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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 30, 1997 COMMISSION FILE NUMBER 0-23630
FIRST ALERT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3157075
- --------------------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NUMBER)
OR ORGANIZATION)
3901 LIBERTY STREET ROAD, AURORA, ILLINOIS 60504
------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(630) 851-7330
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
AT MAY 12, 1997, THERE WERE 24,183,116 SHARES OUTSTANDING OF THE COMPANY'S
COMMON STOCK ($0.01 PAR VALUE).
TOTAL OF SEQUENTIALLY
NUMBERED PAGES: 23
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FIRST ALERT, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 30, 1997 (UNAUDITED) AND
DECEMBER 31, 1996 3
CONSOLIDATED STATEMENT OF OPERATIONS
AND RETAINED EARNINGS (UNAUDITED)
FOR THE THREE MONTH PERIODS ENDED
MARCH 30, 1997 AND MARCH 31, 1996 4
CONSOLIDATED STATEMENT OF CASH
FLOWS (UNAUDITED) FOR THE THREE MONTH
PERIODS ENDED MARCH 30, 1997 AND MARCH 31, 1996 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
3
FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 30, December 31,
1997 1996
--------- -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,845 $ 6,846
Accounts receivable, less
allowance for doubtful accounts of
$3,850 ($3,820 at December 31, 1996) 29,260 40,617
Income tax receivable 9,645 8,503
Inventories (Note 3) 49,421 58,222
Deferred taxes 10,510 10,510
Other assets 3,365 3,249
--------- ---------
Total current assets 111,046 127,947
Property, plant and equipment, net of
accumulated depreciation of $24,105
($22,763 at December 31, 1996) 29,167 29,803
Other Assets:
Goodwill, net of accumulated
amortization of $2,975 ($2,815 at December 31, 1996) 22,524 22,683
Other intangibles, net of accumulated amortization
of $3,072 ($2,905 at December 31, 1996) 5,993 6,058
--------- ---------
Total assets $ 168,730 $ 186,491
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,963 $ 7,304
Accrued expenses 22,549 26,395
Short-term Credit Facility (Note 4) 11,200 20,500
--------- ---------
Total current liabilities 39,712 54,199
Long-term Credit Facility (Note 4) 40,000 40,000
Other long-term liabilities 71 71
Deferred taxes 3,369 3,369
Contingencies (Note 5) -- --
--------- ---------
Total liabilities 83,152 97,639
Stockholders' Equity:
Common stock ($.01 par value, 30,000,000
shares authorized, 24,183,116 issued and
outstanding as of March 30, 1997, and
December 31, 1996) 242 242
Preferred stock ($.01 par value, 1,000,000 shares
authorized, none issued and outstanding as of
March 30, 1997 and December 31, 1996) - -
Paid in capital 71,637 71,637
Stockholder loans (8) (8)
Retained earnings 13,707 16,981
--------- ---------
Total stockholders' equity 85,578 88,852
--------- ---------
Total liabilities and stockholders' equity $ 168,730 $ 186,491
========= =========
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(in thousands, except per share data)
(unaudited)
Three Month Period Ended
---------------------------
March 30, March 31,
1997 1996
-------- --------
Net sales $ 37,413 $ 55,489
Operating expenses:
Cost of sales, excluding depreciation 26,877 40,138
Selling, general and administrative 13,477 19,741
Depreciation and amortization 1,697 1,527
-------- --------
Operating loss (4,638) (5,917)
Other (income) expenses:
Interest expense 868 719
Miscellaneous, net (49) 866
-------- --------
Loss before taxes (5,457) (7,502)
Income tax benefit (2,183) (3,001)
-------- --------
Net loss (3,274) (4,501)
Retained earnings, beginning of period 16,981 35,683
-------- --------
Retained earnings, end of period $ 13,707 $ 31,182
-------- --------
Net loss per share $ (0.13) $ (0.18)
======== ========
Weighted average shares outstanding 24,447 24,625
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Three Month Period Ended
------------------------
March 30, March 31,
1997 1996
-------- --------
OPERATING ACTIVITIES
NET LOSS $ (3,274) $ (4,501)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH AND CASH EQUIVALENTS PROVIDED BY
OPERATING ACTIVITIES:
Depreciation and amortization 1,697 1,527
Write off of intangible asset -- 554
Decrease in accounts receivable 11,357 23,921
Increase in income tax receivable (1,142) --
Decrease (increase) in inventories 8,801 (6,845)
Increase in other assets (116) (72)
Decrease in accounts payable/accrued expenses (5,187) (12,278)
Other (29) 198
-------- --------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
OPERATING ACTIVITIES 12,107 2,504
-------- --------
INVESTING ACTIVITIES
Capital expenditures (838) (1,457)
Disposal of property, plant & equipment 30 11
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES (808) (1,446)
-------- --------
FINANCING ACTIVITIES
Borrowings under revolving loan 1,200 18,400
Payments under revolving loan (10,500) (20,600)
-------- --------
NET CASH AND CASH EQUIVALENTS USED IN
FINANCING ACTIVITIES (9,300) (2,200)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,999 (1,142)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,846 2,387
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,845 $ 1,245
======== ========
INTEREST PAID $ 1,172 $ 624
INCOME TAXES PAID $ 0 $ 0
See accompanying notes to consolidated financial statements.
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FIRST ALERT, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands unless otherwise indicated, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated interim financial statements include the accounts of First
Alert, Inc. and its subsidiaries (the "Company"). These financial statements
are unaudited but, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial condition and results of operations of the Company.
The interim consolidated financial statements have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's 1996 Annual Report to Stockholders.
The results of operations for the three month period ended March 30, 1997, are
not necessarily indicative of the results to be expected for the entire fiscal
year.
During 1997, the Company has adopted a 4-4-5 accounting calendar for periods
ending during the fiscal year. However, the Company's fiscal year end will
continue to be December 31.
Income Taxes
Income taxes of the Company are accounted for using Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Deferred
income tax assets and liabilities arise from recognition of foreign operating
losses and temporary differences between the income tax basis of assets and
liabilities and their reported amounts in the financial statements.
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Net Income Per Share
Net income per share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the periods
computed using the treasury stock method.
NOTE 2 - RESTRUCTURING CHARGE
During the fourth quarter of 1996, the Company adopted a plan to revitalize the
Company's core product lines of smoke and carbon monoxide detectors and
discontinue, reposition or outsource non-performing product lines, right-size
and consolidate manufacturing operations, reduce the Company's selling, general
and administrative cost structures and aggressively address inventory levels.
As a result of this plan, the Company recorded a pre-tax restructuring charge
of $4,497 during the fourth quarter of 1996. The following table sets forth
the details of activity in the related accruals for the first quarter of 1997.
Cash Charges
During the Three
Balance at Month Period Balance at
December 31, 1996 Ended March 30, 1997 March 30, 1997
----------------- -------------------- --------------
Manufacturing equipment
write-down $1,789 -- $1,789
Inventory write-down 1,998 -- 1,998
Severance 93 $ 22 71
Plant restoration 300 -- 300
------ ----- ------
Total $4,180 $ 22 $4,158
====== ===== ======
NOTE 3 - INVENTORIES:
The components of inventory are as follows:
MARCH 30, 1997 DECEMBER 31, 1996
-------------- -----------------
Raw materials $22,971 $25,575
Work-in-process 3,428 3,656
Finished goods 27,689 33,497
Obsolescence reserve (4,667) (4,506)
------- -------
Total $49,421 $58,222
======= =======
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NOTE 4 - REVOLVING CREDIT AGREEMENT:
MARCH 30, 1997 DECEMBER 31, 1996
-------------- -----------------
Revolving Credit Facility $51,200 $60,500
Less: Short Term Portion 11,200 20,500
------- -------
Long-Term Revolving Credit Facility $40,000 $40,000
======= =======
On March 28, 1994, BRK Brands, Inc., a wholly owned subsidiary of the Company,
entered into a revolving credit facility (the "Credit Facility") with a lender
which provided a Credit Facility of $70,000 on April 5, 1994. On September 4,
1996, the subsidiary amended the Credit Facility to increase the amount
available to be borrowed from $70,000 to $85,000; on December 20, 1996, the
amount of the Credit Facility was again amended to reduce the amount available
to $77,500 until January 31, 1997, when the amount available returned to
$70,000. In connection with the September 4, 1996, amendment, the Company
granted a security interest in all of its assets, which included the stock of
wholly-owned subsidiaries, to secure the obligations to the lenders under the
Credit Facility. Similarly, Electronica BRK de Mexico, S.A. de C.V., a wholly
owned subsidiary, agreed to pledge all of its assets to secure repayment of
advances under the Credit Facility.
Under the amended Credit Facility, the Company is subject to a commitment fee of
0.35% per annum on the unused portion of the commitment. The amended Credit
Facility carries an interest rate of LIBOR plus 1.5% for amounts up to $70,000
(LIBOR plus 2.0% for amounts in excess of $70,000) on the LIBOR based loan
portion of the amended Credit Facility and the higher of the lender's corporate
borrowing rate or the Federal Funds Rate plus 0.75% for amounts up to $70,000
(Federal Funds Rate plus 1.25% for amounts in excess of $70,000) on remaining
balances. The Credit Facility matures on March 28, 1999. Additionally, the
Credit Facility contains covenants restricting, among other things, the payment
of dividends, the sale of assets, mergers and acquisitions and requires
maintenance of interest coverage ratios, leverage ratios and a minimum tangible
net worth.
At March 30, 1997, the Company was in default under certain financial covenants
of the Credit Facility. The Company has not pursued a waiver but rather sought
a new source of financing.
In March 1997, the Company and a financial institution signed a commitment
letter relating to a new $80.0 million revolving credit facility (the "New
Credit Facility"). Advances under the New Credit Facility will be limited to
(a) 85% of eligible accounts receivable plus (b) the lesser of 60% of eligible
inventory or
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$35 million. During the period of May 1997 through October 1997,
$10.0 million in additional borrowing will be available and from June 1998
through September 1998, $5.0 million in additional borrowing will be available.
All obligations under the New Credit Facility will be secured by first
priority liens upon certain of the Company's assets. The New Credit Facility
will extend for a term of three years. Amounts outstanding under the New
Credit Facility will bear interest at prime rate plus 1/2% or the London
Interbank Offered Rate plus 2%. Under the New Credit Facility, which is
expected to close in the near future, the Company will be subject to a
commitment fee of 0.375% per annum on the unused portion of the commitment.
The agreement will contain covenants for, among other things, total liabilities
to tangible net worth and fixed charge ratios; maintenance of tangible net
worth; and restrictions on additional indebtedness, capital expenditures and
payment of dividends.
NOTE 5 - CONTINGENCIES:
In November 1994, the Company and certain of its officers and directors were
named as defendants in four purported class action lawsuits filed in the United
States District Court for the Northern District of Illinois, Eastern Division.
The plaintiffs in these actions, pursuant to a Court order, filed a
consolidated and amended complaint resulting in the consolidation of the four
actions. The consolidated case is entitled Gilbert et al. vs. First Alert,
Inc. et al. ("Gilbert"). The amended complaint sought compensatory damages,
costs and attorneys' fees on behalf of the purchasers of the Company's Common
Stock during the period from October 12, 1994 through November 10, 1994. By
order dated August 21, 1995, the Court certified the class. Subsequently, the
plaintiff's motion to amend the complaint to expand the class period to
September 20, 1994 through December 7, 1994, was granted and a second
consolidated and amended complaint was filed on January 16, 1996. The new
class was certified by the Court. The complaint alleges generally that the
Company and other defendants disseminated false and misleading information to
the investing public regarding the First Alert(R) Carbon Monoxide Detector in
connection with an anticipated secondary public offering of the Company's
Common Stock in late 1994 in violation of various provisions of the Securities
Exchange Act of 1934 and the rules promulgated thereunder. The Registration
Statement with respect to the proposed secondary public offering was declared
effective by the Securities and Exchange Commission on November 9, 1994, but
was subsequently withdrawn by the Company at the request of the selling
stockholders. The public offering was solely to facilitate the sale of shares
by certain selling stockholders and the Company would not have received any
proceeds therefrom.
The Company vigorously contested all claims and denied liability.
Nevertheless, to avoid further expense and the burdens of litigation, in
November 1996, the
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Company agreed to a tentative settlement of the consolidated class actions. An
executed settlement agreement was filed with the Court on February 11, 1997 and
the Court entered an order on February 25, 1997, giving preliminary approval to
the settlement.
Pursuant to the Court's February 25, 1997, order, members of the class have
until May 12, 1997, to opt out of the class and until July 28, 1997, to file
proofs of claim if they wish to receive a share of the settlement amount. The
Court will hold a hearing on June 20, 1997, at which the fairness of the
settlement will be considered and the Court will determine whether to give
final approval.
Under the terms of the settlement agreement, defendants will pay a fixed amount
per share to class members, depending on when they bought or sold their shares,
with a maximum amount of $3 million (including attorney's fees and costs for
class counsel) to be paid out in settlement. The pendency of the Gilbert
complaint has not had a material effect on the Company's financial results for
any period and adequate reserves exist at March 30, 1997, for the Company's
share of the settlement amount.
A purported class action entitled Betley et al. vs. First Alert, Inc. et al.
("Betley") was filed in the Circuit Court of Cook County, Illinois on January
3, 1995, against the Company alleging common law fraud, breach of warranties,
and a statutory violation of the Illinois Consumer Fraud Act, all related to
alleged defects in the original First Alert(R) Carbon Monoxide Detector (Model
FACO) design and the manner in which the detector was marketed. The Company
does not believe the plaintiffs claim any personal injuries or property damage;
nor do they claim their detectors failed to detect dangerous levels of carbon
monoxide. Instead, they claim (i) that the Company failed to disclose that the
product alarms in non-life threatening conditions (which they say is a
"nuisance"), (ii) that the Company falsely proclaims the product resets
"automatically" when, in fact, the product can take several hours or days to
reset after it has gone into alarm and (iii) that the Company falsely claims
the product met Underwriters Laboratories' listing criteria for residential
carbon monoxide detectors in effect at the time the Model FACO was
manufactured. They seek a refund of their purchase price, other out-of-pocket
expenses, punitive damages, and attorneys' fees. The Company has raised
numerous defenses to this claim and will continue to oppose it forcefully.
In February 1997, the Company and its wholly-owned subsidiary, BRK Brands,
Inc., were named as defendants in a purported class action lawsuit entitled
Houlihan et al. vs. First Alert, Inc. et al. ("Houlihan") in the Circuit Court
of Cook County, Illinois, alleging breach of express warranty and statutory
violations of various states' consumer protection statutes due to alleged
misrepresentations
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and product defects involving First Alert(R) Carbon Monoxide Detectors. The
Company does not believe the plaintiff claimed any personal injuries or property
damage; nor did he claim specifically that his detector failed to detect
dangerous levels of carbon monoxide. Rather, he sought "rescissionary damages"
and attorneys' fees. The plaintiff's original complaint was stricken by the
Court on April 9, 1997, but the Court gave the plaintiff leave to re-plead the
case which has now been done. The Company is still evaluating the amended
complaint but believes it to be without merit and, thus, the Company will
vigorously defend the case.
In addition to the Gilbert, Betley and Houlihan actions, the Company and its
subsidiaries, including BRK Brands, Inc., are parties to various product
liability and other types of lawsuits and are from time to time subject to
investigations by various governmental agencies, including investigations
regarding environmental matters. Although the ultimate liabilities, if any,
arising out of the Gilbert, Betley, Houlihan and other pending legal actions or
investigations cannot presently be determined, based on its past experience and
assessment of such matters, the Company believes that the outcome of these
matters will not have a material adverse effect on the Company's financial
position.
NOTE 6 - EFFECT OF CHANGING ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." SFAS
128 establishes standards for computing and presenting earnings per share (EPS)
and simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15 (APB 15), "Earnings per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly
to fully diluted EPS pursuant to APB 15.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS 128 requires restatement of all prior-period EPS data
presented.
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Adoption of SFAS 128 is expected to have little or no impact on the Company's
future or previously reported EPS.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below contains certain forward-looking statements
which involve risks and uncertainties. The Company's actual results could
differ materially from the results anticipated in those forward-looking
statements as a result of certain factors set forth below.
RESULTS OF OPERATIONS
Net Sales
Net sales for the first quarter of 1997 were $37.4 million, a decrease of $18.1
million or 32.6% from net sales of $55.5 million for the first quarter of 1996.
This decrease in net sales was due primarily to lower net sales of carbon
monoxide detectors in the U.S.A. and, to a lesser extent, to lower net sales of
smoke detectors in the U.S.A. and Australia. Domestic net sales in the first
quarter of 1997 were hurt by the loss of distribution at a significant customer
during 1996, by other competitive activity and general market softness.
Gross Profit
Gross profit, excluding depreciation ("Gross Profit"), for the first quarter of
1997 was $10.5 million, a decrease of $4.8 million or 31.4%, compared with
Gross Profit of $15.4 million in the first quarter of 1996. As a percent of
net sales, Gross Profit was 28.2% and 27.7% for the first quarter of 1997 and
1996, respectively. The decline in gross profit dollars is due primarily to
lower sales volume, particularly of carbon monoxide detectors. Gross profit as
a percentage of net sales in the first quarter of 1997 was affected by lower
spending at the Company's manufacturing facilities in the first quarter of 1997
compared to the first quarter of 1996, which was in line with the Company's
restructuring plan publicly announced in January 1997. Additionally,
allowances granted to customers for consumer product returns were lower in the
first quarter of 1997 than in the first quarter of 1996. Gross profit in the
first quarter of 1997 was also affected by generally lower selling prices for
carbon monoxide detectors.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first quarter of
1997 were $13.5 million, a decrease of $6.3 million or 31.7%, compared with
SG&A expenses of $19.7 million for the first quarter of 1996. SG&A expenses in
the first quarter of 1997 compared to 1996 decreased primarily as a result of
lower variable selling expenses due to lower net sales and generally lower
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spending consistent with the Company's plan to reduce the SG&A cost structure
as publicly announced in January 1997. Additionally, SG&A expenses in the
first quarter of 1996 included certain unusual items including a charge for
severance costs relating to the departure of certain employees during the first
quarter of 1996 and marketing allowances. As a percent of net sales, SG&A
expenses were 36.0% in the first quarter of 1997 as compared to 35.6% in the
first quarter of 1996.
Interest Expense
Interest expense for the first quarter of 1997 was $0.9 million, an increase of
$0.2 million or 20.7% from interest expense of $0.7 million for the first
quarter of 1996. The increase in interest expense was due mostly to higher
interest rates under the September 4, 1996, amendment to the Credit Facility.
Miscellaneous Income (Expense)
Miscellaneous income (expense) includes realized and unrealized gains/losses on
foreign exchange and non-operating related costs. In the first quarter of
1996, miscellaneous expense included a write-off of certain capitalized product
development costs due to permanent impairment of its value, and the Company's
rescission of future rights to the underlying product, of $0.6 million.
Net Income (Loss)
Net loss for the first quarter of 1997 was $3.3 million, compared to a net loss
of $4.5 million for the first quarter of 1996. The decrease in the net loss for
the first quarter of 1997 compared to the first quarter of 1996 is due mostly
to lower spending in manufacturing and SG&A costs which more than offset the
effects of reduced net sales. An income tax benefit of $2.2 million was
recorded in the quarter ended March 30, 1997, with a 40% effective tax rate,
consistent with the first quarter of 1996.
SEASONALITY AND VARIABILITY IN QUARTERLY RESULTS
The Company's operations are seasonal in nature with the months of September,
October and November being the strongest sales months historically. In the
year ended December 31, 1996, approximately 58.9% of the Company's net sales
were generated in the last six months of the year.
LIQUIDITY AND CAPITAL RESERVES
For the quarter ended March 30, 1997, the Company's net cash provided by
operations increased to $12.1 million from $2.5 million in the corresponding
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period in 1996. At March 30, 1997, the total indebtedness of the Company was
$51.2 million under the Credit Facility. Management anticipates that cash
generated from operations, together with current working capital and the
Company's available and committed credit facilities, will provide sufficient
liquidity to meet the Company's near term working capital and capital
expenditure requirements.
While the Company was in default under certain financial covenants of its
existing credit facility at March 30, 1997, it did not pursue a waiver, but
rather sought a new source of financing.
In March 1997, the Company obtained a commitment from a financial institution
for a new $80.0 million three year credit facility ("New Credit Facility")
replacing its existing credit facility. Advances under the New Credit Facility
will be limited to (a) 85% of eligible accounts receivable plus (b) the lesser
of 60% of eligible inventory or $35.0 million. During the period of May 1997
through October 1997, $10.0 million in additional borrowing will be available
and from June 1998 through September 1998, $5.0 million in additional borrowing
will be available. All obligations under the New Credit Facility will be
secured by first priority liens upon certain of the Company's assets. Amounts
outstanding under the New Credit Facility will bear interest at the prime rate
plus 1/2% or the London Interbank Offered Rate plus 2%. Under the New Credit
Facility, which is expected to close in the near future, the Company will be
subject to a commitment fee of 0.375% per annum on the unused portion of the
commitment. The agreement will contain covenants for, among other things,
total liabilities to tangible net worth and fixed charge ratios; maintenance of
tangible net worth; and restrictions on additional indebtedness, capital
expenditures, and payment of dividends.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual financial condition or results and could cause the
Company's actual financial condition or results to differ materially from those
expressed in any forward-looking statements of the Company made by or on behalf
of the Company. The factors included here are not exhaustive. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not
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possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause the Company's actual financial condition or
results to differ materially from those contained in any forward-looking
statement. Therefore, forward-looking statements should not be relied upon as a
prediction of actual future financial condition or results.
DEPENDENCE UPON KEY SUPPLIERS
Most of the components used in the Company's products are available from
multiple sources; however, the Company has elected to purchase integrated
circuit components used in the Company's smoke detectors and carbon monoxide
detectors, and certain other components used in the Company's products, from
single sources. The Company has recently developed an alternative source of
supply for these integrated circuit components. However, there can be no
assurance that the Company will be able to continue to obtain these components
on a timely basis given the unpredictability of the demand for carbon monoxide
detectors. In addition, the biomimetic sensor, which is the key component used
in the Company's battery powered carbon monoxide detector is obtained by the
Company pursuant to a license from Quantum Group, Inc. ("Quantum"), its sole
supplier of this component. Commencing on January 1, 1997, Quantum may begin
to sell its sensors to other customers. There is no alternative supply for the
biomimetic sensor. An extended interruption or termination in the supply of
any of the components used in the Company's products, or a reduction in their
quality or reliability, would have an adverse effect on the Company's business
and results of operations.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly financial results may vary significantly depending
primarily upon factors such as the timing of significant orders, the timing of
new product offerings by the Company and its competitors and product
presentations. In addition, the Company's business historically has been
seasonal, with the largest proportion of sales occurring in September, October
and November of each calendar year. Moreover, consistently low temperatures
and high levels of snowfall during the typical home heating months increase the
likelihood of improperly vented carbon monoxide gas emissions being trapped
inside a closed home or building, which may in turn increase the demand for the
Company's carbon monoxide detectors, and consequently cause the Company's
quarterly results to fluctuate in such months. Factors such as quarterly
variations in financial results could adversely affect the market price of the
Common Stock and cause it to fluctuate substantially. In addition, the Company
(i) may from time to time increase its operating expenses to fund greater
levels of research and development, increase its sales and marketing
activities, develop
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new distribution channels, improve its operational and financial systems and
broaden its customer support capabilities and (ii) may incur significant
operating expenses associated with any new acquisitions. To the extent that
such expenses precede or are not subsequently followed by increased revenues,
the Company's business, operating results and financial condition will be
materially adversely affected.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including demand for the
Company's products, introduction or enhancement of products by the Company and
its competitors, market acceptance of new products, price reductions by the
Company or its competitors, mix of distribution channels through which products
are sold, level of product returns, mix of products sold, component pricing,
mix of international and North American revenues, and general economic
conditions. In addition, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing or
marketing decisions or acquisitions that could have a material adverse effect
on the Company's business, results of operations or financial condition. As a
result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. Due to all of the foregoing factors, it
is likely that in some future quarters the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.
DEPENDENCE ON CONSUMER PREFERENCE
The Company is susceptible to fluctuations in its business based upon consumer
demand for carbon monoxide and smoke detectors, in part by publicized accounts
of deaths or serious injury due to carbon monoxide poisoning and/or fires. The
Company believes that its success depends in substantial part on its ability to
anticipate, gauge and respond to such fluctuation in consumer demand. However,
it is impossible to predict the occurrence and effect of any such event that
would cause such fluctuations in consumer demand for the Company's home safety
products.
DEPENDENCE UPON TIMELY PRODUCT INTRODUCTION
The Company's ability to remain competitive in the home safety product market
will depend in part upon its ability to successfully identify new product
opportunities and to develop and introduce new products and enhancements on a
timely and cost effective basis. There can be no assurance that the Company
will be successful in developing and marketing new products or in enhancing its
existing products, that new products, such as its carbon monoxide detector,
will
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achieve ongoing consumer acceptance, that products developed by others
will not render the Company's products non-competitive or obsolete or that the
Company will be able to obtain or maintain the rights to use proprietary
technologies developed by others which are incorporated in the Company's
products. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction, could have a material adverse effect on
the Company's financial condition and results of operations.
The future introduction of new products may require the expenditure of funds
for research and development, tooling, manufacturing processes, inventory and
marketing. In order to achieve high volume production of any new product, the
Company may have to make substantial investments in inventory and expand its
production capabilities.
DEPENDENCE ON MAJOR RETAIL CUSTOMERS
The Company's performance is affected by the economic strength and weakness of
its worldwide retail customers. The Company sells its products to mass
merchants, such as Wal-Mart, Kmart, Target Stores and Sears; home center and
hardware chains, such as Lowe's, Builders Square, Home Depot, True Value/Cotter
and Ace Hardware; catalog showrooms, such as Service Merchandise; warehouse
clubs, such as Price Club and Sam's; and electrical wholesale distributors such
as Graybar, Wesco and Grainger. In 1996, net sales to Wal-Mart and Sam's, in
the aggregate, represented approximately 15% of the Company's net sales. In the
three month period ended March 30, 1997, net sales to Wal-Mart and Sam's in the
aggregate, represented approximately 10% of the Company's net sales. The
Company also supplies its products to its wholly-owned, non-U.S. subsidiaries
and to independent foreign distributors, who in turn distribute the Company's
products to over 500 customers in over 50 countries worldwide, with the United
Kingdom, Canada, Australia and the Scandinavian countries currently representing
the Company's principal foreign markets. The loss of any one or more of the
Company's key retail customers either in the United States or abroad due to
their financial weakness or bankruptcy could have a material adverse effect on
the Company's financial condition or results of operations.
PRODUCT LIABILITY RISKS
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains insurance against
product liability claims in amounts deemed adequate by management, but there
can be no assurance that such coverage will continue to be available on terms
acceptable to the Company or that such coverage will be adequate for liability
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actually incurred. The Company's insurance coverage is on an occurrence basis
covering losses attributable to injury to person or property during the policy
period. Although to date product liability claims have not had a material
adverse effect on the financial condition or results of operations of the
Company, there can be no assurance that the Company will not experience
materially adverse losses due to product liability claims in the future. A
successful claim brought against the Company in excess of available insurance
coverage or any claim that results in significant adverse publicity against the
Company, could have a material adverse effect on the Company's financial
condition or results of operations.
RELIANCE UPON CENTRALIZED MANUFACTURING FACILITIES; INTERRUPTION OF OPERATIONS
All of the Company's manufacturing occurs at its two facilities in Juarez,
Mexico, except fire extinguisher manufacturing which occurs at the Company's
Aurora, Illinois facility. The Company's manufacturing operations utilize
certain custom designed equipment which, if damaged or otherwise rendered
inoperable, could result in the disruption of the Company's manufacturing
operations. Although the Company maintains business interruption insurance in
amounts deemed adequate by management, any extended interruption of the
operations at any of these facilities could have a material adverse effect on
the Company's financial condition or results of operations.
GOVERNMENT REGULATION; POTENTIAL PRODUCT RECALLS; ALLEGED NUISANCE ALARMS
The Company's products are subject to the provisions of the Federal Consumer
Product Safety Act (the "FCPS Act") and the rules and regulations promulgated
thereunder. The FCPS Act authorizes the Consumer Product Safety Commission (the
"CPSC") to protect the public against unreasonable risks of injury associated
with consumer products. The CPSC can require the repurchase or recall by a
manufacturer of its products and can impose fines or other penalties in the
event of violations of the FCPS Act. Similar laws exist in states and
municipalities and in foreign countries in which the Company markets its
products. There can be no assurance that the Company will not be required to,
or will not voluntarily, recall its products in the future. On September 8,
1995, the Company received a Special Order and Subpoena from the CPSC for the
production of certain records and answers to questions relating to the sounding
mechanisms in the Company's smoke detectors. The Company has responded to these
requests and is cooperating with the CPSC in its investigation. Although the
Company believes that the CPSC investigation into smoke detectors will not have
a material adverse effect on the Company's financial condition or results of
operations, this investigation has not been formally closed and there can be no
assurance that this investigation will be resolved in favor of the Company. If
this investigation results in a recall of the Company's products,
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such recall could have a material adverse effect on the Company's financial
condition or results of operations. Since the introduction of the Company's
carbon monoxide detector in 1993, there have been numerous reports of incidences
of alleged false or nuisance alarms regarding carbon monoxide detectors,
including those manufactured by the Company. Since March 1994, the Company has
received two requests for information from the CPSC with respect to these
alleged false or nuisance alarms by the Company's carbon monoxide detectors.
Based on the nature of the alleged problem, the Company does not believe that
the CPSC investigation into carbon monoxide detectors will have a material
adverse effect on the Company's financial condition or results of operations;
however, there can be no assurance that this investigation will be resolved in
favor of the Company. If this investigation results in a recall of the Company's
products, such recall could have a material adverse effect on the Company's
financial condition or results of operations.
The Company is subject to various federal, state and foreign laws and
regulations pertaining to the discharge of materials into the environment or
otherwise relating to the protection of the environment, which may require the
Company to allocate a portion of its operating budget for use in ensuring its
full compliance with such regulations. The Company believes that it has
complied in all material respects with all such laws and regulations.
Because certain of the Company's products use a minute quantity of radioactive
material in the detection of the presence of smoke, the Company also is subject
to the oversight of the Nuclear Regulatory Commission ("NRC") and is subject to
various other federal, state and foreign laws and regulations pertaining to
such use. The Company has obtained a license from the NRC to handle
radioactive material in the amounts necessary to conduct its business in the
ordinary course. In order to maintain its license granted by the NRC, the
Company is required to comply with certain rules and regulations promulgated by
the NRC. The Company believes that it has complied in all material respects
with the rules and regulations applicable to it with respect to its use of
radioactive material. Proper and full compliance with the foregoing laws and
regulations in the future could result in a material financial burden on the
Company or failure to so comply could have a material adverse effect on the
Company's financial condition or results of operations.
The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains product liability
insurance and aggressively defends itself against all such claims. The
Company's insurance coverage and the insurance coverage maintained by Pittway
Corporation ("Pittway") on behalf of the Predecessor Company is on an
occurrence basis covering losses attributable to injury to person or property
during the policy period. Under the terms of the purchase agreement relating
to
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the Acquisition, the Company is required to indemnify Pittway to the extent
that Pittway's available insurance for claims made after the Acquisition
relating to occurrences prior to the Acquisition is insufficient to satisfy
such claims. The Company believes that Pittway's insurance coverage in effect
for periods prior to the Acquisition is no less favorable in the aggregate than
the insurance maintained by the Company since the Acquisition; however
Pittway's insurance coverage also covers the business of Pittway unrelated to
the Predecessor Company and claims asserted prior to the Acquisition.
COMPETITION
The home safety market is characterized by intense competition based primarily
on product availability, price, speed of delivery, ability to tailor specific
solutions to customer needs, quality and depth of product lines. The Company's
competition is fragmented across its product lines, and accordingly, the Company
does not compete with any one company across all product lines. The Company
competes with a variety of entities, some of which have greater financial and
other resources than the Company. The Company's ability to remain competitive
in the home safety market depends in part on its ability to successfully
identify new product opportunities and develop and introduce new products and
enhancements on a timely and cost effective basis. In addition, the Company's
products compete to some extent with higher priced AC powered residential
security systems. To the extent that the installation and maintenance expenses
associated with such systems decline, the Company may experience increased
competition for its products from manufacturers and marketers which
traditionally have not competed with the Company.
GENERAL ECONOMIC CONDITIONS AND LIQUIDITY
General economic conditions, both domestic and foreign, and sources and
availability of financing have an impact on the Company's business, financial
condition and results of operations. From time to time the markets in which
the Company sells its products experience weak economic conditions that may
negatively affect the sales of the Company's products. To the extent that
general economic conditions affect the demand for products sold by the Company,
or the sources and availability of funding of the Company's operations, whether
or not under the Company's existing or committed Credit Facilities, such
conditions could have a material adverse effect on the Company's financial
condition or results of operations. Moreover, operating its business in
countries outside of the United States exposes the Company to fluctuations in
foreign currency exchange rates, exchange ratios, nationalization or
expropriation of assets, import/export controls, political instability,
variations in the protection of intellectual property rights. In addition,
limitations on foreign investments and restrictions on the ability to convert
currency are risks
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inherent in conducting operations in geographically distant locations, with
customers speaking different languages and having different cultural approaches
to the conduct of business, any one of which alone or collectively, could have a
material adverse effect on the Company's international operations, and
consequently on the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 3 Defaults Upon Senior Securities
At March 30, 1997, BRK Brands, Inc. was in default under certain
financial covenants of its Credit Facility. The Company has not
pursued a waiver but rather sought a new source of financing, and
in March 1997, the Company and a financial institution signed a
commitment letter relating to a new $80.0 million revolving
credit facility.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Title
----------- -----
10.51 Employment Agreement, dated as of
January 1, 1997, between BRK
Brands, Inc. and Malcolm Candlish
11.1 Statement re: computation of per
share earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company
during the quarter ended March 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST ALERT, INC.
By: /S/ Michael A Rohl Date: May 12, 1997
-------------------------------
Michael A. Rohl, Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer
of the Registrant)
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