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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-23630
FIRST ALERT, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 04-3157075
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
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3901 LIBERTY STREET ROAD, AURORA, ILLINOIS 60504-8122
(Address, including zip code, of Registrant's principal executive office)
(630) 851-7330
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements,
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / X /.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant totaled $27,645,388 (based on the closing price of the Company's
Common Stock on the Nasdaq Stock Market (National Market) on March 18, 1997).
As of March 18, 1997, there were 24,183,116 shares outstanding of the
Company's Common Stock ($0.01 par value).
DOCUMENTS INCORPORATED BY REFERENCE
Certain parts of the Registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Parts I, II and IV of this report.
Certain parts of the Registrant's definitive Proxy Statement dated April 7,
1997 are incorporated by reference into Part III of this report.
Exhibit Index on page 19.
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FIRST ALERT, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
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PAGE
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PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 9
Item 3. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 11
Item 6. Selected Financial Data...................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................... 12
Item 8. Financial Statements and Supplementary Data.................................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial.... 15
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 16
Item 11. Executive Compensation....................................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 16
Item 13. Certain Relationships and Related Transactions............................... 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 16
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PART I
THE COMPANY
The Company was formed in 1992 by Thomas H. Lee Company ("THL Co.") and
senior management of the Company to purchase, through its wholly-owned
subsidiary BRK Brands, Inc. ("BRK Brands"), substantially all of the assets and
to assume substantially all of the liabilities of the BRK Electronics Division
of Pittway Corporation ("Pittway") and to acquire from Pittway all of the
capital stock of various foreign entities engaged in businesses related to
Pittway's BRK Electronics Division (the "Predecessor Company"). The acquisition
of the Predecessor Company by the Company (the "Acquisition") was consummated as
of July 31, 1992. In connection with the Acquisition, Pittway received from the
Company consideration of approximately $92.5 million, including Common Stock of
the Company, then valued at $5.0 million, all of which was sold by Pittway
Intellectual Property Corp. ("PIPCO") in the Company's initial public offering
of Common Stock which was consummated on April 5, 1994.
BUSINESS
ITEM 1.
The Company, through its subsidiaries, is a leading manufacturer and
marketer of a broad range of residential safety products, anchored by its
leadership position in the United States residential smoke detector market. The
Company's market position is supported by the strength of the First Alert(R)
brand name, which the Company believes is the most widely recognized consumer
brand in the home safety business. The Company has capitalized on the First
Alert(R) brand name and its leading smoke detector market share to develop and
market a broad range of residential safety products, including carbon monoxide
detectors, fire extinguishers, rechargeable flashlights and lanterns, electronic
and electromechanical timers, nightlights, fire safes and chests, radon gas
detectors, fire escape ladders, child safety products and motion sensing
lighting controls. This broad product line enables the Company to position
itself with retailers and consumers as a residential safety products provider
and to stimulate incremental sales by cross-marketing its various products. The
Company's most significant addition to its product line is the First Alert(R)
carbon monoxide detector which was introduced in September 1993. In response to
the October 1, 1995 revisions to the Underwriters Laboratories Inc. ("UL")
Safety Standard 2034, the Company introduced two new carbon monoxide detectors
in August 1995. In 1996, the Company introduced a plug in carbon monoxide
detector with a digital readout that allows the consumer to know the level of
carbon monoxide that is present. The Company's carbon monoxide detectors are
designed to detect and provide an early warning against potentially harmful
concentrations of carbon monoxide in the home.
MARKET OVERVIEW
United States Residential Safety Market
Smoke Detectors. The U.S. market for smoke detectors has grown
significantly over the last twenty years with growth fueled by a combination of
increased public awareness of the value of smoke detectors and by state and
local governments enacting legislation requiring the installation of smoke
detectors and in some cases an increased number of smoke detectors per
residence. Independent studies completed in late 1994 indicate that
approximately 92% of households in the United States have one or more smoke
detectors, up from approximately 10% in 1975. Although multiple smoke detectors
can decrease the risk of death due to fire, the U.S. Consumer Product Safety
Commission (the "CPSC") estimates that only 41% of U.S. households have more
than one smoke detector and only 13% have three or more smoke detectors.
The market for residential smoke detectors developed in the 1970s based on
the effectiveness of smoke detectors as an early warning in the event of a fire.
During this period, state and local governments enacted building codes requiring
the installation of residential smoke detectors. In 1978, the National Fire
Protection Association ("NFPA") recommended that a smoke detector be installed
on every level of a residence. In June 1992, NFPA released results of a ten year
study (1981-1990) which indicated that the death rate for individuals in a fire
decreased by 42% in those areas where a smoke detector was present.
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The trend to increasingly stringent smoke detector requirements is
continuing as more governmental entities adopt legislation and as legislation
increasingly covers existing as well as new homes and mandates more smoke
detectors per residence.
Moreover, regional building associations which publish model codes for new
and existing homes such as the Uniform Building Code, the National Building Code
and the One and Two Family Dwelling Code, have enacted guidelines generally
recommending that smoke detectors be installed in or near every sleeping room
and/or on every level.
Carbon Monoxide Detectors. Carbon monoxide detectors have not yet
experienced the market penetration experienced by smoke detectors or fire
extinguishers. Prior to 1994, consumer awareness of the dangers of carbon
monoxide poisoning was low. Since 1994, several highly publicized incidents of
deaths from carbon monoxide poisoning have heightened public awareness of the
dangers of carbon monoxide. In addition, a small number of municipalities,
including the City of Chicago, have passed carbon monoxide detector ordinances
for residential usage.
Carbon monoxide detectors have been subject to scrutiny, notably in
Chicago, where in late 1994 public officials questioned the performance of
carbon monoxide detectors, particularly the sensitivity of the First Alert(R)
product to lower concentrations of carbon monoxide gas.
Carbon monoxide is produced by the incomplete combustion of fuel. Any
device which burns fuel, such as a stove, lamp, furnace, water heater, fireplace
or space heater, is a potential source of harmful carbon monoxide. The CPSC has
recommended that consumers purchase and install at least one carbon monoxide
detector in every household, near the sleeping area.
UL amended the standard for carbon monoxide detectors, all aspects of which
were effective by October 1, 1995. In August 1995, the Company introduced two
new carbon monoxide detectors, both of which complied with the new UL standard.
In 1996, the Company introduced a plug in carbon monoxide detector with a
digital readout that allows the consumer to know the level of carbon monoxide
that is present.
Fire Extinguishers. Over the last several years, fire extinguishers have
also become a key element of residential safety for consumers. The Company is
one of the leading participants in the United States retail fire extinguisher
market. During 1996, the Company introduced a new line of fire extinguishers
with a pressure gauge to be marketed under the SureGrip(TM) brand name. The
Company believes that introduction of innovative new products and expanding into
new markets will help to increase demand for fire extinguishers.
International Residential Safety Markets
The Company believes that in general the markets for residential smoke
detectors outside the United States are in a much earlier stage of development
than the United States market, and the level of development varies greatly from
country to country. Market penetration is greatest in the United Kingdom and
Canada, where the Company estimates approximately 77% and 94% of households,
respectively, have at least one smoke detector. These penetration rates,
however, are not necessarily reflective of the market for residential smoke
detectors in other developed countries such as France, Germany and Japan.
Currently, the Company estimates that the use of smoke detectors in these
countries is generally less than 5%.
In 1987, the well-publicized King's Cross London Underground Station fire
stimulated consumer interest in residential fire safety products in the United
Kingdom. In mid-1990, the United Kingdom became the first European Community
country to adopt a residential smoke detector standard. In June 1992, building
regulations in England and Wales enacted by the Department of the Environment
and the Welsh office became effective requiring the placement of smoke detectors
on every level of new dwellings. The Company believes that the implementation of
these regulations, along with educational advertising by the government, fire
departments, and manufacturers in the wake of the King's Cross fire, were the
primary reasons for the increase in the number of U.K. households with smoke
detectors from an estimated 13% in 1988 to an estimated 77% in 1996.
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The Company believes that adoption of building standards, together with
promotion of consumer awareness of fire safety and the value of smoke detectors,
will serve eventually to increase residential smoke detector usage throughout
Europe. Since local political and cultural factors also affect the market
acceptance of smoke detectors in these international markets, it is difficult to
determine the extent or timing of their market acceptance.
Management intends to focus its attention on selected developed countries
and to stimulate and capitalize on increased international demand for
residential safety-related products in those countries. A new management team
was installed in Europe in 1995 and 1996 to assist the Company in implementing
this strategy.
PRODUCTS
Smoke Detectors. The Company's smoke detector product line for residential
application, consisting of UL listed photoelectric and ionization smoke
detectors, was launched in the late 1960s.
The Company markets its smoke detectors under three principal brand names.
The First Alert(R) brand name is the Company's advertised premium brand and is
featured in media and public relations promotional campaigns. Through the First
Alert(R) brand, the Company offers a full line of smoke detectors, featuring a
variety of options such as a patented light-activated test feature, a unit
specifically designed for the hearing impaired and the only UL Listed ten year
smoke detector. The Company also offers its Family Gard(R) brand as a lower
priced, basic function alternative for those consumers who are price sensitive,
thereby affording retailers the opportunity to offer a full range of
price-points through one supplier.
The Company also offers a variety of smoke detectors under the BRK(R) brand
name which it sells into the electrical wholesale market. Through this brand,
the Company is able to offer its products to contractors who install the
Company's products in new and remodeled homes.
Carbon Monoxide Detectors. In September 1993, the Company introduced its
first carbon monoxide detector in the United States under the First Alert(R)
brand name. The Company introduced two new carbon monoxide detectors in August
1995, both designed to meet the October 1, 1995 revisions to UL Safety Standard
2034. One new carbon monoxide detector is an easy-to-install, nine-volt battery
operated carbon monoxide detector with a two-stage alarm that provides early
warnings at low levels of carbon monoxide and a full alarm at higher levels.
This carbon monoxide detector incorporates a biomimetic sensor specially
designed to replicate the human response to the presence of carbon monoxide in
the blood stream and thus alert the user to possible dangerous levels of this
colorless, odorless gas, the inhalation of which, in moderate quantities, can
lead to flu-like symptoms and which, in excessive quantities, can lead to death.
This sensor is contained in an easily removable unit which requires replacement,
in general, every three years. The other new carbon monoxide detector uses a tin
oxide technology. This model is calibrated at four levels, for long-term
accuracy and reliability and it is easily installed on any standard electrical
outlet. Audible and visual warning signals indicate both low and higher
concentrations of carbon monoxide. In 1996, the Company introduced a plug in,
tin oxide carbon monoxide detector with a digital readout that allows the
consumer to know the level of carbon monoxide that is present, and a Family
Gard(R) carbon monoxide detector with a biomimetic sensor.
The Company believes that its carbon monoxide detectors have helped to
create an important new consumer product category given the increasing consumer
awareness of the dangers of accidental carbon monoxide inhalation, the ease of
installation and the attractive retail price points of the Company's product.
The CPSC has recommended that consumers purchase and install at least one carbon
monoxide detector, near the sleeping area. Management estimates that less than
15% of all households in the United States are equipped with a carbon monoxide
detector.
Fire Extinguishers. The Company's disposable fire extinguisher product
line was introduced in 1985 to complement its First Alert(R) brand smoke
detectors and evidences the Company's commitment and ability to leverage the
First Alert(R) brand name into other residential safety-related product
categories. The Company currently markets a full range of fire extinguisher
products for use by the consumer, including fire extinguishers for use in the
kitchen, garage, workshop, automobile and boat. In 1996, the Company redesigned
its fire extinguisher line to include a pressure gauge and be marketed under a
new SureGrip(TM) brand name.
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Other Residential Products. The Company has extended its product line to
create a broad category of safety-related products. The following products are
marketed through the Company's existing distribution channels in conjunction
with its smoke detectors, carbon monoxide detectors and fire extinguishers:
- Fire escape ladders;
- Fire security safes and chests;
- Child safety products;
- Rechargeable flashlights and lanterns;
- Photoelectric nightlights;
- Electronic and electromechanical timers which permit the automatic
activation of lights and other electrical appliances;
- Passive infrared motion sensors which facilitate the automatic
operation of exterior and interior lighting; and
- Radon and other gas detectors which alert the user to the presence of
potentially harmful gases which either occur naturally or as a result
of leakage.
The following table sets forth the percentages of the Company's net sales
for its product categories for the three years ended December 31:
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1996 1995 1994
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Fire Safety........................................... 58.3% 56.2% 50.1%
Home Safety........................................... 35.5% 38.1% 44.1%
Home Lighting Security................................ 6.2% 5.7% 5.8%
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100.0% 100.0% 100.0%
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The Fire Safety Product Category includes net sales of smoke detectors,
fire extinguishers, fire escape ladders and fire security safes and chests.
The Home Safety Product Category includes net sales of carbon monoxide
detectors, rechargeable lights and lanterns, radon gas detectors and child
safety products.
The Home Lighting Security Product Category includes net sales of
nightlights, timers and passive infrared motion-sensing home lighting controls.
PRODUCT DEVELOPMENT
The Company directs its product development efforts towards extensions of
its existing product categories with feature enhancements and the identification
and development of new residential safety product categories. The Company
conducts ongoing product identification and development activities spearheaded
by its marketing staff. In certain circumstances, the Company engages third
parties to provide or to assist in the development of specific products. In
1994, 1995 and 1996, the Company's research and development expenditures were
approximately $1.6 million, $2.9 million and $3.1 million, respectively. To
facilitate its product development efforts, the Company actively participates in
fire research projects, including those sponsored by the NFPA and other
residential safety-related projects.
In addition to carbon monoxide detectors, First Alert(R) product
introductions since 1993 include: (i) a smoke detector with a non-removable ten
year battery; (ii) a line of electromechanical timers designed to complement its
line of electronic timers; (iii) a line of passive infrared motion sensors; (iv)
a smoke detector for the hearing impaired comprised of a strobe light and a
smoke detector in one unit; (v) a compact fire extinguisher with the fire
fighting rating of a larger unit; (vi) a line of fire security safes and chests;
(vii) fire escape ladders; (viii) a smoke detector with a battery that has a six
year life; (ix) child safety products; and (x) new SureGrip(TM) gauged fire
extinguishers.
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CUSTOMERS AND CUSTOMER RELATIONS
The Company sells its products to mass merchants, such as Wal-Mart, Kmart,
Target Stores and Sears; home center and hardware chains, such as Home Depot,
Lowe's, Builders Square, True Value/Cotter and Ace Hardware; catalog showrooms,
such as Service Merchandise; warehouse clubs, such as Price Club and Sam's; and
electrical wholesale distributors such as Graybar, Wesco and Grainger. In 1996,
net sales to Wal-Mart and Sam's, in the aggregate, represented approximately 15%
of the Company's net sales. The Company believes that its broad customer base
reduces its dependence on sales to any single customer. In addition, the Company
believes that the breadth of its product lines allows it to supply discounters,
warehouse clubs and full service retail establishments.
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 fifty (50) countries worldwide,
with the United Kingdom, Canada, Australia and the Scandinavian countries
currently representing the Company's principal foreign markets.
SALES ORGANIZATION
The Company's sales organization consists of a domestic retail division, an
electrical wholesale division and an international distribution division. The
Company's domestic retail sales division directly supervises sales to selected
national accounts and its five domestic retail regional sales managers supervise
approximately 50 commissioned sales representatives who call on domestic
retailers. The sales organization of the Company's electrical wholesale division
is comprised of a national sales manager and three regional managers who
supervise approximately 60 independent sales organizations which are responsible
for providing wholesale distributors and electrical contractors with the
Company's BRK(R) Electronics line of residential safety products. The Company
distributes its products in the United Kingdom, Canada and Australia through
sales organizations with local country managers and in all other international
markets through approximately 50 distributors under the supervision of three
international sales managers.
ADVERTISING AND PROMOTION
The Company promotes its products primarily through cooperative trade,
television, print and radio advertising. In 1996 and 1995, the Company spent
approximately $22.9 million and $33.3 million, respectively, for advertising.
The Company's principal 1996 promotions related to a national advertising
campaign aimed at promoting multiple usage of smoke detectors.
The Company supplements product advertising with public service campaigns
aimed at increasing residential safety awareness. These educational programs are
not limited to the dangers of fire and carbon monoxide, but also emphasize the
proper maintenance of the respective detectors. In this regard, the Company
associates itself with school, community, and national safety awareness programs
in order to stimulate consumer demand for safety-related consumer products. For
example, the Company's fire safety video, "Plan to Get Out Alive," which was
created with the assistance of the United States Fire Administration and in
conjunction with the New York affiliate of CBS News and McDonald's Corporation,
is used worldwide by fire officials and educators to teach people about the
dangers of fire and the benefits of meaningful precautions. "Project Get
Alarmed," developed in conjunction with the National SAFE KIDS Campaign and the
Company's "Junior Fire Inspector Program" bring the same fire safety education
message to children, the most frequent victims of home fires. The Company
periodically issues the HomeSafe & Sound Guide, created in conjunction with
Meredith Publications, publisher of Ladies Home Journal and Better Homes and
Gardens. The Guide, which is offered to consumers who buy the Company's
products, includes articles, ads and special offers which motivate readers to
make their homes safe. In addition, in recent years, insurance companies have
become active in public service campaigns which encourage the use and proper
maintenance of smoke detectors, and a major battery manufacturer has promoted
its products by reminding customers to replace smoke detector batteries at the
end of each annual daylight savings time period.
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GOVERNMENT REGULATION AND LITIGATION
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, 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 incidents 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 use of potentially dangerous materials, 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 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 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.
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COMPETITION
The Company believes that it competes on the basis of its ability to
provide a reasonably priced broad range of high quality residential safety
products. 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. Although the Company is the leading manufacturer and marketer of
smoke detectors, the residential safety industry is highly competitive and
includes numerous domestic and foreign participants, some of whom are
substantially larger and have greater financial and other resources than the
Company. 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 who traditionally have not competed with the Company.
TRADEMARKS AND PATENTS
The First Alert(R) trademark is owned by the First Alert Trust in which the
Company has a 75% beneficial interest. The Company entered into a license
agreement with the First Alert Trust and Pittway which permits the Company in
perpetuity and on an exclusive, royalty-free basis, to manufacture and market
under the First Alert(R) brand name any products other than products which are
designed to be monitored by an alarm or building control system or to work in
conjunction with a communications panel or other building control system
("Professional Products"). PIPCO owns the remaining 25% beneficial interest in
the First Alert Trust and Pittway is a party to such license agreement with the
First Alert Trust under which it has, in perpetuity, an exclusive, royalty free
license to manufacture and market Professional Products under the First Alert
Professional(R) and First Alert Professional Security System(R) brand names.
Either Pittway or the Company may terminate their further obligations and rights
under the license by providing notice to the other party.
The Company owns a number of trademarks that have been registered with the
United States Patent and Trademark Office, including BRK(R) and Family Gard(R).
The Company also owns a number of patents related to the design and manufacture
of its products.
In 1993, the Company entered into a seventeen year license agreement (the
"Quantum Agreement"), cancelable by either party after seven years, with Quantum
Group, Inc. ("Quantum") pursuant to which the Company obtained an exclusive
license to use and sell, in the United States, the patented biomimetic sensor
component of its carbon monoxide detector product in all markets other than the
United States original equipment manufacturer ("OEM") recreational vehicle
market. Pursuant to this agreement, the Company must pay Quantum a royalty based
upon a percentage of the Company's net sales attributable to the products which
contain the biomimetic sensor component licensed by Quantum. In addition, the
Company obtained and subsequently exercised an option to obtain similar licenses
covering all other international markets, except Japan. In April 1995, the
Company and Quantum amended the Quantum Agreement to (i) permit the Company to
offer products with sensors other than Quantum sensors, subject to the Company
ordering certain minimum quantities of Quantum sensors during 1995 and 1996
which orders would only be required if the detector incorporating such sensors
received a listing from UL by October 31, 1995, the date on which the amendment
to U.L. Safety Standard 2034, related to certain performance characteristics of
the detector, became effective (such listing was obtained); (ii) obligate the
Company to pay a royalty on all of its sales during 1995 and 1996 of detectors
containing non-Quantum sensors; (iii) make the license granted to the Company
under the original Quantum Agreement nonexclusive and permit Quantum to sell its
sensors to other parties, both effective January 1, 1997; and (iv) obligate
Quantum to continue to supply replacement sensors to the Company.
The Company aggressively seeks to protect its intellectual property, such
as trademarks, patents, product designs, manufacturing processes and new product
research and concepts. These rights are protected through the acquisition of
utility and design patents and trademark registrations, the maintenance of trade
secrets, the development of trade dress and, when necessary and appropriate,
litigation against those who, in the Company's opinion, are competing unfairly
with the Company. The Company also maintains stringent procedures to maintain
the secrecy of its confidential business information. These procedures include
the
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establishment of "need to know" criteria for the dissemination of certain
information and the use of written confidentiality agreements in cases where the
sharing of proprietary information with third parties is necessary.
The Company has received from time to time, and may receive in the future,
communications from third parties asserting intellectual property rights
relating to the Company's products and technologies. To date, licenses generally
have been available to the Company where third-party technology was necessary or
useful for development or manufacture of the Company's products. In the future,
however, there can be no assurance that third parties will not assert claims
against the Company with respect to existing or future products or that licenses
will be available on reasonable terms, or at all, with respect to any
third-party technology. If the Company is unable to obtain licenses of
third-party technology, it could be prohibited from manufacturing and marketing
products incorporating that technology. The Company could also incur substantial
costs in redesigning its products or in defending any legal action taken against
it. Should the Company be found to infringe the intellectual property rights of
others, the Company could be required to pay damages to the infringed party.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company has experienced, and expects to continue to experience,
seasonality and quarter to quarter variability in net sales and operating
income. These seasonal trends resulted in 59% and 60% of its net sales being
generated in the last six months of its fiscal year in 1996 and 1995,
respectively.
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 one of the
Company's Aurora, Illinois facilities. 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 would have a material adverse effect
on the Company's financial condition or results of operations. At the present
time, management cannot evaluate the effect, if any, on the Company that may
result from any negative developments in the Mexican economy.
Information regarding the sources and availability of components used in
the Company's products is incorporated herein by reference from Note 1 on page
17 of the Company's 1996 Annual Report to Stockholders.
EMPLOYEES
As of December 31, 1996, the Company had 2,125 full-time employees, 249 of
whom worked in Aurora, Illinois, 1,811 of whom worked in Juarez, Mexico/El Paso,
Texas and 65 of whom worked in other locations. Approximately 95 employees are
represented by the International Brotherhood of Electrical Workers, Local 134
("IBEW"), and work under a three-year labor contract which expires on April 30,
1998. The Company believes its relations with the IBEW and its members are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Information regarding foreign operations is incorporated herein by
reference from Note 15 on page 23 of the Company's 1996 Annual Report to
Stockholders.
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EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each person who is an executive officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Malcolm Candlish................. 61 Chairman of the Board
B. Joseph Messner................ 44 President and Chief Executive Officer
William K. Brouse................ 48 Vice President -Sales
Mark A. Devine................... 39 Vice President - Engineering
Michael A. Rohl.................. 37 Vice President and Chief Financial Officer
</TABLE>
- ---------------
MALCOLM CANDLISH joined the Company as a director in August 1992 and was
elected Chairman of the Board in October 1992 and Chief Executive Officer in
December 1992. Mr. Candlish served as Chief Executive Officer until September
18,1996. He also served as President of the Company from April 1,1996 to
September 18,1996. Prior to his employment with the Company, Mr. Candlish was
Chairman, Chief Executive Officer and President of Sealy, Inc., a bedding
manufacturer, from 1989 until October 1992. From 1983 until 1989, Mr. Candlish
was employed with Beatrice Companies, a conglomerate, as President and Chief
Executive Officer of Samsonite Luggage Company, a luggage manufacturer, and,
from 1977 until 1983, Mr. Candlish was employed by the Wilson Sporting Goods
subsidiary of PepsiCo, Inc. in various executive positions. Mr. Candlish also
serves as a director of AmerUs Life Insurance Company and The Black & Decker
Corporation.
B. JOSEPH MESSNER joined the Company as President, Chief Executive Officer
and a director on September 18, 1996. Prior to his employment with the Company,
Mr. Messner served as President of Bushnell Corporation, formerly the Sports
Optics Division of Bausch & Lomb, Inc., from 1989 to November 1995. In the
period from 1981 through 1989, he held other positions with Bausch & Lomb, Inc.,
including Vice President and Controller of the Eyewear Division and Corporate
Director of Finance. Mr. Messner also serves as a director of Totes, Inc.
WILLIAM K. BROUSE began his employment with the Predecessor Company in 1984
as Director -- Special Markets. Mr. Brouse has served the Predecessor Company as
well as the Company in a variety of capacities since that time. In June 1993,
Mr. Brouse was appointed Vice President -- Sales.
MARK A. DEVINE began his employment with the Predecessor Company in 1982 as
an electrical engineer. Mr. Devine served as Manager of Quality Control from
1987 until June 1994 when Mr. Devine was named Plant Manager of Fire
Extinguisher Operations. In December 1996, Mr. Devine was appointed Vice
President-Engineering.
MICHAEL A. ROHL began his employment with the Company in October 1993 as
Corporate Controller. In May 1996, Mr. Rohl was appointed Vice President and
Chief Financial Officer of the Company. Prior to joining the Company from
September 1992 to October 1993, Mr. Rohl served as Senior Manager, Finance for
Motorola Nortel Communications and prior to that as a Senior Audit Manager with
Deloitte & Touche.
ITEM 2. PROPERTIES
The Company's principal manufacturing facilities are located in Juarez,
Mexico. These facilities comprise a 144,000 square foot owned manufacturing
plant at which smoke detectors, rechargeable flashlights and lanterns, passive
infrared motion sensors, nightlights, rechargeable lead-acid batteries and
plastic injection molded parts are produced and an adjacent 109,000 square foot
leased manufacturing plant at which carbon monoxide detectors and fire security
chests are produced.
In June 1995, the Company commenced occupancy of 60,000 square feet of
office space for a fifteen-year period, pursuant to a lease of a building in
Aurora, Illinois, which serves as the Company's principal executive offices. The
Company sold its 225,000 square foot combined office, plant and warehouse
located in Aurora, Illinois in June 1995. In September 1995, the Company
commenced occupancy of a building of approximately 176,000 square feet in
Aurora, Illinois, pursuant to a lease for a ten year period plus two five-year
renewal
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<PAGE> 12
options, serving as its finished goods warehouse and fire extinguisher
manufacturing facility. The Company currently leases its distribution facilities
in El Paso, Texas (90,000 square feet), Rexdale, Ontario (13,200 square feet),
Newbury, England (14,000 square feet) and Parramatta, Australia (10,200 square
feet). The Company believes that its properties, owned and leased, are and will
be adequate to meet its needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
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 plaintiffs'
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 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 attorneys' fees and costs
for class counsel) to be paid out in settlement. The effect of the Gilbert
complaint did not have a material effect on the Company's financial results for
any period and adequate reserves exist at December 31, 1996, for the Company's
share of the settlement amount.
A purported class action entitled Betley et al. vs. First Alert, Inc.
("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 Underwriter
Laboratories' listing criteria for residential carbon monoxide detectors in
effect at the time the Model FACO was manufactured. They seek a refund of their
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<PAGE> 13
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
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 plaintiffs claim any personal
injuries or property damage, nor do they claim specifically that their detectors
failed to detect dangerous levels of carbon monoxide. Rather, they seek
"rescissionary damages" and attorneys' fees. The Company is still evaluating
this lawsuit 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Nasdaq National Market is the principal market in which the Company's
Common Stock is traded under the symbol "ALRT." The quarterly market prices
included in Note 17 on page 23 of the Company's 1996 Annual Report to
Stockholders are incorporated herein by reference.
At March 18, 1997, there were 417 stockholders of record of the Company's
Common Stock. This number does not include beneficial owners of Common Stock
whose shares are held in the names of various dealers, clearing agencies, banks,
brokers and other fiduciaries.
The Company has neither declared nor paid cash dividends on its Common
Stock during 1996 or 1995. The Company intends to retain all of its earnings to
finance the development and expansion of its business and therefore does not
intend to pay dividends on its Common Stock in the foreseeable future. Any
future declaration of dividends will be subject to the discretion of the Board
of Directors of the Company, will be subject to applicable law and will depend
upon the Company's results of operations, earnings, financial condition,
contractual limitations, cash requirements, future prospects and other factors
deemed relevant by the Company's Board of Directors. In addition, the current
credit facility (the "Credit Facility") of the Company's subsidiary, BRK Brands,
Inc. ("BRK Brands"), limits BRK Brands' ability to pay dividends on its Common
Stock, during any period of four consecutive fiscal quarters, to 50% of BRK
Brands' net income for such period. In March 1997, the Company signed a
commitment letter relating to a new $80.0 million senior secured revolving
credit facility (the "New Credit Facility"). The New Credit Facility also
contains covenants restricting dividends.
ITEM 6. SELECTED FINANCIAL DATA
The Five-Year "Summary of Selected Consolidated/Combined Financial Data" on
page 9 of the Company's 1996 Annual Report to Stockholders is incorporated
herein by reference.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
"Management Discussion and Analysis of Financial Condition and Results of
Operations" on pages 10 through 12 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference. The discussion therein
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.
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 possible for
management to predict all 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 ON KEY SUPPLIERS
Information regarding the dependence upon key suppliers for certain
components used in the Company's products is incorporated herein by reference
from Note 1 on page 17 of the Company's 1996 Annual Report to Stockholders.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations. In addition, the Company's business historically has been
seasonal, with the largest proportion of sales occurring in September, October
and November of each calendar year. Moreover, consistently low temperatures and
high levels of snowfall during the typical home heating months increase the
likelihood of improperly vented carbon monoxide gas emissions being trapped
inside a closed home or building, which may in turn increase the demand for the
Company's carbon monoxide detectors, and consequently cause the Company's
quarterly results to fluctuate in such months. Factors such as quarterly
variations in financial results could adversely affect the market price of the
Common Stock and cause it to fluctuate substantially. In addition, the Company
(i) may from time to time increase its operating expenses to fund greater levels
of research and development, increase its sales and marketing activities,
develop new distribution channels, improve its operational and financial systems
and broaden its customer support capabilities and (ii) may incur significant
operating expenses associated with any new acquisitions. To the extent that such
expenses precede or are not subsequently followed by increased revenues, the
Company's business, operating results and financial condition will be materially
adversely affected.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors, including demand
for the Company's products, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products, price reductions
by the Company or its competitors, mix of distribution channels through which
products are sold, level of product returns, mix of products sold, component
pricing, mix of international and United States 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
12
<PAGE> 15
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an 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 ON 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.
DEPENDENCE ON MAJOR RETAIL CUSTOMERS
The Company's performance is affected by the economic strength and weakness
of its worldwide retail customers. The Company sells its products to mass
merchants, such as Wal-Mart, Kmart, Target Stores and Sears; home center and
hardware chains, such as Home Depot, Lowe's Builders Square, True Value/Cotter
and Ace Hardware; catalog showrooms, such as Service Merchandise; warehouse
clubs, such as Price Club and Sam's; and electrical wholesale distributors such
as Graybar, Wesco and Grainger. In 1996, net sales to Wal-Mart and Sam's, in the
aggregate, represented approximately 15% 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 for
example to their financial weakness or bankruptcy, could have a material adverse
effect on the Company's financial condition or results of operations.
PRODUCT LIABILITY RISKS
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains insurance against product
liability claims in amounts deemed adequate by management, but there can be no
assurance that such coverage will continue to be available on terms acceptable
to the Company or that such coverage will be adequate for liability actually
incurred. The Company's insurance coverage is on an occurrence basis covering
losses attributable to injury to person or property during the policy period.
Although to date product liability claims have not had a material adverse
13
<PAGE> 16
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 one of the
Company's Aurora, Illinois facilities. 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 DETECTORS
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, 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 incidents 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 use of potentially dangerous materials, 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
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<PAGE> 17
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 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 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 and
variations in the protection of intellectual property rights. In addition,
limitations on foreign investments and restrictions on the ability to convert
currency are risks 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements, which are included on pages 13 through 23 of the 1996 Annual Report
to Stockholders, together with the "Report of Independent Accountants" on page
24 of the 1996 Annual Report to Stockholders and the unaudited supplementary
data that are included in Note 17-Quarterly Results on page 23 of the 1996
Annual Report to Stockholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the captions "Election of Directors" and
"Information Concerning the Board of Directors" found in the Company's
definitive Proxy Statement, which will be filed with the Commission on or about
April 7, 1997, is incorporated herein by reference. See Item 1, "Executive
Officers" for information concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the caption "Executive
Compensation" contained in the Company's definitive Proxy Statement, which will
be filed with the Commission on or about April 7, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the captions "Principal
Holders of Voting Securities" and "Security Ownership of Directors and Officers"
contained in the Company's definitive Proxy Statement, which will be filed with
the Commission on or about April 7, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the caption "Certain
Relationships and Related Transactions" contained in the Company's definitive
Proxy Statement, which will be filed with the Commission on or about April 7,
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of First Alert, Inc.
included in the Company's 1996 Annual Report to Stockholders, are incorporated
herein by reference in Item 8 of Part II of this report.
Consolidated Balance Sheet -- December 31, 1996 and 1995 on page 13 of
the 1996 Annual Report to Stockholders
Consolidated Statement of Operations -- years ended December 31, 1996,
1995 and 1994 on page 14 of the 1996 Annual Report to Stockholders
Consolidated Statement of Cash Flows -- years ended December 31, 1996,
1995 and 1994 on page 15 of the 1996 Annual Report to Stockholders
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 on page 16 of the 1996 Annual Report to
Stockholders
Notes to the Consolidated Financial Statements on pages 17 through 23
of the 1996 Annual Report to Stockholders
Report of Independent Accountants on page 24 of the 1996 Annual Report
to Stockholders
(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule is filed with this report:
Schedule II -- Valuation and Qualifying Accounts
The Report of Independent Accountants on Financial Statement Schedule
appears on page 22 of this report. All other schedules for which provision is
made in Regulation S-X of the Securities and Exchange Commission, are not
required under the related instructions or are not applicable and, therefore,
have been omitted.
16
<PAGE> 19
(3) EXHIBITS
The following is a list of exhibits filed as part of the Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -----
<S> <C>
2.1 Amended and Restated Asset Purchase Agreement, dated as of July 31, 1992, with
Pittway (incorporated by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
3.1 Certificate of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-75132),
as filed on February 9, 1994, as amended)
3.2 Restated Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
3.3 By-Laws of the Company (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
3.4 Amended and Restated By-Laws of the Company (incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-1 (No. 33-75132),
as filed on February 9, 1994, as amended)
4.1 Specimen Form of the Company's Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1
(No. 33-75132), as filed on February 9, 1994, as amended)
10.1 Note and Stock Purchase Agreement, dated July 31, 1992 among BRK Brands, the
Company and the ML-Lee Acquisition Funds (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (No. 33-75132), as
filed on February 9, 1994, as amended)
10.2 Holding Company Guaranty, dated July 31, 1992, by the Company in favor of the
ML-Lee Acquisition Funds (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.3 OEM Agreement, dated March 31, 1992, between Nittan Company Ltd. and BRK Brands
(incorporated by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.4 NDC and BRK Distribution Agreement, dated December 22, 1993, between BRK Brands
and Nippon Dry Chemical Co. (incorporated by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.5 Distribution Agreement, dated July 31, 1992, between Pittway Australia Pty. Ltd
and BRK Brands (incorporated by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.6 Distribution Agreement, dated July 31, 1992, between the System Sensor Division
of Pittway and BRK Brands (incorporated by reference to Exhibit 10.24 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.7 License and Distribution Agreement, dated March 19, 1993, between Quantum
Group, Inc. and BRK Brands (incorporated by reference to Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.8 Data Processing Services and Data File Conversion Agreement, dated July
31,1992, between BRK Brands and the System Sensor Division of Pittway
(incorporated by reference to Exhibit 10.26 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.9 Technology and Know-How License Agreement, dated July 31, 1992, between Pittway
and BRK Brands (incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- ----
<S> <C>
10.10 Manufacturing, Testing and Miscellaneous Services Agreement, dated July 31,
1992, between BRK Brands, Pittway and Electronica BRK de Mexico, S.A. de C.V.
(incorporated by reference to Exhibit 10.28 to the Company's Registration
Statement on Form S-1 (No. 33- 75132), as filed on February 9, 1994, as
amended)
10.11 U.S. Patent Assignment, dated July 31, 1992, between Pittway and BRK Brands
(incorporated by reference to Exhibit 10.29 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.12 Foreign Patent Assignment, dated July 31, 1992, between Pittway and BRK Brands
(incorporated by reference to Exhibit 10.30 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.13 U.S. Trademark Assignment, dated July 31, 1992, between Pittway and BRK Brands
(incorporated by reference to Exhibit 10.31 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.14 Foreign Trademark Assignment, dated July 31, 1992, between Pittway and BRK
Brands (incorporated by reference to Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.15 Copyright Assignment, dated July 31, 1992, between Pittway and BRK Brands
(incorporated by reference to Exhibit 10.33 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.16 Trademarks, Technology and Know-How License Agreement, dated July 31, 1992, by
and among the First Alert Trust, BRK Brands and Pittway (incorporated by
reference to Exhibit 10.34 to the Company's Registration Statement on Form S-1
(No. 33-75132), as filed on February 9, 1994, as amended)
10.17 Management Stock Subscription Agreement, dated July 31, 1992 (incorporated by
reference to Exhibit 10.35 to the Company's Registration Statement on Form S-1
(No. 33-75132), as filed on February 9, 1994, as amended)
10.18 Equity Investor Stock Subscription Agreement, dated July 31, 1992 (incorporated
by reference to Exhibit10.36 to the Company's Registration Statement on Form
S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.19 Management IRA Stock Subscription Agreement, dated July 31, 1992 (incorporated
by reference to Exhibit 10.37 to the Company's Registration Statement on Form
S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.20 Stock Subscription Agreement, dated October 31, 1992 (incorporated by reference
to Exhibit 10.38 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
10.21 Shareholders' Agreement, dated October 31, 1992 (incorporated by reference to
Exhibit 10.39 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
10.22 Registration Rights Agreement, dated July 31, 1992 (incorporated by reference
to Exhibit 10.40 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
10.23 1992 Time Accelerated Restricted Stock Option Plan (incorporated by reference
to Exhibit 10.41 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
10.24 1994 Stock Option Plan (incorporated by reference to Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.25 1994 Management Incentive Bonus Program (incorporated by reference to Exhibit
10.43 to the Company's Registration Statement on Form S-1 (No. 33-75132), as
filed on February 9, 1994, as amended)
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -----
<S> <C>
10.26 Lease Agreement, dated January 15, 1985, among William J. Strong, Albert
Emerich, and Achin Wolf, The Old Second National Bank of Aurora as Trustee
under Trust #1887 and BRK Brands (incorporated by reference to Exhibit 10.45 to
the Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.27 Lease Agreement, dated December 1986, between Louis Kennedy and BRK Brands, as
assigned to The Lincoln National Insurance Company (incorporated by reference
to Exhibit 10.46 to the Company's Registration Statement on Form S-1 (No.
33-75132), as filed on February 9, 1994, as amended)
10.28 First Amendment to Lease Agreement, dated October 28, 1987, between Louis
Kennedy and BRK Brands (incorporated by reference to Exhibit 10.47 to the
Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.29 Collective Bargaining Agreement between BRK Brands and Local Union No.
134,International Brotherhood of Electrical Workers, AFL-CIO from May 1, 1992
to April 30, 1995 (incorporated by reference to Exhibit 10.48 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.30 Amended and Restated Executive Employment and Non-Competition Agreement, dated
November 25, 1992, between BRK Brands and Gerald Carrino (incorporated by
reference to Exhibit 10.49 to the Company's Registration Statement on Form S-1
(No. 33-75132), as filed on February 9, 1994, as amended)
10.31 Amended and Restated Executive Employment and Non-Competition Agreement, dated
November 25, 1992, between BRK Brands and Gary L. Lederer (incorporated by
reference to Exhibit 10.50 to the Company's Registration Statement on Form S-1
(No. 33-75132), as filed on February 9, 1994, as amended)
10.32 Termination Benefits Agreement, dated July 31, 1992, between BRK Brands and
Richard F. Timmons (incorporated by reference to Exhibit 10.51 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.33 Termination Benefits Agreement, dated July 31, 1992, between BRK Brands and
William K. Brouse (incorporated by reference to Exhibit 10.52 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.34 Termination Benefits Agreement, dated July 31, 1992, between BRK Brands and
Andrew J. Saarnio (incorporated by reference to Exhibit 10.53 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.35 Termination Benefits Agreement, dated July 31, 1992, between BRK Brands and
Gerard Seyler (incorporated by reference to Exhibit 10.54 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended).
10.36 Management Agreement, dated July 31, 1992, among THL Co., the Company and BRK
Brands (incorporated by reference to Exhibit 10.55 to the Company's
Registration Statement on Form S-1 (No. 33-75132), as filed on February 9,
1994, as amended)
10.37 Form of Credit Agreement, among BRK Brands, the Lenders parties thereto and The
First National Bank of Chicago (incorporated by reference to Exhibit 10.56 to
the Company's Registration Statement on Form S-1 (No. 33-75132), as filed on
February 9, 1994, as amended)
10.38 Form of Guaranty by the Company to and in favor of each of the Lenders parties
thereto, the LC Issuer and the Agent party thereto, to the Credit Agreement
(incorporated by reference to Exhibit 10.57 to the Company's Registration
Statement on Form S-1 (No. 33-75132), as filed on February 9, 1994, as amended)
10.39 Trust Agreement, dated as of July 31, 1992, by and between Pittway and
Continental Bank, National Association (incorporated by reference to Exhibit
10.58 to the Company's Registration Statement on Form S-1 (No. 33-75132), as
filed on February 9, 1994, as amended)
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -------------------------------------------------------------------------------
<C> <S>
10.40 Lease, dated September 7, 1994, by and between the Company and American
National Bank and Trust Company of Chicago, not personally but as Trustee under
Trust Agreement, dated August 3, 1994 and known as Trust No. 118625-05
(incorporated by reference to Exhibit 10.59 to the Company's Annual Report on
Form 10-K, as filed on March 30, 1995)
10.41 Amendment to License and Distribution Agreement between Quantum Group, Inc. and
BRK Brands, effective April 11, 1995. (incorporated by reference to Exhibit
10.62 to the Company's Annual Report on Form 10-K, as filed on March 29, 1996)
10.42 First Alert, Inc. Nonqualified Stock Option Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10.63 to the Company's Annual Report on
Form 10-K, as filed on March 29, 1996)
10.43 Standard Industrial Lease Agreement by and between The Lincoln National Life
Insurance Company and BRK Brands for 25A Spur Drive, El Paso, Texas, effective
as of March 15, 1996 (incorporated by reference to Exhibit 10.64 to the
Company's Annual Report on Form 10-K, as filed on March 29, 1996)
10.44 First Amendment to Building Lease between American National Bank and Trust
Company of Chicago and BRK Brands for 3901 Liberty Street Road, Aurora,
Illinois, effective as of March 15, 1995 (incorporated by reference to Exhibit
10.65 to the Company's Annual Report on Form 10-K, as filed on March 29, 1996)
10.45 Industrial Building Lease between American National Bank and Trust Company of
Chicago and BRK Brands for 3920 Enterprise Court, Aurora, Illinois, effective
as of April 3, 1995 and First Amendment thereto effective as of October 31,
1995 (incorporated by reference to Exhibit 10.66 to the Company's Annual Report
on Form 10-K, as filed on March 29, 1996)
10.46 Employment Agreement, dated as of September 18, 1996, between the Company and
B. Joseph Messner (filed herewith)
10.47 Termination Benefits Agreement, dated July 5, 1995, between BRK Brands and
Michael A. Rohl (filed herewith)
10.48 Termination Benefits Agreement, dated April 24, 1996, between BRK Brands and
Fred W. Higgenbottom (filed herewith)
10.49 1995 Management Incentive Bonus Program (filed herewith)
10.50 1996 Management Incentive Bonus Program (filed herewith)
11.1 Statement re: computation of per share earnings (filed herewith)
13.1 1996 Annual Report to Stockholders (filed herewith)
21.1 List of Subsidiaries (incorporated by reference to Exhibit 22.1 to the
Company's Annual Report on Form 10-K, as filed on March 30, 1995)
24.0 Consent of Price Waterhouse LLP (filed herewith)
27.0 Financial Data Schedule (filed herewith)
</TABLE>
- ---------------
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the fourth quarter ended
December 31, 1996.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of
March, 1997.
FIRST ALERT, INC.
/s/ B. JOSEPH MESSNER
By: ................................
B. JOSEPH MESSNER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ B. JOSEPH MESSNER President, Chief Executive March 31, 1997
........................................ Officer and Director
B. JOSEPH MESSNER (Principal Executive Officer)
/s/ MICHAEL A. ROHL Vice President and Chief March 31, 1997
........................................ Financial Officer (Principal
MICHAEL A. ROHL Financial and Accounting
Officer)
/s/ MALCOLM CANDLISH Chairman of the Board March 31, 1997
........................................
MALCOLM CANDLISH
/s/ JOHN R. ALBERS Director March 31, 1997
........................................
JOHN R. ALBERS
/s/ ANTHONY J. DINOVI Director March 31, 1997
........................................
ANTHONY J. DINOVI
/s/ DAVID V. HARKINS Director March 31, 1997
........................................
DAVID V. HARKINS
/s/ SCOTT A. SCHOEN Director March 31, 1997
........................................
SCOTT A. SCHOEN
/s/ PETER M. WOOD Director March 31, 1997
........................................
PETER M. WOOD
</TABLE>
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of First Alert, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 21, 1997 appearing on page 24 of the 1996 Annual Report to
Stockholders of First Alert, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Chicago, Illinois,
March 21, 1997
22
<PAGE> 25
SCHEDULE II
FIRST ALERT INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING CHARGES TO AT CLOSE
DESCRIPTIONS OF PERIOD EXPENSE DEDUCTIONS OF PERIOD
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for Doubtful Accounts............. $3,342 $1,252 $ (774) $ 3,820
Inventory Reserve........................... 5,118 4,685 (5,297) $ 4,506
Year Ended December 31, 1995
Allowance for Doubtful Accounts............. $2,600 $ 861 $ (119) $ 3,342
Inventory Reserve........................... 2,000 3,803 (685) 5,118
Year Ended December 31, 1994
Allowance for Doubtful Accounts............. $1,265 $2,339 $ (1,004) $ 2,600
Inventory Reserve........................... 1,098 3,083 (2,181) 2,000
</TABLE>
23
<PAGE> 26
EXHIBIT 11.1
FIRST ALERT, INC. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding............ 24,118,854 24,043,116 22,619,424
Weighted average common share equivalents outstanding
during the period computed in accordance with the
treasury stock method period computed in accordance
with the treasury stock method...................... 440,496 788,269 981,240
---------- ---------- ----------
Total weighted average shares outstanding............. 24,559,350 24,831,385 23,600,664
========== ========== ==========
</TABLE>
24
<PAGE> 1
EMPLOYMENT AGREEMENT
--------------------
This Agreement is made as of the 18th day of September, 1996 between First
Alert, Inc., a Delaware corporation (the "Company"), and B. Joseph Messner (the
"Employee").
RECITALS
--------
WHEREAS, the Company desires to employ the Employee as President and Chief
Executive Officer of the Company and its wholly-owned subsidiary, BRK Brands,
Inc., a Delaware corporation ("BRK Brands"), and the Employee desires to serve
as President and Chief Executive Officer of the Company and BRK Brands, on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto, each intending to be legally bound hereby,
agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee as the President and
Chief Executive Officer of the Company and BRK Brands, and the Employee accepts
such employment for the term of employment specified in Section 3 below (the
"Employment Term"). During the Employment Term, the Employee shall, subject to
the direction of the Board of Directors of the Company, oversee and direct the
operations of the Company and perform such other duties as may from time to time
be assigned to him by the Board of Directors. The Employee shall also be elected
as a member of the Company's Board of Directors for a term expiring on the date
of the Company's 1999 Annual Meeting of Shareholders.
2. PERFORMANCE. The Employee agrees to devote his best efforts and all of
his business time to the performance of his duties hereunder during the
Employment Term.
3. EMPLOYMENT TERM. The Employment Term shall begin on the date of this
Agreement and continue until September 30, 1999 (the "Initial Employment Term").
Employment shall thereafter continue on the basis hereby established for
successive one year terms unless, more than 180 days prior to the expiration of
the term of employment, either the Employee or the Company provides the other
with written notice that this Agreement will not be renewed (the "Subsequent
Employment Term" and with the Initial Employment Term, the "Employment Term").
Employment during the Employment Term shall be subject to termination in
accordance with the terms of this Agreement.
4. Compensation.
------------
(a) SALARY. During the period commencing on the date hereof and ending
on December 31, 1997, the Company shall pay the Employee a base salary, payable
in bi-weekly installments, subject to withholding and other applicable taxes, at
an annual rate of Three Hundred Thousand Dollars ($300,000.00). Commencing on
January 1, 1998, the base salary will be reviewed annually by the Compensation
Committee of the Board of Directors and may be increased but not decreased.
<PAGE> 2
(b) BONUS. In addition to the annual base salary payable to the
Employee, commencing with the fiscal year ending December 31, 1997, the Employee
shall be eligible to participate in the Management Incentive Bonus Program of
the Company pursuant to which the Employee will be entitled to earn an annual
bonus of up to one hundred percent (100%) of the annual base salary in effect
for such year, subject to achieving specified financial targets established by
the Compensation Committee of the Board of Directors. All bonuses payable under
this Section 4(b) shall be paid to the Employee as soon as practicable after the
delivery of the Company's audited financial statements for the bonus year.
(c) STOCK OPTIONS. The Employee shall be granted, effective the date
the Employee shall join the Company, an option (the "Option") to purchase
300,000 shares of Common Stock of the Company, at an exercise price (the "Strike
Price") equal to the fair market value of the Common Stock on the business day
immediately preceding the date of grant, as defined in the Company's 1994 Stock
Option Plan (the "Option Plan"). The Option will vest and become exercisable in
four equal annual installments on the first, second, third and fourth
anniversaries of the date of grant. The Option will vest and become immediately
exercisable upon the occurrence of a Change of Control (as defined below). The
Option will be granted pursuant to a Stock Option Agreement in the form of
EXHIBIT A hereto. In addition, the Employee will be granted an option to
purchase an additional 200,000 shares of Common Stock, at an exercise price
equal to the Strike Price (the "Additional Option"), which will vest and become
exercisable only in the event there shall occur a Change of Control (as
hereinafter defined) prior to December 31, 1997. The Additional Option shall
terminate and be of no further force and effect if a Change of Control is not
consummated prior to December 31, 1997. For purposes of this Agreement, a
"Change of Control" shall mean the happening of any of the following events:
(i) Any acquisition resulting in any person, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2)) of the Securities
Exchange Act of 1934 (the "Exchange Act") having beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 50% or more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of directors of
the Company; excluding, however, the following: (1) any acquisition
directly from the Company, other than an acquisition by virtue of the
exercise of a conversion privilege unless the security being so
converted was itself acquired directly from the Company, (2) any
acquisition by the Company, (3) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, (4) any acquisition by
the Thomas H. Lee Company or its affiliates, or (5) any acquisition by
any entity pursuant to a transaction which is excluded from subsection
(ii) below; or
(ii) The approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition
of all or
- 2 -
<PAGE> 3
substantially all of the assets of the Company ("Corporate
Transaction"); excluding, however, any Corporate Transaction which
would result in the voting securities of the Company immediately prior
to such Corporate Transaction continuing to represent (either by
remaining outstanding or being converted into voting securities or
another entity) 50% or more of the combined voting power of the
securities entitled to vote generally in the election of directors of
the Company or such other entity outstanding immediately after such
Corporate Transaction.
Notwithstanding the foregoing, a Change of Control shall not be deemed to have
occurred if the "person" described in the preceding portions of this Section
4(c) is an underwriter or underwriting syndication that has acquired ownership
of 50% or more of the combined voting power of the Company's then outstanding
voting securities solely in connection with a public offering of the Company's
securities.
(d) INSURANCE; OTHER BENEFITS. The Employee shall be entitled to
participate in all employee benefit plans now existing or hereinafter
established by the Company, including, but not limited to, medical plans, group
life and disability insurance plans, pension, profit sharing or bonus plans,
401(k) plans and any other employee benefit plan or arrangement made available
to executive officers of the Company.
(e) VACATION. The Employee shall be entitled to take four weeks of
paid vacation during each year of the Employment Term, to be taken at such time
or times as shall be mutually convenient and consistent with his duties and
obligations to the Company. The Employee shall be entitled to carry-over not
more than two weeks vacation for use in the immediately succeeding year of the
Employment Term.
(f) AUTOMOBILE. The Employee shall be entitled to the use of one
Company provided automobile during the Employment Term pursuant to the terms of
the Company's Automobile Policy.
(g) CLUB MEMBERSHIP. The Company shall reimburse the Employee for all
initiation and annual or monthly dues incurred by the Employee in connection
with one country club membership to a club in the Aurora, Illinois area selected
by the Employee.
(h) RELOCATION EXPENSES. The Employee shall be reimbursed by the
Company for all reasonable out-of-pocket expenses incurred by him in relocating
to the Aurora, Illinois area upon receipt of appropriate documentation. Such
expenses shall include travel and temporary living expenses incurred in
relocating, actual moving and storage costs and all transportation expenses
associated with relocating the Employee's personal property. To the extent that
the expenses reimbursed by the Company under this Section 4(h) are included in
the Employee's taxable income and are not tax deductible by the Employee, the
Company will reimburse the Employee for all income taxes attributable to such
expenses reimbursement.
- 3 -
<PAGE> 4
5. BUSINESS EXPENSES. The Employee shall be reimbursed by the Company
for all reasonable expenses incurred by him in connection with the performance
of his duties hereunder in accordance with policies established by the Board of
Directors from time to time and upon receipt of appropriate documentation.
6. Restrictions on Activities.
--------------------------
(a) COMPETITION. The Employee acknowledges that he will be employed by
the Company in a key executive capacity which 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 Employee 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 Employee 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 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
Employee's employment with the Company. Notwithstanding the foregoing, the
Employee may own, directly or indirectly, less than 1% of the capital stock of
any public corporation. For purposes of this Agreement, the "Non-Competition
Period" shall mean twelve (12) consecutive months immediately following the date
the Employee ceases being employed by the Company, whether the Employee's
termination from employment with the Company is voluntary or otherwise.
(b) NON-SOLICITATION OF EMPLOYEES, CUSTOMERS AND SUPPLIERS. The
Employee acknowledges that by virtue of his employment with the Company he will
have the opportunity to develop knowledge of and relationships with the
Company's employees, customers, and suppliers. The Employee further acknowledges
that the Company's relationships with its
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<PAGE> 5
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 Employee 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 Employee'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 6(b) shall be
deemed to prohibit the Employee 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 (i) in the case of the
solicitation of any officer, director, consultant, executive or employee, the
period of thirty-six (36) consecutive months immediately following the date the
Employee ceases being employed by the Company, whether the Employee's
termination from employment with the Company is voluntary or otherwise, and (ii)
in the case of the solicitation of any customer or supplier, the period of
twelve (12) consecutive months immediately following the date the Employee
ceases being employed by the Company, whether Employee's termination from
employment with the Company is voluntary or otherwise.
(c) PROPRIETARY INFORMATION. By virtue of his employment by the
Company, the Employee 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 Employee may have had access, whether
conceived or developed by others or by the Employee 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, provided the same
are not in the public domain as a consequence of disclosure directly or
indirectly by the Employee in violation of this Agreement.
The Employee agrees that Proprietary Information is of critical
importance to the Company. The Employee will keep all Proprietary Information in
a
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<PAGE> 6
fiduciary capacity for the sole benefit of the Company. The Employee 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:
(1) any of the Company's trade secrets, at any time hereafter,
and
(2) any Proprietary Information as defined in subsection 6(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 date
the Employee ceases being employed with the Company, whether
the Employee's termination from employment with the Company
is voluntary or otherwise.
(d) NON-DISPARAGEMENT. The Employee further agrees that (1) he 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 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
Employee 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
Employee of his duties, or otherwise performing his duties.
(e) RETURN OF DOCUMENTS. The Employee agrees that upon his termination
from the Company, whether voluntary or otherwise, the Employee 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 Employee 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
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<PAGE> 7
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 Employee, 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 work
performed by any employee or agent thereof during the Employee's employment by
the Company and for a period of thirty-six months following the date the
Employee ceases being employed with the Company.
(g) ADDITIONAL PROTECTIONS. The obligations of the Employee under the
foregoing subsections 6(a) through 6(f) shall be in addition to, and shall not
limit, any other obligations of the Employee to the Company imposed either by
law or agreement with respect to the matters set forth in this Section 6.
(h) REPRESENTATION. THE EMPLOYEE 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 EMPLOYEE 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.
(i) REMEDIES. It is specifically understood and agreed that any breach
of the provisions of this Section 6 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 Employee and to seek both temporary and permanent
injunctive relief (to 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 Employee under
Section 4 or Section 9 of this Agreement on or after the date on which any
breach of the provisions of this Section 6 occurs and shall have the right to
cease such payments and benefits.
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<PAGE> 8
(j) 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 this Section 6 or any portion hereof, the
Company shall be entitled to discontinue any payments or benefits that would
otherwise be provided under Section 4 or Section 9 and the Employee 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 Employee's violation
of this Section 6, shall determine that specific performance of any portion of
this Section 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.
8. Termination.
-----------
(a) TERMINATION AT END OF TERM. The employment of the Employee
hereunder shall not automatically terminate at the end of the Initial Employment
Term, but shall continue thereafter for Subsequent Employment Terms in the
manner contemplated by Section 3, unless otherwise terminated in the manner
provided in this Section 8.
(b) TERMINATION BY THE COMPANY WITH CAUSE. The Company shall have the
right at any time to terminate the Employee's employment hereunder upon the
occurrence of any of the following (any such termination being referred to as a
termination for "Cause"):
(i) the commission by the Employee of any fraud, embezzlement or
other deliberate and premeditated act of dishonesty or breach of
fiduciary duty against the financial or business interests of the
Company or any of its subsidiaries;
(ii) the drug addiction or habitual intoxication of the Employee;
(iii) the conviction by the Employee of or the pleading by the
Employee of NOLO CONTENDERE to, a felony or a crime involving moral
turpitude;
(iv) the willful failure or refusal of the Employee to perform
the duties specified in and pursuant to Section 1 hereof, which
failure or refusal is not cured within 15 days subsequent to notice
from the Company to the Employee specifying the nature of such failure
or refusal; or
(v) the breach by the Employee of any material terms of this
Agreement, which breach is not cured within 30 days subsequent to
notice from the Company to the Employee specifying such breach.
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<PAGE> 9
(c) TERMINATION UPON DEATH OR DISABILITY. The Employee's employment
hereunder shall automatically terminate upon the Employee's death or upon his
inability to perform his duties hereunder by reason of any mental, physical or
other disability for a period of at least six consecutive months, as determined
by a qualified physician.
(d) TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company shall have
the right to terminate the Employee's employment at any time for any reason
without Cause.
9. Effect of Termination of Employment.
-----------------------------------
(a) WITH CAUSE; RESIGNATION; DEATH OR DISABILITY. If the Employee's
employment is terminated with Cause pursuant to Section 8(b) or if the
Employee's employment is terminated by the death or disability of the Employee
pursuant to Section 8(c) or if the Employee elects to terminate his employment,
the Employee's salary and other benefits specified in Section 4 shall cease at
the time of such termination; provided, however, that the Employee shall be
entitled to all salary and bonuses which are accrued through the date of
termination, shall be entitled to continue to participate in the Company's
medical benefit plans to the extent required by law and shall retain any stock
options which have vested through the date of termination in the manner provided
in the Stock Option Agreement.
(b) WITHOUT CAUSE BY THE COMPANY. If the Employee's employment is
terminated by the Company without Cause pursuant to Section 8(d) prior to the
expiration of the Employment Term, or if the Employee's employment is terminated
as a result of the Company's election to not renew the Agreement, as provided in
Section 3, the Employee's salary and other benefits specified in Section 4 shall
cease at the time of such termination, and the Employee shall only be entitled
to receive all salary and bonuses which are accrued through the date of
termination and the continuation of his base salary, as then in effect, for the
Severance Period (as defined below). In addition, the Employee shall be entitled
to (i) continue his participation in the Company's medical benefit plans for a
period of twelve months from the date of termination on the same terms and
conditions as in effect during the term of his employment hereunder, (ii) retain
any stock options which have vested through the date of termination in the
manner provided in the Stock Option Agreement, and (iii) receive a pro rata
portion of the incentive bonus referred to in Section 4(b) for the fiscal year
in which the Employee is terminated, subject to the Company achieving the
specified financial targets established by the Compensation Committee for such
fiscal year, which bonus, if earned, will be paid to the Employee at the same
time as bonuses are paid to the other participants in the Management Incentive
Bonus Program. The salary payments shall be payable in equal bi-weekly
installments, subject to withholding and other applicable taxes. If the Employee
obtains other employment during the period in which the Company is required to
continue his salary hereunder, the amount of compensation received from such
other employment source during the period that the Company is required to make
payments under this Section 9(b) shall reduce on a dollar-for-dollar basis the
payments otherwise required to be made hereunder, unless the Employee is
terminated in connection with a Change of Control, in which event the payments
required to be made to the Employee under this Section
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<PAGE> 10
9(b) shall not be subject to such reduction. For purposes of this Section 9(b),
the term "Severance Period" shall mean (i) in the case of the termination of the
Employee's employment without Cause pursuant to Section 8(d) prior to the
expiration of the Employment Term, a period equal to the longer of (x) the
remainder of the Employment Term, or (y) twenty-four months from the date of
termination, and (ii) in the case of the termination of the Employee's
employment as a result of the Company's election to not renew the Agreement, a
period equal to twelve months from the date the Company delivers to the Employee
a written notice of its election to not renew this Agreement under Section 3
hereof.
10. INSURANCE. The Company may purchase insurance on the life of the
Employee, and if it does so, the Employee shall cooperate fully by performing
all the requirements of the life insurer which are necessary conditions
precedent to the issuance of the life insurance policy issued by it.
11. NO OTHER BENEFITS. Except as specifically provided in this Agreement,
the Employee shall not be entitled to any compensation, severance or other
benefits from the Company or any of its divisions, subsidiaries or affiliates in
the event of the Employee's termination of employment for any reason.
12. NOTICE. Any notices required or permitted hereunder shall be in writing
and shall be deemed to have been given when personally delivered or when mailed,
certified or registered mail, postage prepaid, to the following addresses or
such other address as to which notice is given in the manner provided herein:
If to the Employee:
B. Joseph Messner
11724 High Drive
Leawood, Kansas 66211
If to the Company:
First Alert, Inc.
3901 Liberty Street Road
Aurora, Illinois 60504-8122
Attn: Chairman
13. General.
--------
(a) GOVERNING LAW. The terms of this Agreement shall be governed by and
construed under the laws of the State of Illinois without regard to its
principles of conflicts of laws.
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<PAGE> 11
(b) ASSIGNABILITY. The Employee may not assign his interest in or
delegate his duties under this Agreement. The Company may not assign the
Agreement or the rights and obligations hereunder without consent of Employee.
(c) ENFORCEMENT COSTS. In the event that either the Company or the
Employee initiates an action or claim to enforce any provision or term of this
Agreement, the costs and expenses (including attorney's fees) of the prevailing
party shall be paid by the other party, such party to be deemed to have
prevailed if such action or claim is concluded pursuant to a court order or
final judgment which is not subject to appeal, a settlement agreement or
dismissal of the principle claims.
(d) BINDING EFFECT; SUCCESSORS. This Agreement shall be binding upon
and inure to the benefit of the Company, its permitted successors and assigns
and the Employee, his representatives and heirs. The Company will require that
any successor (whether direct or indirect, by purchase of stock or assets, by
merger, by consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, together with such successor's ultimate
parent corporation (if any), will be jointly and severally liable for the
obligations owed to the Employee hereunder and will perform this Agreement in
the same manner and to the same extent that the Company is obligated to perform
it. Any succession shall not, however, relieve or alter the Company's continuing
liability for all obligations owing to the Employee hereunder. The Employee
acknowledges and understands, however, that the Employee's employment by a
successor to the Company, if consistent with the terms and provisions of this
Agreement, will not be deemed a termination of the Employee's employment with
the Company.
(e) ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
entire agreement of the parties hereto with respect to the subject matter hereof
and may not be modified or amended in any way except in writing by the parties
hereto.
(f) DURATION. Notwithstanding the term of employment hereunder, this
Agreement shall continue for so long as any obligations remain under this
Agreement.
(g) REPRESENTATION OF EMPLOYEE. The Employee represents and warrants
that neither the execution and delivery of this Agreement nor the performance of
his duties hereunder violates the provisions of any other agreement to which he
is a party or by which he is bound.
* * * *
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have hereunto executed this Agreement the day and year first written above.
FIRST ALERT, INC.
By: /s/ Malcolm Candlish
----------------------------
Name: Malcolm Candlish
Title: Chairman
EMPLOYEE
/s/ B. Joseph Messner
--------------------------------
B. Joseph Messner
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<PAGE> 1
TERMINATION BENEFITS AGREEMENT
------------------------------
AGREEMENT, dated the 5th day of July, 1995, between BRK Brands, Inc. (the
"Company") and the undersigned executive employee of the Company whose name and
address appear on the signature page hereto (the "Executive").
W I T N E S S E T H :
---------------------
WHEREAS, the Company considers it important to the best interests of the
Company and its affiliates, that the Executive be encouraged to continue to be
employed by the Company;
WHEREAS, the Company considers it imperative to the best interests of the
Company and its affiliates 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 affiliates;
WHEREAS, the Company anticipates that providing severance benefits will
operate as an incentive for the Executive to continue to be employed by the
Company and to refrain from activities contrary to the interests of the Company
and its affiliates;
NOW, THEREFORE, to induce the Executive to continue to be employed by the
Company, to refrain from activities contrary to the interests of the Company and
its affiliates and for other good and valuable consideration, the Company and
the Executive agree as follows:
1. Circumstances Triggering Receipt Of Severance Benefits.
------------------------------------------------------
The Company shall provide the Executive with the benefits set forth in
Section 4 of this Agreement if his employment is terminated by the Company
during the term of this Agreement without cause attributable to the Executive.
The Executive shall not be entitled to the benefits set forth in Section 4 if:
<PAGE> 2
a) the Executive voluntarily terminates his employment with the
Company;
b) the Executive dies or becomes incapacitated during the term of
his employment; or
c) the Executive's employment is terminated by the Company for one
or more of the following reasons:
(1) The Executive has been convicted of, or has pleaded guilty
or NOLO CONTENDERE to any felony or a crime involving moral
turpitude;
(2) The Executive has materially failed or refused to perform
his duties hereunder and such material failure or refusal
has continued 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 has breached any provision of Section 5
hereof; or
(4) The Executive has committed any fraud, embezzlement,
misappropriation of funds, breach of fiduciary duty or other
act of dishonesty or intentional malfeasance against the
Company.
2. Notice of Termination.
----------------------
Termination of the Executive's employment with the Company by the Company
or by the Executive shall be communicated by written "Notice of Termination" to
the other party.
3. Nonrenewal.
----------
This Agreement shall not renew automatically and shall expire at the end of
the term specified in Section 14 below unless both parties, in writing, agree to
its renewal 60 days prior to its termination. To be effective, such renewal of
this Agreement must set forth the term of the renewal period and be signed by
both parties. Expiration of this Agreement shall not in
- 2 -
<PAGE> 3
and of itself serve to terminate Executive's employment with the Company and
shall, in and of itself, give rise to no right to the benefits set forth in
Section 4 below.
4. Termination Benefits.
--------------------
a) Subject to the conditions set forth in Section 1 and as specified
in this Section 4, the Executive shall be entitled to receive the following
benefits:
(1) PERIODIC PAYMENTS. The Executive shall be paid a monthly
termination benefit in an amount equal to 1/12th of his annual base salary in
effect as of the termination date less any applicable payroll or other taxes
required by law to be withheld ("monthly payment"). For purposes of this
Agreement, "annual base salary" shall not include any cost of living
adjustments, bonus payments, or other forms of supplementary compensation.
Provided that Executive complies with his obligations under Section 5 and is
otherwise entitled to benefits under Section 1, Executive shall receive a
minimum of three monthly payments, and thereafter, if Executive is still
unemployed, he shall continue to receive monthly payments until such time as he
becomes employed, he dies, he becomes incapacitated, or he has received a total
of 12 monthly payments, whichever occurs first. Said monthly payments shall be
paid on the last business day of the month beginning with the first month
following the date of termination.
(2) ACCRUED BUT UNUSED VACATION TIME. The Company shall pay to
the Executive, in a lump sum within 31 days after the termination date, all
vacation time accrued but unused by the Executive prior to the termination date.
(3) INSURANCE BENEFITS. Subject to his payment of the employee
contribution or share as specified in the Company's employee benefit plans and
his continuing compliance
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<PAGE> 4
with Section 5 of this Agreement, the Executive shall continue to participate to
the same extent and level he was participating as of the termination date, in
any life, accident, disability, health and dental insurance plans and other
similar fringe benefits of the Company in effect on the termination date for a
period of six months from the termination date unless the Executive obtains
other employment prior to the expiration of six months in which event the
Executive's participation in the foregoing benefit plans will terminate on such
earlier date as he and any members of his family covered by the Company's
benefit plans become eligible for coverage under any benefit plan offered to the
Executive by virtue of such other employment.
b) It is understood and agreed that the Company's obligation to make
monthly payments as specified in Section 4(a) (1) and to allow continuing
participation in employee benefit plans as specified in Sections 4(a)(2) and (3)
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 making the monthly payments and cease
any contribution for employee benefits and may further recover from the
Executive any monthly payments made to and any monthly premium payments made for
the Executive prior to the date of its determination but after the Executive
initially failed to comply.
(c) It is further understood and agreed that the Executive will
promptly notify the Company if he obtains other employment and the Executive
promises that he will return any monthly payment erroneously made to him prior
to the Company's receipt of notification of the Executive's other employment
together with a reimbursement of any
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<PAGE> 5
premium payment erroneously made on his behalf by the Company prior to its
receipt of such notice.
(d) Finally, it is understood and agreed that the monthly payments
specified in Section 4(a)(1) shall be reduced to the extent of any unemployment
or other insurance benefits paid to the Executive by the State or the Company.
5. Continuing obligations.
----------------------
The Executive acknowledges that by virtue of his employment by the Company
and the nature of his duties, the Executive has acquired confidential
information and trade secrets of the Company and its corporate affiliates (the
latter being hereafter referred to as the "Group") and that he has also gained
influence with the Company's and the Group's customers, suppliers and employees.
The Executive further acknowledges that in order to protect the Company's and
the Group's business, certain restrictions on the Executive's activities are
reasonably necessary. It is understood and agreed that absent an agreement to
such restrictions, the Company would not enter into this Agreement. Therefore,
in order to induce the Company to enter into this Agreement and to reasonably
protect the Company's and the Group's business, the Executive hereby agrees as
follows:
a) CONFIDENTIALITY. All documents, records, techniques, trade secrets
and other information which have come into the Executive's possession from time
to time during his employment by the Company shall be deemed to be confidential
and proprietary to the Company and shall not be disseminated by the Executive to
any third party at any time either before or after his employment by the Company
terminates except to the extent necessary to the Executive's proper performance
of his duties as an executive of the Company. The
- 5 -
<PAGE> 6
Executive further agrees to retain in confidence any confidential information
known to him concerning the Company and its subsidiaries and corporate
affiliates and their respective businesses so long as such information is not in
the public domain. (For purposes of this paragraph, information shall not be
deemed in the public domain if its initial disclosure constituted a breach of
confidentiality.) The Executive further agrees that upon his termination, he
will promptly return to the Company any Company documents or articles. The
obligations of the Executive under this Section 5 shall be in addition to, and
shall not limit, any other obligation of the Executive to the Company with
respect to the matters set forth herein or otherwise, except as required by law.
(b) NON-COMPETITION/SOLICITATION/DISPARAGEMENT. The Executive agrees
that he shall not during his employment by the Company and for a period of one
year following his termination of employment with the Company without prior
written consent of the Company directly or indirectly for himself or on behalf
of or as an employee or agent of any other:
(1) Engage in or be employed by or in any business which shall
directly or indirectly compete with the Company in the provision of services or
the making, processing, adapting for sale or selling of goods or materials of a
kind and nature with which he was concerned to a material extent at any time
during the period beginning with his hire by the Company; provided that nothing
in this subsection shall restrain Executive from such action as aforesaid in any
business insofar as his duties or work shall relate to services, good or
materials of a kind or nature with which Executive was not concerned to a
material extent at any time during the period beginning with his hire by the
Company;
- 6 -
<PAGE> 7
(2) canvas or solicit business from any customer of the Company
unless such business is of a completely different kind and nature from that of
the Company;
(3) Interfere or seek to interfere or take such steps as may
interfere with the continuance of supplies to the Company from any suppliers who
are, or who have been at any time during his employment by the Company,
supplying components, materials or services to the Company;
(4) Solicit or entice or endeavor to solicit or entice any
employee away from the Company;
(5) Solicit or entice or endeavor to solicit or entice any agent
or distributor away from the Company;
(6) Speak negatively about the Company, its Board of Directors,
or its personnel.
(c) INTELLECTUAL PROPERTY. The Executive shall, without additional
remuneration, promptly communicate and disclose to the Company:
(1) All inventions, discoveries, products, product modifications
and improvements, whether patentable or not, conceived, originated or developed
by the Executive, solely or jointly with others, during any period of employment
by the Company, or at the facilities, expense or request of the Company, or
based on knowledge or information obtained from the Company or any member of the
Group during the course of or incidental to his employment (hereinafter together
called "Inventions"). Upon request of the Company, the Executive shall without
additional remuneration (except that the Company shall reimburse the Executive
for expenses reasonably incurred by Executive in connection with the development
- 7 -
<PAGE> 8
or assignment of said invention) assign to the Company, or as the Company may
lawfully direct, any and all Inventions, free from all encumbrances and
restrictions. All such assignments shall include the patent rights in the United
States and throughout the world. With respect to patentable Inventions, in the
event the Company or other member of the Group does not file or cause to be
filed an application for patent rights within two years after the Executive
discloses completely to the Company such invention, and provided that the
Company has not utilized such invention as part of the secret know-how used or
licensed by the Company or by any of the Group, if within one year thereafter
Executive requests the Company in writing to do so, the Company will release
such invention to Executive provided that Executive files a patent application
thereon within one year following the date of such request, and offers to grant,
and upon acceptance of such offer does grant, the Company, or such person or
entity as the Company shall direct, non-exclusive, worldwide, royalty-free
licenses for manufacture and sales with respect thereto. It is agreed that the
Executive's promises as set forth in this paragraph (c)(1) do not apply to
inventions for which no equipment, supplies, facilities or trade secrets of the
Company were used and which were developed entirely on the Executive's own time
unless the invention relates to the business of the Company or the Company's
actual or demonstrably anticipated research or development or the invention
results from any work performed by the Executive for the Company.
(2) Any trademarks, labels of product or other designs conceived,
originated or developed by him, whether solely or jointly with others, during
any period of employment by the Company, or at the Company's facilities, expense
or request, or based upon knowledge or information obtained from the Company
during the course of his employment (hereinafter
- 8 -
<PAGE> 9
together called "Protected Material"). Protected Material which relates to the
business or products of the Company, or of any member of the Group, is
hereinafter called "BRK Protected Material," and such BRK Protected Material and
any copyrights and trademarks arising therefrom shall be solely and exclusively
the property of the Company, their successors and assigns, absolutely and
forever. The Company shall, for itself and for members of the Group, have the
rights, in the capacity of an employer of an employee for hire, to secure
trademark registrations and copyright in such BRK Protected Material throughout
the world in its own name or in any other name designated by it, and all
renewals and extensions of such trademark registration and copyright, whether
now or hereafter created, and shall have the sole and exclusive right to use and
dispose of such BRK Protected Material and to direct the use and disposition
thereof throughout the world in any manner whatsoever, and at its sole
discretion to refrain therefrom. The Executive hereby assigns to the Company all
such future copyrights, and agrees to execute and deliver all such documents as
are necessary or desirable to secure and protect the rights of the Company and
of the members of the Group and the rights of their respective successors and
assigns in such BRK Protected Material and to protect the Company from liability
therefore, the Company to reimburse the Executive for expenses reasonably
incurred in connection with such assignment.
(d) ADDITIONAL COVENANT. As a separate and additional covenant
with the Company, which is for this purpose the agent of the Group, the
provisions of Sections 5(a), 5(b), subsections (1) through (6) inclusive, and
5(c) shall apply respectively to each member of the Group as if herein set out
seriatim.
- 9 -
<PAGE> 10
(e) REPRESENTATION. THE EXECUTIVE REPRESENTS AND WARRANTS THAT
THE KNOWLEDGE, SKILLS AND ABILITIES HE POSSESSED AT THE TIME OF HIS ACCEPTANCE
OF EMPLOYMENT WITH THE COMPANY ARE SUFFICIENT TO PERMIT HIM TO EARN A LIVELIHOOD
SATISFACTORY TO HIMSELF WITHOUT VIOLATING ANY PROVISION OF SECTION 5 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.
(f) 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 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 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.
- 10 -
<PAGE> 11
6. 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 or any of its affiliates in the event of the Executive's termination.
7. 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 shareholder approval. For the purposes hereof,
the "present value" of any payment shall be determined in accordance with
Section 280(G) of the Code.
8. Assignment and Transfer.
------------------------
a) THE EXECUTIVE. 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. If the
Executive should die or become incapacitated while receiving the three initial
monthly payments specified in subsection 4(a),
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<PAGE> 12
those initial three monthly payments, to the extent that they have not already
been paid to the Executive, shall be paid in accordance with the terms of this
Agreement to his estate's personal representatives or administrators or his
trustee, whichever applies. In the case of the Executive's bankruptcy while any
amounts are payable to him hereunder, all such payments otherwise provided
herein may at the discretion of the Company be paid in accordance with the terms
of this Agreement to his trustee in bankruptcy. Payment to any of the aforesaid
representatives, administrators or trustees shall be deemed to satisfy in full
the Company's obligations under this Agreement.
b) THE COMPANY. 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, and the provisions of this Agreement
shall inure to the benefit of any such successor in interest to the Company. It
is further intended that the provisions of this Agreement shall be binding on
any such successor in interest to the Company, provided that if the terms of
such merger, consolidation or transfer render it impractical to pay the benefits
provided by this Agreement, the Company shall only be required to make
reasonable efforts to procure the payment of equivalent benefits.
9. Notices.
-------
For the purposes of this Agreement, notices and all other communications
provided for herein shall be in writing and shall be deemed to have been duly
given when delivered or mailed by registered mail, return receipt requested,
postage prepaid, addressed as follows:
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<PAGE> 13
If to the Executive, to the address set forth below his name on the
signature page hereto.
If to the Company:
BRK Brands, Inc.
3901 Liberty Street Road
Aurora, Illinois 60504-8122
U.S.A.
Attention: Senior Vice President and Chief Financial Officer
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices or change of address shall
be effective only upon receipt.
10. Governing Law.
-------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Illinois.
11. Waiver and Modification.
-----------------------
Except as necessary in order to conform the terms of Section 5 of this
Agreement to any restrictions imposed by law so as to render the terms of each
subsection thereof enforceable to the fullest extent possible, no provisions of
this Agreement may be modified, waived, or discharged unless such waiver,
modification or discharge is agreed to in writing signed by the Executive and
the Company. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision 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. No agreements or representations, oral or otherwise, express or
implied, with respect to the
- 13 -
<PAGE> 14
subject matter hereto have been made by either party which are not set forth
expressly in this Agreement.
12. Separability.
------------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect, 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. The parties further authorize any court of
competent jurisdiction to impose any limitation or other modification necessary
to render the various subsections of Section 5 enforceable to the maximum extent
possible.
13. Non-assignability.
-----------------
This Agreement is personal in nature and Executive shall not, without
the consent of the Company, assign or transfer this Agreement or any rights or
obligations hereunder. Without limiting the foregoing, the Executive's right to
receive payments hereunder shall not be assignable or transferable, whether by
pledge, creation of a security interest or otherwise, and in the event of any
attempted assignment or transfer contrary to this paragraph the Company shall
have no liability to pay any amount so attempted to be assigned or transferred,
provided that the Company may choose to pay benefits as specified in subsection
8(a) above.
- 14 -
<PAGE> 15
14. Term of Agreement.
-----------------
This Agreement shall become effective as of the date first above written
and shall terminate on December 31, 1997, unless renewed annually in writing by
the parties in accordance with Section 3.
- 15 -
<PAGE> 16
TERMINATION BENEFITS AGREEMENT
Counterpart Signature Page
--------------------------
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the day and year first above set forth.
BRK Brands, Inc.
By: /s/ Malcolm Candlish
--------------------
/s/ Michael A. Rohl
--------------------
Michael A. Rohl
372 Marion Avenue
Glen Ellyn, Illinois 60137
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<PAGE> 1
TERMINATION BENEFITS AGREEMENT
------------------------------
AGREEMENT, dated this 24th day of April, 1996, between BRK Brands, Inc.
(the "Company") and the undersigned executive whose name and address appear on
the signature page hereto (the "Executive").
W I T N E S S E T H:
--------------------
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 in an executive level position;
WHEREAS, the Company considers it imperative to the best interests of the
Company and its affiliated corporations that the Executive continue to 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
WHEREAS, the Company anticipates that continuing to provide severance
benefits 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 induce the Executive to refrain from activities contrary to the
interests of the Company and its corporate affiliates, the Company and the
Executive agree as follows:
1. Circumstances Triggering Receipt Of Severance Benefits.
------------------------------------------------------
The Company shall provide the Executive with the benefits set forth in
Section 4 of this Agreement if his employment is terminated by the Company
during the term of this Agreement
<PAGE> 2
without cause attributable to the Executive. The Executive shall not be entitled
to the benefits set forth in Section 4 if:
a) the Executive voluntarily terminates his employment with the Company;
b) the Executive dies or becomes incapacitated during the term of his
employment;
c) the Executive's employment is terminated by the Company for one or more
of the following reasons:
(1) The Executive has been convicted of, or has pleaded guilty or NOLO
CONTENDERE to any felony or a crime involving moral turpitude;
(2) The Executive has materially failed or refused to perform his duties
hereunder and such material failure or refusal has continued 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 has breached any provision of Section 5 hereof; or
(4) The Executive has committed any fraud, embezzlement, misappropriation
of funds, breach of fiduciary duty or other act of dishonesty or
intentional malfeasance against the Company.
2. Notice Of Termination.
---------------------
Termination of the Executive's employment with the Company by the Company
or by the Executive shall be communicated by written "Notice of Termination" to
the other party. The date the Executive ceases the performance of his duties
with the Company shall be considered the "Termination Date."
- 2 -
<PAGE> 3
3. NONRENEWAL.
----------
With the exception of the obligations set forth in Section 5, which shall
be of a continuing nature, this Agreement shall not renew automatically and
shall expire at the end of the term specified in Section 12 below unless both
parties, in writing, agree to its renewal. To be effective, such renewal of this
Agreement must set forth the term of the renewal period and be signed by both
parties. Expiration of this Agreement shall not in and of itself serve to
terminate Executive's employment with the Company and shall, in and of itself,
give rise to no right to the benefits set forth in Section 4 below.
4. TERMINATION BENEFITS.
--------------------
a) Subject to the conditions set forth in Section 1 and as specified
in this Section 4, the Executive shall be entitled to receive the following
benefits:
(1) PERIODIC PAYMENTS. The Executive shall be paid a monthly
termination benefit in an amount equal to 1/12th of his annual base salary in
effect as of the Termination Date less any applicable payroll or other taxes
required by law to be withheld and any required employee contributions towards
benefits pursuant to Company employee benefit plans ("monthly payment"). For
purposes of this Agreement, "annual base salary" shall not include any cost of
living adjustments, bonus payments, or other forms of supplementary
compensation. Said monthly payments shall be paid on the last business day of
each month beginning with the first month following the Termination Date. If the
Executive complies with his obligations under Section 5 of this Agreement and is
otherwise entitled to benefits under Section 1 of this Agreement, the Executive
shall receive monthly payments until such time as he becomes employed (which
term includes self employment), he dies, he becomes
- 3 -
<PAGE> 4
incapacitated or he has received a total of 12 monthly payments, whichever
occurs first; provided, however, the Executive shall receive, if he complies
with his obligations under Section 5 of this Agreement and is otherwise entitled
to benefits under Section 1 of this Agreement, a minimum of three such monthly
payments.
(2) ACCRUED BUT UNUSED VACATION TIME. The Company shall pay to
the Executive, in a lump sum within 31 days after the Termination Date, all
vacation time accrued but unused by the Executive prior to the Termination Date.
(3) INSURANCE BENEFITS. Subject to his payment of the employee
contribution or share as specified in the Company's employee benefit plans and
his continuing compliance with Section 5 of this Agreement, the Executive shall
continue to participate to the same extent and level he was participating as of
the Termination Date, in any life, accident, disability, health and dental
insurance plans and other similar fringe benefits of the Company in effect on
the Termination Date for a period of six months from the Termination Date unless
the Executive obtains other employment prior to the expiration of six months in
which event the Executive's participation in the foregoing benefit plans will
terminate on such earlier date as he and any members of his family covered by
the Company's benefit plans become eligible for coverage under any benefit plan
offered to the Executive by virtue of such other employment.
(4) OUTPLACEMENT. The Company will provide the Executive with
outplacement services at a reasonable cost not to exceed $25,000.00, which
services shall be provided through a reputable outplacement firm of the
Company's choice in the El Paso/Juarez metropolitan area or such other area as
the parties may agree. Executive acknowledges it is
- 4 -
<PAGE> 5
the Company's present intent to remove this subsection from this Agreement the
next time this Agreement is considered for renewal.
(5) AUTOMOBILE. The Company shall sell to the Executive the
automobile which is provided for his use by the Company upon payment by the
Executive of the wholesale value of said automobile as set forth in the most
recent available edition of EDMUND'S USED CAR PRICES. Failure by the Executive
to tender payment to the Company or to reach agreement with the Company upon a
payment schedule with appropriate security within 30 days after the Termination
Date shall terminate the Company's obligation to sell under this subsection
4(a)(4).
b) It is understood and agreed that the Company's obligation to make
monthly payments and to allow continuing participation in employee benefit plans
as specified in subsections 4(a)(1) and (2) 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 making the monthly payments and cease any contribution for employee
benefits and may further recover from the Executive any monthly payments made to
and any monthly premium payments made for the Executive prior to the date of the
Company's determination but after the Executive initially failed to comply.
c) It is further understood and agreed that the Executive will
promptly notify the Company if he obtains other employment and the Executive
promises that he will return any monthly payment erroneously made to him prior
to the Company's receipt of notification of Executive's other employment
together with a reimbursement of any premium payment erroneously made on his
behalf by the Company prior to its receipt of such notice.
- 5 -
<PAGE> 6
d) Finally, it is agreed and understood that the monthly payments
specified in Section 4(a)(1) shall be reduced by any unemployment or other
severance benefits paid to the Executive by any governmental agency or the
Company.
5. RESTRICTIONS ON ACTIVITIES.
--------------------------
a) COMPETITION. The Executive acknowledges that he has been employed
by the Company in a key management capacity and will 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 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
- 6 -
<PAGE> 7
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 or (9) child safety or elder care products. Notwithstanding the
foregoing, the Executive may own, directly or indirectly, less than 1% of the
capital stock of any public corporation. For purposes of this Agreement, the
"Non-Competition Period" shall mean the period of twelve (12) consecutive months
immediately following the Termination Date, whether the Executive's termination
from employment with the Company is voluntary or otherwise.
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
- 7 -
<PAGE> 8
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 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
- 8 -
<PAGE> 9
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:
(1) any of the Company's trade secrets, at any time hereafter, and
(2) any Proprietary Information as defined in Section 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 (i) 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 (ii) he has not and
- 9 -
<PAGE> 10
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, the actions
prohibited by (i) and (ii) above shall be permissible to the extent required by
law and to the extent required for conducting internal employee performance
appraisals or as required by the Chief Executive Officer or one or more
directors of the Company for purposes of appraising the performance of the
Company, its officers or employees.
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,
- 10 -
<PAGE> 11
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 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.
h) 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
- 11 -
<PAGE> 12
PROVISION OF SECTION 5 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 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
- 12 -
<PAGE> 13
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.
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
- 13 -
<PAGE> 14
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 prepaid, as
follows:
If to the Company: BRK BRANDS, INC.
3901 Liberty Street Road
Aurora, IL 60504-8122
Attn: Gary L. Lederer
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 10.
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.
- 14 -
<PAGE> 15
b) WAIVER. No waiver by either party hereto at any time 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.
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.
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 the date
first above written and shall terminate on June 30, 1997, unless renewed in
writing by the parties in accordance with Section 3 except that Executive's
obligations under Section 5 shall continue without regard to renewal.
IN WITNESS WHEREOF, the parties hereto have duly executed
- 15 -
<PAGE> 16
and delivered this Agreement as of the date first above written.
The Executive BRK Brands, Inc.
/s/ Fred W. Higgenbottom By: /s/ Gary L. Lederer
- -------------------------- -------------------------------
Fred W. Higgenbottom Gary L. Lederer
1748 Larry Hinson Place Senior Vice President and
El Paso, TX 79936 Chief Financial Officer
- 16 -
<PAGE> 1
BRK BRANDS, INC.
1995 MANAGEMENT INCENTIVE BONUS PROGRAM
I. PURPOSE
-------
The BRK Brands, Inc. 1995 Management Incentive Bonus Program (called the
"Program") is established to give employees of the Company a special
individual incentive to further the profits and growth of the Company. This
Program shall be effective only for the fiscal year beginning January 1,
1995, and ending December 31, 1995. The Company may, at any time, amend,
suspend, or terminate the Program.
II. DEFINITIONS
-----------
2.1 "Company" means BRK Brands, Inc.
2.2 "Bonus" means the sum of the Non-Discretionary Bonus and the
Discretionary Bonus to a Participant under the Program each year.
2.3 "Participant" means an employee selected to participate in the
Program.
2.4 "Level of Participation" means the maximum percentage level at which a
Participant participates in the Program.
2.5 "Earnings per Share" (EPS) means the consolidated net income of First
Alert, Inc. for the fiscal year divided by the weighted average of the
fully diluted common stock outstanding as determined in accordance
with generally accepted accounting principles.
2.6 "Percentage Weight" means the percentage of importance assigned to
earnings per share for the determination of the Non-Discretionary
Bonus and to personal performance for the determination of the
Discretionary Bonus respectively. The sum of the Percentage Weights
shall equal 100%.
2.7 "Hire Date" means the date on which a Participant commences his/her
employment with the Company.
2.8 "Termination Date" means the date on which a Participant terminates
his/her employment with the Company.
III. ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Separate programs have been established by the Board of Directors for
the Chairman/CEO and the President/COO, therefore they are excluded
from this program.
<PAGE> 2
3.2 Employees eligible for Bonuses under the Program will be limited to
those employees of the Company who, in the judgment and discretion of
the Company, are deemed to be in a position to have a major impact on
the profits and growth of the Company. Notwithstanding an employee's
salary grade, participation and maximum level of participation shall
be determined at the sole discretion of the Company.
3.3 A Participant's Level of Participation shall not exceed the following
unless otherwise determined by the Board of Directors:
Management Maximum Level
Group of Participation
---------- ----------------
1 - Vice President 30%
2 - Operating Unit General Manager 25%
3 - Functional Area Department 20%
Director/Manager
4 - First-level Manager 10%
A Participant's Level of Participation times his/her base salary on June 1,
1995, represents the maximum Bonus ("Maximum Bonus") a Participant may
receive in any year.
3.3 Participants employed by January 1 of the Program year are eligible
for full-year participation.
3.4 Participants employed after January 1 but prior to October 1 are
eligible on the first day of the quarter following their Hire Date.
Any earned Bonus will be calculated on a pro rata basis.
3.5 Employees newly employed in or promoted to a position with bonus
eligibility between October 1 and December 31 of the Program year are
not eligible to participate in the Program until the following year.
IV. ADMINISTRATION OF THE PROGRAM
-----------------------------
4.1 The Board of Directors will have full and final authority to
prescribe, amend and rescind rules and regulations relating to the
administration of the Program; to interpret the Program and the rules
and regulations applicable thereto; and to make
- 2 -
<PAGE> 3
all other determinations deemed necessary or advisable for the
administration of the Program. Such administrative action will be
conclusive and binding on all parties at interest.
4.2 The Company has selected Participants, determined the minimum, target,
and maximum earnings per share results, the Percentage Weights and
each Participant's Level of Participation, and will notify each
Participant of the foregoing,
V. BONUS DETERMINATION
-------------------
5.1 NON-DISCRETIONARY BONUS
-----------------------
The percentage weight for the Non-discretionary Bonus shall be 66
2/3%. The Non-discretionary Bonus shall be the product of the maximum
level of participation, times the percentage weight, times earnings
per share attainment percentage.
EPS attainment is expressed as a percentage based on the audited EPS
of First Alert, Inc.
For fiscal year 1995, EPS attainment is:
0% = $0.78 per share or less
50% = $0.89 per share
100% = $1.00 per share or greater
If earnings per share attainment falls between the minimum and the
maximum figures, the earnings per share attainment shall be computed
on a straight-line basis between the minimum and the maximum earnings
per share.
5.2 DISCRETIONARY BONUS
-------------------
5.2.1. At the Company's discretion, each Participant may receive a bonus
("Discretionary Bonus") based upon his/her individual performance
for the year.
5.2.2. A Discretionary Bonus pool will be determined from which individual
Discretionary Bonuses will be paid. The Discretionary Bonus pool
will equal 50% of the aggregate Non-discretionary Bonuses paid with
respect to the program year less any Non-discretionary Bonuses paid
to the Company
- 3 -
<PAGE> 4
Chairman and to any Program Participant whose employment with the
Company terminated for any reason during the program year.
The Discretionary Bonus pool will be allocated to each Vice
President on the basis of Program Participants within his/her
area of responsibility. Each Vice President will recommend the
Discretionary Bonus, if any, to be paid to the Program
Participants in his/her area of responsibility, subject to review
of the President and approval of the Board of Directors. The
total of such Discretionary Bonus recommendations will not exceed
the allocated amount.
VI. MINIMUM BONUS
-------------
If the minimum earnings per share figure is achieved, a total
Non-discretionary Bonus of at least $500 will be awarded to each
full-year Participant. Conversely, if the minimum EPS figure is not
achieved, no Non-discretionary nor Discretionary Bonuses will he paid.
VII. DISTRIBUTION OF BONUS
---------------------
Bonuses shall be distributed to each Participant in a lump sum as
soon as practicable after the audit of the Company's financial
statements is completed.
VIII. TERMINATION OF EMPLOYMENT
-------------------------
A Participant who leaves the employ of the Company either by
mutual consent or by the action of the Company, except for
cause*, before distribution of the Bonus, shall be entitled to
receive a pro rata Non-discretionary Bonus only for his/her
period of employment during the calendar year up to and including
the Participant's Termination Date, and shall not be entitled to
a Discretionary Bonus.
A Participant who voluntarily leaves the employ of the Company
during the Program year shall forfeit any right to both
Non-Discretionary and Discretionary Bonuses.
A Participant who voluntarily leaves the employ of the Company
after the Program year but before the distribution of the Bonus
shall forfeit any right to any Discretionary Bonus.
*Termination for cause includes but is not limited to failure of
the Participant to perform his/her duties faithfully, diligently,
and competently for reasons other than serious physical
disability or other incapacity; theft of Company property or
property of other employees; other criminal conduct; deliberate
destruction of or damage to Company property; excessive
absenteeism or tardiness; fighting during working hours or on
Company property; falsification of records; refusal to follow
directions of
- 4 -
<PAGE> 5
supervision; bringing firearms or other dangerous weapons,
alcoholic beverages, drugs or narcotics onto Company premises;
reporting to work under the influence of alcohol or drugs;
drinking alcoholic beverages during working hours or on Company
premises; possessing, selling, or offering for sale drugs or
narcotics on Company premises; repeated or willful violation of
Company rules.
IX. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PROGRAM
----------------------------------------------------
9.1 The Company may, at any time, amend, suspend, or terminate the
Program.
9.2 An employee selected to be a Participant in any year may be
removed as a Participant during that year if he/she is demoted to
a position that, in the opinion of the Board of Directors, does
not qualify for participation in the Program.
X. FUNDING OF PROGRAM
------------------
The Bonuses to be granted under the Program constitute general claims
against the Company. Such Bonuses will not be funded through a trust or
special segregated assets of the Company.
XI. NON-ASSIGNABILITY
-----------------
A Participant's Bonus under the Program shall not (otherwise than by will
or the laws cf descent and distribution) be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
or charge, and any attempt to so anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge the same shall be null and void; nor
shall any such Bonus be liable for, or subject to, the debts, contracts,
liabilities or torts of the Participant (or his/her beneficiary) entitled
to such Bonus.
XII. RIGHTS TO CONTINUED EMPLOYMENT
------------------------------
The Program shall not in any way grant any rights to any Participant to
his/her continued employment by the Company and the Company shall maintain
any rights it might otherwise have to terminate the employment of any
Participant.
XIII. EFFECTIVE DATE
--------------
This Program shall be effective only for the fiscal year beginning
January 1, 1995, and ending December 31, 1995.
- 5 -
<PAGE> 6
XIV. EFFECT ON BENEFIT PLANS
-----------------------
10.1 The payment of Bonuses to a Participant actively employed at the time
of payment under the terms of the Program will be considered
compensation for the purpose of determining benefits available under
the Company's Pension Program, Retirement Savings Program, or any
other employee benefit Program or program.
10.2 Payments made after a Participant's employment termination date or
retirement date will not be considered compensation under the Pension
Program, Retirement Savings Program, or any other employee benefit
plan or program.
- 6 -
<PAGE> 1
BRK BRANDS, INC.
1996 MANAGEMENT INCENTIVE BONUS PROGRAM
I. PURPOSE
-------
The BRK Brands, Inc., 1996 Management Incentive Bonus Program (called the
"Program") is established to give employees of the Company a special
individual incentive to further the profits and growth of the Company. This
Program shall be effective only for the fiscal year beginning January 1,
1996, and ending December 31, 1996. The Company may, at any time, amend,
suspend, or terminate the Program.
II. DEFINITIONS
-----------
2.1 "Company" means BRK Brands, Inc.
2.2 "Bonus" means the sum of the Non-Discretionary Bonus and the
Discretionary Bonus to a Participant under the Program each year.
2.3 "Participant" means an employee selected to participate in the
Program.
2.4 "Level of Participation" means the maximum percentage level at which a
Participant participates in the Program.
2.5 "Earnings per Share" (EPS) means the consolidated net income of First
Alert, Inc. for the fiscal year divided by the weighted average of the
fully diluted common stock outstanding as determined in accordance
with generally accepted accounting principles.
2.6 "Percentage Weight" means the percentage of importance assigned to
earnings per share for the determination of the Non-Discretionary
Bonus and to personal performance for the determination of the
Discretionary Bonus respectively. The sum of the Percentage Weights
shall equal 100%.
2.7 "Hire Date" means the date on which a Participant commences his/her
employment with the Company.
2.8 "Termination Date" means the date on which a Participant terminates
his/her employment with the Company.
- 1 -
<PAGE> 2
III. ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Separate programs have been established by the Board of Directors for
the Chairman/CEO and the President/COO, therefore they are excluded
from this program.
3.2 Employees eligible for Bonuses under the Program will be limited to
those employees of the Company who, in the judgment and discretion of
the Company, are deemed to be in a position to have a major impact on
the profits and growth of the Company. Notwithstanding an employee's
salary grade, participation and maximum level of participation shall
be determined at the sole discretion of the Company.
3.3 Managers participating in the Bonus Program have access to and
knowledge of confidential information regarding the Company's
business. Participation in the Management Incentive Bonus Program is
contingent upon signing the Company's February, 1996 "Confidential
Information and Inventions Agreement". Failure to sign the Agreement
will result in forfeiture of bonus Eligibility for the Program year.
3.4 A Participant's Level of Participation shall not exceed the following
unless otherwise determined by the Board of Directors:
Management Maximum Level
Group of Participation
---------- ----------------
1 - Vice President 30%
2 - Operating Unit General Manager 25%
3 - Functional Area Department 20%
Director/Manager
4 - First-level Manager 10%
A Participant's Level of Participation times his/her base salary on
June 1, 1996, represents the maximum Bonus ("Maximum Bonus") a
Participant may receive in any year.
3.5 Participants employed by January 1 of the Program year are eligible
for full-year participation.
- 2 -
<PAGE> 3
3.6 Participants employed after January 1 but prior to October 1 are
eligible on the first day of the quarter following their Hire Date.
Any earned Bonus will be calculated on a pro rata basis.
3.7 Employees newly employed in or promoted to a position with bonus
eligibility between October 1 and December 31 of the Program year are
not eligible to participate in the Program until the following year.
IV. ADMINISTRATION OF THE PROGRAM
-----------------------------
4.1 The Board of Directors will have full and final authority to
prescribe, amend and rescind rules and regulations relating to the
administration of the Program; to interpret the Program and the rules
and regulations applicable thereto; and to make all other
determinations deemed necessary or advisable for the administration of
the Program. Such administrative action will be conclusive and binding
on all parties at interest.
4.2 The Company has selected Participants, determined the minimum, target,
and maximum earnings per share results, the Percentage Weights and
each Participant's Level of Participation, and will notify each
Participant of the foregoing.
V. BONUS DETERMINATION
-------------------
5.1 NON-DISCRETIONARY BONUS
-----------------------
The percentage weight for the Non-discretionary Bonus shall be
66 2/3%. The Non-discretionary Bonus shall be the product of the
maximum level of participation, times the percentage weight, times
earnings per share attainment percentage.
EPS attainment is expressed as a percentage based on the audited EPS
of First Alert, Inc.
For fiscal year 1996, EPS attainment is:
0% = $0.55 per share or less
50% = $0.60 per share
100% = $0.70 per share or greater.
- 3 -
<PAGE> 4
If earnings per share attainment falls between the minimum and the
maximum figures, the earnings per share attainment shall be computed
on a straight-line basis between the minimum and the maximum earnings
per share.
5.2 DISCRETIONARY BONUS
-------------------
5.2.1. At the Company's discretion, each Participant may receive a
bonus ("Discretionary Bonus") based upon his/her individual
performance for the year.
5.2.2. A Discretionary Bonus pool will be determined from which
individual Discretionary Bonuses will be paid. The
Discretionary Bonus pool will equal 53% of the aggregate
Nondiscretionary Bonuses paid with respect to the program
year less any Non-discretionary Bonuses paid to any Program
Participant whose employment with the Company terminated for
any reason during the program year.
The Discretionary Bonus pool will be allocated to
each Vice President on the basis of Program
Participants within his/her area of responsibility.
Each Vice President will recommend the Discretionary
Bonus, if any, to be paid to the Program Participants
in his/her area of responsibility, subject to review
of the President and approval of the Board of
Directors. The total of such Discretionary Bonus
recommendations will not exceed the allocated amount.
VI. MINIMUM BONUS
-------------
If the minimum earnings per share figure is achieved, a total
Non-discretionary Bonus of at least $500 will be awarded to each full-year
Participant. Conversely, if the minimum EPS figure is not achieved, no
Non-discretionary nor Discretionary Bonuses will be paid.
VII. DISTRIBUTION OF BONUS
---------------------
Bonuses shall be distributed to each Participant in a lump sum as soon as
practicable after the audit of the Company's financial statements is
completed.
VIII. TERMINATION OF EMPLOYMENT
-------------------------
A Participant who leaves the employ of the Company either by mutual
consent or by the action of the Company, except for cause*, before
distribution of the Bonus, shall be entitled to receive a pro rata
Non-Discretionary Bonus only for his/her period of employment during
the calendar year up to and including the Participant's Termination
Date, and shall not be entitled to a Discretionary Bonus.
- 4 -
<PAGE> 5
A Participant who voluntarily leaves the employ of the Company during
the Program year shall forfeit any right to both Non-Discretionary and
Discretionary Bonuses.
A Participant who voluntarily leaves the employ of the Company after
the Program year but before the distribution of the Bonus shall forfeit
any right to any Discretionary Bonus.
*Termination for cause includes but is not limited to failure of the
Participant to perform his/her duties faithfully, diligently, and
competently for reasons other than serious physical disability or other
incapacity; theft of Company property or property of other employees;
other criminal conduct; deliberate destruction of or damage to Company
property; excessive absenteeism or tardiness; fighting during working
hours or on Company property; falsification of records; refusal to
follow directions of supervision; bringing firearms or other dangerous
weapons, alcoholic beverages, drugs or narcotics onto Company premises;
reporting to work under the influence of alcohol or drugs; drinking
alcoholic beverages during working hours or on Company premises;
possessing, selling, or offering for sale drugs or narcotics on Company
premises; repeated or willful violation of Company rules.
IX. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PROGRAM
----------------------------------------------------
9.1 The Company may, at any time, amend, suspend, or terminate the
Program.
9.2 An employee selected to be a Participant in any year may be removed
as a Participant during that year if he/she is demoted to a position
that, in the opinion of the Board of Directors, does not qualify for
participation in the Program.
X. FUNDING OF PROGRAM
------------------
The Bonuses to be granted under the Program constitute general claims
against the Company. Such Bonuses will not be funded through a trust or
special segregated assets of the Company.
XI. NON-ASSIGNABILITY
-----------------
A Participant's Bonus under the Program shall not (otherwise than by will
or the laws of descent and distribution) be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
or charge, and any attempt to so anticipate, alienate, sell, transfer,
assign, pledge, encumber, or charge the same shall be null and void; nor
shall any such Bonus be liable for, or subject to, the debts, contracts,
liabilities or torts of the Participant (or his/her beneficiary) entitled
to such Bonus.
- 5 -
<PAGE> 6
XII. RIGHTS TO CONTINUED EMPLOYMENT
------------------------------
The Program shall not in any way grant any rights to any Participant to
his/her continued employment by the Company and the Company shall maintain
any rights it might otherwise have to terminate the employment of any
Participant.
XIII. EFFECTIVE DATE
--------------
This Program shall be effective only for the fiscal year beginning January
1, 1996, and ending December 31, 1996.
XIV. EFFECT ON BENEFIT PLANS
-----------------------
10.1 The payment of Bonuses to a Participant actively employed at the time
of payment under the terms of the Program will be considered
compensation for the purpose of determining benefits available under
the Company's Pension Program, Retirement Savings Program, or any
other employee benefit Program or program.
10.2 Payments made after a Participant's employment termination date or
retirement date will not be considered compensation under the Pension
Program, Retirement Savings Program, or any other employee benefit
plan or program.
- 6 -
<PAGE> 1
EXHIBIT 11.1
FIRST ALERT, INC. AND SUBSIDIARIES
CALCULATION OF SHARES USED IN DETERMINING NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding............ 24,118,854 24,043,116 22,619,424
Weighted average common share equivalents outstanding
during the period computed in accordance with the
treasury stock method period computed in accordance
with the treasury stock method...................... 440,496 788,269 981,240
---------- ---------- ----------
Total weighted average shares outstanding............. 24,559,350 24,831,385 23,600,664
========== ========== ==========
</TABLE>
24
<PAGE> 1
FIRST ALERT, INC.
1996 Annual Report to Stockholders
<PAGE> 2
FIRST ALERT, INC.
3901 Liberty Street Road
Aurora, Illinois 60504
<PAGE> 3
First Alert, Inc., through its subsidiaries, is a leading manufacturer and
marketer of smoke detectors, carbon monoxide detectors and other residential
safety products.
These high quality products are marketed in the United States and more
than 50 other countries primarily under the FIRST ALERT[Registered
Trademark] brand name, which is considered to be the most widely
recognized consumer brand name in home safety.
The Company's leadership position in home safety began in 1969 with the
introduction of the first battery-operated residential smoke detector to
receive an Underwriters Laboratories Inc. listing. The Company continues to
earn the trust of consumers by developing and introducing innovative
products that enhance home safety.
Contents
Product Testimonials
Financial Summary 1
Message from Management 2
Letter to Stockholders 3
Letter to Customers 6
Letter to Employees 8
Summary of Selected Consolidated/Combined Financial Data 9 [FIRST]
Management Discussion and Analysis 10
Financial Statements 13
Notes to Consolidated Financial Statements 17
Report of Independent Accountants 24
Management's Responsibility for Financial Statements 24
Corporate and Stockholder Information Inside Back Cover
This report contains certain statements that relate to future plans,
expectations, events, performance and the like which are
forward-looking statements within the meaning of the Private
Securities Litigation Act of 1995. Actual results or events could
differ materially from those described in the forward-looking
statements due to a variety of factors, including those set forth in
the Company's report on Form 10-K expected to be filed with the
Securities and Exchange Commission in March 1997.
First Alert[Registered Trademark] is a registered trademark of the First
Alert Trust; BRK [Registered Trademark] and Family Gard[Registered
Trademark] are registered trademarks of First Alert, Inc.
References to the corporate entity First Alert, Inc. ("First Alert" or the
"Company") in this Annual Report to Stockholders mean either First Alert
acting as a single entity or through its subsidiaries.
<PAGE> 4
"Well, from what I know about carbon monoxide poisoning....
It's scary to think what could have happened in that house
without...First Alert."
RUBEN AND ELMA PORTER -- Downers Grove, Illinois
"On November 12, 1996, I was awakened to the sound of my
three First Alert Smoke Alarms. An umbrella had fallen onto
my floor furnace, the plastic handle was melting through the
grate onto the furnace.... I awoke to a smokey, odd smelling
bedroom with my smoke alarm blasting....I am a very deep
sleeper...and often wondered if a smoke alarm would wake me.
It did and I am very grateful to your company for putting
out an affordable product, anyone can purchase to help the
safety of their home and their lives. Thank you"
SANDRA SUE COLLINS -- Lexington, Kentucky
"I have been in the Fire Service for twenty-one years and I have fought many
fires. I feel confident in saying that your smoke detector saved this house from
burning to the ground. Firefighting is a tough job, but, thanks to your
products, our job is getting a little easier..On behalf of all firefighters I
would like to say 'Thank You' for everything you do."
BILL COOMBS, CHIEF, Laurens Fire Department -- Laurens, New York
<PAGE> 5
"...we heard about this First Alert Carbon Monoxide
Detector....which we bought, and put it up about 6:30 and it
went off at 9:30....It was a crack in the heat exchanger in
the furnace....I KNOW it saved our lives..."
RICHARD AND MARGIE BEST -- Wolcottville, Indiana
"On January 28, 1997, at 3 a.m. the First Alert Smoke Detector at my daughter's
house...alerted her and her husband that there was a fire in their home. My
son-in-law got up...to alert our two young grandsons who were sleeping in the
other side of the home. He was able to get out the front door and went to the
children's bedroom from the outside and was able to rescue my daughter and two
grandsons. Their home was totally destroyed within minutes and if it were not
for the smoke detectors they all would have perished....Thank you."
WARREN STEINKAMP WITH WIFE SHIRLEY (GRANDPARENTS) -- Steelville, Missouri
<PAGE> 6
<TABLE>
CORPORATE AND STOCKHOLDER INFORMATION
<S> <C> <C> <C>
WORLD HEADQUARTERS OFFICERS SUBSIDIARIES INVESTOR RELATIONS
AND DIVISIONS
FIRST ALERT, INC. MALCOLM CANDLISH MICHAEL A. ROHL
3901 Liberty Street Road Chairman of the Board BRK BRANDS, INC. Vice President and
Aurora, Illinois 60504 3901 Liberty Street Road Chief Financial Officer
B. JOSEPH MESSNER Aurora, Illinois 60504 First Alert, Inc.
BOARD OF DIRECTORS President and 3901 Liberty Street Road
Chief Executive Officer BRK BRANDS CANADA Aurora, Illinois 60504
JOHN R. ALBERS(1) a division of
Chairman, President WILLIAM K. BROUSE BRK Brands, Inc. STOCK LISTING
and CEO (retired) Vice President - Sales 6650 Finch Ave. West,
Dr Pepper/Seven-Up Unit 9 THE NASDAQ NATIONAL
Companies, Incorporated MARK A. DEVINE Rexdale, Ontario MARKET
Vice President - Engineering M9W 5Y6 Canada SYMBOL: ALRT
MALCOLM CANDLISH
Chairman of the Board MICHAEL A. ROHL BRK BRANDS EUROPE LTD. ANNUAL MEETING
Vice President and Fountain House OF STOCKHOLDERS
ANTHONY J. DINOVI(1)(2) Chief Financial Officer Canal View Road
Managing Director Newbury The Annual Meeting of
Thomas H. Lee Company HALDON K. GRANT Berkshire RG14 5XF Stockholders will be held
General Counsel and England Tuesday, May 6, 1997,
DAVID V. HARKINS(1)(2) Secretary Susan Young, at 10:30 a.m. at the
Senior Managing Director Managing Director Hilton Hotel Lisle/Naperville
Thomas H. Lee Company 3003 Corporate West Drive
BRK BRANDS PTY LTD. Lisle, Illinois 60532.
B. JOSEPH MESSNER Unit 7, Riverside Centre Telephone (630) 505-0900.
President and 24-28 River Road West Any First Alert, Inc.
Chief Executive Officer Parramatta, NSW 2150 stockholder may receive,
Australia without charge, a copy of the
SCOTT A. SCHOEN(1)(2) Mark L. Euvrard, most recent Annual Report on
Managing Director General Manager Form 10-K, as filed with the
Thomas H. Lee Company Securities and Exchange Commission,
ELECTRONICA BRK by writing to the following:
PETER M. WOOD(2) DE MEXICO S.A. DE C.V.
Former Managing Director Fernando Borreguero y MICHAEL A. ROHL
J.P. Morgan & Co. Lopez Mateos Vice President and
Incorporated Apartado Postal 2541-E Chief Financial Officer
Cd. Juarez, Chihuahua First Alert, Inc.
Mexico Post Office Box 68
(1) Compensation Committee Aurora, Illinois 60507-0068
(2) Audit Committee INDEPENDENT (630) 851-7330
ACCOUNTANTS
(C)1997 First Alert, Inc.
PRICE WATERHOUSE LLP Printed in the U.S.A.
200 East Randolph Drive CM1050
Chicago, Illinois 60601
TRANSFER AGENT
THE FIRST NATIONAL BANK
OF BOSTON
c/o Boston EquiServ, L.P.
150 Royall Street
Canton,
Massachusetts 02110
</TABLE>
<PAGE> 7
<TABLE>
FINANCIAL SUMMARY
(in thousands, except per share data) First Alert, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $205,607 $246,266
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit, excluding depreciation 54,996 105,286
- ------------------------------------------------------------------------------------------------------------------------------
Restructuring charge 2,499 --
- ------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (26,519) 20,433
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (18,702) 11,437
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (0.76) 0.46
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 24,559 24,831
- ------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 6,353 $ 7,305
- ------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 5,274 10,648
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
- ------------------------------------------------------------------------------------------------------------------------------
Working capital $ 73,748 $ 68,852
- ------------------------------------------------------------------------------------------------------------------------------
Total assets 186,491 206,993
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt (including current maturities) 60,500 52,200
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 88,852 107,044
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ALERT, INC. LOGO]
1
<PAGE> 8
MESSAGE FROM MANAGEMENT
We failed to achieve the goals we had established for 1996. As a result,
important changes have been made at the senior management level, in our
strategies, and in our operating systems.
The most visible change -- and the one that I believe is the most
significant -- was the appointment last September of Joe Messner as President
and Chief Executive Officer. Joe has had a distinguished career with major con
sumer products companies, where he demonstrated an ability to grow sales and
earnings. His experience, accomplishments and leadership skills mesh well with
the challenges and opportunities we face in our Company.
I am confident that Joe is the right person to lead First Alert to a new
level of strong performance.
Sincerely,
/s/ Malcolm Candlish
Malcolm Candlish
CHAIRMAN OF THE BOARD
Focus, Innovation, Commitment. These three words best characterize the strategic
direction of this Company and represent the theme of this year's Annual Report.
A sharp focus on our core product lines and our valuable brand names is
critical at First Alert, as we strive to return to an acceptable level of
profitability. Innovation is also essential, as we apply the newest technology
in creative ways to all of our products. And, throughout the Company, we will
establish a culture of commitment to meeting the high standards we have set for
our products and our Company's performance.
This report addresses three separate audiences essential to the Company:
our shareholders, our customers and our employees. With strong and appropriate
leadership from management, working partnerships with our customers in the
retail trade and the dedicated efforts of all our employees, I am confident that
First Alert can build on its strengths and return to its stature as a growing,
profitable company.
Sincerely,
[PHOTO OF MALCOLM CANDLISH
AND JOE MESSNER]
/s/ B. Joseph Messner
B. Joseph Messner
PRESIDENT AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 9
TO OUR STOCKHOLDERS
The year just ended was a difficult one for First Alert. Sales declined
significantly from the prior year, and the Company was unprofitable. Our stock
performed equally poorly. In this report, we will discuss performance for the
past year, which we regard as both disappointing and unacceptable. More
importantly, we will outline the decisive steps already taken and the actions
planned for the immediate future to position this Company to perform as our
stockholders, customers and employees expect and deserve.
PERFORMANCE IN 1996 Net sales of $205.6 million for the year were 16.5% below
the level of the prior year. The major factors responsible for this decrease in
sales were overall market softness and lower average selling prices of carbon
monoxide detectors in 1996 compared to 1995, and lower sales volume of smoke
detectors, reflecting lost distribution in certain key accounts.
The Company's overhead expenses were much too high to achieve profitability
at this level of sales volume. Consequently, we reported a net loss of $18.7
million, or $.76 per share. In addition to the impact of lower sales, the
operating loss reflects the effect on gross margin of sharply reduced levels of
production and resulting plant underutilization, particularly in the fourth
quarter. Restructuring and other charges taken in the fourth quarter further
increased the net loss.
[LOGO: FOCUS]
1997 AND BEYOND Last October, we announced plans to refocus and refresh First
Alert's product lines to compete more effectively in the evolving market
environment. Accordingly, we initiated a series of actions designed to:
* Revitalize the Company's core product lines of smoke and carbon monoxide
detectors and discontinue, reposition or outsource non-performing product
lines;
* Reduce the Company's selling, general and administrative cost structures;
* Right-size and consolidate manufacturing operations; and
* Aggressively address inventory levels.
These actions resulted in a charge of approximately $9.5 million before tax, or
$0.23 per share after tax in the fourth quarter of 1996. The charge includes
costs associated with product line decisions, related inventory and
manufacturing equipment write-do wns and severance costs. The strategic
importance of those actions is explained on the following pages.
REVITALIZE CORE PRODUCT LINES The vast majority of our sales and earnings come
from two core product lines; smoke detectors and carbon monoxide detectors. In
the past, in an effort to cover the broad home safety category, we have
occasionally applied excessive resources to secondary lines with limit ed
potential to contribute to earnings. We will evaluate product line extensions
and consider extensions valuable only if they produce attractive returns for our
stockholders by applying this Company's competitive advantages to the needs of
our customers and consumers. We are scrutinizing our secondary product lines,
and those not producing adequate contributions to earnings are being
repositioned, outsourced or eliminated.
3
<PAGE> 10
TO OUR STOCKHOLDERS
Today the primary focus of First Alert is the residential safety marketplace,
particularly the very attractive opportunities that exist for our core product
categories. Actions are underway to strengthen the Company's smoke detector
lines with an emphasis on product design, features, benefits and enhancing
consumer value. During 1997, we plan to introduce a series of new models of
smoke detectors with distinctive benefits that are clearly communicated.
Appealing new packaging that emphasizes the FIRST ALERT[Registered Trademark]
brand name will make our products more productive on retailers' shelves.
We are redesigning and refining performance of our carbon monoxide
detectors, while also working to build consensus among standards-setting
organizations within the industry. As the market leader, First Alert has the
opportunity and, we believe, the responsibility to take a leadership role in the
establishment of agreed-upon performance standards for carbon monoxide
detectors. In the past, various interested parties, including the American Gas
Association, Underwriters Laboratories Inc. (UL), the Consumer Product Safety
Commission and GAMA (the detector manufacturers' trade association), have
separately proposed standards which were often in conflict with one another.
This situation created confusion that diminished consumer confidence in carbon
monoxide detectors and slowed market growth. We believe that consumers are best
served by a clear, consistent message, and it is our goal to develop such a
message for the industry.
In evaluating products -- either new products or those presently in our line
- -- we ask ourselves two major questions. First, "Is it something the consumer
wants and needs?" And second, "Do we bring a core competency to the category?"
Only if we can answer both positively, and if we can bring the product to market
in a cost-effective manner, does the item belong in our line.
While refreshing the product line, we are also rejuvenating our marketing
programs. Our objective is to mount advertising and public relations campaigns
that will contribute to category growth by increasing consumer awareness of
safety issues, while also communicating a strong brand message stressing the
advantages of FIRST ALERT products.
REDUCE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES We have taken dramatic
steps to reduce selling, general and administrative (SG&A) expense levels. We
have reduced our staffing levels by approximately 10% and plan substantial
reductions in other SG&A expenses. In 1996, we have recognized the severance
costs related to these changes; the cost savings will begin in 1997.
RATIONALIZE MANUFACTURING OPERATIONS AND ADDRESS INVENTORY LEVELS In the
fourth quarter of 1996, we provided for costs associated with reducing excess
inventory levels of components and certain finished goods. Equally important, we
have taken steps to build the forecasting and materials management capabilities
to avoid accumulations of excess inventory in the future. There is a significant
opportunity to improve earnings and cash flow through improved production
planning and better inventory management. These two functional areas are closely
related to one another, and they must work in concert in order to be effective.
4
<PAGE> 11
We have already established a corporate materials management function, and we
will soon have a senior executive responsible for all operations at
headquarters. Manufacturing is collaborating effectively with sales forecasting
on our master schedule for production. Our sales force, in turn, is working more
closely with major customers to project the timing and levels of sales so that
production can be scheduled accordingly.
Significant changes in our manufacturing operations are also in progress.
At our Juarez plant, improved manufacturing flexibility will reduce lead times.
We have reduced component lead times up to 50% in the last five months by
consolidating our supplier base, while strengthening partnerships with our key
suppliers. Over the next few months, we will be examining every aspect of the
design and manufacture of our products, analyzing the potential to use common
components across a range of products and determining which of certain non-core
products could be manufactured more efficiently through outsourcing.
[LOGO]
STRENGTHEN BRAND IDENTITY While acting decisively to correct the problems
of the immediate past, we are also taking positive steps to emphasize and
take advantage of the strength of the FIRST ALERT[Registered Trademark]
brand. This powerful brand name is a valuable asset and a major reason for
our position of leadership in the home safety category. Our brand has a
high level of awareness that would be extremely difficult and expensive to
develop anew. Now we must develop existing awareness with a more complete
brand communication statement, so that consumers everywhere know that FIRST
ALERT stands for quality, durability, technology and for the satisfaction
that comes from knowing the home is safe.
INTERNATIONAL MARKETS Our international strategy is centered on large,
profitable markets, particularly Europe and Australia. As we develop
business in additional markets, our goal is to take a more global approach
to new product development, minimizing the number of unique products and
components. At the same time, we must be efficient in responding to local
authorities, researching requirements specific to certain markets before
planning products.
[LOGO]
THE FUTURE We look to the future with a serious focus on our strengths, a
spirit of purposeful innovation and a commitment to significantly improved
performance. We intend to create stockholder value through the
revitalization of the FIRST ALERT brand, focus on core product categories
and introduction of complementary lines. This Company has certain
significant fundamental strengths: the equity in the FIRST ALERT brand
name, our broad distribution base and participation in a market with sound
fundamentals. By building on these strengths, our goal is to report
significantly improved results in 1997.
5
<PAGE> 12
TO OUR CUSTOMERS
There are many reasons that First Alert is the market leader in residential
safety products. Our products deliver real consumer benefits, backed by the
promise of quality and reliability inherent in the powerful FIRST
ALERT[Registered Trademark] brand name. The close working relationships we
enjoy with our customers are also vital to our success. We strive to create
partnerships with our customers that encompass every facet of business,
including logistics, planning and technology.
We believe that it is the responsibility of the market leader to build
markets and to generate positive momentum by driving consumer demand for
products. We must lead in innovation, in the design of products and packaging
and in implementing programs that develop the home safety category. We want
retailers and end users to regard FIRST ALERT as the brand with the newest and
best ideas -- the brand that will bring consumers into the store.
IMPROVING CUSTOMER RESPONSIVENESS True market leadership means
providing superior service to customers, and we are committed to
continuous improvement in this area. Since our objectives and those of
the retailers who are our customers are closely aligned, solid working
partnerships can maximize benefits for all parties. We are utilizing
technology and dedicating internal resources to ensure market
leadership in quality, cost and on-time delivery. We are establishing
cross-functional teams with major accounts so that all aspects of
logistics operate smoothly and efficiently. And, by assuming category
management responsibility, we are teaming with key customers to build
the home safety product category.
[LOGO]
First Alert is committed to the channels of trade where our products are
now distributed, primarily mass merchandisers, home improvement and
hardware stores. As we evaluate potential new product lines, we pledge to
consider the appropriateness and earnings potential of these lines for our
customers as well as for First Alert. In addition, we will continue to
provide innovative and effective products to the contractor market, under
the BRK[Registered Trademark] Electronics brand name. The confidence of
contractors in the quality of these products is demonstrated by the
strength of sales of BRK Electronics products, which achieved a five
percent increase in volume in 1996.
Our goal is to provide superior service to complement the strong
equity in the FIRST ALERT brand name. When we have the superior customer
service and world-class logistics to which we aspire, we will have a
dynamic competitive advantage that will benefit our Company and our
customers.
NEW PRODUCTS Since innovation motivates consumer purchases, retailers
expect fresh ideas from the market leader, and our plans for 1997 include
several distinctive new products. We intend to lead the home safety market
by offering products that meet consumer needs and by communicating their
benefits in a manner that is informative and appealing.
6
<PAGE> 13
[LOGO]
The new line of FIRST ALERT[Registered Trademark] Smoke Detectors has a more
contemporary, ergonomic design, with larger reset buttons and controls that are
more logical and easier to use. Proprietary patented features, such as the major
benefit of being able to test the detector from the ground with a flashlight,
will be emphasized in advertising, merchandising and packaging.
IN ALL PRODUCT DEVELOPMENT, OUR FOCUS IS ON DEVELOPING NEW AND IMPROVED PRODUCTS
THAT COMPLEMENT OUR CORE LINES AND MEET CONSUMER NEEDS. In 1996, we introduced a
plug-in carbon monoxide detector with a digital readout that allows the consumer
to know the level of carbon monoxide that is present. We plan to introduce a new
battery-operated carbon monoxide detector incorporating a non-replaceable
sensor, eliminating the need to change the sensor when the battery expires. We
also anticipate introducing the first ever dual smoke and carbon monoxide
detector, which we plan to submit to UL for testing during this year.
[LOGO]
MARKETING AND PUBLIC RELATIONS TO BUILD AWARENESS Because home safety is the
central focus of First Alert, our marketing, advertising and public relations
programs are designed not only to sell our products but also to promote home
safety through consumer education. We develop comprehensive programs that
communicate to parents, homeowners, consumers, children, firefighters, reporters
and editors across the country. The favorable reports and programs that result
are vital to building our business.
In conjunction with the International Association of Fire Chiefs, we help
educate the public about the importance of smoke detectors and fire
extinguishers, particularly during National Fire Safety Week. Other efforts
include the FIRST ALERT Junior Fire Inspector Program. This program provides
local fire departments, traditionally the providers of fire safety information,
a packaged course that helps firefighters teach kids the basics of fire safety
in the schools through simple, meaningful activities.
We are also active in promoting Carbon Monoxide Awareness Week. Our public
relations team is in constant contact with top television, radio, magazine and
print editors both nationally and locally to ensure that reporters and editors
understand the complex issues of carbon monoxide poisoning and its prevention.
For example, recent publicity efforts include home safety segments in December
1996 and January 1997 on a network morning television show which featured our
battery-operated and plug-in carbon monoxide detectors and our 10-year smoke
detector. As a result of our efforts, GOOD HOUSEKEEPING magazine evaluated nine
carbon monoxide detectors. The ensuing story concluded, "our favorite was First
Alert's battery-powered extra sensitive carbon monoxide detector" (Good
Housekeeping magazine, February 1997 issue).
[LOGO]
7
<PAGE> 14
TO OUR EMPLOYEES
[LOGO]
Our employees are the foundation and most valuable asset of this Company. The
objectives outlined in the messages to stockholders and customers are
challenging, but we believe they are achievable based on the impressive talents
and skills resident within our organization.
In light of the disappointing performance of recent periods, it is possible
to lose sight of this Company's fundamental strengths. These strengths include
the equity in the FIRST ALERT[Registered Trademark] brand name, our broad
distribution base and the fact that we participate in attractive markets with
growth potential. Equally important is the strength represented by our dedicated
employees. By combining these basic strengths with vision and leadership, we
will be able to reach the goals we have set forth.
[COMMITMENT]
As always, we are committed to products of the highest quality. But we must
make sure to define quality as our customers and consumers do. We must pay
great attention to the fine balance among product features, price and
performance that defines true quality in the eyes of consumers. We must
analyze fundamental consumer needs, create products to fulfill those needs
and communicate clearly the consumer benefits our products provide. The
more c losely our products match consumer needs, the more successful we
will be as a company. And the more closely we can work together as an
integrated organization, the more successful we will be at designing,
manufacturing and marketing products that provide the benefits consumers
want and need.
Your senior management's pledge to all employees is to sponsor and
encourage a team approach to the business tasks at hand. We have
shattered some of the barriers that existed among functions, but we
still have a long way to go. Our goal is to establish interfunctional
[LOGO] teams to address product development, manufac-turing, marketing and
sales in a manner that is beneficial for our Company, our employees,
our customers and our consumers. There will be considerable investment
in training and cross-training to increase understanding and
capabilities across functions. Our management team will be enhanced
with the best talent in every area of responsibility.
The path we have before us is challenging and exciting. It will
be a productive time, a time of high energy. With the commitment of
each of our employees, we can enhance our Company's market leadership;
we can make it a profitable investment for our stockholders; and we
can make it a great place to work.
8
<PAGE> 15
<TABLE>
SUMMARY OF SELECTED CONSOLIDATED/COMBINED FINANCIAL DATA
(in thousands, except per share data) First Alert, Inc. and Subsidiaries
<CAPTION>
Company Predecessor
----------------------------------------------------------------- -----------
Combined Five Seven
year months months
Year ended December 31, ended ended ended
- ----------------------------------------------------------------------------------------------------------------------- -----------
1996 1995 1994 1993 12/31/92 12/31/92 7/31/92
- ----------------------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $205,607 $246,266 $248,404 $157,625 $131,061 $73,006 $58,055
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit, excluding depreciation 54,996 105,286 116,415 63,468 46,783 25,903 20,880
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 72,663 77,548 73,857 41,836 35,793 16,982 18,811
- ------------------------------------------------------------------------------------------------------------------------------------
Restructuring charge 2,499 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,353 7,305 7,646 6,624 4,509 2,289 2,220
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (26,519) 20,433 34,912 15,008 6,481 6,632 (151)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 3,803 1,487 2,983 6,074 2,819 2,566 253
- ------------------------------------------------------------------------------------------------------------------------------------
Other expenses (income) 628 (113) 720 452 1,149 1,281 (132)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and extraordinary item (30,950) 19,059 31,209 8,482 2,513 2,785 (272)
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) (12,248) 7,622 12,500 3,440 1,276 1,206 70
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (18,702) 11,437 18,709 5,042 1,237 1,579 (342)
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary item, net of tax (1) -- -- 1,084 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(18,702) $ 11,437 $ 17,625 $ 5,042 $ 1,237 $ 1,579 $ (342)
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA: (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) per share before
- ------------------------------------------------------------------------------------------------------------------------------------
extraordinary item $ (0.76) $ 0.46 $ 0.79 $ 0.25 $ -- $ 0.08 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (0.76) 0.46 0.75 0.25 -- 0.08 --
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 24,559 24,831 23,601 19,922 -- 19,835 --
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit before non-recurring expense (3) $ 54,996 $105,286 $116,415 $ 63,468 $ 51,931 $31,051 $20,880
- ------------------------------------------------------------------------------------------------------------------------------------
Non-recurring expense (3) -- -- -- -- 5,148 5,148 --
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA (4) (20,166) 27,738 42,558 21,632 16,138 14,069 2,069
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,353 7,305 7,646 6,624 4,509 2,289 2,220
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 5,274 10,648 6,740 6,081 4,791 2,288 2,503
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Company Predecessor
-----------------------------------------------------------------------------
As of December 31, As of
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 7/31/92
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
- -----------------------------------------------------------------------------------------------------------------------------------
Working capital $ 73,748 $ 68,852 $ 52,517 $ 20,552 $ 15,152 $24,756
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 186,491 206,993 172,305 139,868 117,279 69,907
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt (including current maturities) 60,500 52,200 15,700 75,191 60,903 --
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 88,852 107,044 95,413 36,541 31,059 49,176
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The extraordinary item, net of tax, of $1,084 relates to deferred expenses arising from financing the Acquisition (See
Note 1 to Consolidated Financial Statements) in 1992. The non-cash write-off of these costs is caused by the repayment of the
related debt with the proceeds of the initial public offering ("IPO").
(2) Per share data are not applicable to the seven months ended July 31, 1992, or to fiscal 1992 (combined) since the
Predecessor operated as a division of Pittway Corporation during those periods and no common shares were outstanding. For the five
month period ended December 31, 1992, and the 1 993, 1994, 1995 and 1996 fiscal years the Company did not declare any cash dividends
on its Common Stock.
(3) Non-recurring expense represents the write-off of costs associated with the step-up of inventory value in connection with
the Acquisition. Gross profit before non-recurring expense is not based upon generally accepted accounting principles ("GAAP") and
should not be construed as an alternative to gross profit (as determined in accordance with GAAP). Management believes, however,
that gross profit before nonrecurring expense is indicative of the ongoing nature of the Company's operations.
(4) Earnings before interest expense, taxes, depreciation, amortization, extraordinary item and non-recurring expense
("EBITDA") is a widely accepted financial indicator of a company's ability to service and/or incur debt. However, EBITDA should not
be construed as an alternative to operating income (as determined in accordance with GAAP) or to cash flows from operating
activities (as determined in accordance with GAAP) and should not be construed as an indication of the Company's operating
performance or as a measure of liquidity.
</TABLE>
9
<PAGE> 16
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Alert, Inc. and Subsidiaries
GENERAL
Effective July 31, 1992, the Company acquired substantially all of the assets
and assumed substantially all of the liabilities of the Predecessor (See Note 1
to Consolidated Financial Statements) ("Acquisition"). During 1993 and through
April 5, 1994, the closing date for the initial public offering ("IPO") (See
Note 1 to Consolidated Financial Statements), the Company's results of
operations were affected by an increase in interest expense and the amortization
of deferred financing costs related to the Acquisition.
In January 1997, the Company announced a series of actions designed 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. Associated with these actions, the Company recorded a pre-tax
charge of $9.5 million ($0.23 per share after tax) in 1996 consisting of a
restructuring charge of $4.5 million (See Restructuring Charge below) and other
operational charges of $5.0 million.
COMPARISON OF FISCAL 1996 TO FISCAL 1995
NET SALES
Net sales for fiscal 1996 were $205.6 million, a decrease of $40.7 million or
16.5% from net sales of $246.3 million for fiscal 1995. This decrease was due
primarily to lower unit volume net sales of smoke detectors in the U.S.,
Australia and in other export markets, and to lower net sales of FIRST
ALERT[Registered Trademark] Carbon Monoxide Detectors in the U.S. and Canada
caused by lower unit volume and lower average selling prices. Domestic net
sales in fiscal 1996 were hurt by the loss of distribution at two significant
customers during the year, by other competitive activity and general market
softness. Net sales of smoke detectors in the U.S. decreased by 15.3% in fiscal
1996 compared with fiscal 1995, due partially to efforts of customers to
reduce their inventories and partially to higher shipments of smoke detectors
by the Company at the end of 1995. Carbon monoxide detector net sales were
adversely affected by significant pricing pressures in fiscal 1996.
Consolidated net sales of carbon monoxide detectors in fiscal 1996 were $60.5
million compared to $81.4 million during fiscal 1995.
International net sales totalled $35.0 million in fiscal 1996, down 13.9%
from $40.6 million in fiscal 1995. Net sales in Europe and Australia were
relatively flat with the prior year while net sales declined in Canada and in
other export markets.
GROSS PROFIT, EXCLUDING DEPRECIATION
Gross profit, excluding depreciation ("gross profit") decreased to $55.0 million
in 1996 from $105.3 million in 1995, or 47.8%. As a percent of net sales, gross
profit was 26.7% in fiscal 1996 compared to 42.8% in fiscal 1995. Gross profit
in 1996, excluding inventory write-downs associated with restructuring of $2.0
million, was $57.0 million or 27.7% of net sales while gross profit in 1995,
excluding the one time $3.5 million write-off of first generation carbon
monoxide sensor inventories, was $108.8 million, or 44.2% of net sales. Gross
profit in 1996 was negatively impacted by the lower net sales levels,
particularly of carbon monoxide detectors and smoke detectors, which
significantly affected plant utilization; by generally lower selling prices for
carbon monoxide detectors; by higher material costs associated with new carbon
monoxide detectors introduced in August 1995, to meet an amendment to the
Underwriters Laboratories Inc. ("U.L.") Standard for carbon monoxide detectors
in October 1995; by higher than normal allowances granted to customers for
consumer product returns, in particular, for carbon monoxide detectors,
exacerbated by the amendment to the UL Standard; and by costs associated with
reducing excess inventory levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $72.7 million in
fiscal 1996 from $77.5 million in fiscal 1995, or 6.3%. As a percent of net
sales, selling, general and administrative expenses were 35.3% in fiscal 1996 as
compared to 31.5% in fiscal 1995. The decrease in the total amount of expenses
was due mostly to lower variable costs directly related to lower net sales,
lower national advertising costs and lower product design costs related to the
carbon monoxide detector product line. Significant product development costs
were incurred in 1995 related to the new carbon monoxide detectors, which met
the amended UL Standard. The decreases in the total amount of expenses were
offset by higher outside service costs, certain one-time legal and public
relations costs and a charge for severance costs relating to the departure of
certain employees during the year.
RESTRUCTURING CHARGE
The restructuring charge of $4.5 million referred to above includes $2.0 million
for inventory write-downs which have been charged to cost of sales, excluding
depreciation.The remaining $2.5 million of the restructuring charge includes
$1.8 million for write-downs of manufacturing equipment, $0.3 million for plant
restoration costs and $0.4 million for severance costs of approximately 600
employees who were released from employment in the fourth quarter of fiscal
1996.
RESULTS OF OPERATIONS
The table shown below presents, for the periods indicated, percentages of
certain items in the historical statements of operations of the Company relative
to net sales.
<TABLE>
- ------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------
Gross profit, excluding depreciation 26.7 42.8 46.9
- ------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 35.3 31.5 29.7
- ------------------------------------------------------------------------------------------------------
Restructuring charge 1.2 -- --
- ------------------------------------------------------------------------------------------------------
Depreciation and amortization 3.1 3.0 3.1
- ------------------------------------------------------------------------------------------------------
Operating income (loss) (12.9) 8.3 14.1
- ------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 17
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Alert, Inc. and Subsidiaries
OPERATING INCOME (LOSS)
Operating loss for fiscal 1996 totalled $26.5 million compared to operating
income of $20.4 million in fiscal 1995. Operating loss for fiscal 1996, before
the restructuring charge totalled $22.0 million, while operating income ,
excluding the $3.5 million write-off, totalled $23.9 million in fiscal 1995.
Operating loss for fiscal 1996 resulted from reduced sales, reduced gross
profit and the restructuring charge offset by lower selling, general and
administrative costs and lower depreciation and amortization.
INTEREST EXPENSE
Interest expense increased to $3.8 million in fiscal 1996 from $1.5 million in
fiscal 1995. The increase in interest expense was due mostly to the higher debt
levels carried by the Company during fiscal 1996 compared to fiscal 1995 and due
to the higher interest rates under the September 4, 1996, amendment to the
revolving credit facility ("Credit Facility") as discussed below.
OTHER EXPENSES (INCOME)
Other expenses include realized and unrealized gains/losses on foreign exchange
and non-operating related costs. In 1996, miscellaneous expense includes foreign
exchange gains of $0.7 million, primarily related to the U.K., offset by $1.3
million of other costs.
NET INCOME (LOSS)
Net loss in fiscal 1996 totalled $18.7 million compared to net income of $11.4
million in fiscal 1995. Net loss in fiscal 1996 before the restructuring charge
totalled $16.0 million, while net income in fiscal 1995, excluding the write-off
of first generation carbon monoxide sensor inventories, totalled $13.5 million.
The effective tax rate was a tax benefit of 39.6% in fiscal 1996 compared to a
tax provision of 40.0% in fiscal 1995.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
NET SALES
Net sales totalled $246.3 million in fiscal 1995, flat with the $248.4 million
in fiscal 1994. Lower sales of FIRST ALERT[Registered Trademark] Carbon Monoxide
Detectors in 1995 were partially offset by growth in sales of smoke detectors in
the U.S. and sales of new products, including fire escape ladders and fire
security safes and chests. Net sales of smoke detectors in the U.S. increased by
10.6% in fiscal 1995 compared with fiscal 1994, primarily as a result of unit
growth and due to the sale of higher priced models. Net sales of carbon monoxide
detectors in fiscal 1995 were $81.4 million compared to $92.1 million during
fiscal 1994. The decrease was due to the late onset of cold weather and the
absence of media activity in 1995 that surrounded the 1994 death of Vitas
Gerulaitis from carbon monoxide poisoning.
International net sales totalled $40.6 million in fiscal 1995, down
slightly from $41.8 million in fiscal 1994, or 2.8%. Significant gains in
Australia and other export markets virtually offset net sales declines in
Europe.
GROSS PROFIT
Gross profit, excluding the one-time $3.5 million write-off of first generation
carbon monoxide sensor inventories, decreased to $108.8 million in fiscal 1995
from $116.4 million in fiscal 1994, or 6.6%. As a percent of net sales, gross
profit, excluding the $3.5 million write-off, was 44.2% in fiscal 1995, compared
to 46.9% in fiscal 1994. Gross profit in fiscal 1995 was affected by lower
pricing to close out first generation FIRST ALERT Carbon Monoxide Detectors,
lower unit sales and higher material costs associated with new carbon monoxide
detectors partially offset by increased sales of smoke detectors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $77.5 million in
fiscal 1995 from $73.9 million in fiscal 1994, or 5.0%. As a percent of net
sales, selling, general and administrative expenses were 31.5% in fiscal 1995 as
compared to 29.7% in fiscal 1994. The increase in selling expenses in fiscal
1995 is directly related to new product development and marketing programs,
primarily to support carbon monoxide detectors, smoke detectors and home safety
awareness.
OPERATING INCOME
Operating income, excluding the $3.5 million write-off, totalled $23.9 million
in fiscal 1995, or 9.7% of net sales compared to $34.9 million in fiscal 1994,
or 14.1% of net sales. Operating income for fiscal 1995 was affected by reduced
gross profit and increased selling, general and administrative expenses.
INTEREST EXPENSE
Interest expense decreased to $1.5 million in fiscal 1995 from $3.0 million in
fiscal 1994. Debt levels were high in the first quarter of 1994 prior to the
retirement of $21.5 million of subordinated indebtedness and $18.5 million of
indebtedness under an original bank credit agreement, using the IPO proceeds.
OTHER EXPENSES (INCOME)
Other expenses include realized and unrealized gains/losses on foreign exchange
and non-operating related costs. These amounts were not significant in fiscal
1995 or fiscal 1994.
NET INCOME
Income before extraordinary item totalled $11.4 million in fiscal 1995 compared
to $18.7 million in fiscal 1994. Income before extraordinary item in fiscal
1995, excluding the write-off of first generation carbon monoxide sensor
inventories, totalled $13.5 million. The extraordinary item, net of tax, of $1.1
million in the second quarter of 1994 related to the write-off of deferred debt
costs arising from financing the acquisition of the business in 1992. The
non-cash write-off of these costs was due to the repayment of the related debt
with the proceeds of the IPO. The effective tax rate was 40.0% in fiscal 1995
compared to 40.1% in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements since the Acquisition have been
funded internally, supplemented by borrowings under its credit facilities. Cash
used in operations netted to approximately zero in fiscal 1996 compared to cash
used in operations of $27.8 million in fiscal 1995. At December 31, 1996, the
total indebtedness of the Company was $60.5 million under the Credit Facility.
Management anticipates that cash generated from operations, together with
current working capital and the available and committed credit facilities, will
provide sufficient liquidity to meet the Company's near term working capital and
capital expenditure requirements.
11
<PAGE> 18
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Alert, Inc. and Subsidiaries
While the Company was in default under its existing credit facility at December
31, 1996, it did not pursue a waiver, but rather sought a new source of credit
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. All obligations under the New Credit Facility will be secured by
first priority liens upon all 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, 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 interest coverage ratios;
maintenance of net worth; and restrictions on additional indebtedness and
payment of dividends.
Of the Company's 1996 net sales, 58.9% were generated in the third and
fourth quarters. In order to stabilize its manufacturing operations and to
ensure that products are available to meet customer orders in the third and
fourth quarters, the Company manufactures its products at relatively constant
rates throughout the year. The Company generates a significant amount of its net
cash from operating activities in the fourth and first quarters, reflecting the
reduction in inventory and the collection of accounts receivable from sales in
the third and fourth quarters. Inventory levels at December 31, 1996, have
remained high, which has resulted in a corresponding high level of borrowing
under the Credit Facility. The Company expects the inventory and borrowing
levels to follow normal seasonal patterns until the fourth quarter of 1997, when
they are expected to decline. Historically, the Company's principal uses of
funds generated from operations have been to purchase inventory and fixed
assets, support credit terms offered to customers and service its indebtedness.
Such uses are expected to be the Company's primary uses of funds in the future.
Historically, the Company's capital expenditures primarily have been for
the acquisition of tooling required for injection molding of plastic parts used
in new and existing products. In addition, machinery and equipment have been
acquired to enable the Company to manufacture its products more efficiently and
in volumes needed to support sales growth. Future capital expenditures will
continue to be required for tooling and machinery to support the anticipated
sales growth of the business and support new product introductions. Capital
expenditures for fiscal 1996, fiscal 1995 and fiscal 1994 were $5.3 million,
$10.6 million and $6.7 million, respectively.
The Company completed the IPO in April 1994, pursuant to which it received net
proceeds of approximately $40.0 million (net of underwriting discount and other
offering expenses). Approximately $21.5 million of the net proceeds was used to
prepay 12 1\2% Senior Subordinate d Notes, due July 31, 2002, of a subsidiary
and the remaining net proceeds were used to repay senior indebtedness of that
subsidiary, under that subsidiary's original credit agreement.
Net cash provided by financing activities primarily has been used for
working capital, and in 1994 proceeds from the IPO were used to pay debt as
discussed in the prior paragraph. It is expected that for the foreseeable future
all cash generated from operations will be used to fund the Company's working
capital and capital expenditure requirements and to service its obligations
under the Credit Facility or New Credit Facility.
The principal source of net cash from financing activities has been borr
owings under the Credit Facility which is a five-year revolving credit agreement
in the principal amount of $70.0 million obtained by BRK concurrently with the
IPO from a syndicate of banks.
On September 4, 1996, the Company amended the Credit Facility to increase
the amount available to be borrowed from $70.0 million to $85.0 million; on
December 20, 1996, the amount of the Credit Facility was again ame nded to
reduce the amount available to $77.5 million until January 31, 1997, when the
amount available to be borrowed returned to $70.0 million. In connection with
the 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.
Amounts outstanding under the Credit Facility bear interest at an annual
rate equal to, at the Company's option, either: (i) the higher of an established
prime rate of interest and the Federal Funds Rate plus 3\4% (1 1\4 % for amounts
in excess of $70 million) or (ii) the London Interbank Offered Rate plus 1 1\2%
(2% for amounts in excess of $70 million).
The Credit Facility between the syndicate of banks and the Company contains
customary covenants including, without limitation, restrictions on the
incurrence of indebtedness, the sale of assets, mergers and acquisitions, the
payment of dividends on capital stock and on the repurchase or redemption of
capital stock, transactions with affiliates and investments. The Credit Facility
also requires that the Company satisfy certain financial covenants including a
leverage ratio, a minimum tangible net worth test and an interest coverage
ratio. At December 31, 1996, the Company was not in compliance with the leverage
and interest coverage ratios, and in March 1997, the Company signed a commitment
letter for the New Credit Facility.
SEASONALITY
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, 58.9% of the Company's net sales were generated in the
last six months of the year.
INFLATION
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. In the past, the
Company has successfully mitigated the effects of inflation by instituting
operating efficiencies and improved product designs.
12
<PAGE> 19
<TABLE>
CONSOLIDATED BALANCE SHEET
(in thousands, except share data) First Alert, Inc. and Subsidiaries
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
Current assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 6,846 $ 2,387
- -----------------------------------------------------------------------------------------------------------------------------------
Accounts receivable, less allowance for doubtful accounts of $ 3,820
at December 31, 1996, $3,342 at December 31, 1995 40,617 62,967
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax receivable 8,503 1,340
- -----------------------------------------------------------------------------------------------------------------------------------
Inventories (Note 4) 58,222 68,081
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred taxes (Note 9) 10,510 7,182
- -----------------------------------------------------------------------------------------------------------------------------------
Prepayments and other assets 3,249 2,479
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 127,947 144,436
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated depreciation of
$22,763 at December 31, 1996, $17,525 at December 31, 1995 (Note 6) 29,803 32,150
- -----------------------------------------------------------------------------------------------------------------------------------
Other Assets:
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill, net of accumulated amortization of $2,815
at December 31, 1996, $2,178 at December 31, 1995 (Note 5) 22,683 23,320
- -----------------------------------------------------------------------------------------------------------------------------------
Other intangibles, net of accumulated amortization of $2,905 at
December 31, 1996, $2,680 at December 31, 1995 (Note 5) 6,058 7,087
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $186,491 $206,993
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
- -----------------------------------------------------------------------------------------------------------------------------------
Accounts payable $ 7,304 $ 21,586
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued expenses (Note 7) 26,395 21,798
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term revolving credit facility (Note 8) 20,500 32,200
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 54,199 75,584
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term revolving credit facility (Note 8) 40,000 20,000
- -----------------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities 71 72
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred taxes (Note 9) 3,369 4,293
- -----------------------------------------------------------------------------------------------------------------------------------
Contingencies (Note 13) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 97,639 99,949
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock ($.01 par value, 30,000,000 shares authorized, 24,183,116 issued
and outstanding at December 31, 1996;
24,043,116 issued and outstanding at December 31, 1995) 242 240
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock ($.01 par value, 1,000,000 shares authorized
at December 31, 1996 and 1995, none issued and outstanding) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Paid-in capital 71,637 71,137
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholder loans (8) (16)
- -----------------------------------------------------------------------------------------------------------------------------------
Retained earnings 16,981 35,683
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 88,852 107,044
- -----------------------------------------------------------------------------------------------------------------------------------
total liabilities and stockholders' equity $186,491 $206,993
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 20
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
First Alert, Inc. and Subsidiaries (in thousands, except per share data)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $205,607 $246,266 $248,404
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
- -----------------------------------------------------------------------------------------------------------------------
Cost of sales, excluding depreciation 150,611 140,980 131,989
- -----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 72,663 77,548 73,857
- -----------------------------------------------------------------------------------------------------------------------
Restructuring charge (Note 3) 2,499 -- --
- -----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,353 7,305 7,646
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) (26,519) 20,433 34,912
- -----------------------------------------------------------------------------------------------------------------------
Other expenses (income)
- -----------------------------------------------------------------------------------------------------------------------
Interest expense 3,803 1,487 2,983
- -----------------------------------------------------------------------------------------------------------------------
Miscellaneous, net 628 (113) 720
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes and extraordinary item (30,950) 19,059 31,209
- -----------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) (12,248) 7,622 12,500
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (18,702) 11,437 18,709
- -----------------------------------------------------------------------------------------------------------------------
Extraordinary item - write-off of deferred finance costs,
net of income taxes of $644 -- -- 1,084
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $(18,702) $ 11,437 $ 17,625
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) per share before extraordinary item $ (0.76) $ 0.46 $ 0.79
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (0.76) 0.46 0.75
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 24,559 24,831 23,601
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 21
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) First Alert, Inc. and Subsidiaries
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(18,702) $ 11,437 $ 17,625
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,353 7,305 7,646
- ----------------------------------------------------------------------------------------------------------------------------------
Write-off of deferred finance cost, net -- -- 1,084
- ----------------------------------------------------------------------------------------------------------------------------------
Restructuring charge 4,497 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities:
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease/(Increase) in accounts receivable 22,350 (4,351) (27,751)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase in income tax receivable (6,910) (1,340) --
- ----------------------------------------------------------------------------------------------------------------------------------
Decrease/(Increase) in inventories 8,731 (28,933) (1,953)
- ----------------------------------------------------------------------------------------------------------------------------------
Increase in prepayments and other assets (770) (1,028) (778)
- ----------------------------------------------------------------------------------------------------------------------------------
(Increase)/Decrease in net deferred taxes (4,252) 3,028 (3,192)
- ----------------------------------------------------------------------------------------------------------------------------------
(Decrease)/Increase in accounts payable/accrued expenses (11,266) (14,034) 31,065
- ----------------------------------------------------------------------------------------------------------------------------------
Other changes, net (41) 87 (102)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents (used in) provided by operating activities (10) (27,829) 23,644
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures (5,274) (10,648) (6,740)
- ----------------------------------------------------------------------------------------------------------------------------------
Disposal of property, plant and equipment 848 4,159 920
- ----------------------------------------------------------------------------------------------------------------------------------
Other 554 (997) 389
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents used in investing activities (3,872) (7,486) (5,431)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
- ----------------------------------------------------------------------------------------------------------------------------------
Borrowings under revolving loans 59,300 65,550 80,923
- ----------------------------------------------------------------------------------------------------------------------------------
Payments under revolving loans (51,000) (29,050) (89,914)
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock, net -- -- 40,023
- ----------------------------------------------------------------------------------------------------------------------------------
Payments of long-term debt -- -- (50,500)
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from sale of stock 226 28 256
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from stockholder loans 8 43 161
- ----------------------------------------------------------------------------------------------------------------------------------
Other (193) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash and cash equivalents provided by (used in) financing activities 8,341 36,571 (19,051)
- ----------------------------------------------------------------------------------------------------------------------------------
net increase (decrease) in cash and cash equivalents 4,459 1,256 (838)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 2,387 1,131 1,969
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6,846 $ 2,387 $ 1,131
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest paid $ 3,586 $ 1,701 $ 3,191
- ----------------------------------------------------------------------------------------------------------------------------------
Income taxes paid 1,274 12,559 9,014
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 22
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
First Alert, Inc. and Subsidiaries (in thousands, except share data)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------------- Paid in Stockholder Treasury Retained
Shares Par Value Capital Loans Stock Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1993 18,686,786 $187 $30,313 $(220) $(360) $ 6,621
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net income during the year ended
December 31, 1994 -- -- -- -- -- $ 17,625
- ---------------------------------------------------------------------------------------------------------------------------------
Stock issued and restored, net 5,180,000 $ 52 $39,611 -- $ 360 --
- ---------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 158,830 1 255 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax benefit related to the
exercise of stock options -- -- 807 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Payment of stockholder loans, net -- -- -- $161 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance december 31, 1994 24,025,616 $240 $70,986 $(59) -- $ 24,246
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net income during the year ended
December 31, 1995 -- -- -- -- -- $ 11,437
- ---------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 17,500 -- $ 28 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax benefit related to the
exercise of stock options -- -- 112 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Payment of stockholder loans, net -- -- -- $ 43 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Value of stock options granted -- -- 11 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance december 31, 1995 24,043,116 $240 $71,137 $(16) -- $ 35,683
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss during the year ended
December 31, 1996 -- -- -- -- -- $(18,702)
- ---------------------------------------------------------------------------------------------------------------------------------
Stock options exercised 140,000 $ 2 $ 224 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax benefit related to the
exercise of stock options -- -- 253 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Payment of stockholder loans, net -- -- -- $ 8 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Value of stock options granted -- -- 23 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance december 31, 1996 24,183,116 $242 $71,637 $ (8) -- $ 16,981
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
First Alert, Inc. and Subsidiaries
NOTE 1 - THE COMPANY
Effective July 31, 1992, THL-FA Operating Corp. acquired substantially all
the net assets of the BRK Electronics Division and all the issued and
outstanding shares of certain non-U.S. subsidiaries of the Fire Safety Group
of Pittway Corporation (hereinafter referred to as the "Predecessor" or the
"Division") for approximately $92,500 ("Acquisition"). THL-FA Operating Corp.
is a wholly owned subsidiary of THL-FA Holding Corp. THL-FA Operating Corp.
subsequently changed its name to BRK Brands, Inc. and THL-FA Holding Corp.
subsequently changed its name to First Alert, Inc. ("Company" or "First
Alert"). After this acquisition, the Company was owned by Thomas H. Lee
Company and related entities, Pittway Intellectual Property Corporation, a
subsidiary of Pittway Corporation ("Pittway") and management of the Company.
On April 5, 1994, the Company completed an initial public offering
("IPO")of 5,180,000 shares of its common stock. An additional 3,100,000 shares
of the Company's common stock was sold by Pittway as part of the same offering.
The net proceeds to the Company of the offering, which aggregated approximately
$40.0 million (net of underwriting discounts and offering expenses), were used
to retire $21.5 million of Senior Subordinated indebtedness held by a related
party and to pay down approximately $18.5 million of indebtedness under an
original bank credit agreement.
The Company, through its subsidiaries, manufactures and markets residential
safety products including smoke and carbon monoxide detectors, fire
extinguishers, motion sensing lighting control devices, timers, fire security
safes and chests, fire escape ladders, child safety products and rechargeable
flashlights. The Company's manufacturing operations are located in Juarez,
Mexico and Aurora, Illinois.
While the Company has a number of customers in the retail and wholesale
markets, a significant amount of its net sales are concentrated in three major
U.S. national retail chains comprising 15%, 7% and 5% of consolidated net sales
for the year ended December 31, 1996; 13%, 8% and 6% for the year ended December
31, 1995; and 12%, 8% and 6% for the year ended December 31, 1994.
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 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.
Certain amounts in the Consolidated Financial Statements at December 31,
1995, have been reclassified to conform to the current presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include those assets,
liabilities, revenue and expenses of the Company and its subsidiaries and its
foreign operations after eliminating significant intercompany accounts and
transactions. The financial statements include the operations in the United
States, Canada, Europe, Mexico and, beginning in 1994, Australia.
REVENUE RECOGNITION
Revenue is recorded at the time products are shipped to customers and title
passes. Net sales include estimates for returns, discounts and volume rebates.
The Company grants credit terms to its customers consistent with normal industry
practices.
CASH AND CASH EQUIVALENTS
Only highly liquid investments with initial maturities of less than three months
are considered as cash and cash equivalents. Substantially all of the Company's
cash is held by one bank at December 31, 1996. The Company does not believe that
as a result of this concentration, it is subject to any unusual credit risk
beyond the normal risk associated with commercial banking relationships.
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.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the foreign operations included in these financial
statements is the U.S. dollar. Translation adjustments and transaction gains and
losses are reflected in net income and consisted of a gain of $733 in the year
ended December 31, 1996, a loss of $39 in the year ended December 31, 1995, and
a loss of $68 in the year ended December 31, 1994.
INVENTORIES
Company inventories are valued at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Properties are stated at cost. Depreciation of all assets is computed over their
estimated useful lives using the straight-line method for financial reporting
and accelerated methods for income tax reporting.
Upon sale or retirement of property, plant and equipment, a gain or loss is
recognized. Expenditures for maintenance and repairs are charged to expense.
<TABLE>
Useful lives for property, plant and equipment are as follows:
- --------------------------------------------------------------------------------
<CAPTION>
Years
- --------------------------------------------------------------------------------
<S> <C>
Buildings Up to 40
- --------------------------------------------------------------------------------
Building improvements 20
- --------------------------------------------------------------------------------
Furniture and fixtures 10
- --------------------------------------------------------------------------------
Machinery and equipment 10
- --------------------------------------------------------------------------------
Tools, jigs and dies 3
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Alert, Inc. and Subsidiaries
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
GOODWILL
Goodwill, representing the difference between the total purchase price and the
fair value of assets (tangible and intangible) and liabilities at the date of
acquisition, is being amortized on a straight-line basis over 40 years.
Amortization expense totalled $637, $638 and $637 for the years ended December
31, 1996, 1995 and 1994, respectively.
IMPAIRMENT OF ASSETS
In 1996, the Company adopted Financial Accounting Standards Board Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount of an asset may not be
recoverable. Under provisions of the statement, impairment losses are recognized
when expected future cash flows are less than the assets' carrying value. There
was no material impact on the results of operations or the financial position of
the Company from the adoption of this statement because the Company's prior
impairment recognition practice was consistent with the major provisions of the
statement.
PATENTS, TRADEMARKS AND OTHER INTANGIBLES
Patents, trademarks and other intangibles are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over the estimated
useful lives of the assets, not to exceed 40 years (see Note 5). Amortization
expense was $682, $1,054 and $783 for the years ended December 31, 1996, 1995
and 1994, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable and
payable and accrued liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The aggregate fair value of the
Credit Facility approximates its carrying amount because of the recent and
frequent repricing based on market conditions.
STOCK BASED COMPENSATION
Effective January 1, 1996, the Company adopted the "disclosure method" provisi
ons of Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation." As permitted under this statement, the Company
continues to recognize stock-based compensation costs under the intrinsic value
based method of accounting as prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees."
INCOME TAXES
Income taxes of the Company are accounted for using Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes."
ADVERTISING AND RESEARCH AND DEVELOPMENT COSTS
<TABLE>
Advertising costs, including advertising allowances granted to customers, are
accrued at the date of sale of certain products to reflect advertising
commitments made to customers. Research and development costs are charged to
expense as incurred. Expense charged to operations for the periods presented
were as follows:
- --------------------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising and product promotion $22,899 $33,258 $32,130
- --------------------------------------------------------------------------------
Research and development $ 3,121 $ 2,866 $ 1,638
- --------------------------------------------------------------------------------
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make esti-mates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 3 -- RESTRUCTURING CHARGE
<TABLE>
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 including a provision of $1,998 for inventory write-downs which have been
appropriately charged to cost of sales, excluding depreciation. The remaining
restructuring charge of $2,499 includes $1,789 for the write-down of the net
book value of manufacturing equipment for product lines that will be outsourced
or eliminated, $410 for severance costs for approximately 600 manufacturing and
corporate office employees who were released from employment in the fourth
quarter of 1996 and $300 for plant restoration costs. The provision for
inventory write-downs relates mostly to inventory for the product lines that
will be outsourced or eliminated. The following table sets forth the details of
activity for 1996:
- --------------------------------------------------------------------------------
<CAPTION>
1996 1996 Balance at
Provision Cash Dec. 31,
Charges 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufacturing equipment
write-down $1,789 -- $1,789
- --------------------------------------------------------------------------------
Inventory write-down 1,998 -- 1,998
- --------------------------------------------------------------------------------
Severance 410 $317 93
- --------------------------------------------------------------------------------
Plant restoration 300 -- 300
- --------------------------------------------------------------------------------
Total $4,497 $317 $4,180
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
NOTE 4 - INVENTORIES
The components of inventory are as follows:
- --------------------------------------------------------------------------------
<CAPTION>
At Dec. 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $25,575 $32,423
- --------------------------------------------------------------------------------
Work-in-process 3,656 7,451
- --------------------------------------------------------------------------------
Finished goods 33,497 33,325
- --------------------------------------------------------------------------------
Reserves (4,506) (5,118)
- --------------------------------------------------------------------------------
Total $58,222 $68,081
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
NOTE 5 - GOODWILL AND OTHER INTANGIBLES
- --------------------------------------------------------------------------------
<CAPTION>
Useful Lives
At Dec. 31, 1996 1995 (Years)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Goodwill $25,498 $25,498 40
- --------------------------------------------------------------------------------
Trademarks 5,000 5,000 40
- --------------------------------------------------------------------------------
Patents 2,995 2,995 Various
- --------------------------------------------------------------------------------
Organization costs 275 275 5
- --------------------------------------------------------------------------------
Non-compete agreement 500 500 5
- --------------------------------------------------------------------------------
Other 193 997 Various
- --------------------------------------------------------------------------------
Less: accumulated amortization (5,720) (4,858)
- --------------------------------------------------------------------------------
Total $28,741 $30,407
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
First Alert, Inc. and Subsidiaries
<TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
<CAPTION>
At Dec. 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 816 $ 816
- --------------------------------------------------------------------------------
Buildings 3,815 3,777
- --------------------------------------------------------------------------------
Machinery and equipment 29,686 30,646
- --------------------------------------------------------------------------------
Leasehold improvements 3,611 2,090
- --------------------------------------------------------------------------------
Tools, jigs and dies 14,638 12,346
- --------------------------------------------------------------------------------
Less: accumulated depreciation (22,763) (17,525)
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 29,803 $ 32,150
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
NOTE 7 - ACCRUED EXPENSES
- --------------------------------------------------------------------------------
<CAPTION>
At Dec. 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Advertising/promotion $ 8,859 $10,631
- --------------------------------------------------------------------------------
Warranty and product related 6,526 2,565
- --------------------------------------------------------------------------------
Other 11,010 8,602
- --------------------------------------------------------------------------------
Total $26,395 $21,798
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
NOTE 8 - REVOLVING CREDIT FACILITY
- --------------------------------------------------------------------------------
<CAPTION>
At Dec. 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility
(average rate of 7.2% at December 31,
1996, and 6.5% at December 31, 1995) $60,500 $52,200
- --------------------------------------------------------------------------------
Less: Short-term portion 20,500 32,200
- --------------------------------------------------------------------------------
Long-term revolving credit facility $40,000 $20,000
- --------------------------------------------------------------------------------
</TABLE>
On March 28, 1994, 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 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 LIBORbased
loan portion of the 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 December 31, 1996, the Company was not in compliance with the interest
coverage ratio and the leverage ratio covenants. The Company has not pursued a
waiver but rather sought a new source of credit financing.
In March 1997, the Company and a financial institution signed a commitment
letter relating to a new $80.0 million revolving credit facility ("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 $35 million. During the period of May 1997 through October 1997,
$10.0 million in additional borrowing will be available. All obligations under
the New Credit Facility will be secured by first priority liens upon all 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 Cre dit Facility, 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
interest coverage ratios; maintenance of net worth; and restrictions on
additional indebtedness and payment of dividends.
<TABLE>
NOTE 9 - INCOME TAXES
The domestic and foreign components of statutory income (loss) before income
taxes and extraordinary item are as follows:
- --------------------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(31,578) $19,563 $31,324
- --------------------------------------------------------------------------------
Foreign 628 (504) (115)
- --------------------------------------------------------------------------------
Total $(30,950) $19,059 $31,209
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
The elements of the income tax provision (benefit) of the Company are as
follows:
- --------------------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income taxes:
- --------------------------------------------------------------------------------
Federal $(6,467) $3,232 $12,616
- --------------------------------------------------------------------------------
State (1,911) 813 3,044
- --------------------------------------------------------------------------------
Foreign 382 549 32
- --------------------------------------------------------------------------------
$(7,996) $4,594 $15,692
- --------------------------------------------------------------------------------
Deferred income taxes:
- --------------------------------------------------------------------------------
Federal $(3,685) $3,183 $(2,434)
- --------------------------------------------------------------------------------
State (393) 618 (758)
- --------------------------------------------------------------------------------
Foreign (174) (773) 0
- --------------------------------------------------------------------------------
$(4,252) $3,028 $(3,192)
- --------------------------------------------------------------------------------
Income tax provision (benefit) $12,248) $7,622 $12,500
- --------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Alert, Inc. and Subsidiaries
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
<TABLE>
The tax effects of the significant temporary differences which
comprise the deferred tax assets and liabilities are as follows:
<CAPTION>
- ------------------------------------------------------------------------
At Dec. 31, 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------
Foreign statutory operating losses $ 1,861 $ 1,687
- ------------------------------------------------------------------------
Advertising/promotion accruals 3,342 2,209
- ------------------------------------------------------------------------
Warranty and product related 1,997 1,000
- ------------------------------------------------------------------------
Other 3,827 2,803
- ------------------------------------------------------------------------
GROSS DEFERRED ASSETS $11,027 $ 7,699
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------
Accelerated depreciation $(3,369) $(4,293)
- ------------------------------------------------------------------------
GROSS DEFERRED LIABILITIES $(3,369) $(4,293)
- ------------------------------------------------------------------------
Valuation allowance (517) (517)
- ------------------------------------------------------------------------
NET ASSETS $ 7,141 $ 2,889
- ------------------------------------------------------------------------
</TABLE>
The Company has recorded a net deferred tax asset of $7,141 at December 31,
1996. Realization of the net deferred tax asset is dependent on generating
sufficient future taxable income. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
<TABLE>
Reconciliations of the differences between income taxes computed at
the Federal statutory rates and consolidated income tax provision (benefit)
are as follows:
<CAPTION>
- ----------------------------------------------------------------------------
Year ended Dec. 31, 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed at Federal
statutory rate (35%) $(10,833) $6,671 $10,923
- ----------------------------------------------------------------------------
State taxes, net of Federal benefit (1,497) 930 1,485
- ----------------------------------------------------------------------------
Foreign losses and rate differentials (12) (48) 72
- ----------------------------------------------------------------------------
Other, net 94 69 20
- ----------------------------------------------------------------------------
INCOME TAX PROVISION (BENEFIT) $(12,248) $7,622 $12,500
- ----------------------------------------------------------------------------
</TABLE>
NOTE 10 - RETIREMENT PLANS
The Company has retirement plans covering substantially all U.S. employees of
its subsidiaries. No other post-retirement benefits are offered to retirees.
Eligible U.S. employees may participate in the Company's defined
contribution plans. Company contributions to the plans are based upon a
percentage of the employee contribution and vest over a five-year period
commencing with date of employment. Such contributions amounted to $210, $154
and $169 for the years 1996, 1995 and 1994, respectively.
There are two non-contributory defined benefit plans covering
substantially all U.S. employees. Benefits are based on years of service and
annual compensation as defined by such plans. Employees vest in plan benefits
after five years of service.
<TABLE>
Pursuant to the terms of the purchase agreement with Pittway, all
retirement obligations earned by Company employees through July 31, 1992,
were retained by Pittway. Obligations arising subsequent to that date are the
responsibility of the Company. Pension costs recorded for the fiscal years
1996, 1995 and 1994 aggregated $379, $346 and $288, respectively. The
components of net pension cost for the fiscal years 1996, 1995 and 1994
consist of:
<CAPTION>
- ------------------------------------------------------------------------
YEAR ENDED DEC. 31, 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned
during the year $ 378 $ 328 $ 282
- ------------------------------------------------------------------------
Interest cost on projected
benefit obligation 74 50 35
- ------------------------------------------------------------------------
Return on plan assets (188) (172) (7)
- ------------------------------------------------------------------------
Net amortization and deferred
gains and losses 115 140 (22)
- ------------------------------------------------------------------------
NET PENSION COST $ 379 $ 346 $ 288
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Discount rate 7.0% 7.0% 7.0%
- ------------------------------------------------------------------------
Rate of compensation increase 5.0% 5.0% 5.0%
- ------------------------------------------------------------------------
Long-term rate of return on assets 7.0% 7.0% 7.0%
- ------------------------------------------------------------------------
</TABLE>
A reconciliation of the funded status of the plans is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
At Dec. 31, 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligations:
- ------------------------------------------------------------------------
Vested benefit obligation $ 878 $ 658
- ------------------------------------------------------------------------
Non-vested benefit obligation 197 47
- ------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION 1,075 705
- ------------------------------------------------------------------------
Projected benefit obligation 1,500 1,022
- ------------------------------------------------------------------------
PLAN ASSETS AT FAIR VALUE 1,498 1,050
- ------------------------------------------------------------------------
Plan assets less than
(in excess of ) projected benefit obligation 2 (28)
- ------------------------------------------------------------------------
Unrecognized net gain 145 57
- ------------------------------------------------------------------------
ACCRUED PENSION COST INCLUDED
IN THE CONSOLIDATED BALANCE SHEET $ 147 $ 29
- ------------------------------------------------------------------------
</TABLE>
The cost of benefit plans covering non-U.S. employees is not significant.
NOTE 11 - STOCK OPTIONS
Following the Acquisition, the Company established the 1992 Time Accelerated
Restricted Stock Option Plan ("1992 Plan") under which it is authorized to
grant non-qualified options to purchase shares of Company common stock at a
price equal to the market value of a share of such stock on the date of
grant. Such options vest over a five-year period if certain provisions are
met and are generally exercisable once vested, or, in the case of a
terminated employee, become exercisable pursuant to the terms of the plan.
During 1994, the Company established the 1994 Stock Option Plan
("1994 Plan") which provides for the grant of options to purchase up to
1,226,666 shares of common stock. The 1994 Plan allows for the issuance of
incentive stock options and non-qualified options. Options granted under the
1994 Plan are generally issued at an exercise price of not less than the curre
nt market price and vest over periods determined by the Board of Directors.
Under the 1994 Plan, no option shall be exercisable after ten years from the
date on which it was granted.
During 1996, the Company established the Nonqualified Stock Option
Plan for Non-Employee Directors ("Non-Employee Director Plan") which provides
for the grant of options for the purchase of an aggregate of 100,000 shares
of common stock by all independent directors of the Company. Options to
purchase 8,694 shares of common stock at an exercise price of $3.97 per share
were granted in 1996 under the Non-Employee Director Plan, and are
outstanding at December 31, 1996. Options granted under the Non-Employee
Director Plan are generally granted at an exercise price of one half of the
market price of a share of common stock at the date of grant and become fully
exercisable on the first anniversary of the date of grant except that options
granted in 1996 became exercisable on July 26, 1996. Under the Non-Employee
Director Plan, options expire ten years after the date granted.
20
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
First Alert, Inc. and Subsidiaries
During 1996, the Company granted options for 114,000 shares at a price of
$6.06 per share. These options have a time-based vesting schedule. The
Company also granted options for 200,000 shares at a price of $6.06 per share
which will only become exercisable in the event of a change in control of the
Company consummated on or before December 31, 1997. These options were
granted apart from any Company stock option plan. The exercise price of these
options represents the market price of the Company's common stock at the date
of grant and their fair value at the date of grant was $2.92 per share using
the Black-Scholes option pricing model. All 314,000 options were outstanding
at December 31, 1996. Such options are not exercisable after ten years from
the date on which they were granted. In February 1997, the holder of all
314,000 options was given the opportunity to exchange these options for
314,000 newly granted options at a price of $ 3.19 per share.
<TABLE>
Stock option activity for fixed plans is as follows:
- --------------------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of period 1,541,864 1,238,364 1,149,990
- --------------------------------------------------------------------------------
Granted 814,194 324,000 455,870
- --------------------------------------------------------------------------------
Exercised (140,000) (17,500) (158,830)
- --------------------------------------------------------------------------------
Cancelled (628,834) (3,000) (208,666)
- --------------------------------------------------------------------------------
Outstanding at end of period 1,587,224 1,541,864 1,238,364
- --------------------------------------------------------------------------------
Options exercisable at end of year 643,457 725,963 476,496
- --------------------------------------------------------------------------------
<CAPTION>
The weighted average exercise price per share related to this stock option
activity is as follows:
- --------------------------------------------------------------------------------
Year ended Dec. 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Outstanding at beginning of period $ 6.34 $ 4.25 $1.61
- --------------------------------------------------------------------------------
Granted 6.83 14.12 8.77
- --------------------------------------------------------------------------------
Exercised 1.61 1.61 1.61
- --------------------------------------------------------------------------------
Cancelled 10.00 13.50 1.61
- --------------------------------------------------------------------------------
Outstanding at end of period $ 5.55 $ 6.34 $4.25
- --------------------------------------------------------------------------------
Options exercisable at end of year $ 3.59 $ 2.74 $1.61
- --------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted under fixed plans was
$3.13 per share in 1996 and $6.59 per share in 1995 using the Black-Scholes
option pricing model.
<TABLE>
The following tables summarize information about employee stock options
outstanding for fixed plans at December 31, 1996:
<CAPTION>
- --------------------------------------------------------------------------------
Options Outstanding:
-------------------------------------------------------------
Range of Shares Outstanding Weighted-Average Weighted-Average
Exercise Price at Dec. 31, 1996 Remaining Life Exercise Price
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$ 1.61 - 8.50 1,481,224 9.6 years $ 5.00
- --------------------------------------------------------------------------------
12.13 - 13.50 106,000 8 years 13.34
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Options Exercisable:
-------------------------------------------------------------
Range of Shares Exercisable Weighted-Average
Exercise Price at Dec. 31, 1996 Exercise Price
- --------------------------------------------------------------------------------
<C> <C> <C> <C>
$ 1.61 - 8.50 616,957 $ 3.17
- --------------------------------------------------------------------------------
12.13 - 13.50 26,500 13.34
- --------------------------------------------------------------------------------
</TABLE>
In February 1997, the holders of 614,202 options under the 1994 Plan
were given the opportunity to exchange those options for 614,202 newly granted
options at a price of $3.19 per share. These new options will vest over a
period of four years commencing on the date of grant.
Shares of common stock have been reserved for future issuance under
all of the foregoing options.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the aforementioned stock plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans while compensation
expense has been recognized for its compensatory plans. Had compensation cost
for the Company's fixed stock option plans been determined based on the fair
value based method, as defined in Statement No. 123, the Company's net
earnings and earnings per share would not be significantly different from thos
e reported and consequently pro forma amounts have not been disclosed.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants: expected volatility of 29.3% in 1996 and
28.0% in 1995; expected lives of seven years for both 1996 and 1995 and risk
free interest rate of 6.4% in 1996 and 7.8% in 1995. It has been assumed that
no dividends will be paid for the expected term of the options.
NOTE 12 - LEASE COMMITMENTS
<TABLE>
The Company leases certain warehouses, office space and equip-
ment under noncancelable operating leases expiring at various dates through
the year 2010. Minimum annual rental commitments under all noncancelable
leases for the next five years beginning with 1997
are as follows:
<CAPTION>
- --------------------------------------------------------------------------------
1997 1998 1999 2000 2001 Thereafter
<C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
$3,476 $2,867 $2,843 $2,474 $2,165 $10,647
- --------------------------------------------------------------------------------
</TABLE>
Total rent expense including taxes, insurance and maintenance when included
in rent amounted to $3,801, $2,681 and $1,177 for the years ended December
31, 1996, 1995 and 1994, respectively.
21
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Alert, Inc. and Subsidiaries
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
NOTE 13 - 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[Registered Trademark] 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 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 effect of
the GILBERT complaint did not have a material effect on the Company's
financial results for any period and adequate reserves exist at December 31,
1996, for the Company's share of the settlement amount.
A purported class action entitled BETLEY ET AL. VS. FIRST ALERT, INC.
("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 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
Carbon Monoxide Detectors. The Company does not believe the plaintiffs claim
any personal injuries or property damage; nor do they claim specifically that
their detectors failed to detect dangerous levels of carbon monoxide. Rather,
they seek "rescissionary damages" and attorneys' fees. The Company is still
evaluating this lawsuit 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. 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 14 - RELATED PARTY TRANSACTIONS
Certain administrative fees were paid to Thomas H. Lee Company aggregating
$195, $326 and $216, for the years ended December 31, 1996, 1995 and 1994,
respectively.
The FIRST ALERT trademark is owned by the First Alert Trust in which
the Company has a 75% beneficial interest. The Company entered into a license
agreement with the First Alert Trust and Pittway which permits the Company in
perpetuity and on an exclusive, royalty-free basis, to manufacture and market
under the FIRST ALERT brand name any products other than products which are
designed to be monitored by an alarm or building control system or to work in
conjunction with a communications panel or other building control system
("Professional Products"). Pittway owns the remaining 25% beneficial interest
in the First Alert Trust and is a party to such license agreement with the
First Alert Trust under which Pittway has, in perpetuity, an exclusive,
royalty-free license to manufacture and market Professional Products under the
FIRST ALERT PROFESSIONAL[Registered Trademark] and FIRST ALERT PROFESSIONAL
SECURITY SYSTEM[Registered Trademark] brand names. Either Pittway or the Company
may terminate their further obligations and rights under the license by
providing notice to the other party.
22
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all dollar amounts in thousands unless
otherwise indicated, except per share data)
First Alert, Inc. and Subsidiaries
NOTE 15 - SEGMENT INFORMATION
The Company operates in one segment - residential safety products.
<TABLE>
Presented below is information on the geographic areas in which the
Company operates. Sales between geographic areas are made at approximate
arms-length prices.
<CAPTION>
- ----------------------------------------------------------------------
GEOGRAPHIC AREAS
- ----------------------------------------------------------------------
YEAR ENDED DEC. 31, 1996 AT DEC. 31, 1996
-------------------------------------------
OPERATING IDENTIFIABLE
NET SALES INCOME (LOSS) ASSETS
<S> <C> <C> <C>
- ----------------------------------------------------------------------
United States $188,363 $(25,382) $167,824
- ----------------------------------------------------------------------
Europe 16,877 (278) 7,315
- ----------------------------------------------------------------------
Other 18,120 (838) 11,352
- ----------------------------------------------------------------------
Elimination (17,753) (21) --
- ----------------------------------------------------------------------
TOTAL $205,607 $(26,519) $186,491
- ----------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1995 At Dec. 31, 1995
-------------------------------------------
Operating Identifiable
Net sales income (loss) assets
- ----------------------------------------------------------------------
United States $225,430 $20,511 $187,045
- ----------------------------------------------------------------------
Europe 16,964 (1,840) 5,961
- ----------------------------------------------------------------------
Other 23,661 1,807 13,987
- ----------------------------------------------------------------------
Elimination (19,789) (45) --
- ----------------------------------------------------------------------
TOTAL $246,266 $20,433 $206,993
- ----------------------------------------------------------------------
<CAPTION>
Year ended Dec. 31, 1994 At Dec. 31, 1994
-------------------------------------------
Operating Identifiable
Net sales income (loss) assets
- ----------------------------------------------------------------------
United States $244,412 $35,166 $152,086
- ----------------------------------------------------------------------
Europe 21,804 (783) 8,955
- ----------------------------------------------------------------------
Other 19,987 550 11,264
- ----------------------------------------------------------------------
Elimination (37,799) (21) --
- ----------------------------------------------------------------------
TOTAL $248,404 $34,912 $172,305
- ----------------------------------------------------------------------
</TABLE>
Operating income includes costs of goods sold, selling, general and
administrative expenses, restructuring charge and depreciation and
amortization expense.
NOTE 16 - STOCK SPLITS
On March 18, 1994, the Company consummated a 3.1 for 1 stock split.
On October 28, 1994, the Company consummated a 2 for 1 stock split effected
as a 100% stock dividend. All shares and per share amounts for periods prior
to the above mentioned dates included in these finan-
cial statements have been adjusted retroactively to give effect to both stock
splits.
NOTE 17 - QUARTERLY RESULTS (UNAUDITED)
<TABLE>
Quarterly Results of Operations for the years ended December 31, 1996 and
1995 are shown below:
<CAPTION>
- --------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $55,489 $28,981 $60,860 $60,277
- --------------------------------------------------------------------------
Gross profit 15,351 6,579 24,276 8,790
- --------------------------------------------------------------------------
Net income (loss) (4,501) (5,937) 2,203 (10,467)
- --------------------------------------------------------------------------
Net income (loss)
- --------------------------------------------------------------------------
per share (0.18) (0.24) 0.09 (0.43)
- --------------------------------------------------------------------------
Common stock
price range-
- --------------------------------------------------------------------------
High 11.375 7.75 6.375 6.125
- --------------------------------------------------------------------------
Low 6.375 4.00 4.375 3.00
- --------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------
Net sales $62,814 $34,920 $72,178 $76,354
- --------------------------------------------------------------------------
Gross profit 29,900 12,947 33,910 28,529
- --------------------------------------------------------------------------
Net income (loss) 5,779 (1,012) 8,747 (2,077)
- --------------------------------------------------------------------------
Net income (loss)
per share 0.23 (0.04) 0.35 (0.08)
- --------------------------------------------------------------------------
Common stock
price range-
- --------------------------------------------------------------------------
High 17.00 15.75 18.50 17.50
- --------------------------------------------------------------------------
Low 8.75 10.125 13.875 8.25
- --------------------------------------------------------------------------
</TABLE>
Income per share amounts for each quarter are required to
be computed independently and, therefore, may not equal the amount computed
for the entire year.
Results of operations during the three months ended December 31, 1996,
includes a pre-tax restructuring charge of $4,497, including inventory write-
down, and a pre-tax charge to operations of $4,972. The pre-tax charge to
operations includes additional inventory related costs, anticipated product
allowances for sales made prior to December 31, 1996, severance and asset
impairment costs. Cost of goods sold during the three months ended December
31, 1995, includes a one-time pre-tax write-off of $3,500 relating to first
generation carbon monoxide sensor inventories.
23
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP [LOGO]
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FIRST ALERT, INC.
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, of cash flows and of stockholders'
equity present fairly, in all material respects, the financial position of
First Alert, Inc. and its subsidiaries at December 31, 1996 and 1995 and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Chicago, Illinois
March 21, 1997
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
FIRST ALERT, INC. AND SUBSIDIARIES
The financial statements of First Alert, Inc. and its subsidiaries, and all
other information presented in this Annual Report, are the responsibility
of the management of the Company. These statements have been prepared in
accordance with generally accepted accounting principles consistently
applied and reflect in all material respects the substance of events and
transactions that should be included.
Management is responsible for the accuracy and objectivity of the
financial statements, including estimates and judgments reflected therein,
and fulfills this responsibility primarily by establishing and maintaining
accounting systems and practices adequately supported by internal
accounting controls. Management believes that the internal accounting
controls in use are satisfactory to provide reasonable assurance that the
Company's assets are safeguarded, that transactions are executed in
accordance with management's authorizations and that the financial records
are reliable for the purpose of preparing financial statements.
Independent accountants were selected by the Audit Committee of the
Board of Directors to audit the financial statements in accordance with
generally accepted auditing standards. Their audits include a review of
internal accounting control policies and procedures for the purpose of
determining the scope and timing of their audit procedures and selective
tests of transactions.
The Audit Committee meets regularly with management and the
independent accountants to review matters relating to financial reporting,
internal accounting controls and auditing. The independent accountants have
unrestricted access to the Audit Committee.
24
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-04237, 333-04239 and 333-04241) of First
Alert, Inc. of our report dated March 21, 1997, which appears on page 24 of the
Annual Report to Stockholders of First Alert, Inc. which is incorporated by
reference in First Alert, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996. We also consent to the incorporation by reference of our
report on the Financial Statement Schedule, which appears on page 22 of this
Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Chicago, Illinois
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6846
<SECURITIES> 0
<RECEIVABLES> 44437
<ALLOWANCES> 3820
<INVENTORY> 58222
<CURRENT-ASSETS> 127947
<PP&E> 52566
<DEPRECIATION> 22763
<TOTAL-ASSETS> 186491
<CURRENT-LIABILITIES> 54199
<BONDS> 0
0
0
<COMMON> 242
<OTHER-SE> 88610
<TOTAL-LIABILITY-AND-EQUITY> 186491
<SALES> 205607
<TOTAL-REVENUES> 205607
<CGS> 150611
<TOTAL-COSTS> 150611
<OTHER-EXPENSES> 81515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3803
<INCOME-PRETAX> (30950)
<INCOME-TAX> (12248)
<INCOME-CONTINUING> (18702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18702)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)
</TABLE>
