH 30, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Raw materials $22,971 $25,575
Work-in-process 3,428 3,656
Finished goods 27,689 33,497
Obsolescence reserve (4,667) (4,506)
------- -------
Total $49,421 $58,222
======= =======
</TABLE>
- 7 -
<PAGE> 8
NOTE 4 - REVOLVING CREDIT AGREEMENT:
<TABLE>
<CAPTION>
MARCH 30, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Revolving Credit Facility $51,200 $60,500
Less: Short Term Portion 11,200 20,500
------- -------
Long-Term Revolving Credit Facility $40,000 $40,000
======= =======
</TABLE>
On March 28, 1994, BRK Brands, Inc., a wholly owned subsidiary of the Company,
entered into a revolving credit facility (the "Credit Facility") with a lender
which provided a Credit Facility of $70,000 on April 5, 1994. On September 4,
1996, the subsidiary amended the Credit Facility to increase the amount
available to be borrowed from $70,000 to $85,000; on December 20, 1996, the
amount of the Credit Facility was again amended to reduce the amount available
to $77,500 until January 31, 1997, when the amount available returned to
$70,000. In connection with the 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
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 Credit Facility.
Under the amended Credit Facility, the Company is subject to a commitment fee of
0.35% per annum on the unused portion of the commitment. The amended Credit
Facility carries an interest rate of LIBOR plus 1.5% for amounts up to $70,000
(LIBOR plus 2.0% for amounts in excess of $70,000) on the LIBOR based loan
portion of the amended Credit Facility and the higher of the lender's corporate
borrowing rate or the Federal Funds Rate plus 0.75% for amounts up to $70,000
(Federal Funds Rate plus 1.25% for amounts in excess of $70,000) on remaining
balances. The Credit Facility matures on March 28, 1999. Additionally, the
Credit Facility contains covenants restricting, among other things, the payment
of dividends, the sale of assets, mergers and acquisitions and requires
maintenance of interest coverage ratios, leverage ratios and a minimum tangible
net worth.
At March 30, 1997, the Company was in default under certain financial covenants
of the Credit Facility. The Company has not pursued a waiver but rather sought
a new source of financing.
In March 1997, the Company and a financial institution signed a commitment
letter relating to a new $80.0 million revolving credit facility (the "New
Credit Facility"). Advances under the New Credit Facility will be limited to
(a) 85% of eligible accounts receivable plus (b) the lesser of 60% of eligible
inventory or
- 8 -
<PAGE> 9
$35 million. During the period of May 1997 through October 1997,
$10.0 million in additional borrowing will be available and from June 1998
through September 1998, $5.0 million in additional borrowing will be available.
All obligations under the New Credit Facility will be secured by first
priority liens upon certain of the Company's assets. The New Credit Facility
will extend for a term of three years. Amounts outstanding under the New
Credit Facility will bear interest at prime rate plus 1/2% or the London
Interbank Offered Rate plus 2%. Under the New Credit Facility, which is
expected to close in the near future, the Company will be subject to a
commitment fee of 0.375% per annum on the unused portion of the commitment.
The agreement will contain 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.
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
- 9 -
<PAGE> 10
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 have
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
Court will hold a hearing on June 20, 1997, at which the fairness of the
settlement will be considered and the Court will determine whether to give
final approval.
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 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 March 30, 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 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
- 10 -
<PAGE> 11
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 is still evaluating the amended
complaint but believes it to be without merit and, thus, the Company will
vigorously defend the case.
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.
- 11 -
<PAGE> 12
Adoption of SFAS 128 is expected to have little or no impact on the Company's
future or previously reported EPS.
- 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 first quarter of 1997 were $37.4 million, a decrease of $18.1
million or 32.6% from net sales of $55.5 million for the first quarter of 1996.
This decrease in net sales was due primarily to lower net sales of carbon
monoxide detectors in the U.S.A. and, to a lesser extent, to lower net sales of
smoke detectors in the U.S.A. and Australia. Domestic net sales in the first
quarter of 1997 were hurt by the loss of distribution at a significant customer
during 1996, by other competitive activity and general market softness.
Gross Profit
Gross profit, excluding depreciation ("Gross Profit"), for the first quarter of
1997 was $10.5 million, a decrease of $4.8 million or 31.4%, compared with
Gross Profit of $15.4 million in the first quarter of 1996. As a percent of
net sales, Gross Profit was 28.2% and 27.7% for the first quarter of 1997 and
1996, respectively. The decline in gross profit dollars is due primarily to
lower sales volume, particularly of carbon monoxide detectors. Gross profit as
a percentage of net sales in the first quarter of 1997 was affected by lower
spending at the Company's manufacturing facilities in the first quarter of 1997
compared to the first quarter of 1996, which was in line with the Company's
restructuring plan publicly announced in January 1997. Additionally,
allowances granted to customers for consumer product returns were lower in the
first quarter of 1997 than in the first quarter of 1996. Gross profit in the
first quarter of 1997 was also affected by generally lower selling prices for
carbon monoxide detectors.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first quarter of
1997 were $13.5 million, a decrease of $6.3 million or 31.7%, compared with
SG&A expenses of $19.7 million for the first quarter of 1996. SG&A expenses in
the first quarter of 1997 compared to 1996 decreased primarily as a result of
lower variable selling expenses due to lower net sales and generally lower
- 13 -
<PAGE> 14
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 quarter 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 marketing allowances. As a percent of net sales, SG&A
expenses were 36.0% in the first quarter of 1997 as compared to 35.6% in the
first quarter of 1996.
Interest Expense
Interest expense for the first quarter of 1997 was $0.9 million, an increase of
$0.2 million or 20.7% from interest expense of $0.7 million for the first
quarter of 1996. The increase in interest expense was due mostly to higher
interest rates under the September 4, 1996, amendment to the Credit Facility.
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 first quarter of 1997 was $3.3 million, compared to a net loss
of $4.5 million for the first quarter of 1996. The decrease in the net loss for
the first quarter of 1997 compared to the first quarter 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 $2.2 million was
recorded in the quarter ended March 30, 1997, with a 40% effective tax rate,
consistent with the first quarter 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 RESERVES
For the quarter ended March 30, 1997, the Company's net cash provided by
operations increased to $12.1 million from $2.5 million in the corresponding
- 14 -
<PAGE> 15
period in 1996. At March 30, 1997, the total indebtedness of the Company was
$51.2 million under the Credit Facility. Management anticipates that cash
generated from operations, together with current working capital and the
Company's available and committed credit facilities, will provide sufficient
liquidity to meet the Company's near term working capital and capital
expenditure requirements.
While the Company was in default under certain financial covenants of its
existing credit facility at March 30, 1997, it did not pursue a waiver, but
rather sought a new source of financing.
In March 1997, the Company obtained a commitment from a financial institution
for a new $80.0 million three year credit facility ("New Credit Facility")
replacing its existing credit facility. Advances under the New Credit Facility
will be 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 will be available
and from June 1998 through September 1998, $5.0 million in additional borrowing
will be available. All obligations under the New Credit Facility will be
secured by first priority liens upon certain of the Company's assets. Amounts
outstanding under the New Credit Facility will bear interest at the prime rate
plus 1/2% or the London Interbank Offered Rate plus 2%. Under the New Credit
Facility, which is expected to close in the near future, the Company will be
subject to a commitment fee of 0.375% per annum on the unused portion of the
commitment. The agreement will contain 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual financial condition or results and could cause the
Company's actual financial condition or results to differ materially from those
expressed in any forward-looking statements of the Company made by or on behalf
of the Company. The factors included here are not exhaustive. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not
- 15 -
<PAGE> 16
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause the Company's actual financial condition or
results to differ materially from those contained in any forward-looking
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.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations. In addition, the Company's business historically has been
seasonal, with the largest proportion of sales occurring in September, October
and November of each calendar year. Moreover, consistently low temperatures
and high levels of snowfall during the typical home heating months increase the
likelihood of improperly vented carbon monoxide gas emissions being trapped
inside a closed home or building, which may in turn increase the demand for the
Company's carbon monoxide detectors, and consequently cause the Company's
quarterly results to fluctuate in such months. Factors such as quarterly
variations in financial results could adversely affect the market price of the
Common Stock and cause it to fluctuate substantially. In addition, the Company
(i) may from time to time increase its operating expenses to fund greater
levels of research and development, increase its sales and marketing
activities, develop
- 16 -
<PAGE> 17
new distribution channels, improve its operational and financial systems and
broaden its customer support capabilities and (ii) may incur significant
operating expenses associated with any new acquisitions. To the extent that
such expenses precede or are not subsequently followed by increased revenues,
the Company's business, operating results and financial condition will be
materially adversely affected.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company and
its competitors, market acceptance of new products, price reductions by the
Company or its competitors, mix of distribution channels through which products
are sold, level of product returns, mix of products sold, component pricing,
mix of international and North American revenues, and general economic
conditions. In addition, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing or
marketing decisions or acquisitions that could have a material adverse effect
on the Company's business, results of operations or financial condition. As a
result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. Due to all of the foregoing factors, it
is likely that in some future quarters the Company's operating results will be
below the 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
- 17 -
<PAGE> 18
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.
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
three month period ended March 30, 1997, net sales to Wal-Mart and Sam's in the
aggregate, represented approximately 10% of the Company's net sales. The
Company also supplies its products to its wholly-owned, non-U.S. subsidiaries
and to independent foreign distributors, who in turn distribute the Company's
products to over 500 customers in over 50 countries worldwide, with the United
Kingdom, Canada, Australia and the Scandinavian countries currently representing
the Company's principal foreign markets. The loss of any one or more of the
Company's key retail customers either in the United States or abroad due to
their financial weakness or bankruptcy could have a material adverse effect on
the Company's financial condition or results of operations.
PRODUCT LIABILITY RISKS
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains insurance against
product liability claims in amounts deemed adequate by management, but there
can be no assurance that such coverage will continue to be available on terms
acceptable to the Company or that such coverage will be adequate for liability
- 18 -
<PAGE> 19
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 is cooperating with the CPSC in its investigation. Although the
Company believes that the CPSC investigation into smoke detectors will not have
a material adverse effect on the Company's financial condition or results of
operations, this investigation 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,
- 19 -
<PAGE> 20
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.
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") on behalf of the Predecessor Company is on an
occurrence basis covering losses attributable to injury to person or property
during the policy period. Under the terms of the purchase agreement relating
to
- 20 -
<PAGE> 21
the Acquisition, the Company is required to indemnify Pittway to the extent
that Pittway's available insurance for claims made after the Acquisition
relating to occurrences prior to the Acquisition is insufficient to satisfy
such claims. The Company believes that Pittway's insurance coverage in effect
for periods prior to the Acquisition is no less favorable in the aggregate than
the insurance maintained by the Company since the Acquisition; however
Pittway's insurance coverage also covers the business of Pittway unrelated to
the Predecessor Company and claims asserted prior to the Acquisition.
COMPETITION
The home safety market is characterized by intense competition based primarily
on product availability, price, speed of delivery, ability to tailor specific
solutions to customer needs, quality and depth of product lines. The Company's
competition is fragmented across its product lines, and accordingly, the Company
does not compete with any one company across all product lines. The Company
competes with a variety of entities, some of which have greater financial and
other resources than the Company. The Company's ability to remain competitive
in the home safety market depends in part on its ability to successfully
identify new product opportunities and develop and introduce new products and
enhancements on a timely and cost effective basis. In addition, the Company's
products compete to some extent with higher priced AC powered residential
security systems. To the extent that the installation and maintenance expenses
associated with such systems decline, the Company may experience increased
competition for its products from manufacturers and marketers which
traditionally have not competed with the Company.
GENERAL ECONOMIC CONDITIONS AND LIQUIDITY
General economic conditions, both domestic and foreign, and sources and
availability of financing have an impact on the Company's business, financial
condition and results of operations. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
or the sources and availability of funding of the Company's operations, whether
or not under the Company's existing or committed Credit Facilities, such
conditions could have a material adverse effect on the Company's financial
condition or results of operations. Moreover, operating its business in
countries outside of the United States exposes the Company to fluctuations in
foreign currency exchange rates, exchange ratios, nationalization or
expropriation of assets, import/export controls, political instability,
variations in the protection of intellectual property rights. In addition,
limitations on foreign investments and restrictions on the ability to convert
currency are risks
- 21 -
<PAGE> 22
inherent in conducting operations in geographically distant locations, with
customers speaking different languages and having different cultural approaches
to the conduct of business, any one of which alone or collectively, could have a
material adverse effect on the Company's international operations, and
consequently on the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 3 Defaults Upon Senior Securities
At March 30, 1997, BRK Brands, Inc. was in default under certain
financial covenants of its Credit Facility. The Company has not
pursued a waiver but rather sought a new source of financing, and
in March 1997, the Company and a financial institution signed a
commitment letter relating to a new $80.0 million revolving
credit facility.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
----------- -----
10.51 Employment Agreement, dated as of
January 1, 1997, between BRK
Brands, Inc. and Malcolm Candlish
11.1 Statement re: computation of per
share earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company
during the quarter ended March 30, 1997.
- 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: May 12, 1997
-------------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer
of the Registrant)
- 23 -
<PAGE> 1
EXHIBIT 10.51.
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of this 1st day of January 1997, between BRK Brands,
Inc. (the "Company") and the undersigned executive whose name and address
appear on the signature page hereto (the "Executive").
WITNESSETH:
WHEREAS, the Company considers it important to the best interests of the
Company and its affiliated corporations that the Executive be encouraged to
maintain employment with the Company;
WHEREAS, the Company considers it imperative to the best interests of
the Company and its affiliated corporations that the Executive be subject to
certain restrictions concerning the activities which he may undertake for
himself or others unrelated to the Company and its corporate affiliates and
would not enter into an agreement to provide certain benefits to Executive
absent such restrictions; and
WHEREAS, the Company anticipates that entering into an employment
agreement will operate as an incentive for the Executive to maintain
employment with the Company and to refrain from activities contrary to the
interests of the Company and its corporate affiliates;
NOW, THEREFORE, to induce the Executive to maintain employment with the
Company and to refrain from activities contrary to the interests of the
Company and its corporate affiliates, and to induce the Company to continue
Executive's employment with the Company and to provide certain benefits to
Executive, the Company and the Executive agree as follows:
<PAGE> 2
1. Terms of Employment
(a) Duration of Employment. Executive shall be employed by the
Company through December 31, 1999 (the "Employment Period").
(b) Position/Duties. The Executive shall serve as Chairman of the Board
of Directors of the Company and its parent, First Alert, Inc., through at
least June 30, 1998. Thereafter, the Executive shall perform such duties as
he may be directed to perform by the Board of Directors of the Company
("Board").
(c) Business Efforts. So long as the Executive is employed by the
Company, the Executive shall devote a significant portion of his business
time to the performance of his duties under this Agreement but in no event
less than twenty (20) days per year.
(d) Salary. Provided that the Executive continues to be employed by the
Company, he shall be paid an annual base salary of $100,000.00, less any
applicable payroll or other taxes required to be withheld and any required
employee contributions towards benefits pursuant to Company employee benefit
plans or such other amount not less than $100,000 as may be determined by
the Board in its discretion.
(e) Bonus. In addition to a base annual salary, the Executive shall be
entitled to receive such bonuses as the Board may determine to be
appropriate or as provided by separate agreement between the Company and
the Executive. Nothing contained in this Agreement is intended to affect
any rights to bonus which the Executive currently has or as precluding the
entry into any future agreement concerning bonuses.
(f) Insurance Benefits. The Executive shall be eligible to participate
in all insurance benefit plans and group health programs sponsored by the
Company which are applicable to non-
- 2 -
<PAGE> 3
exempt employees throughout the period of the Executive's employment by the
Company, provided that the Executive pays the employee share of any premium
attributable to said benefit.
(g) Annual Physical. The Executive may elect to undergo a physical
examination by a physician of the Executive's choice once each calendar year.
All fees and medical expenses associated with said physical examination shall be
paid by the Company.
(h) Other Benefits. The Executive shall further be eligible to participate
in other employee benefit plans such as pension and 401 (k) plans and receive
such benefits as vacation and leave time on the same terms as are applicable to
other officers of the Company.
2. Termination of Employment.
(a) By the Company. During the term of this Agreement and any extension
thereof, the Executive's employment with the Company may be terminated by the
Company only for cause. For purposes of this Agreement, the following reasons
shall constitute "cause":
(1) The Executive is convicted of, or pleads guilty or nolo
contenders to any felony or a crime involving moral turpitude;
(2) The Executive materially fails or refuses to perform his duties
and such material failure or refusal continues for a period of
ten (10) days following written notice of such failure or refusal
in reasonable detail, it being understood that the Company's
failure to achieve its business plan or projections shall not
itself be considered a failure or refusal to perform duties;
(3) The Executive breaches any provision of Section 5 hereof;
- 3 -
<PAGE> 4
(4) The Executive commits any fraud, embezzlement, misappropriation
of funds, breach of fiduciary duty or other act of dishonesty or
intentional malfeasance against the Company; or
(5) The Executive's death or permanent incapacity.
(b) By the Executive. During the term of this Agreement and any extension
thereof, the Executive's employment with the Company may be terminated by the
Executive for any reason.
(c) Effect of Termination of Employment. The termination of the
Executive's employment pursuant to subsections 2(a) or 2(b) shall relieve the
Company of any further obligation to pay to the Executive salary pursuant to
subsection 1(d) or bonus, or to permit the Executive's participation in any
benefit plan (other than medical/dental insurance or group health program
coverage as set forth below) pursuant to subsection 1(f), but shall not relieve
the Company of its obligation to provide an annual physical examination pursuant
to subsection 1(g) above and continuing medical/dental insurance or group health
program coverage pursuant to Section 4 below, unless the Executive's employment
is terminated by the Company pursuant to subsections 2(a)(1), (3) or (4), and
provided that the Executive continues at all times to comply with his
obligations under Section 5 below.
3. Notice of Termination/Resignation.
Termination of the Executive's employment with the Company by the Company
pursuant to subsection 2(a) or resignation from employment with the Company by
the Executive pursuant to subsection 2(b) shall be communicated by a written
"Notice of Termination" or "Notice of Resignation" to the other party. (In the
case of the Executive's death or permanent incapacity,
- 4 -
<PAGE> 5
receipt of actual notice of death or incapacity by the Company shall be deemed
Notice of immediate Resignation.) Except in the case of the Executive's death or
permanent incapacity, the Notice of Termination or Notice of Resignation may, at
the discretion of the party giving the notice, be effective immediately or at a
future specified date. The date the Executive ceases performance of services for
the Company pursuant to said Notice, or pursuant to the expiration of the term
of this Agreement on December 31, 1999 or a later date, shall be considered the
"Termination Date."
4. Continuing Medical/Health Insurance or Group Health Program Coverage.
Provided that the Executive complies with his obligations under Section 5,
the Executive shall be entitled to receive the following benefits after the
Termination Date, without regard to whether said Termination Date occurs during
the term of this Agreement or subsequent to its expiration:
(a) The Executive and Jasmine R. Cresswell Candlish ("the Executive's
Wife") shall be eligible to continue to participate, to the same extent and
level they were participating as of the Termination Date, in any Company
sponsored group medical and dental plans (whether insured or self-insured) for
non-bargaining unit employees and their spouses ("Group Plan") in effect on the
Termination Date, for the maximum allowable period under COBRA ("COBRA
Coverage"). Participation in said Group Plan by the Executive and the
Executive's Wife shall be subject to his/her payment of the regular employee
contribution or share for employee and spouse coverage as specified in the Group
Plan. Provided that the Executive or the Executive's Wife pays said regular
employee contribution, the remainder of the premium for COBRA Coverage shall be
paid by the Company.
- 5 -
<PAGE> 6
(b) If, as of the date the Executive is no longer eligible for COBRA
Coverage, the Executive has not reached the minimum age for coverage under
Medicare, the Company shall at the Company's option: (1) purchase for the
Executive a medical/dental insurance policy (to be effective as of the date the
Executive is no longer eligible for COBRA Coverage) which will provide benefits
comparable to those then available to employees of the Company under the Group
Plan; or (2) directly reimburse the Executive for any medical/dental costs
incurred by him after the date the Executive is no longer eligible for COBRA
Coverage on the same terms as such costs would be paid by the Group Plan if the
Executive were insured under such Group Plan then in effect at the Company. The
Executive's benefits pursuant to this sub-section 4(b) shall terminate on the
date the Executive becomes eligible for Medicare coverage. It is understood that
depending upon the circumstances at the time, the payments made pursuant to this
subsection (whether the payments are made to purchase insurance or to directly
reimburse the Executive for medical/dental costs) may constitute taxable income
to the Executive. In the event that such payments constitute taxable income, it
is agreed that the payments will be reported to the Internal Revenue Service and
any other appropriate taxing authority as taxable income to the Executive, and
it is further agreed that the Executive shall be solely responsible for any
taxes associated with such payments.
(c) If, as of the date the Executive's Wife is no longer eligible for
COBRA Coverage pursuant to subsection 4(a), the Executive's Wife has not reached
the minimum age for coverage under Medicare, the Company shall at the Company's
option: (1) purchase for the Executive's Wife a medical/dental insurance policy
(to be effective as of the date the Executive's Wife is no longer eligible for
COBRA Coverage) which will provide benefits comparable to those then
- 6 -
<PAGE> 7
available to spouses of employees of the Company under the Group Plan; or (2)
directly reimburse the Executive or, in the case of the Executive's demise, the
Executive's Wife, for any medical/dental costs incurred by her after the date on
which the Executive's Wife is no longer eligible for COBRA Coverage on the same
terms as such costs would be paid by the Group Plan if the Executive's Wife were
insured under such Group Plan then in effect at the Company. The Executive's
Wife's benefits pursuant to this subsection 4(c) shall terminate on the date the
Executive's Wife becomes eligible for Medicare coverage. It is understood that
depending upon the circumstances at the time, the payments made pursuant to this
subsection (whether the payments are made to purchase insurance or to directly
reimburse the Executive or the Executive's Wife for medical/dental costs) may
constitute taxable income to either the Executive or to the Executive's Wife. In
the event that such payments do constitute taxable income, it is agreed that the
payments will be reported to the Internal Revenue Service and any other
appropriate taxing authority as taxable income to the Executive and/or the
Executive's Wife, and it is further agreed that the Executive and/or the
Executive's Wife shall be solely responsible for any taxes associated with such
payments.
(d) It is understood and agreed that the Company's obligation to allow
continuing participation in employee benefit plans as specified in subsection
4(a) and the Company's obligations to provide the benefits as specified in
subsections 4(b) and (c) is contingent upon the Executive's continuing
compliance with his obligations under Section 5. If the Company determines
that the Executive has failed to comply with said obligations, it may cease
any contribution for employee benefits, may cease any further payment of
medical/dental insurance premiums or reimbursement of medical/dental costs,
and may further recover from the Executive
- 7 -
<PAGE> 8
any premium payments made for or reimbursement payments made to the Executive
prior to the date of the Company's determination but after the Executive
initially failed to comply.
It is further understood and agreed that if the Executive, the Executive's
wife or both of them, receive medical and dental plan coverage from another
employer of the Executive which is comparable to that provided under this
Agreement as such coverage may be in effect for them from time to time, the
COMPANY'S obligations to provide coverage under this Section 4 to the Executive,
the Executive's Wife or both of them, as the case may be, shall cease.
5. Restrictions on Activities.
(a) Competition. The Executive acknowledges that he has been and will
continue to be employed by the Company in a key executive capacity which has
given and will give him access to confidential information concerning the
Company's products, suppliers, customers. manufacturing operations and
research and development activities throughout the world, that the Company is
engaged in a highly competitive business and that the success of the Company's
business in the marketplace depends upon its goodwill, reputation for quality
and dependability and the preservation of confidential information. The
Executive further acknowledges and agrees that reasonable limits may be placed
on his ability to compete against the Company as provided herein so as to
protect and preserve the legitimate business interests and goodwill of the
Company.
During his employment with the Company and the Non-Competition Period (as
defined below), the Executive will not (anywhere in the world where the Company
or any of its divisions, subsidiaries or affiliates then conducts business)
engage or participate in, directly or indirectly, as principal, agent, employee,
employer, consultant, investor or partner, or assist in the
- 8 -
<PAGE> 9
management of, or own any stock or any other ownership interest in, any
business which competes with the Company (as defined below). For purposes of
this Agreement, a business shall be considered to compete with the Company
only if it engages directly or indirectly in the business of designing,
manufacturing, marketing, distributing or selling (1) residential smoke
detectors which are not capable of being monitored by an alarm control panel,
(2) rechargeable lanterns and flashlights, (3) fire extinguishers, (4) night
lights, (5) electromechanical or electronic timers which are stand alone
devices and not part of a lighting control system, (6) passive infrared motion
sensors which are not part of any lighting control or building control system,
(7) fire-resistant storage boxes, (8) carbon monoxide detectors, (9) fire
escape ladders, (10) child safety or elder care products or (11) any other
products which the Company is developing, designing, manufacturing, marketing,
distributing or selling during the Executive's employment with the Company.
Notwithstanding the foregoing, the Executive may own, directly or indirectly,
less than 1% of the capital stock of any public corporation, may serve as a
director of The Black & Decker Corporation, and may serve as a director of
such other corporations, which may have any of the foregoing competing
businesses as part of their business, as the Board may from time to time
agree, without violating this subsection 5(a). For purposes of this Agreement,
the "Non-Competition Period" shall mean the period equal to the longer of (i)
the period from the effective date of this Agreement to December 31, 1997,
(ii) twelve (12) consecutive months immediately following the date the
Executive ceases being employed by the Company, whether the Executive's
termination from employment with the Company is voluntary or otherwise, or
(iii) twelve (12) consecutive months immediately following the date the
Executive ceases receiving salary payments from the Company hereunder.
- 9 -
<PAGE> 10
(b) Non-Solicitation of Employees. Customers and Suppliers. The Executive
acknowledges that by virtue of his employment with the Company he has had and
will have the opportunity to develop knowledge of and relationships with the
Company's employees, customers, and suppliers. The Executive further
acknowledges that the Company's relationships with its employees, customers, and
suppliers are critical to its ability to operate and its financial well-being.
While employed by the Company and during the Non Solicitation Period (as
defined below), the Executive will not solicit, or attempt to solicit, any
officer, director, consultant, executive or employee of the Company or any of
its divisions, subsidiaries or affiliates to leave his or her engagement with
the Company or such division, subsidiary or affiliate nor will he call upon,
solicit, divert or attempt to solicit or divert from the Company or any of its
divisions, subsidiaries or affiliates any party of whose name he was aware
during the term of his employment with the Company and who is, was, or was
solicited to become a customer of the Company or its divisions, subsidiaries
or affiliates at any time during the course of the Executive's employment with
the Company nor will he divert or attempt to divert from the Company or any of
its divisions, subsidiaries or affiliates any supplier (or potential supplier
of whose name he is aware) of the Company, its divisions, subsidiaries or
affiliates; provided, however, that nothing in this subsection 5(b) shall be
deemed to prohibit the Executive from calling upon or soliciting a customer or
supplier during the Non-Solicitation Period if such action relates solely to a
business which does not compete with the Company. For purposes of this
Agreement, the "Non-Solicitation Period" shall mean the period of thirty-six
(36) consecutive
- 10 -
<PAGE> 11
months immediately following the Termination Date whether the Executive's
termination from employment with the Company is voluntary or otherwise.
(c) Proprietary Information. By virtue of his employment by the Company,
the Executive has had and will have access to confidential specifications,
strategic or technical data, marketing research data, product research and
development data, manufacturing techniques, confidential customer lists and
sources of supply, and trade secrets, all of which are confidential and may be
proprietary and are owned or used by the Company, its divisions, subsidiaries
or affiliates. Such information shall hereinafter be called "Proprietary
Information" and shall include any and all items enumerated in the preceding
sentence and coming within the scope of the business of the Company or any of
its divisions, subsidiaries or affiliates as to which the Executive may have
had access, whether conceived or developed by others or by the Executive alone
or with others during the period of his service to the Company, whether or not
conceived or developed during regular working hours. Proprietary Information
shall not include any records, data or information which are in the public
domain during the period of service by the Executive, provided the same are
not in the public domain as a consequence of disclosure directly or indirectly
by the Executive in violation of this Agreement.
The Executive agrees that Proprietary Information is of critical importance
to the Company. The Executive has kept all Proprietary Information in a
fiduciary capacity for the sole benefit of the Company. The Executive has not
and shall not directly or indirectly disclose (except as required by law) to any
person other than the Company or its employees authorized to receive such
disclosure by the Company, or use for his own benefit or for the benefit of any
other person or entity:
- 11 -
<PAGE> 12
(1) any of the Company's trade secrets. at any time hereafter, and
(2) any Proprietary Information as defined in subsection 5(c) of this
Agreement but which does not qualify as a trade secret under
Illinois law. while he is employed by the Company and for a
period of thirty-six (36) months following the Termination Date
whether the Executive's termination from employment with the
Company is voluntary or otherwise.
(d) Non-Disparagement. The Executive further agrees that (1) he has not
and will not, at any time following the date of this Agreement, take any action
that will demean, disparage or criticize the Company, its subsidiaries,
divisions or affiliates or any of their respective officers, employees, agents,
directors or stockholders, and (2) he has not and will not make any negative or
adverse remarks whatsoever to any third party, including without limitation,
actual or potential customers, distributors, sales representatives and investors
of the Company and past, current or future employees and/or consultants of the
Company, concerning the business, operations, technologies, products, services,
marketing strategies, pricing policies, management. affairs and financial
condition of the Company, its subsidiaries, divisions, affiliates and/or their
successors, assigns, stockholders, officers, directors and employees; provided,
however, that nothing contained in this subsection shall be deemed to prohibit
the Executive from truthfully responding to inquiries pursuant to legal process,
providing information as required by law, conducting internal employee
performance appraisals, providing information to the Board or the Company's
officers. employees, and investors as necessary to the performance by the
Executive of his duties. or otherwise performing his duties.
- 12 -
<PAGE> 13
(e) Return of Documents. The Executive agrees that upon his termination
from the Company, whether voluntary or otherwise, the Executive shall deliver
to the Company all notes, letters, documents and records which may contain
Proprietary Information which are then in his possession or control and shall
destroy any and all copies and summaries thereof not returned to the Company.
(f) Assignment of Inventions. The Executive agrees to assign and transfer
to the Company or its designee, without any separate remuneration or
compensation, his entire right, title and interest in and to all Inventions in
the Field (as defined below), together with all United States and foreign
rights with respect thereto, and at the Company's expense to execute and
deliver all appropriate patent and copyright applications for securing United
States and foreign patents and copyrights on Inventions in the Field and to
perform all lawful acts, including giving testimony, and to execute and
deliver all such instruments that may be necessary or proper to vest all such
Inventions in the Field and patents and copyrights with respect thereto in the
Company, and to assist the Company in the prosecution or defense of any
interference which may be declared involving any of said patent applications,
patents, copyright applications or copyrights. For the purposes of this
Agreement, the words "Inventions in the Field" shall include any discovery,
process, design, development, improvement, application, technique, or
invention, whether patentable or copyrightable or not and whether reduced to
practice or not, conceived or made by the Executive, individually or jointly
with others (whether on or off the Company's premises or during or after
normal working hours) while in the employ of the Company, and which was or is
directly or indirectly related to the business of the Company or any of its
subsidiaries, divisions or affiliates, or which resulted or results from or
was suggested by any
- 13 -
<PAGE> 14
work performed by any employee or agent thereof during the Executive's
employment by the Company and for a period of thirty-six months following the
Termination Date.
(g) Additional Protections. The obligations of the Executive under the
foregoing subsections 5(a) through 5(f) shall be in addition to, and shall not
limit, any other obligations of the Executive to the Company imposed either by
law or agreement with respect to the matters set forth in this Section 5.
(b) Representation. THE EXECUTIVE REPRESENTS AND WARRANTS THAT THE
KNOWLEDGE, SKILLS AND ABILITIES HE POSSESSED AT THE TIME OF EXECUTION OF THIS
AGREEMENT ARE SUFFICIENT TO PERMIT HIM TO EARN A LIVELIHOOD SATISFACTORY TO
HIMSELF WITHOUT VIOLATING ANY PROVISION OF SECTION 6 HEREOF. FOR EXAMPLE, BY
USING SUCH KNOWLEDGE, SKILLS AND ABILITIES, OR SOME OF THEM, IN THE SERVICE
OF A NON-COMPETITOR THE EXECUTIVE FURTHER REPRESENTS AND WARRANTS THAT HIS
ABILITY SO TO EARN A LIVELIHOOD SATISFACTORY TO HIMSELF DOES NOT DEPEND UPON
HIS ABILITY TO OBTAIN COMPENSATION FOR HIS SERVICES AT, OR IN EXCESS OF, THE
LEVEL AT WHICH HE WILL BE COMPENSATED BY THE COMPANY.
6. Remedies.
It is specifically understood and agreed that any breach of the provisions
of Section 5 of this Agreement will result in serious and irreparable injury to
the Company's business and that the remedy at law alone will be an inadequate
remedy for such breach, and that in addition to any other remedy it may have,
the Company shall be entitled to obtain the specific performance of this
Agreement by the Executive and to seek both temporary and permanent injunctive
relief (to
- 14 -
<PAGE> 15
the extent permitted by law) without the necessity of proving actual damages.
In addition to the foregoing, the Company shall have no obligation to make any
payment or provide any benefit to the Executive under Section 4 of this
Agreement on or after the date on which any breach of the provisions of
Section 5 of this Agreement occurs and shall have the right to cease such
payments and benefits.
7. No Other Benefits.
Except as specifically provided in this Agreement, the Executive shall
not be entitled to any compensation, severance or other benefits from the
Company, its parent or any of their respective divisions, subsidiaries or
affiliates in the event of the Executive's termination of employment for any
reason.
8. Limitations on Payments.
Anything herein to the contrary notwithstanding, in no event shall the
present value of all payments made to the Executive by the Company hereunder
which constitute "parachute payments" (within the meaning of Section
280(G)(b)(2) of the Internal Revenue Code of 1986. as amended (the "Code"),
without regard to clause A(ii) thereof), when aggregated with any other payments
made by the Company to the Executive which constitute "parachute payments" (as
so defined), exceed 299% of the Executive's "base amount" (within the meaning of
said Section 280(G)) unless the applicable percentage of the holders of the
Company's common stock outstanding as of the date of such payments shall
approve such payments after appropriate disclosure. The Company agrees to make
reasonable efforts to obtain such stockholder approval. For the purposes hereof,
the "present value" of any payment shall be determined in accordance with
Section 280(G) of the Code.
- 15 -
<PAGE> 16
9. Severable Provisions.
The provisions of this Agreement are severable and the invalidity of any
one or more provisions shall not affect the validity of any other provision,
except that if a court of competent jurisdiction invalidates or voids Section 5
of this Agreement or any portion thereof, the Company shall be entitled to
discontinue any payments or benefits that would otherwise be provided under
Section 4 and the Executive shall forfeit his rights to the same. In the event
that a court of competent jurisdiction, in the course of a proceeding to enjoin
the Executive's violation of Section 5, shall determine that specific
performance of any portion of Section 5 of this Agreement cannot be obtained in
whole or in part because of the duration or scope thereof, the parties hereto
agree that said court in making such determination shall have the power to
reduce the duration and scope of such provision to the extent necessary to
permit an order of specific performance, and that the Agreement in its reduced
form shall be enforced to the full extent permitted by law.
10. Notices.
All notices hereunder, to be effective, shall be in writing and shall be
delivered by hand or mailed by certified mail, postage and fees prepared, as
follows:
IF TO THE COMPANY: BRK BRANDS, INC.
3901 Liberty Street Road
Aurora, IL 60504-8122
Attn: Haldon K. Grant
If to the Executive, to the address set forth below his name on the
signature page hereto; or to such other address as a party may notify the other
pursuant to a notice given in accordance with this Section 11.
- 16 -
<PAGE> 17
11. Miscellaneous.
(a) Modification. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof,
superseding all prior understandings and agreements, whether written or oral.
except as specifically referenced herein. This Agreement may not be amended
or revised except by a writing signed by both parties or by a court of
competent jurisdiction as provided in Section 9 above.
(b) Waiver. No waiver by either party hereto at anytime of (1) any
breach by the other party hereto of any provision of this Agreement, or (2)
compliance with any condition of this Agreement to be performed by such
other party, shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or any prior or subsequent time.
(c) Assignment and Transfer. This Agreement shall not be terminated by
the merger or consolidation of the Company with any corporate or other entity
or by the transfer of all or substantially all of the assets of the Company to
any other person, corporation, firm or entity. The provisions of this
Agreement shall be binding on and shall inure to the benefit of any such
successor in interest to the Company. Neither this Agreement nor any of the
rights, duties or obligations of the Executive shall be assignable by the
Executive, nor shall any of the payments required or permitted to be made to
the Executive by this Agreement be encumbered, transferred or in any way
anticipated, except as specifically provided herein.
(d) Captions. Captions herein have been inserted solely for convenience
of reference and in no way define, limit or describe the scope or substance
of any provision of this Agreement.
- 17 -
<PAGE> 18
(e) Governing Law. This Agreement shall be construed under and enforced in
accordance with the laws of The State of Illinois.
12. Term of Agreement. This Agreement shall become effective as of
January 1, 1997, and continue in effect through December 31, 1999. The
Executive's obligations under Section 5, and the Company's obligations under
subsection 1(g) and Section 4 shall continue without regard to expiration.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
The Executive BRK Brands, Inc.
Malcolm Candlish By: David V. Harkins
- ---------------------------------- ------------------------------
Malcolm Candlish David V. Harkins
465 Walls Way Chairman of the
Osprey, Florida 34229 Compensation Committee
- 18 -
<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
-------------------------
March 30, March 31,
1997 1996
---------- ----------
<S> <C> <C>
Weighted average common shares outstanding 24,183,116 24,043,116
Weighted average common share equivalents
outstanding during the period computed in
accordance with the treasury stock method 263,927 582,213
---------- ----------
Total weighted average shares outstanding 24,447,043 24,625,329
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<CASH> 8845
<SECURITIES> 0
<RECEIVABLES> 33110
<ALLOWANCES> 3850
<INVENTORY> 49421
<CURRENT-ASSETS> 111046
<PP&E> 53272
<DEPRECIATION> 24105
<TOTAL-ASSETS> 168730
<CURRENT-LIABILITIES> 39712
<BONDS> 0
0
0
<COMMON> 242
<OTHER-SE> 85336
<TOTAL-LIABILITY-AND-EQUITY> 168730
<SALES> 37413
<TOTAL-REVENUES> 37413
<CGS> 26877
<TOTAL-COSTS> 26877
<OTHER-EXPENSES> 15174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 868
<INCOME-PRETAX> (5457)
<INCOME-TAX> (2183)
<INCOME-CONTINUING> (3274)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3274)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
