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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, 1997
                         COMMISSION FILE NUMBER 0-23630
 
                               FIRST ALERT, INC.
             (Exact name of Registrant as specified in its charter)
 
<TABLE>
<S>                                            <C>
                   DELAWARE                                      04-3157075
         (State or other jurisdiction                          (IRS Employer
      of incorporation or organization)                    Identification Number)
</TABLE>
 
             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 $50,212,509 (based on the closing price of the Company's
Common Stock on the Nasdaq Stock Market (National Market) on March 3, 1998).
 
     As of March 3, 1998, there were 24,335,112 shares outstanding of the
Company's Common Stock ($0.01 par value).
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Certain parts of the Registrant's Schedule 14D-9,
Solicitation/Recommendation Statement filed with the Commission and dated March
6, 1998 are incorporated by reference into Part III and IV of this report.
================================================================================
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                               FIRST ALERT, INC.
 
                                   FORM 10-K
 
                      FISCAL YEAR ENDED DECEMBER 31, 1997
 
                                     INDEX
 
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                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   10
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.........................................   12
Item 6.   Selected Financial Data.....................................   13
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of
          Operation...................................................   14
Item 8.   Financial Statements and Supplementary Data.................   23
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial...............................................   24

PART III
Item 10.  Directors and Executive Officers of the Registrant..........   24
Item 11.  Executive Compensation......................................   27
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   31
Item 13.  Certain Relationships and Related Transactions..............   31
PART IV
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................   31
</TABLE>
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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. In 1997, the Company introduced a new carbon
monoxide detector with a replaceable nine-volt battery and in February 1998, the
Company introduced a combination smoke and carbon monoxide detector, which is
the first of its type in the U.S. market to obtain listing by UL. 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
 
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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.
 
     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 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.
 
     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.
 
     UL amended the standard for carbon monoxide detectors, all aspects of which
were effective by October 1, 1995 and which generally called for the products to
be somewhat less sensitive. 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. In 1997, the Company introduced a new carbon monoxide detector with a
replaceable nine-volt battery and in February 1998, the Company introduced a
combination smoke and carbon monoxide detector, which is the first of its type
in the U.S. market to obtain listing by UL.
 
     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(R) 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
 
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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 1997.
 
     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 sensor. In 1997, the Company introduced
a new carbon monoxide detector with a replaceable nine-volt battery which uses
the biomimetic technology and is in a tabletop design. In February 1998, the
Company introduced a combination smoke and carbon monoxide detector which is the
first of its type in the U.S. market to obtain listing by UL.
 
     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
 
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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(R) brand name.
 
     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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<CAPTION>
                                                        1997     1996     1995
                                                        ----     ----     ----
<S>                                                     <C>      <C>      <C>
Fire Safety.........................................     66.3%    58.3%    56.2%
Home Safety.........................................     26.0%    35.5%    38.1%
Home Lighting Security..............................      7.7%     6.2%     5.7%
                                                        -----    -----    -----
                                                        100.0%   100.0%   100.0%
                                                        =====    =====    =====
</TABLE>
 
     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
1995, 1996 and 1997, the Company's research and development expenditures were
approximately, $2.9 million, $3.1 million and $2.0 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.
 
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     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(R) gauged fire
extinguishers.
 
CUSTOMERS AND CUSTOMER RELATIONS
 
     The Company sells its products to mass merchants, such as Wal-Mart, Kmart,
Target 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 1997,
net sales to Wal-Mart and Sam's, in the aggregate, represented approximately 17%
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 four 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 1997 and 1996, the Company charged
to operations approximately $12.8 million and $22.9 million, respectively, for
advertising. The Company's principal 1997 promotions related to a magazine
advertising campaign aimed at attracting attention and educating our target
audience, parents who are dedicated to the safety and security of their
families, on home safety issues.
 
     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. In addition, in
recent years, insurance companies have
 
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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.
 
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 has cooperated with the CPSC in its investigation. The Company has
been informally advised this investigation has been closed and believes that the
CPSC investigation into the sounding mechanisms of the Company's smoke detectors
will not 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 discharge of materials into the environment or
otherwise relating to the protection of the environment, which may require the
Company to allocate a portion of its operating budget for use in ensuring its
full compliance with such regulations. The Company believes that it has complied
in all material respects with all such laws and regulations, however, there can
be no assurance that the Company will not be required to make expenditures
relating to environmental compliance.
 
     Because certain of the Company's products use a minute quantity of
radioactive material in the detection of the presence of smoke, the Company also
is subject to the oversight of the Nuclear Regulatory Commission ("NRC") and is
subject to various other federal, state and foreign laws and regulations
pertaining to such use. The Company has obtained a license from the NRC to
handle radioactive material in the amounts necessary to conduct its business in
the ordinary course. In order to maintain its license granted by the NRC, the
Company is required to comply with certain rules and regulations promulgated by
the NRC. The Company believes that it has complied in all material respects with
the rules and regulations applicable to it with respect to its use of
radioactive material. Proper and full compliance with the foregoing laws and
regulations in the future could result in a material financial burden on the
Company or failure to so comply could have a material adverse effect on the
Company's financial condition or results of operations.
 
     The Company is subject to various claims brought against it for alleged
non-performance of its products. The Company maintains product liability
insurance and aggressively defends itself against all such claims. The Company's
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. 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
 
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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.
 
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), Family Gard(R) and
SureGrip(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
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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
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 65% and 59% of its net sales being
generated in the last six months of its fiscal year in 1997 and 1996,
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 set forth in Note 1 on page F-7 of the Notes to
Consolidated Financial Statements contained in Part IV, Item 14(a)(1) of this
report.
 
EMPLOYEES
 
     As of December 31, 1997, the Company had 3,142 full-time employees, 300 of
whom worked in Aurora, Illinois, 2,781 of whom worked in Juarez, Mexico/El Paso,
Texas and 61 of whom worked in other locations. Approximately 94 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 set forth in Note 15 on page
F-20 of the Notes to Consolidated Financial Statements contained in Part IV,
Item 14(a)(1) of this report.
 
                                        8
<PAGE>   11
 
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.......................  62    Chairman of the Board
B. Joseph Messner......................  45    President and Chief Executive Officer
Douglas H. Kellam......................  39    Vice President -- Marketing
Mark A. Devine.........................  40    Vice President -- Engineering
Michael A. Rohl........................  38    Vice President and Chief Financial Officer
Edward J. Tyranski.....................  55    Vice President -- Operations
Mark K. Welch..........................  40    Vice President -- Sales
</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 1988, 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.
 
     MARK A. DEVINE has been Vice President -- Engineering of the Company since
1996. From 1987 until June 1992, Mr. Devine served as Manager of Quality Control
of the BRK Electronics Division of Pittway Corporation, ("Pittway"). When the
Company, through its wholly-owned subsidiary BRK Brands, Inc. ("BRK") acquired
substantially all of the assets of Pittway in June 1992, Mr. Devine served in
the same position with BRK until June 1994. In June 1994, he was appointed Plant
Manager of Fire Extinguishing Operations of BRK.
 
     DOUGLAS H. KELLAM has been Vice President -- Marketing since April 1997.
Prior to his employment with the Company, Mr. Kellam served as Vice
President -- Marketing and Sales for the soft drink division of Austin, Nichols
& Co. from 1995 to November of 1996, and spent the seven years prior to that in
brand management with the North American Pepsi Cola marketing division.
 
     MICHAEL A. ROHL has been Vice President and Chief Financial Officer of the
Company since May 1996. He began his employment with the Company in October 1993
as Corporate Controller. From September 1992 through 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.
 
     EDWARD J. TYRANSKI has been Vice President -- Operations since March 1997.
Prior to his employment with the Company, Mr. Tyranski served as Executive Vice
President of North American Operations for The Thermos Company beginning in
1994. Mr. Tyranski's prior experience includes positions with Allied Signal
Corporation in 1994, Vice President of Worldwide Manufacturing Operations of
Remington Products from 1989 to 1993, various positions at Timex Corporation
from 1981 to 1989, departing as VP Manufacturing and General Manager of European
Operations, Warner-Lambert Company from 1978 to 1981, and General Electric from
1965 to 1978.
 
                                        9
<PAGE>   12
 
     MARK K. WELCH has been Vice President -- Sales since October 1997. Prior to
his employment with the Company, Mr. Welch served as President (Founder) of
Elite Appliances LLC/Pillsbury Kitchen Appliances since August of 1995. From
February 1994 through July of 1995, Mr. Welch served as Vice President Sales and
Marketing of Windmere Corporation. From February 1985 to January 1994 Mr. Welch
worked in the sales division of Black & Decker, Household Products, departing as
National Sales Manager, Wal-Mart Team.
 
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 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.
 
     The Company occupies 60,000 square feet of office space pursuant to a
fifteen-year lease of a building in Aurora, Illinois, which serves as the
Company's principal executive offices. The Company also occupies 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 options, serving as its finished
goods warehouse and fire extinguisher manufacturing facility. The Company
currently leases its distribution facilities in El Paso, Texas (68,000 square
feet), Rexdale, Ontario (25,311 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 plaintiff's
motion to amend the complaint to expand the class period to September 20, 1994
through December 7, 1994, was granted and a second consolidated and amended
complaint was filed on January 16, 1996. The new class was certified by the
Court. The complaint alleges generally that the Company and other defendants
disseminated false and misleading information to the investing public regarding
the First Alert(R) Carbon Monoxide Detector in connection with an anticipated
secondary public offering of the Company's Common Stock in late 1994 in
violation of various provisions of the Securities Exchange Act of 1934 and the
rules promulgated thereunder. The Registration Statement with respect to the
proposed secondary public offering was declared effective by the Securities and
Exchange Commission on November 9, 1994, but was subsequently withdrawn by the
Company at the request of the selling stockholders. The public offering was
solely to facilitate the sale of shares by certain selling stockholders and the
Company would not have received any proceeds therefrom.
 
     The Company vigorously contested all claims and denied liability.
Nevertheless, to avoid further expense and the burdens of litigation, in
November 1996, the Company agreed to tentative settlement of the consolidated
class actions. An executed settlement agreement was filed with the Court on
February 11, 1997 and the Court entered an order on February 25, 1997, giving
preliminary approval to the settlement.
 
     Pursuant to the Court's February 25, 1997, order, members of the class had
until May 12, 1997, to opt out of the class and until July 28, 1997, to file
proofs of claim if they wished to receive a share of the settlement amount. The
Court held a hearing on June 20, 1997, to consider the fairness of the
settlement and, at that time, the Court approved the settlement.
 
     Under the terms of the settlement agreement, defendants will pay a fixed
amount per share to class members, depending on when they bought or sold their
shares, with a maximum amount of $3.0 million (including attorney's fees and
costs for class counsel) to be paid out in settlement. The majority of the
                                       10
<PAGE>   13
 
settlement amount is being paid by the Company's directors and officers
liability insurance carrier. The pendency of the Gilbert complaint has not had a
material effect on the Company's financial results for any period and adequate
reserves exist at December 31, 1997, for the Company's share of the settlement
amount.
 
     A purported class action entitled Betley et al. vs. First Alert, Inc. et
al. ("Betley") was filed in the Circuit Court of Cook County, Illinois on
January 3, 1995, against the Company and its wholly-owned subsidiary, BRK
Brands, Inc., alleging common law fraud, breach of warranties, and a statutory
violation of the Illinois Consumer Fraud Act, all related to alleged defects in
the original First Alert(R) Carbon Monoxide Detector (Model FACO) design and the
manner in which the detector was marketed. The Company does not believe that the
plaintiffs claim any personal injuries or property damage; nor do the plaintiffs
claim that their detectors failed to detect dangerous levels of carbon monoxide.
Instead, they claim (i) that the Company failed to disclose that the product
alarms in non-life threatening conditions (which they state in their complaint
to be a "nuisance"), (ii) that the Company falsely proclaims the product resets
"automatically" when, in fact, the product can take several hours or days to
reset after it has gone into alarm and (iii) that the Company falsely claims
that the product met Underwriters Laboratories' listing criteria for residential
carbon monoxide detectors in effect at the time the Model FACO was manufactured.
The plaintiffs seek a refund of their purchase price, other out-of-pocket
expenses, punitive damages, and attorneys' fees. The Company has raised numerous
defenses to this claim and will continue to oppose it forcefully.
 
     In February 1997, the Company and its wholly-owned subsidiary, BRK Brands,
Inc., were named as defendants in a purported class action lawsuit entitled
Houlihan et al. vs. First Alert, Inc. et al. ("Houlihan") in the Circuit Court
of Cook County, Illinois, alleging breach of express warranty and statutory
violations of various states consumer protection statutes due to alleged
misrepresentations and product defects involving First Alert(R) Carbon Monoxide
Detectors. The Company does not believe the plaintiff claimed any personal
injuries or property damage; nor did he claim specifically that his detector
failed to detect dangerous levels of carbon monoxide. Rather, the plaintiff
sought "rescissionary damages" and attorneys' fees. The plaintiff's original
complaint was stricken by the Court on April 9, 1997, but the Court gave the
plaintiff leave to re-plead the case which was done. The Company filed a Motion
to Dismiss the amended complaint and that motion was granted on August 22, 1997.
The case has now been settled by refunding the plaintiff's purchase price of the
detector.
 
     On February 11, 1998, a jury returned a verdict against the Company's BRK
Brands, Inc. subsidiary, awarding damages totaling $16.9 million in the case of
Mercer et al. vs. BRK Brands, Inc. et al. which was tried in the Iowa District
Court for Scott County. The verdict includes $12.5 million of punitive damages.
The case alleged negligence, breach of warranty and fraudulent nondisclosure in
connection with a BRK(R) Electronics smoke detector that alarmed during a
residential fire. The punitive damage award was based upon the jury finding a
preponderance of clear, convincing and satisfactory evidence the Company's
conduct constituted willful and wanton disregard for the rights or safety of
others. Substantially all of the cost of defense and the damages assessed in
this case are covered by the Company's insurance. The Company intends to
continue to vigorously contest this case by pursuing a number of post-trial
motions to overturn the verdict and appealing the decision, if necessary.
 
     In addition to the Gilbert, Betley and Mercer 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, Mercer 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 1997, no matter was submitted to a vote of
security holders.
 
                                       11
<PAGE>   14
 
                                    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." See the quarterly market prices
included in Note 16 on page F-21 of the Notes to Consolidated Financial
Statements contained in Part IV, Item 14(a)(1) of this report.
 
     At March 3, 1998, there were 422 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 1997 or 1996. 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 restricts the Company's
ability to pay dividends on its Common Stock.
 
                                       12
<PAGE>   15
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The following selected financial data and other data should be read in
connection with the 1997 Consolidated Financial Statements of First Alert, Inc.
and the Notes related thereto included in pages F-1 through F-21 of this report.
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                       SUMMARY OF SELECTED FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        1997        1996        1995        1994        1993
                                      --------    --------    --------    --------    --------
<S>                                   <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Net sales.........................  $186,941    $205,607    $246,266    $248,404    $157,625
  Gross profit, excluding
     depreciation...................    52,592      54,996     105,286     116,415      63,468
  Selling, general and
     administrative.................    54,213      72,663      77,548      73,857      41,836
  Restructuring charge..............        --       2,499          --          --          --
  Depreciation and amortization.....     6,846       6,353       7,305       7,646       6,624
                                      --------    --------    --------    --------    --------
  Operating income (loss)...........    (8,467)    (26,519)     20,433      34,912      15,008
  Interest expense..................     3,555       3,803       1,487       2,983       6,074
  Other expenses (income)...........     1,038         628        (113)        720         452
                                      --------    --------    --------    --------    --------
  Income (loss) before taxes and
     extraordinary item.............   (13,060)    (30,950)     19,059      31,209       8,482
  Income tax provision (benefit)....    (5,224)    (12,248)      7,622      12,500       3,440
                                      --------    --------    --------    --------    --------
  Income (loss) before extraordinary
     item...........................    (7,836)    (18,702)     11,437      18,709       5,042
  Extraordinary item, net of tax
     (1)............................        --          --          --       1,084          --
                                      --------    --------    --------    --------    --------
  Net income (loss).................  $ (7,836)   $(18,702)   $ 11,437    $ 17,625    $  5,042
                                      ========    ========    ========    ========    ========
PER SHARE DATA:(2)(3)
  Basic income (loss) per share
     before extraordinary item......  $  (0.32)   $  (0.78)   $   0.48    $   0.83    $   0.27
  Diluted income (loss) per share
     before extraordinary item......     (0.32)      (0.78)       0.46        0.79        0.25
  Basic net income (loss) per
     share..........................     (0.32)      (0.78)       0.48        0.78        0.27
  Diluted net income (loss) per
     share..........................     (0.32)      (0.78)       0.46        0.75        0.25
  Basic weighted average shares
     outstanding....................    24,242      24,119      24,043      22,538      18,720
  Diluted weighted average shares
     outstanding....................    24,242      24,119      24,831      23,601      19,941
OTHER DATA:
  Gross profit, excluding
     depreciation...................  $ 52,592    $ 54,996    $105,286    $116,415    $ 63,468
  EBITDA(4).........................    (1,621)    (20,166)     27,738      42,558      21,632
  Depreciation and amortization.....     6,846       6,353       7,305       7,646       6,624
  Capital expenditures..............     3,992       5,274      10,648       6,740       6,081
</TABLE>
 
                                       13
<PAGE>   16
 
<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31,
                                      --------------------------------------------------------
                                        1997        1996        1995        1994        1993
                                      --------    --------    --------    --------    --------
<S>                                   <C>         <C>         <C>         <C>         <C>
BALANCE SHEET DATA:
  Working capital...................  $ 29,611    $ 73,748    $ 68,852    $ 52,517    $ 20,552
  Total assets......................   164,361     186,491     206,993     172,305     139,868
  Long-term debt (including current
     maturities)....................    45,026      60,500      52,200      15,700      75,191
  Stockholders' equity..............    81,400      88,852     107,044      95,413      36,541
</TABLE>
 
---------------
(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) The Company did not declare any cash dividends on its Common Stock for the
    1993, 1994, 1995, 1996 and 1997 fiscal years.
 
(3) In 1997, the Company adopted Financial Accounting Standards Board Statement
    No. 128 "Earnings per Share." All prior period EPS data has been restated.
 
(4) Earnings before interest expense, taxes, depreciation, amortization, and
    extraordinary item ("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.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
 
     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.
 
GENERAL
 
     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.
 
     During 1997 the Company incurred a number of unanticipated costs associated
with its manufacturing operation in Mexico. Certain of these costs related to
production inefficiencies caused by manufacturing facility changes resulting
partly from the delay in the receipt of UL approval for new smoke and carbon
monoxide detectors scheduled for release in the second half of 1997. When it
became apparent that approval would not be obtained in order to meet 1997
customer requirements for the new product, alternate products needed to be
furnished which resulted in manufacturing facility realignments, shipment delays
and increased customer allowances. Additionally, the Company experienced
material shortages and other production inefficiencies with respect to ramping
up production for other products. Approximately $4.5 million of these costs were
offset by the release of reserves established in previous years which were no
longer required. These reserves had been established over a period of years and
their initial recording was not significant to any individual prior reporting
period.
 
                                       14
<PAGE>   17
 
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>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1997     1996     1995
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Net sales...................................................  100.0%   100.0%   100.0%
Gross profit, excluding depreciation........................   28.1     26.7     42.8
Selling, general and administrative expenses................   29.0     35.3     31.5
Restructuring charge........................................     --      1.2       --
Depreciation and amortization...............................    3.7      3.1      3.0
Operating income (loss).....................................   (4.5)   (12.9)     8.3
</TABLE>
 
COMPARISON OF FISCAL 1997 TO FISCAL 1996
 
NET SALES
 
     Net sales for fiscal 1997 were $186.9 million, a decrease of $18.7 million
or 9.1% from net sales of $205.6 million for fiscal 1996. This decrease was due
primarily to lower unit volume and lower average selling prices of First
Alert(R) Carbon Monoxide Detectors in the U.S. and slightly lower average
selling prices of smoke detectors in the U.S., partially offset by higher net
sales in Europe. Net sales of smoke detectors in the U.S. decreased by 2.2%
while net sales of carbon monoxide detectors in the U.S. decreased 44.9% in
fiscal 1997 compared to fiscal 1996. Domestic net sales in 1997 were adversely
impacted by delays in ramping up the Company's manufacturing facilities due to
new product introductions, certain material shortages and production
inefficiencies and delays in obtaining UL approval on the new combination smoke
and carbon monoxide detector. Additionally, the loss of distribution at a
significant customer during the second half of 1996, other competitive activity
and general softness in certain of the Company's markets adversely impacted 1997
net sales compared to 1996. Consolidated net sales of carbon monoxide detectors
in fiscal 1997 were $34.8 million compared to $60.5 million during fiscal 1996.
 
     International net sales totalled $38.1 million in fiscal 1997, up 8.8% from
$35.0 million in fiscal 1996. Net sales were up 19.9% in Europe, and increased
net sales in Canada were offset by decreased net sales in Australia and in other
export markets.
 
GROSS PROFIT, EXCLUDING DEPRECIATION
 
     Gross profit, excluding depreciation ("gross profit"), decreased to $52.6
million in 1997 from $55.0 million in 1996, or 4.4%. As a percent of net sales,
gross profit was 28.1% in fiscal 1997 compared to 26.7% in fiscal 1996. Gross
profit in 1996, excluding inventory write-downs associated with the
restructuring charge of $2.0 million, was $57.0 million or 27.7% of net sales.
Gross profit in 1997 was favorably impacted by cost reductions in the Company's
manufacturing facilities which more than countered significantly lower
production levels, and by lower allowances granted to customers for product
returns in 1997 than in 1996. These overall improvements were partially offset
by generally lower selling prices for carbon monoxide detectors and by slightly
lower selling prices for smoke detectors. Additionally certain costs associated
with inefficiencies incurred in manufacturing operations in 1997 were partially
offset by the release of $1.4 million of restructuring and other reserves
established in 1996 deemed no longer necessary. These reserves were deemed no
longer necessary as the Company, in light of market conditions faced in 1997,
reassessed its original cost estimates associated with repositioning certain
product lines and consolidating its manufacturing operations.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
     Selling, general and administrative expenses decreased to $54.2 million in
fiscal 1997 from $72.7 million in fiscal 1996, or 25.4%. As a percent of net
sales, selling, general and administrative expenses were 29.0% in fiscal 1997 as
compared to 35.3% in fiscal 1996. The decrease was due primarily to lower
variable costs directly related to lower net sales and generally lower spending
consistent with the Company's plan to reduce the
 
                                       15
<PAGE>   18
 
SG&A cost structure as publicly announced in January 1997. National advertising,
public relations and promotions, product packaging and display costs and outside
service costs were reduced in 1997 compared to 1996. Additionally, certain costs
associated with premium freight out charges and key customer allowances in 1997
were partially offset by the release of $3.1 million of reserves established in
prior years deemed no longer necessary. SG&A costs in 1996 included certain
one-time legal and public relations costs and a charge for severance costs
relating to the departure of certain employees during 1996.
 
OPERATING LOSS
 
     Operating loss for fiscal 1997 totalled $8.5 million compared to operating
loss of $26.5 million in fiscal 1996. Operating loss for fiscal 1996, before the
restructuring charge totalled $22.0 million. Operating loss for 1997 was
affected by reduced net sales and gross profit, higher depreciation and
amortization, offset by reduced selling, general and administrative expenses.
 
INTEREST EXPENSE
 
     Interest expense decreased to $3.6 million in fiscal 1997 from $3.8 million
in fiscal 1996. The decrease in interest expense was due mostly to lower net
borrowing levels in 1997 partially offset by higher interest rates under both
the previous and current revolving credit facilities (see Note 8 to Consolidated
Financial Statements).
 
OTHER EXPENSES (INCOME)
 
     Other expenses include realized and unrealized gains/losses on foreign
exchange and non-operating related costs. Other expense includes foreign
exchange losses of $1.1 million in 1997 and foreign exchange gains of $0.7
million in 1996. The Company has experienced foreign exchange losses during 1997
due primarily to increased export business into continental Europe and the
general strengthening of the U.S. dollar compared to most European and
Asia/Pacific currencies.
 
NET INCOME (LOSS)
 
     Net loss in fiscal 1997 totalled $7.8 million compared to net loss of $18.7
million in fiscal 1996. Net loss in fiscal 1996 before the restructuring charge
totalled $16.0 million. The effective tax rate was a tax benefit of 40.0% in
fiscal 1997 and 39.6% in fiscal 1996.
 
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(R)
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.
 
                                       16
<PAGE>   19
 
GROSS PROFIT, EXCLUDING DEPRECIATION
 
     Gross profit, excluding depreciation 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 the restructuring charge 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.
 
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 a September 4, 1996, amendment to the
former revolving credit facility ("Former Credit Facility").
 
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.
 
                                       17
<PAGE>   20
 
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.
 
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
provided by operations totalled $16.4 million in 1997 compared to approximately
zero in fiscal 1996. At December 31, 1997, the total indebtedness of the Company
was $45.0 million under a revolving credit facility. Management anticipates that
cash generated from operations, together with current working capital and a
renegotiated credit facility, will provide sufficient liquidity to meet the
Company's working capital and capital expenditure requirements for the next
twelve months.
 
     On May 14, 1997, the Company entered into an $80.0 million revolving
three-year credit facility (the "Credit Facility") with an agent financial
institution and a syndicate of banks. Advances under the Credit Facility are
limited to (a) 85% of eligible accounts receivable plus (b) the lesser of 60% of
eligible inventory or $35.0 million. During the period of May 1997 through
October 1997, $10.0 million in additional borrowing was available and from June
1998 through September 1998, $5.0 million in additional borrowing will be
available under the original agreement. All obligations under the Credit
Facility are secured by first priority liens upon certain of the Company's
assets. Amounts outstanding under the Credit Facility bear interest at prime
rate plus 1/2% or the London Interbank Offered Rate (LIBOR) plus 2%. The Company
is subject to a commitment fee of 0.375% per annum on the unused portion of the
Credit Facility less $2.0 million. The Credit Facility agreement contains
covenants for, among other things, total liabilities to tangible net worth and
fixed charge ratios; maintenance of tangible net worth; and restrictions on
additional indebtedness, capital expenditures and payment of dividends.
 
     At December 31, 1997, the Company was not in compliance with the total
liabilities to tangible net worth, fixed charge coverage ratio and minimum
tangible net worth covenants set forth in the Credit Facility. While a waiver
was obtained from the lender for the noncompliance with these covenants at
December 31, 1997, it is not expected that the Company will be able to meet the
restrictive covenants throughout 1998. Accordingly, the Credit Facility has been
classified as a current liability. The Company is currently negotiating the
terms of an extension of the Credit Facility, as well as a modification of the
restrictive covenants and fully expects that a new agreement with its current
lender will be in place by the second quarter of 1998.
 
     Of the Company's 1997 net sales, 65.3% 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. The Company expects the borrowing levels to
follow normal seasonal patterns in the near future. 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 1997, fiscal 1996 and fiscal 1995 were $4.0 million,
$5.3 million and $10.6 million, respectively.
 
                                       18
<PAGE>   21
 
     Net cash provided by financing activities primarily has been used for
working capital. 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.
 
     The principal source of net cash from financing activities has been
borrowings under the Credit Facility.
 
IMPACT OF THE YEAR 2000 ISSUE
 
     The Company has determined that it will be required to modify or upgrade
significant portions of its software so that its computer systems will properly
utilize dates beyond December 31, 1999. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company. The Year 2000 Issue is currently not
expected to have a significant impact on the future results of operations of the
Company.
 
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, 1997, 65.3% 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.
 
IMPACT OF NEW ACCOUNTING STANDARDS
 
     In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share," which
establishes standards for computing and presenting earnings per share (EPS) and
simplifies the standards for computing EPS previously found in APB Opinion No.
15 (APB 15), "Earnings per Share." As prescribed by SFAS 128, the Company
retroactively adopted this standard in the fourth quarter 1997, and has restated
all prior-period EPS data presented. The adoption of SFAS 128 had little or no
impact on previously reported EPS.
 
     Financial Accounting Standards Board Statement No. 130 (SFAS 130),
"Reporting Comprehensive Income" and Financial Accounting Standards Board
Statement No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," were issued in June 1997 and are effective for the
Company's fiscal year 1998. SFAS 130 establishes standards for the reporting and
display of comprehensive income, which includes net income and changes in equity
except those resulting from investments by, or distributions to, stockholders.
SFAS 131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.
 
SUBSEQUENT EVENTS
 
     On February 11, 1998, a jury returned a verdict against the Company's BRK
Brands, Inc. subsidiary, awarding damages totalling $16.9 million in the case of
Mercer et al. vs. BRK Brands, Inc. et al. which was tried in the Iowa District
Court for Scott County. The verdict includes $12.5 million of punitive damages.
The case alleged negligence, breach of warranty and fraudulent nondisclosure in
connection with a BRK(R) Electronics smoke detector that alarmed during a
residential fire. The punitive damage award was based upon the jury finding a
preponderance of clear, convincing and satisfactory evidence the Company's
conduct constituted willful and wanton disregard for the rights or safety of
others. Substantially all of the cost of defense and the damages assessed in
this case are covered by the Company's insurance. The Company intends
 
                                       19
<PAGE>   22
 
to continue to vigorously contest this case by pursuing a number of post-trial
motions to overturn the verdict and appealing the decision, if necessary.
 
     On March 2, 1998, the Company announced that it had entered into a
definitive agreement with Sunbeam Corporation ("the Agreement") providing for
the acquisition of the Company by Sunbeam in a transaction valued at
approximately $175 million including the assumption of existing debt. The
consummation of the offer is subject to certain customary conditions, including
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act. The Agreement provides that the Company pay a fee of $3.75
million in the event that the acquisition is terminated.
 
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
 
     The Company cautions that the following important factors, among others
(including but not limited to factors mentioned from time to time in the
Company's reports filed with the Securities and Exchange Commission), could
affect the Company's actual financial condition or results of operations and
could cause the Company's actual financial condition or results of operations to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company. The factors included here are not
exhaustive. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all 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 F-7 of the Notes to Consolidated Financial Statements
contained in Part IV, Item 14(a)(1) of this report.
 
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 North American revenues, and general economic
conditions. In addition, as a strategic response to changes in the competitive
environment,
 
                                       20
<PAGE>   23
 
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 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 detectors or
combined smoke and 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 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 1997, net sales to Wal-Mart and Sam's, in the aggregate,
represented approximately 17% of the Company's net sales. The Company also
supplies its products to its wholly-owned, non-U.S. subsidiaries and to
independent foreign distributors, who in turn distribute the Company's products
to over 500 customers in over 50 countries worldwide, with the United Kingdom,
Canada, Australia and the Scandinavian countries currently representing the
Company's principal foreign markets. The loss of any one or more of the
Company's key retail customers either in the United States or abroad, could have
a material adverse effect on the Company's financial condition 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
                                       21
<PAGE>   24
 
acceptable to the Company or that such coverage will be adequate for liability
actually incurred. The Company's insurance coverage is on an occurrence basis
covering losses attributable to injury to person or property during the policy
period. Although to date product liability claims have not had a material
adverse effect on the financial condition or results of operations of the
Company, there can be no assurance that the Company will not experience
materially adverse losses due to product liability claims in the future. A
successful claim brought against the Company in excess of available insurance
coverage or any claim that results in significant adverse publicity against the
Company, could have a material adverse effect on the Company's financial
condition or results of operations.
 
RELIANCE UPON CENTRALIZED MANUFACTURING FACILITIES; INTERRUPTION OF OPERATIONS
 
     All of the Company's manufacturing occurs at its two facilities in Juarez,
Mexico, except fire extinguisher manufacturing which occurs at 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 has cooperated with the CPSC in its investigation. The Company has
been informally advised this investigation has been closed and believes that the
CPSC investigation into the sounding mechanisms of the Company's smoke detectors
will not 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 discharge of materials into the environment or
otherwise relating to the protection of the environment, which may require the
Company to allocate a portion of its operating budget for use in ensuring its
full compliance with such regulations. The Company believes that it has complied
in all material respects with all such laws and regulations, however, there can
be no assurance that the Company will not be required to make expenditures
relating to environmental compliance.
 
     Because certain of the Company's products use a minute quantity of
radioactive material in the detection of the presence of smoke, the Company also
is subject to the oversight of the Nuclear Regulatory Commission ("NRC") and is
subject to various other federal, state and foreign laws and regulations
pertaining to such use. The Company has obtained a license from the NRC to
handle radioactive material in the amounts necessary to conduct its business in
the ordinary course. In order to maintain its license granted by the NRC, the
                                       22
<PAGE>   25
 
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. 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 credit facility, such conditions could have a
material adverse effect on the Company's financial condition or results of
operations. Moreover, operating its business in countries outside of the United
States exposes the Company to fluctuations in foreign currency exchange rates,
exchange ratios, nationalization or expropriation of assets, import/export
controls, political instability and variations in the protection of intellectual
property rights. In addition, limitations on foreign investments and
restrictions on the ability to convert currency are risks 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
 
     See Consolidated Financial Statements and Notes to the Consolidated
Financial Statements, which are included herein on pages F-1 through F-21,
together with the "Report of Independent Accountants" on page F-2 and the
unaudited supplementary data that are included in Note 16 -- Quarterly Results
on page F-21 contained in Part IV, Item 14(a)(1) of this report.
 
                                       23
<PAGE>   26
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The Board of Directors is divided into three classes, with each class as
nearly equal in number as possible. One class is elected each year for a term of
three years. The Company presently has a Board of Directors of seven members.
 
     The following are the current directors of the Company:
 
<TABLE>
<CAPTION>
                                            YEAR FIRST
                                            ELECTED A        POSITION WITH THE COMPANY OR PRINCIPAL
          NAME OF DIRECTOR            AGE    DIRECTOR        OCCUPATION DURING THE PAST FIVE YEARS
          ----------------            ---   ----------       --------------------------------------
<S>                                   <C>   <C>          <C>
SERVING FOR A TERM ENDING IN 2000:
Malcolm Candlish....................  62       1992      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.
</TABLE>
 
                                       24
<PAGE>   27
 
<TABLE>
<CAPTION>
                                            YEAR FIRST
                                            ELECTED A        POSITION WITH THE COMPANY OR PRINCIPAL
          NAME OF DIRECTOR            AGE    DIRECTOR        OCCUPATION DURING THE PAST FIVE YEARS
          ----------------            ---   ----------       --------------------------------------
<S>                                   <C>   <C>          <C>
David V. Harkins....................  57       1992      David V. Harkins has served as a director of
                                                         the Company since July 1992. Mr. Harkins has
                                                         also served as Chairman of the Company's
                                                         Compensation Committee and as a member of the
                                                         Company's Audit Committee since October 1992.
                                                         Mr. Harkins has been employed by THL Co., an
                                                         investment firm, since 1986 and currently
                                                         serves as a Senior Managing Director. Mr.
                                                         Harkins has been Chairman and director of
                                                         National Dentex Corporation, an operator of
                                                         dental laboratories, since 1983. Mr. Harkins
                                                         also serves as Senior Vice President and
                                                         Trustee of Thomas H. Lee Advisors I, L.P.
                                                         ("Advisors I") and Mezzanine II, an affiliate
                                                         of the ML-Lee Acquisition Funds, and as a
                                                         director of Stanley Furniture Company, Inc.,
                                                         Fisher Scientific International Inc., Syratech
                                                         Corporation, Freedom Securities Corporation
                                                         and various private corporations.
Albert L. Prillaman.................  52       1997      Albert L. Prillaman currently serves as
                                                         Chairman, Chief Executive Officer and
                                                         President of Stanley Furniture Company, Inc.
                                                         ("Stanley"), a furniture manufacturer. Mr.
                                                         Prillaman has been President and Chief
                                                         Executive Officer of Stanley since December
                                                         1985 and Chairman of the Board of Stanley
                                                         since September 1988. Before such time, Mr.
                                                         Prillaman served in various executive
                                                         capacities with Stanley and its predecessor
                                                         company since 1969. Mr. Prillaman also is a
                                                         director of MainStreet BankGroup Incorporated.
SERVING A TERM ENDING IN 1998:
John R. Albers......................  66       1995      John R. Albers has served as a director of the
                                                         Company since July 1995. Mr. Albers has also
                                                         served as a member of the Company's
                                                         Compensation Committee since July 1995. From
                                                         May 1995 to present, Mr. Albers has served as
                                                         Chief Executive Officer and President of
                                                         Fairfield Enterprises, Inc., a holding
                                                         company. From 1988 to March 1995, Mr. Albers
                                                         served as Chairman, President and Chief
                                                         Executive Officer of Dr. Pepper/Seven-Up
                                                         Companies, Inc., a beverage manufacturer. Mr.
                                                         Albers is also a director of AmerUs Life
                                                         Insurance Company and AMAL.
</TABLE>
 
                                       25
<PAGE>   28
 
<TABLE>
<CAPTION>
                                            YEAR FIRST
                                            ELECTED A        POSITION WITH THE COMPANY OR PRINCIPAL
          NAME OF DIRECTOR            AGE    DIRECTOR        OCCUPATION DURING THE PAST FIVE YEARS
          ----------------            ---   ----------       --------------------------------------
<S>                                   <C>   <C>          <C>
Anthony J. DiNovi...................  35       1992      Anthony J. DiNovi has served as a director of
                                                         the Company since July 1992. Mr. DiNovi has
                                                         also served on the Company's Audit Committee
                                                         since October 1992 and the Company's
                                                         Compensation Committee since July 1995. Mr.
                                                         DiNovi has been employed by THL Co., an
                                                         investment firm, since 1988 and currently
                                                         serves as a Managing Director. Mr. DiNovi also
                                                         serves as a Vice President of Advisors I and
                                                         Mezzanine II, an affiliate of the ML-Lee
                                                         Acquisition Funds, and as a director of
                                                         Safelite Glass Corp., The Learning Company,
                                                         Inc., Fisher Scientific International Inc. and
                                                         various private corporations.
SERVING A TERM ENDING IN 1999:
B. Joseph Messner...................  45       1996      B. Joseph Messner joined the Company as the
                                                         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 1988, 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.
Scott A. Schoen.....................  39       1992      Scott A. Schoen has served as a director of
                                                         the Company since July 1992. Mr. Schoen has
                                                         also served as a member of the Company's
                                                         Compensation Committee and Chairman of the
                                                         Company's Audit Committee since October 1992.
                                                         Mr. Schoen has been employed by THL Co., an
                                                         investment firm, since 1986 and currently
                                                         serves as a Managing Director. Mr. Schoen also
                                                         serves as a Vice President of Advisors I and
                                                         Mezzanine II, an affiliate of the ML-Lee
                                                         Acquisition Funds and as a director of
                                                         Signature Brands USA, Inc., Rayovac
                                                         Corporation, Syratech Corporation,
                                                         TransWestern Communications Company, Inc.,
                                                         Anchor Advanced Products, Inc. and various
                                                         private corporations.
</TABLE>
 
                 INFORMATION CONCERNING THE BOARD OF DIRECTORS
 
     Directors of the Company who are not employees of the Company and who are
not affiliates of significant investors in the Company receive an annual
retainer of $13,000 and a fee of $2,000 for each Board meeting attended or $500
for each Board meeting in which the director participates by telephone. Such
directors also receive annual retainer fees of an aggregate of $2,000 for
service as a member of one or more Board committees and fees for each Board
committee meeting attended, not held in conjunction with a full Board meeting,
of $1,000 or $500 for each committee meeting in which the director participates
by telephone. Pursuant to the Non-Qualified Stock Option Plan for Non-Employee
Directors, ("Non-Employee Director
                                       26
<PAGE>   29
 
Plan"), qualifying directors receive approximately one half of their
compensation as directors in the form of options to acquire Common Stock of the
Company. No director received compensation for serving as such, except that in
1997 Mr. Albers earned $13,250 and Mr. Prillaman earned $9,500 in cash and
Messrs. Albers and Prillaman received options to purchase 6,456 and 6,827 shares
of Common Stock, respectively, under the Non-Employee Director Plan; and Messrs.
Candlish and Messner received compensation as employees of BRK Brands, Inc., the
principal subsidiary of the Company. During 1997, BRK Brands, Inc. also
reimbursed the travel expenses of Messrs. Albers, DiNovi, Harkins, Prillaman and
Schoen in the amount of approximately $11,743, $5,385, $5,874, $2,745 and
$7,293, respectively, in connection with their attending meetings of the Board
of Directors of the Company.
 
     See Item 1, "Executive Officers" for information concerning executive
officers.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
                  EXECUTIVE COMPENSATION AND OTHER INFORMATION
 
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
 
     The following table shows, for the fiscal years ending December 31, 1995,
1996 and 1997, the cash compensation paid by the Company and its Subsidiaries,
to the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company and its subsidiaries (other than
the Chief Executive Officer) at the end of 1997.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                               LONG TERM
                                                                              COMPENSATION
                                              ANNUAL COMPENSATION             ------------
                                    ---------------------------------------    SECURITIES
                                                               OTHER ANNUAL    UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITION   YEAR  SALARY $(1)   BONUS $(1)   COMPENSATION   OPTIONS (#)    COMPENSATION
----------------------------  ----  -----------   ----------   ------------   ------------   ------------
<S>                           <C>   <C>           <C>          <C>            <C>            <C>
Malcolm Candlish............  1997   $101,154           0        $  8,290(2)           0        $3,872(3)
  Chairman of the Board       1996    325,000           0          64,081(2)      50,000         4,425(4)
                              1995    400,000           0          77,277(2)      45,000         6,524(5)
B. Joseph Messner(6)........  1997    300,000           0          22,887(2)     500,000(7)      2,299(8)
  President and Chief         1996     84,231           0          11,319(9)     500,000           532(10)
  Executive Officer           1995          0           0               0              0             0
Mark A. Devine..............  1997     97,885           0               0         79,500(11)     6,117(12)
  Vice
    President -- Engineering  1996     83,501       2,000               0          3,500         2,475(13)
                              1995     87,723           0               0          1,000         2,632(14)
Douglas H. Kellam(15).......  1997    120,962           0         117,804(16)    100,000         1,540(17)
  Vice
     President -- Marketing   1996          0           0               0              0             0
                              1995          0           0               0              0             0
Michael A. Rohl.............  1997    125,769           0               0        114,200(18)     8,472(19)
  Vice President and          1996    112,384           0               0         23,000         6,069(20)
  Chief Financial Officer     1995     99,885       5,000               0          4,000         3,687(21)
Edward J. Tyranski(22)......  1997    120,000           0               0        100,000         4,958(23)
  Vice President --           1996          0           0               0              0             0
  Operations                  1995          0           0               0              0             0
</TABLE>
 
---------------
 (1) Salary and bonus amounts are presented in the year earned; however, the
     payment of such amounts may have occurred in other years.
 
 (2) Represents commuting expenses.
 
 (3) Represents $2,375 contributed by BRK pursuant to BRK's Retirement Savings
     Plan -- 401(K) (the "401(K) Plan") and $1,497 of insurance premiums.
 
 (4) Represents $2,521 contributed by BRK pursuant to the 401(K) Plan and $1,904
     of insurance premiums.
 
 (5) Represents $4,620 contributed by BRK pursuant to the 401(K) Plan and $1,904
     of insurance premiums.
 
 (6) Mr. Messner became President and Chief Executive Officer of the Company in
     September 1996.
 
                                       27
<PAGE>   30
 
 (7) Represents repricing of 500,000 options granted in 1996.
 
 (8) Represents $472 contributed by BRK pursuant to the 401(K) Plan, $483 of
     insurance premiums and $1,344 for personal use of a company car.
 
 (9) Represents reimbursement of commuting and other expenses.
 
(10) Represents $532 for personal use of a company car.
 
(11) Includes repricing of 4,500 options granted in 1996 and 1995.
 
(12) Represents $2,937 contributed by BRK pursuant to the 401(K) Plan, $29 of
     insurance premiums and $3,151 for personal use of a company car.
 
(13) Represents $2,475 contributed by BRK pursuant to the 401(K) Plan.
 
(14) Represents $2,632 contributed by BRK pursuant to the 401(K) Plan.
 
(15) Mr. Kellam became Vice President -- Marketing of the Company in April 1997.
 
(16) Represents the reimbursement of moving related expenses.
 
(17) Represents $85 of insurance premiums and $1,455 for personal use of a
     company car.
 
(18) Includes repricing of 64,200 options granted in 1996, 1995 and 1994.
 
(19) Represents $3,773 contributed by BRK pursuant to the 401(K) Plan, $74 of
     insurance premiums and $4,625 for personal use of a company car.
 
(20) Represents $3,372 contributed by BRK pursuant to the 401(K) Plan and $2,697
     for personal use of a company car.
 
(21) Represents $3,687 contributed by BRK pursuant to the 401(K) Plan.
 
(22) Mr. Tyranski became Vice President -- Operations of the Company in March
     1997.
 
(23) Represents $791 of insurance premiums and $4,167 for personal use of a
     company car.
 
STOCK OPTIONS
 
     The following table contains information concerning the grant of stock
options during 1997 to the Company's executives listed in the Summary
Compensation Table above.
 
     Irrespective of the theoretical value placed on a stock option on the date
of grant, its ultimate value will depend on the market value of the Company's
Common Stock at a future date. If the price of the Company's Common Stock
increases, all stockholders will benefit commensurately with the optionees.
 
                             OPTION GRANTS IN 1997
 
<TABLE>
<CAPTION>
                                                INDIVIDUAL GRANTS                        POTENTIAL REALIZABLE VALUE
                            ----------------------------------------------------------    AT ASSUMED RATES OF STOCK
                               NUMBER OF      PERCENT OF TOTAL                             PRICE APPRECIATION FOR
                              SECURITIES      OPTIONS GRANTED                                    OPTION TERM
                              UNDERLYING      TO EMPLOYEES IN    EXERCISE   EXPIRATION   ---------------------------
NAME                        OPTIONS GRANTED     FISCAL YEAR       PRICE        DATE           5%            10%
----                        ---------------   ----------------   --------   ----------   ------------   ------------
<S>                         <C>               <C>                <C>        <C>          <C>            <C>
Malcolm Candlish..........            0                0               0           0               0              0
B. Joseph Messner.........      500,000(1)          38.4%        $3.1875     2/14/07      $1,002,301     $2,540,027
Mark A. Devine............       79,500(1)           6.1%         3.1875     2/14/07      $  159,366     $  403,664
Douglas H. Kellam.........      100,000(2)           7.7%         2.7656      4/7/07      $  173,927     $  440,765
Michael A. Rohl...........      114,200(1)           8.8%         3.1875     2/14/07      $  228,926     $  580,142
Edward J. Tyranski........      100,000(3)           7.7%         2.9373     3/31/07      $  184,725     $  468,130
</TABLE>
 
---------------
(1) On February 14, 1997, the Company granted new options to acquire a total of
    279,000 shares of Common Stock at an exercise price of $3.19 per share to
    certain employees, including options to Messrs. Devine and Rohl for 75,000
    and 50,000 shares, respectively. Additionally, on February 14, 1997, the
    Company gave holders of options for an aggregate of 619,200 shares
    previously granted, including 114,000 shares apart from any Company stock
    option plan, the opportunity to exchange such options for newly granted
    options to purchase the same number of shares at $3.19 per share. Mr.
    Messner exchanged 300,000
 
                                       28
<PAGE>   31
 
    shares, including 114,000 shares apart from any company stock option plan.
    Additionally, Mr. Messner exchanged the options to purchase 200,000 shares
    of Common Stock for options to purchase the same number of shares at $3.19
    per share. These options vested only if a change in control of the Company
    occurred prior to December 31, 1997. The options for a total of 500,000
    shares held by Mr. Messner were originally granted on September 18, 1996, at
    a price of $6.06 per share. Messrs. Devine and Rohl exchanged 4,500 and
    64,200 shares, respectively. Of Mr. Devine's 4,500 options, 1,000 were
    issued on January 5, 1995 at $13.50 per share, 2,000 were issued on February
    9, 1996 at $7.94 per share and 1,500 were issued on April 4, 1996 at $6.69
    per share. Of Mr. Rohl's 64,200 options, 37,200 were issued on February 3,
    1994 at $8.50 per share, 4,000 were issued on January 5, 1995 at $13.50 per
    share, 10,000 were issued on February 9, 1996 at $7.94 per share and 13,000
    were issued on April 4, 1996 at $6.69 per share. These options were not
    exercisable during the first twelve months after the date of grant and,
    thereafter, the options become exercisable as to 25% of the shares covered
    thereby on each anniversary of the date of grant.
 
    The Board of Directors of the Company approved the foregoing repricing,
    effective February 14, 1997, of all outstanding options under the Company's
    1994 Stock Option Plan (the "Plan") for all participants in the Plan with
    the exception of the Chairman of the Board. The rationale for the repricing
    was as follows: a) Mr. Messner, President and Chief Executive Officer, was
    in the process of completing his management team by filling the positions of
    Vice President -- Marketing and Vice President -- Operations, had reviewed
    market compensation packages for such executives and determined that stock
    options were a critical component, b) at the same time it was recognized
    that the existing management team (consisting of all Plan participants) had
    options that were significantly "out of the money" and realistically lacked
    any effective incentive from outstanding options, and c) in order to create
    an effective incentive for the management team to increase stockholder
    value, the Board of Directors voted to reprice existing options to provide
    essentially the same incentive to all then current participants in the
    Company's principal stock option plan.
 
(2) On April 7, 1997, the Company granted options to acquire 100,000 shares of
    Common Stock at an exercise price of $2.77 per share to Mr. Kellam. These
    options were not exercisable during the first twelve months after the date
    of grant, and, thereafter, the options become exercisable as to 25% of the
    shares covered thereby on each anniversary of the date of grant.
 
(3) On March 31, 1997, the Company granted options to acquire 100,000 shares of
    Common Stock at an exercise price of $2.94 per share to Mr. Tyranski. These
    options were not exercisable during the first twelve months after the date
    of grant, and, thereafter, the options became exercisable as to 25% of the
    shares covered thereby on each anniversary of the date of grant.
 
OPTION EXERCISES AND HOLDINGS
 
     The following table sets forth information with respect to the Company's
executives listed in the Summary Compensation Table above, concerning the
exercise of options during the year ended December 31, 1997 and unexercised
options held as of the end of the fiscal year.
 
                                       29
<PAGE>   32
 
                           AGGREGATE OPTION EXERCISES
               AND YEAR-END OPTION VALUES AS OF DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                                                         NUMBER OF UNEXERCISED         VALUE OF UNEXERCISED
                                                              OPTIONS AT               IN THE MONEY OPTIONS
                                                           DECEMBER 31, 1997          AT DECEMBER 31, 1997(1)
                         SHARES ACQUIRED    VALUE     ---------------------------   ---------------------------
NAME                       ON EXERCISE     REALIZED   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                     ---------------   --------   -----------   -------------   -----------   -------------
<S>                      <C>               <C>        <C>           <C>             <C>           <C>
Malcolm Candlish.......         0             0         478,999        181,333       $163,871        $40,968
B. Joseph Messner......         0             0               0        300,000              0              0
Mark A. Devine.........         0             0               0         79,500              0              0
Douglas H. Kellam......         0             0               0        100,000              0              0
Michael A. Rohl........         0             0               0        114,200              0              0
Edward J. Tyranski.....         0             0               0        100,000              0              0
</TABLE>
 
---------------
(1) The amounts set forth represent the difference, if positive, between the
    fair market value of the Common Stock underlying the options at December 31,
    1997 ($2.125 per share) and the exercise price of the options ($1.613 for
    options under the 1992 Stock Option Plan and $8.50, $13.50, $7.94 and $3.19
    for options under the 1994 Stock Option Plan, $2.94 and $2.77 for options
    under the 1997 Stock Option Plan and $3.19 for options granted apart from
    any Company stock option plan), multiplied by the applicable number of
    shares for which options have been granted.
 
PENSION PLANS
 
     The Company's Pension Plan is a non-contributory defined benefit plan that
provides for fixed benefits to employees and their survivors in the event of
retirement after certain age and service requirements have been met. Normal
retirement age under the Pension Plan is 65. There is no maximum number of years
of service that may be considered under the Pension Plan formula.
 
     The following table illustrates the estimated annual benefits payable,
without any offset for social security benefits, upon retirement pursuant to the
Pension Plan for specified remuneration and years of participating service and
assuming retirement at normal retirement age. The Company does not have any
supplemental pension program so no such benefits are reflected in the table.
 
<TABLE>
<CAPTION>
                                                          YEARS OF SERVICE
                                      --------------------------------------------------------
            REMUNERATION                 15          20          25          30          35
            ------------              --------    --------    --------    --------    --------
<S>                                   <C>         <C>         <C>         <C>         <C>
$ 75,000............................  $ 14,436    $ 19,248    $ 24,060    $ 28,872    $ 33,684
$100,000............................  $ 21,374    $ 28,498    $ 35,623    $ 42,747    $ 49,872
$125,000............................  $ 28,311    $ 37,748    $ 47,185    $ 56,622    $ 66,059
$150,000............................  $ 35,249    $ 46,998    $ 58,748    $ 70,497    $ 82,247
$175,000............................  $ 42,186    $ 56,248    $ 70,310    $ 84,372    $ 98,434
$200,000............................  $ 49,124    $ 65,498    $ 81,873    $ 98,247    $114,622
$225,000............................  $ 56,061    $ 74,748    $ 93,435    $112,122    $130,809
$250,000............................  $ 62,999    $ 83,998    $104,998    $125,997    $146,997
$300,000............................  $ 76,874    $102,498    $128,123    $153,747    $179,372
$400,000............................  $104,624    $139,498    $174,373    $209,247    $244,122
</TABLE>
 
     Messrs. Candlish, Messner, Devine and Rohl, respectively, had 5, 1, 5 and 4
years of credited service under the Pension Plan as of December 31, 1997, while
Messrs. Kellam and Tyranski each had less than one year of credited service.
"Remuneration" means average base salary, prior to reduction for any pre-tax
contributions made to a 401(K) savings plan, plus incentive compensation
("Bonus" as displayed in the Summary Compensation Table). The basis on which
benefits are computed is (i) the straight life annuity method for single
participants with all payments ceasing at death and (ii) the joint and 50%
surviving spouse annuity method for married participants.
 
                                       30
<PAGE>   33
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Incorporated by reference to the information under the captions "Security
Ownership of Certain Beneficial Owners and Management" and "Security Ownership
of Directors and Executive Officers" contained in the Company's Schedule 14D-9,
Solicitation/Recommendation Statement filed with the Commission and dated March
6, 1998.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Incorporated by reference to the information under the captions "Employment
Agreements," "Salary Continuation Arrangements," "Termination Benefits
Agreement" and "Certain Relationships and Related Transactions" contained in the
Company's Schedule 14D-9, Solicitation/Recommendation Statement filed with the
Commission and dated March 6, 1998.
 
                                    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.:
 
          Consolidated Balance Sheet -- December 31, 1997 and 1996 on page F-3
     hereof.
 
          Consolidated Statement of Operations -- years ended December 31, 1997,
     1996 and 1995 on page F-4 hereof.
 
          Consolidated Statement of Cash Flows -- years ended December 31, 1997,
     1996 and 1995 on page F-5 hereof.
 
          Consolidated Statement of Stockholders' Equity for the years ended
     December 31, 1997, 1996 and 1995 on page F-6 hereof.
 
          Notes to the Consolidated Financial Statements on pages F-7 through
     F-21 hereof.
 
          Report of Independent Accountants on page F-2 hereof.
 
(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 37 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.
 
(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)
</TABLE>
 
                                       31
<PAGE>   34
 
<TABLE>
<CAPTION>
  EXHIBIT NO.                              TITLE
  -----------                              -----
  <S>           <C>
       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)
     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)
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
  EXHIBIT NO.                              TITLE
  -----------                              -----
  <S>           <C>
     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 Exhibit 10.36 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)
     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)
</TABLE>
 
                                       33
<PAGE>   36
 
<TABLE>
<CAPTION>
  EXHIBIT NO.                              TITLE
  -----------                              -----
  <S>           <C>
     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)
     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 (incorporated by
                reference to Exhibit 10.46 to the Company's Annual Report of
                Form 10-K, as filed on March 31, 1997)
     10.47      Termination Benefits Agreement, dated July 5, 1995, between
                BRK Brands and Michael A. Rohl (incorporated by reference to
                Exhibit 10.47 to the Company's Annual Report of Form 10-K,
                as filed on March 31, 1997)
     10.48      Termination Benefits Agreement, dated April 24, 1996,
                between BRK Brands and Fred W. Higgenbottom (incorporated by
                reference to Exhibit 10.48 to the Company's Annual Report of
                Form 10-K, as filed on March 31, 1997)
     10.49      1995 Management Incentive Bonus Program (incorporated by
                reference to Exhibit 10.49 to the Company's Annual Report of
                Form 10-K, as filed on March 31, 1997)
     10.50      1996 Management Incentive Bonus Program (incorporated by
                reference to Exhibit 10.50 to the Company's Annual Report on
                Form 10-K, as filed on March 31, 1997)
     10.51      First Alert, Inc. 1997 Stock Option Plan and Forms of
                Non-Qualified and Incentive Stock Option Agreements issued
                under such plan (filed herewith)
</TABLE>
 
                                       34
<PAGE>   37
 
<TABLE>
<CAPTION>
  EXHIBIT NO.                              TITLE
  -----------                              -----
  <S>           <C>
     10.52      Agreement and Plan of Merger, dated as of February 28, 1998,
                among First Alert, Inc., Sunbeam Corporation and Sentinel
                Acquisition Corp. (incorporated by reference to Exhibit 1 to
                the Company's Schedule 14D-9, Solicitation/Recommendation
                Statement, as filed on March 6, 1998)
     10.53      Employment Agreement, dated January 1, 1997, between Malcolm
                Candlish and the Company (incorporated by reference to
                Exhibit 9 to the Company's Schedule 14D-9,
                Solicitation/Recommendation Statement, as filed on March 6,
                1998)
     10.54      Noncompetition Agreement, dated February 27, 1998, between
                B. Joseph Messner and the Company (incorporated by reference
                to Exhibit 10 to the Company's Schedule 14D-9,
                Solicitation/Recommendation Statement, as filed on March 6,
                1998)
     10.55      Noncompetition Agreement, dated February 27, 1998, between
                Michael A. Rohl and the Company (incorporated by reference
                to Exhibit 11 to the Company's Schedule 14D-9, Solicitation/
                Recommendation Statement, as filed on March 6, 1998)
     10.56      Termination Benefits Agreement, dated July 5, 1995, between
                BRK Brands, Inc. and Michael A. Rohl, as amended by an
                agreement dated September 26, 1997 (incorporated by
                reference to Exhibit 16 to the Company's Schedule 14D-9,
                Solicitation/Recommendation Statement, as filed on March 6,
                1998)
     10.57      Letter Agreement, dated April 15, 1997, between Douglas H.
                Kellam and BRK Brands, Inc. (incorporated by reference to
                Exhibit 12 to the Company's Schedule 14D-9, Solicitation/
                Recommendation Statement, as filed on March 6, 1998)
     10.58      Letter Agreement, dated February 27, 1998, between Mark A
                Devine and BRK Brands, Inc. (incorporated by reference to
                Exhibit 13 to the Company's Schedule 14D-9, Solicitation/
                Recommendation Statement, as filed on March 6, 1998)
     10.59      Letter Agreement, dated February 27, 1998, between Edward J.
                Tyranski and BRK Brands, Inc. (incorporated by reference to
                Exhibit 15 to the Company's Schedule 14D-9, Solicitation/
                Recommendation Statement, as filed on March 6, 1998)
     10.60      First Alert Management Incentive Plan with 1997 Exhibit
                setting forth Objectives, Ratings and Rating Factors (filed
                herewith)
      11.1      Statement re: computation of per share earnings (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, 1997.
 
                                       35
<PAGE>   38
 
                                   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 20th day of
March, 1998.
 
                                            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>                                                 <S>                                    <S>
               /s/ B. JOSEPH MESSNER                 President, Chief Executive Officer     March 20, 1998
     ........................................        and Director (Principal Executive
                 B. JOSEPH MESSNER                   Officer)
 
                /s/ MICHAEL A. ROHL                  Vice President and Chief Financial     March 20, 1998
     ........................................        Officer (Principal Financial and
                  MICHAEL A. ROHL                    Accounting Officer)
 
               /s/ MALCOLM CANDLISH                  Chairman of the Board                  March 20, 1998
     ........................................
                 MALCOLM CANDLISH
 
                /s/ JOHN R. ALBERS                   Director                               March 20, 1998
     ........................................
                  JOHN R. ALBERS
 
               /s/ ANTHONY J. DINOVI                 Director                               March 20, 1998
     ........................................
                 ANTHONY J. DINOVI
 
               /s/ DAVID V. HARKINS                  Director                               March 20, 1998
     ........................................
                 DAVID V. HARKINS
 
                /s/ SCOTT A. SCHOEN                  Director                               March 20, 1998
     ........................................
                  SCOTT A. SCHOEN
 
              /s/ ALBERT L. PRILLAMAN                Director                               March 20, 1998
     ........................................
                ALBERT L. PRILLAMAN
</TABLE>
 
                                       36
<PAGE>   39
 
                       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 13, 1998 appearing on page F-2 of the 1997 consolidated
financial statements of First Alert, Inc. (which report and consolidated
financial statements are included 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 13, 1998
 
                                       37
<PAGE>   40
 
                                                                     SCHEDULE II
 
                       FIRST ALERT INC. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                             (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, 1997
     Allowance for Doubtful Accounts.............    $3,820        $1,101       $(1,084)      $3,837
     Inventory Reserve...........................     4,506         2,311        (3,242)       3,575
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
</TABLE>
 
                                       38
<PAGE>   41
 
                                                                    EXHIBIT 11.1
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
         CALCULATION OF SHARES USED IN DETERMINING NET INCOME PER SHARE
                                   (IN 000'S)
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED      YEAR ENDED      YEAR ENDED
                                                        DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                            1997            1996            1995
                                                        ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
Basic earnings per share:
Weighted average common shares outstanding............       24,242          24,119          24,043
                                                         ==========      ==========      ==========
Diluted earnings per share:
Weighted average common shares outstanding............       24,242          24,119          24,043
Weighted average common share equivalents outstanding
  during the period computed in accordance with the
  treasury stock method...............................           --              --             788
                                                         ----------      ----------      ----------
Total weighted average shares outstanding.............       24,242          24,119          24,831
                                                         ==========      ==========      ==========
</TABLE>
 
                                       39
<PAGE>   42
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Financial Statements:
  Consolidated Balance Sheet at December 31, 1997 and
     1996...................................................  F-3
  Consolidated Statement of Operations for the years ended
     December 31, 1997, 1996 and 1995.......................  F-4
  Consolidated Statement of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995.......................  F-5
  Consolidated Statement of Stockholders' Equity for the
     years ended December 31, 1997, 1996 and 1995...........  F-6
  Notes to Consolidated Financial Statements................  F-7
</TABLE>
 
                                       F-1
<PAGE>   43
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
PRICE WATERHOUSE LLP
 
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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 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 13, 1998
 
                                       F-2
<PAGE>   44
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                AT DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $  2,996    $  6,846
  Accounts receivable, less allowance for doubtful accounts
     of $3,837 at December 31, 1997, $3,820 at December 31,
     1996...................................................    46,106      40,617
  Income tax receivable.....................................     7,572       8,503
  Inventories (Note 4)......................................    40,285      58,222
  Deferred taxes (Note 9)...................................     6,646      10,510
  Prepayments and other assets..............................     4,034       3,249
                                                              --------    --------
Total current assets........................................   107,639     127,947
Property, plant and equipment, net of accumulated
  depreciation of $22,994 at December 31, 1997, $22,763 at
  December 31, 1996 (Note 6)................................    28,181      29,803
Other Assets:
  Goodwill, net of accumulated amortization of $3,453 at
     December 31, 1997, $2,815 at December 31, 1996 (Note
     5).....................................................    22,045      22,683
  Other intangibles, net of accumulated amortization of
     $3,440 at December 31, 1997, $2,905 at December 31,
     1996 (Note 5)..........................................     6,496       6,058
                                                              --------    --------
Total assets................................................  $164,361    $186,491
                                                              ========    ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $ 15,897    $  7,304
  Accrued expenses (Note 7).................................    17,105      26,395
  Short-term revolving credit facility (Note 8).............    45,026      20,500
                                                              --------    --------
Total current liabilities...................................    78,028      54,199
Long-term revolving credit facility (Note 8)................        --      40,000
Other long-term liabilities.................................        71          71
Deferred taxes (Note 9).....................................     4,862       3,369
Contingencies (Note 13).....................................        --          --
                                                              --------    --------
Total liabilities...........................................    82,961      97,639
Stockholders' equity:
  Common stock ($.01 par value, 30,000,000 shares
     authorized, 24,335,112 issued and outstanding at
     December 31, 1997; 24,183,116 issued and outstanding at
     December 31, 1996).....................................       243         242
  Preferred stock ($.01 par value, 1,000,000 shares
     authorized at December 31, 1997 and 1996, none issued
     and outstanding).......................................        --          --
Paid-in capital.............................................    72,012      71,637
Stockholder loans...........................................        --          (8)
Retained earnings...........................................     9,145      16,981
                                                              --------    --------
Total stockholders' equity..................................    81,400      88,852
                                                              --------    --------
Total liabilities and stockholders' equity..................  $164,361    $186,491
                                                              ========    ========
</TABLE>
 
          See accompanying notes to Consolidated Financial Statements.
 
                                       F-3
<PAGE>   45
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Net sales..................................................  $186,941    $205,607    $246,266
Operating expenses:
  Cost of sales, excluding depreciation....................   134,349     150,611     140,980
  Selling, general and administrative......................    54,213      72,663      77,548
  Restructuring charge (Note 3)............................        --       2,499          --
  Depreciation and amortization............................     6,846       6,353       7,305
                                                             --------    --------    --------
Operating income (loss)....................................    (8,467)    (26,519)     20,433
Other expenses (income):
  Interest expense.........................................     3,555       3,803       1,487
  Miscellaneous, net.......................................     1,038         628        (113)
                                                             --------    --------    --------
Income (loss) before taxes.................................   (13,060)    (30,950)     19,059
Income tax provision (benefit).............................    (5,224)    (12,248)      7,622
                                                             --------    --------    --------
Net income (loss)..........................................  $ (7,836)   $(18,702)   $ 11,437
                                                             ========    ========    ========
Basic net income (loss) per share..........................  $  (0.32)   $  (0.78)   $   0.48
Diluted net income (loss) per share........................     (0.32)      (0.78)       0.46
 
Basic weighted average shares outstanding..................    24,242      24,119      24,043
Diluted weighted average shares outstanding................    24,242      24,119      24,831
</TABLE>
 
          See accompanying notes to Consolidated Financial Statements.
                                       F-4
<PAGE>   46
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1997        1996        1995
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
OPERATING ACTIVITIES:
Net income (loss)..........................................  $ (7,836)   $(18,702)   $ 11,437
Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
  Depreciation and amortization............................     6,846       6,353       7,305
  Restructuring charge.....................................        --       4,497          --
  Changes in assets and liabilities:
     (Increase)/Decrease in accounts receivable............    (5,489)     22,350      (4,351)
     Decrease/(Increase) in income tax receivable..........     1,039      (6,910)     (1,340)
     Decrease/(Increase) in inventories....................    17,937       8,731     (28,933)
     Increase in prepayments and other assets..............      (785)       (770)     (1,028)
     Decrease/(Increase) in net deferred taxes.............     5,357      (4,252)      3,028
     Decrease in accounts payable/accrued expenses.........      (697)    (11,266)    (14,034)
     Other changes, net....................................       (18)        (41)         87
                                                             --------    --------    --------
Net cash and cash equivalents provided by (used in)
  operating activities.....................................    16,354         (10)    (27,829)
INVESTING ACTIVITIES:
Capital expenditures.......................................    (3,992)     (5,274)    (10,648)
Disposal of property, plant and equipment..................       255         848       4,159
Other......................................................    (1,246)        554        (997)
                                                             --------    --------    --------
Net cash and cash equivalents used in investing
  activities...............................................    (4,983)     (3,872)     (7,486)
FINANCING ACTIVITIES:
Borrowings under revolving credit facilities...............    38,645      59,300      65,550
Payments under revolving credit facilities.................   (54,119)    (51,000)    (29,050)
Payment of Former Credit Facility..........................   (36,896)         --          --
Proceeds from Credit Facility..............................    36,896          --          --
Proceeds from sale of stock................................       245         226          28
Proceeds from stockholder loans............................         8           8          43
Other......................................................        --        (193)         --
                                                             --------    --------    --------
Net cash and cash equivalents (used in) provided by
  financing activities.....................................   (15,221)      8,341      36,571
                                                             --------    --------    --------
Net (decrease) increase in cash and cash equivalents.......    (3,850)      4,459       1,256
Cash and cash equivalents at beginning of period...........     6,846       2,387       1,131
                                                             --------    --------    --------
Cash and cash equivalents at end of period.................  $  2,996    $  6,846    $  2,387
                                                             ========    ========    ========
Interest paid..............................................  $  4,108    $  3,586    $  1,701
Income taxes paid (refunded), net..........................    (8,668)      1,274      12,559
</TABLE>
 
          See accompanying notes to Consolidated Financial Statements.
 
                                       F-5
<PAGE>   47
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                          COMMON STOCK
                                     -----------------------    PAID IN    STOCKHOLDER    RETAINED
                                       SHARES      PAR VALUE    CAPITAL       LOANS       EARNINGS
                                     ----------    ---------    -------    -----------    --------
<S>                                  <C>           <C>          <C>        <C>            <C>
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
Net loss during the year ended
  December 31, 1997................          --        --            --         --        $ (7,836)
Stock options exercised............     151,996      $  1       $   244         --              --
Income tax benefit related to the
  exercise of stock options........          --        --           108         --              --
Payment of stockholder loans,
  net..............................          --        --            --       $  8              --
Value of stock options granted.....          --        --            23         --              --
                                     ----------      ----       -------       ----        --------
BALANCE DECEMBER 31, 1997..........  24,335,112      $243       $72,012       $ --        $  9,145
                                     ==========      ====       =======       ====        ========
</TABLE>
 
          See accompanying notes to Consolidated Financial Statements.
 
                                       F-6
<PAGE>   48
 
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
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
were sold by Pittway as part of the same offering.
 
     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 13%, 7% and 7% of consolidated net sales
for the year ended December 31, 1997; 15%, 7% and 5% for the year ended December
31, 1996 and 13%, 8% and 6% for the year ended December 31, 1995.
 
     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 developed an alternative source of supply for
these integrated circuit components. However, there can be no assurance that the
Company will be able to continue to obtain these components on a timely basis
given the unpredictability of the demand for carbon monoxide detectors. In
addition, the biomimetic sensor, which is the key component used in the
Company's battery-powered carbon monoxide detector, is obtained by the Company
pursuant to a license from Quantum Group, Inc. (Quantum), its sole supplier of
this component. Commencing on January 1, 1997, Quantum was permitted to 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.
 
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 Australia.
 
Revenue Recognition
 
     Revenue is recorded at the time products are shipped to customers and title
passes. Net sales include estimates for returns, warranties, discounts and
volume rebates. The Company grants credit terms to its customers consistent with
normal industry practices.
 
                                       F-7
<PAGE>   49
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
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, 1997. 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.
 
Earnings per Share
 
     In 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128 (SFAS 128), "Earnings per Share." This statement establishes standards
for computing earnings per share (EPS) and simplifies the standards for
computing EPS previously found in APB Opinion No. 15 (APB15), "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
is based on the weighted average number of shares of common stock while Diluted
EPS is based on the weighted average number of shares of common stock and
dilutive potential shares of common stock outstanding during the periods. In
accordance with the requirements of SFAS 128, the Company has restated all EPS
data for prior periods.
 
     A reconciliation of both the income and shares used in the calculation of
Basic and Diluted EPS are as follows:
 
<TABLE>
<CAPTION>
                                                1997        1996       1995
                                               -------    --------    -------
<S>                                            <C>        <C>         <C>
BASIC EPS CALCULATION:
Numerator:
  Net income (loss)..........................  $(7,836)   $(18,702)   $11,437
Denominator:
Common shares outstanding....................   24,242      24,119     24,043
                                               -------    --------    -------
Basic EPS....................................  $ (0.32)   $  (0.78)   $  0.48
                                               =======    ========    =======
DILUTED EPS CALCULATION:
Numerator:
  Net income (loss)..........................  $(7,836)   $(18,702)   $11,437
Denominator:
Common shares outstanding....................   24,242      24,119     24,043
Dilutive Options.............................        0           0        788
                                               -------    --------    -------
Total shares.................................   24,242      24,119     24,831
                                               -------    --------    -------
Diluted EPS..................................  $ (0.32)   $  (0.78)   $  0.46
                                               =======    ========    =======
</TABLE>
 
     Stock options were outstanding at December 31, 1997, 1996 and 1995, as
discussed in Note 11.
 
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 loss of $1,149
in the year ended December 31, 1997, a gain of $733 in the year ended December
31, 1996, and a loss of $39 in the year ended December 31, 1995.
 
                                       F-8
<PAGE>   50
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
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.
 
     Useful lives for property, plant and equipment are as follows:
 
<TABLE>
<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>
 
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 $638 for each of the three years in the period
ended December 31, 1997.
 
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.
 
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 $704, $682 and $1,054 for the years ended December 31,
1997, 1996 and 1995, 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.
 
                                       F-9
<PAGE>   51
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
Stock Based Compensation
 
     Effective January 1, 1996, the Company adopted the "disclosure method"
provisions 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
 
     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:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             --------------------------------
                                               1997        1996        1995
                                             --------    --------    --------
<S>                                          <C>         <C>         <C>
Advertising and product promotion..........  $ 12,796    $ 22,899    $ 33,258
Research and development...................  $  2,012    $  3,121    $  2,866
</TABLE>
 
Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates 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.
 
Impact of New Accounting Standards
 
     Financial Accounting Standards Board Statement No. 130 (SFAS 130),
"Reporting Comprehensive Income" and Financial Accounting Standards Board
Statement No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and
Related Information," were issued in June 1997 and are effective for the
Company's fiscal year 1998. SFAS 130 establishes standards for the reporting and
display of comprehensive income, which includes net income and changes in equity
except those resulting from investments by, or distributions to, stockholders.
SFAS 131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.
 
NOTE 3 -- 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 including a provision of $1,998 for inventory write-downs which was
appropriately charged to cost of sales, excluding depreciation. The remaining
restructuring charge
 
                                      F-10
<PAGE>   52
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
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 contractual plant restoration costs. The provision for inventory
write-downs relates primarily to inventory for product lines that either have
been or will be outsourced or eliminated. The following table sets forth the
details of activity for 1997:
 
<TABLE>
<CAPTION>
                                             BALANCE AT                 BALANCE AT
                                            DECEMBER 31,     1997      DECEMBER 31,
                                                1996        CHARGES        1997
                                            ------------    -------    ------------
<S>                                         <C>             <C>        <C>
Manufacturing equipment write-down........     $1,789           --        $1,789
Inventory write-down......................      1,998       $1,283           715
Severance.................................         93           93            --
Plant restoration.........................        300          135           165
                                               ------       ------        ------
          Total...........................     $4,180       $1,511        $2,669
                                               ======       ======        ======
</TABLE>
 
     Of the 1997 charges, $93 of severance was a cash charge with the remainder
being non-cash charges.
 
     During the fourth quarter of 1997, the Company released $1,005 of inventory
write-down and plant restoration cost accruals which were determined by the
Company's management as no longer being required. The release, reflected as a
non-cash charge in the above table, was recorded through cost of sales,
excluding depreciation. These accruals were deemed no longer necessary as the
Company, in light of market conditions faced in 1997, reassessed its original
cost estimates associated with repositioning certain product lines and
consolidating its manufacturing operations.
 
NOTE 4 -- INVENTORIES
 
     The components of inventory are as follows:
 
<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
<S>                                                        <C>        <C>
Raw materials............................................  $19,311    $25,575
Work-in-process..........................................    4,892      3,656
Finished goods...........................................   19,657     33,497
Reserves.................................................   (3,575)    (4,506)
                                                           -------    -------
          Total..........................................  $40,285    $58,222
                                                           =======    =======
</TABLE>
 
NOTE 5 -- GOODWILL AND OTHER INTANGIBLES
 
<TABLE>
<CAPTION>
                                               AT DECEMBER 31,
                                              ------------------    USEFUL LIVES
                                               1997       1996        (YEARS)
                                              -------    -------    ------------
<S>                                           <C>        <C>        <C>
Goodwill....................................  $25,498    $25,498           40
Trademarks..................................    5,000      5,000           40
Patents.....................................    2,995      2,995      Various
Other.......................................    1,941        968          3-5
Less: accumulated amortization..............   (6,893)    (5,720)
                                              -------    -------
          Total.............................  $28,541    $28,741
                                              =======    =======
</TABLE>
 
                                      F-11
<PAGE>   53
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                           AT DECEMBER 31,
                                                         --------------------
                                                           1997        1996
                                                         --------    --------
<S>                                                      <C>         <C>
Land...................................................  $    816    $    816
Buildings..............................................     4,040       3,815
Machinery and equipment................................    30,392      29,686
Leasehold improvements.................................     3,600       3,611
Tools, jigs and dies...................................    12,327      14,638
Less: accumulated depreciation.........................   (22,994)    (22,763)
                                                         --------    --------
          Net property, plant and equipment............  $ 28,181    $ 29,803
                                                         ========    ========
</TABLE>
 
NOTE 7 -- ACCRUED EXPENSES
 
<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
<S>                                                        <C>        <C>
Advertising/promotion....................................  $ 3,634    $ 8,859
Warranty and product related.............................    6,000      6,526
Other....................................................    7,471     11,010
                                                           -------    -------
          Total..........................................  $17,105    $26,395
                                                           =======    =======
</TABLE>
 
NOTE 8 -- REVOLVING CREDIT FACILITY
 
<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
<S>                                                        <C>        <C>
Revolving credit facility (average rate of 7.85% at
  December 31, 1997, and 7.2% at December 31, 1996)......  $45,026    $60,500
Less: Short-term portion.................................   45,026     20,500
                                                           -------    -------
          Long-term revolving credit facility............  $    --    $40,000
                                                           =======    =======
</TABLE>
 
     On May 14, 1997, the Company entered into an $80.0 million revolving
three-year credit facility (the "Credit Facility") with an agent financial
institution, replacing its Former Credit Facility (as defined below). Advances
under the Credit Facility are limited to (a) 85% of eligible accounts receivable
plus (b) the lesser of 60% of eligible inventory or $35.0 million. During the
period of May 1997 through October 1997, $10.0 million in additional borrowing
was available and from June 1998 through September 1998, $5.0 million in
additional borrowing will be available under the Credit Facility. All
obligations under the Credit Facility are secured by first priority liens upon
certain of the Company's assets. Amounts outstanding under the Credit Facility
bear interest at prime rate plus  1/2% or the London Interbank Offered Rate
(LIBOR) plus 2%. The Company is subject to a commitment fee of 0.375% per annum
on the unused portion of the Credit Facility less $2.0 million. The Credit
Facility agreement contains covenants for, among other things, total liabilities
to tangible net worth and fixed charge ratios; maintenance of tangible net
worth; and restrictions on additional indebtedness, capital expenditures and
payment of dividends.
 
     At December 31, 1997, the Company was not in compliance with the total
liabilities to tangible net worth, fixed charge coverage ratio and minimum
tangible net worth covenants set forth in the Credit Facility. While a waiver
was obtained from the lender for the noncompliance with these covenants at
December 31, 1997, it is not expected that the Company will be able to meet the
restrictive covenants throughout 1998. Accordingly, the Credit Facility has been
classified as a current liability. The Company is currently negotiating
 
                                      F-12
<PAGE>   54
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
the terms of an extension of the Credit Facility, as well as a modification of
the restrictive covenants and fully expects that a new agreement with its
current lender will be in place by the second quarter of 1998.
 
     At December 31, 1996, under the terms of the Company's former revolving
credit facility (the "Former Credit Facility"), the Company was able to borrow
up to $77.5 million until January 31, 1997, when the amount available was
reduced to $70.0 million. In connection with a September 4, 1996 amendment, the
Company granted a security interest in all of its assets which included the
stock of wholly owned subsidiaries to secure the obligations to the lenders
under the Former Credit Facility. Similarly, Electronica BRK de Mexico S.A. de
C.V., a wholly owned subsidiary, agreed to pledge all of its assets to secure
repayment of advances under the Former Credit Facility.
 
     Under the Former Credit Facility, the Company was subject to a commitment
fee of 0.35% per annum on the unused portion of the Former Credit Facility. The
Former Credit Facility carried an interest rate of LIBOR plus 1.5% for amounts
up to $70.0 million (LIBOR plus 2.0% for amounts in excess of $70.0 million) on
the LIBOR based portion of the Former Credit Facility and the higher of the
lender's corporate borrowing rate or the Federal Funds Rate plus 0.75% for
amounts up to $70.0 million (Federal Funds Rate plus 1.25% for amounts in excess
of $70.0 million) on the remaining balance. Additionally the Former Credit
Facility contained covenants restricting, among other things, the payment of
dividends, the sale of assets, mergers and acquisitions and required maintenance
of interest coverage ratios, leverage ratios and a minimum tangible net worth.
At December 31, 1996, the Company was not in compliance with the interest
coverage ratio and the leverage ratio covenants. On May 14, 1997, proceeds from
the Credit Facility were used to fully reduce the Company's indebtedness under
the Former Credit Facility.
 
NOTE 9 -- INCOME TAXES
 
     The domestic and foreign components of income (loss) before taxes are as
follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                              -------------------------------
                                                1997        1996       1995
                                              --------    --------    -------
<S>                                           <C>         <C>         <C>
Domestic....................................  $(14,517)   $(31,578)   $19,563
Foreign.....................................     1,457         628       (504)
                                              --------    --------    -------
          Total.............................  $(13,060)   $(30,950)   $19,059
                                              ========    ========    =======
</TABLE>
 
     The elements of the income tax provision (benefit) of the Company are as
follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                               ------------------------------
                                                 1997        1996       1995
                                               --------    --------    ------
<S>                                            <C>         <C>         <C>
Current income taxes:
  Federal....................................  $ (8,982)   $ (6,467)   $3,232
  State......................................    (2,246)     (1,911)      813
  Foreign....................................       647         382       549
                                               --------    --------    ------
                                               $(10,581)   $ (7,996)   $4,594
Deferred income taxes:
  Federal....................................  $  4,318    $ (3,685)   $3,183
  State......................................     1,206        (393)      618
  Foreign....................................      (167)       (174)     (773)
                                               --------    --------    ------
                                               $  5,357    $ (4,252)   $3,028
                                               --------    --------    ------
Income tax provision (benefit)...............  $ (5,224)   $(12,248)   $7,622
                                               ========    ========    ======
</TABLE>
 
                                      F-13
<PAGE>   55
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
     The tax effects of the significant temporary differences which comprise the
deferred tax assets and liabilities are as follows:
 
<TABLE>
<CAPTION>
                                                            AT DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
<S>                                                        <C>        <C>
ASSETS:
  Foreign statutory operating losses.....................  $ 2,028    $ 1,861
  Advertising/promotion accruals.........................      830      3,342
  Warranty and product related accruals..................    1,788      1,997
  Alternative minimum tax................................    1,125         --
  Other..................................................    3,598      3,827
                                                           -------    -------
Gross deferred assets....................................  $ 9,369    $11,027
                                                           -------    -------
LIABILITIES:
  Accelerated depreciation...............................  $(5,092)   $(3,369)
  Accounts receivable and other..........................   (1,976)        --
                                                           -------    -------
Gross deferred liabilities...............................  $(7,068)   $(3,369)
  Valuation allowance....................................     (517)      (517)
                                                           -------    -------
Net assets...............................................  $ 1,784    $ 7,141
                                                           =======    =======
</TABLE>
 
     Reconciliations of the differences between income taxes computed at the
Federal statutory rate and consolidated income tax provision (benefit) are as
follows:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                -----------------------------
                                                 1997        1996       1995
                                                -------    --------    ------
<S>                                             <C>        <C>         <C>
Income taxes computed at Federal statutory
  rate (35%)..................................  $(4,571)   $(10,833)   $6,671
State taxes, net of Federal benefit...........     (678)     (1,497)      930
Foreign losses and rate differentials.........      (30)        (12)      (48)
Other, net....................................       55          94        69
                                                -------    --------    ------
Income tax provision (benefit)................  $(5,224)   $(12,248)   $7,622
                                                =======    ========    ======
</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 $182, $210,
and $154 for the years 1997, 1996 and 1995, 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.
 
     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 1997,
1996 and 1995
 
                                      F-14
<PAGE>   56
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
aggregated $307, $379 and $346, respectively. The components of net pension cost
for the fiscal years 1997, 1996 and 1995 consist of:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                     1997     1996     1995
                                                     -----    -----    -----
<S>                                                  <C>      <C>      <C>
Service cost of benefits earned during the year....  $ 346    $ 378    $ 328
Interest cost on projected benefit obligation......     89       74       50
Return on plan assets..............................   (289)    (188)    (172)
Net amortization and deferred gains and losses.....    161      115      140
                                                     -----    -----    -----
Net pension cost...................................  $ 307    $ 379    $ 346
                                                     =====    =====    =====
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 DECEMBER 31,
                                                             ----------------
                                                              1997      1996
                                                             ------    ------
<S>                                                          <C>       <C>
Actuarial present value of benefit obligations:
  Vested benefit obligation................................  $1,049    $  878
  Non-vested benefit obligation............................     244       197
                                                             ------    ------
Accumulated benefit obligation.............................   1,293     1,075
Projected benefit obligation...............................   1,659     1,500
Plan assets at fair value..................................   1,905     1,498
                                                             ------    ------
Plan assets (in excess of) less than projected benefit
  obligation...............................................    (246)        2
Unrecognized net gain......................................     531       145
                                                             ------    ------
Accrued pension cost included in the consolidated balance
  sheet....................................................  $  285    $  147
                                                             ======    ======
</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. During 1997, the Company established the 1997 Stock
Option Plan ("1997 Plan") which provides for the grant of options to purchase up
to 1,300,000 shares of common stock. The 1994 and 1997 Plans allow for the
issuance of incentive stock options and non-qualified options. Options granted
under the 1994 and 1997 Plans are generally issued at an exercise price of not
less than the current market price and vest over periods determined by the Board
of Directors. Under the 1994 and 1997 Plans, 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 12,912
 
                                      F-15
<PAGE>   57
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
shares of common stock at an exercise price of $1.78 per share 6,456 of which
have expired and 6,827 shares of common stock at an exercise price of $1.17 per
share were granted in 1997 under the Non-Employee Director Plan. 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.
Under the Non-Employee Director Plan, options expire ten years after the date
granted.
 
     In February 1997, options for 314,000 shares of common stock were repriced
to $3.19 per share, the market price of the Company's common stock on the date
of repricing. Of these options, 114,000 shares have a time-based vesting
schedule while 200,000 shares were only to become exercisable in the event of a
change in control of the Company consummated on or before December 31, 1997.
Options for those 314,000 shares were granted apart from any Company stock
option plan. The option for 114,000 shares was outstanding at December 31, 1997,
while the one for 200,000 shares expired by its terms on December 31, 1997.
 
     In February 1997, 505,200 options under the 1994 Plan were repriced to
$3.19 per share, the market price of the Company's common stock on the date of
the repricing.
 
     Stock option activity for fixed plans is as follows:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           ------------------------------------
                                              1997         1996         1995
                                           ----------    ---------    ---------
<S>                                        <C>           <C>          <C>
Outstanding at beginning of period.......   1,587,224    1,541,864    1,238,364
Granted..................................   1,322,939      814,194      324,000
Exercised................................    (151,996)    (140,000)     (17,500)
Cancelled................................  (1,013,505)    (628,834)      (3,000)
                                           ----------    ---------    ---------
Outstanding at end of period.............   1,744,662    1,587,224    1,541,864
                                           ==========    =========    =========
Options exercisable at end of year.......     483,346      643,457      725,963
                                           ==========    =========    =========
</TABLE>
 
     The weighted average exercise price per share related to this stock option
activity is as follows:
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    -------------------------
                                                    1997      1996      1995
                                                    -----    ------    ------
<S>                                                 <C>      <C>       <C>
Outstanding at beginning of period................  $5.55    $ 6.34    $ 4.25
Granted...........................................   3.11      6.83     14.12
Exercised.........................................   1.61      1.61      1.61
Cancelled.........................................   6.19     10.00     13.50
                                                    -----    ------    ------
Outstanding at end of period......................  $3.67    $ 5.55    $ 6.34
                                                    =====    ======    ======
Options exercisable at end of year................  $4.12    $ 3.59    $ 2.74
                                                    =====    ======    ======
</TABLE>
 
     The weighted average fair value of options granted under fixed plans was
$1.42 per share in 1997, $3.13 per share in 1996 and $6.59 per share in 1995
using the Black-Scholes option pricing model.
 
                                      F-16
<PAGE>   58
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
     The following tables summarize information about employee stock options
outstanding for fixed plans at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                   OPTIONS OUTSTANDING:
                                ----------------------------------------------------------
RANGE OF                         SHARES OUTSTANDING    WEIGHTED-AVERAGE   WEIGHTED-AVERAGE
EXERCISE PRICE                  AT DECEMBER 31, 1997    REMAINING LIFE     EXERCISE PRICE
--------------                  --------------------   ----------------   ----------------
<S>                             <C>                    <C>                <C>
$1.17-8.50....................       1,699,662            7.7 years            $ 3.33
     13.50....................          45,000              7 years             13.50
</TABLE>
 
<TABLE>
<CAPTION>
                                                       OPTIONS EXERCISABLE:
                                              ---------------------------------------
RANGE OF                                       SHARES EXERCISABLE    WEIGHTED-AVERAGE
EXERCISE PRICE                                AT DECEMBER 31, 1997    EXERCISE PRICE
--------------                                --------------------   ----------------
<S>                                           <C>                    <C>
$1.17-8.50..................................         460,846              $ 3.66
     13.50..................................          22,500               13.50
</TABLE>
 
     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 option 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 (loss) and earnings (loss) per share would not be
significantly different from those 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 27.0% in 1997, 29.3% in 1996
and 28.0% in 1995; expected lives of seven years for 1997, 1996 and 1995 and
risk free interest rate of 6.3% in 1997, 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
 
     The Company leases certain warehouses, office space and equipment 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 1998 are as follows:
 
<TABLE>
<CAPTION>
 1998    1999    2000    2001    2002    THEREAFTER
------  ------  ------  ------  -------  ----------
<S>     <C>     <C>     <C>     <C>      <C>
$2,879  $2,852  $2,483  $2,172   $2,165   $11,547
</TABLE>
 
     Total rent expense including taxes, insurance and maintenance when included
in rent amounted to $3,223, $3,801 and $2,681 for the years ended December 31,
1997, 1996 and 1995, respectively.
 
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
                                      F-17
<PAGE>   59
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
January 16, 1996. The new class was certified by the Court. The complaint
alleges generally that the Company and other defendants disseminated false and
misleading information to the investing public regarding the First Alert(R)
Carbon Monoxide Detector in connection with an anticipated secondary public
offering of the Company's Common Stock in late 1994 in violation of various
provisions of the Securities Exchange Act of 1934 and the rules promulgated
thereunder. The Registration Statement with respect to the proposed secondary
public offering was declared effective by the Securities and Exchange Commission
on November 9, 1994, but was subsequently withdrawn by the Company at the
request of the selling stockholders. The public offering was solely to
facilitate the sale of shares by certain selling stockholders and the Company
would not have received any proceeds therefrom.
 
     The Company vigorously contested all claims and denied liability.
Nevertheless, to avoid further expense and the burdens of litigation, in
November 1996, the Company agreed to a tentative settlement of the consolidated
class actions. An executed settlement agreement was filed with the Court on
February 11, 1997 and the Court entered an order on February 25, 1997, giving
preliminary approval to the settlement.
 
     Pursuant to the Court's February 25, 1997, order, members of the class had
until May 12, 1997, to opt out of the class and until July 28, 1997, to file
proofs of claim if they wished to receive a share of the settlement amount. The
Court held a hearing on June 20, 1997, to consider the fairness of the
settlement and, at that time, the Court approved the settlement.
 
     Under the terms of the settlement agreement, defendants will pay a fixed
amount per share to class members, depending on when they bought or sold their
shares, with a maximum amount of $3.0 million (including attorney's fees and
costs for class counsel) to be paid out in settlement. The majority of the
settlement amount is being paid by the Company's directors and officers
liability insurance carrier. The pendency of the Gilbert complaint has not had a
material effect on the Company's financial results for any period and adequate
reserves exist at December 31, 1997, for the Company's share of the settlement
amount.
 
     A purported class action entitled Betley et al. vs. First Alert, Inc. et
al. ("Betley") was filed in the Circuit Court of Cook County, Illinois on
January 3, 1995, against the Company and its wholly owned subsidiary, BRK
Brands, Inc., alleging common law fraud, breach of warranties, and a statutory
violation of the Illinois Consumer Fraud Act, all related to alleged defects in
the original First Alert(R) Carbon Monoxide Detector (Model FACO) design and the
manner in which the detector was marketed. The Company does not believe that the
plaintiffs claim any personal injuries or property damage; nor do the plaintiffs
claim that their detectors failed to detect dangerous levels of carbon monoxide.
Instead, they claim (i) that the Company failed to disclose that the product
alarms in non-life threatening conditions (which they state in their complaint
to be a "nuisance"), (ii) that the Company falsely proclaims the product resets
"automatically" when, in fact, the product can take several hours or days to
reset after it has gone into alarm and (iii) that the Company falsely claims
that the product met Underwriters Laboratories' listing criteria for residential
carbon monoxide detectors in effect at the time the Model FACO was manufactured.
The plaintiffs seek a refund of their purchase price, other out-of-pocket
expenses, punitive damages, and attorneys' fees. The Company has raised numerous
defenses to this claim and will continue to oppose it forcefully.
 
     In February 1997, the Company and its wholly owned subsidiary, BRK Brands,
Inc., were named as defendants in a purported class action lawsuit entitled
Houlihan et al.vs. First Alert, Inc. et al. ("Houlihan") in the Circuit Court of
Cook County, Illinois, alleging breach of express warranty and statutory
violations of various states' consumer protection statutes due to alleged
misrepresentations and product defects involving First Alert(R) Carbon Monoxide
Detectors. The Company does not believe the plaintiff claimed any personal
injuries or property damage; nor did he claim specifically that his detector
failed to detect dangerous levels of carbon monoxide. Rather, the plaintiff
sought "rescissionary damages" and attorneys' fees. The plaintiff's original
complaint was stricken by the Court on April 9, 1997, but the Court gave the
plaintiff leave to re-plead the case which was done. The Company filed a Motion
to Dismiss the amended complaint and that motion
                                      F-18
<PAGE>   60
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
was granted on August 22, 1997. The case has now been settled by refunding the
plaintiff's purchase price of the detector.
 
     On February 11, 1998, a jury returned a verdict against the Company's BRK
Brands, Inc., subsidiary, awarding damages totaling $16.9 million in the case of
Mercer et al. vs. BRK Brands, Inc. et al, which was tried in the Iowa District
Court for Scott County. The verdict includes $12.5 million of punitive damages.
The case alleged negligence, breach of warranty and fraudulent nondisclosure in
connection with a BRK(R) Electronics smoke detector that alarmed during a
residential fire. The punitive damage award was based upon the jury finding a
preponderance of clear, convincing and satisfactory evidence the Company's
conduct constituted willful and wanton disregard for the rights or safety of
others. Substantially all of the cost of defense and the damages assessed in
this case are covered by the Company's insurance. The Company intends to
continue to vigorously contest this case by pursuing a number of post-trial
motions to overturn the verdict and appealing the decision, if necessary.
 
     In addition to the Gilbert, Betley and Mercer 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, Mercer 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
$214, $195 and $326, for the years ended December 31, 1997, 1996 and 1995,
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(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.
 
                                      F-19
<PAGE>   61
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
NOTE 15 -- SEGMENT INFORMATION
 
     The Company operates in one segment -- residential safety products.
 
     Presented below is information on the geographic areas in which the Company
operates. Sales between geographic areas are made at approximate arms-length
prices.
 
GEOGRAPHIC AREAS
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,      AT DECEMBER 31,
                                                                  1997                    1997
                                                       --------------------------    ---------------
                                                                      OPERATING       IDENTIFIABLE
                                                       NET SALES    INCOME (LOSS)        ASSETS
                                                       ---------    -------------    ---------------
<S>                                                    <C>          <C>              <C>
United States........................................  $169,017       $ (7,891)         $144,978
Europe...............................................    20,243          1,418             7,396
Other................................................    17,823         (1,973)           11,987
  Elimination........................................   (20,142)           (21)               --
                                                       --------       --------          --------
          Total......................................  $186,941       $ (8,467)         $164,361
                                                       ========       ========          ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,      AT DECEMBER 31,
                                                                  1996                    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
                                                       ========       ========          ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,      AT DECEMBER 31,
                                                                  1995                    1995
                                                       --------------------------    ---------------
                                                                      OPERATING       IDENTIFIABLE
                                                       NET SALES    INCOME (LOSS)        ASSETS
                                                       ---------    -------------    ---------------
<S>                                                    <C>          <C>              <C>
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
                                                       ========       ========          ========
</TABLE>
 
     Operating income includes costs of goods sold, selling, general and
administrative expenses, restructuring charge and depreciation and amortization
expense.
 
                                      F-20
<PAGE>   62
                       FIRST ALERT, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 (ALL DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED, EXCEPT PER SHARE
                                     DATA)
 
NOTE 16 -- QUARTERLY RESULTS (UNAUDITED)
 
     Quarterly Results of Operations for the years ended December 31, 1997 and
1996 are shown below:
 
<TABLE>
<CAPTION>
                                                                       1997
                                                --------------------------------------------------
                                                             THREE MONTH PERIOD ENDED
                                                --------------------------------------------------
                                                MARCH 30    JUNE 29    SEPTEMBER 28    DECEMBER 31
                                                --------    -------    ------------    -----------
<S>                                             <C>         <C>        <C>             <C>
Net sales.....................................  $37,413     $27,481      $50,774         $71,273
Gross profit..................................   10,536       7,097       14,163          20,796
Net income (loss).............................   (3,274)     (4,404)      (1,543)          1,385
Basic net income (loss) per share.............    (0.14)      (0.18)       (0.06)           0.06
Diluted net income (loss) per share...........    (0.14)      (0.18)       (0.06)           0.06
Common stock price range --
  High........................................    4.125        3.50         4.00            3.50
  Low.........................................    2.688       1.875         2.75           1.875
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       1996
                                                --------------------------------------------------
                                                             THREE MONTH PERIOD ENDED
                                                --------------------------------------------------
                                                MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 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)
Basic net income (loss) per share.............    (0.19)      (0.25)        0.09           (0.43)
Diluted net income (loss) per share...........    (0.19)      (0.25)        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
</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 in the three month period ended December 31, 1997
include costs associated with inefficiencies incurred in manufacturing
operations, premium freight out charges and key customer allowances which were
partially offset by the release of $4.5 million of reserves established in prior
years deemed no longer necessary. These reserves had been established over a
period of years and their initial recording was not significant to any
individual prior reporting period.
 
     Results of operations during the three months ended December 31, 1996,
include 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.
 
NOTE 17 -- SUBSEQUENT EVENTS
 
     On March 2, 1998, the Company announced that it had entered into a
definitive agreement with Sunbeam Corporation ("the Agreement") providing for
the acquisition of the Company by Sunbeam in a transaction valued at
approximately $175 million including the assumption of existing debt. The
consummation of the offer is subject to certain customary conditions, including
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act. The Agreement provides that the Company pay a fee of $3.75
million in the event that the acquisition is terminated.
 
                                      F-21
<PAGE>   63
 
                                                                   EXHIBIT 10.51
 
                               FIRST ALERT, INC.
 
                             1997 STOCK OPTION PLAN
 
     1. Purpose of the Plan.  This stock option plan (the "Plan") is intended to
provide incentives: (a) to the officers and other employees of First Alert, Inc.
(the "Company") and any present or future subsidiaries of the Company by
providing them with opportunities to purchase stock in the Company pursuant to
options granted hereunder which qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("ISO"
or "ISOs"); and (b) to officers, employees and consultants of the Company and
any present or future subsidiaries by providing them with opportunities to
purchase stock in the Company pursuant to options granted hereunder which do not
qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"). As used
herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation," respectively, as those terms are defined in Section
424 of the Code and the Treasury Regulations promulgated thereunder (the
"Regulations").
 
     2. Stock Subject to the Plan.
 
     (a) The total number of shares of the authorized but unissued shares of the
common stock, $.01 par value, of the Company ("Common Stock") for which options
may be granted under the Plan shall not exceed 1,300,000 shares, subject to
adjustment as provided in Section 11 hereof.
 
     (b) If an option granted hereunder shall expire or terminate for any reason
without having been exercised in full, the unpurchased shares subject thereto
shall again be available for subsequent option grants under the Plan.
 
     (c) Stock issuable upon exercise of an option granted under the Plan may be
subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Committee (as defined in Section 3
below).
 
     3. Administration of the Plan.
 
     (a) At the discretion of the Board of Directors, the Plan shall be
administered either (i) by the full Board of Directors or (ii) by a committee
(the "Committee") consisting of two or more members of the Company's Board of
Directors. In the event that the Board of Directors is the administrator of the
Plan, references herein to the Committee shall be deemed to include the full
Board of Directors. The Board of Directors may from time to time appoint a
member or members of the Committee in substitution for or in addition to the
member or members then in office and may fill vacancies on the Committee however
caused. The Committee shall choose one of its members as Chairman and shall hold
meetings at such times and places as it shall deem advisable. A majority of the
members of the Committee shall constitute a quorum and any action may be taken
by a majority of those present and voting at any meeting. Any action may also be
taken without the necessity of a meeting by a written instrument signed by a
majority of the Committee. The decision of the Committee as to all questions of
interpretation and application of the Plan shall be final, binding and
conclusive on all persons. The Committee shall have the authority to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan. The Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement granted hereunder in the manner and to the extent it shall
deem expedient to carry the Plan into effect and shall be the sole and final
judge of such expediency. No Committee member shall be liable for any action or
determination made in good faith.
The option price or prices of shares of the Company's Common Stock for ISOs
shall be the fair market value of such Common Stock at the time the option is
granted as determined by the Committee in accordance with the Regulations
promulgated under Section 422 of the Code. If such shares are then listed on any
national securities exchange, the fair market value shall be the mean between
the high and low sales prices, if any, on such exchange on the date of the grant
of the option or, if none, shall be determined by taking a weighted average of
the means between the highest and lowest sales prices on the nearest date before
and the nearest
 
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<PAGE>   64
 
     (b) Subject to the terms of the Plan, the Committee shall have the
authority to (i) determine the employees of the Company and its subsidiaries
(from among the class of employees eligible under Section 4 to receive ISOs) to
whom ISOs may be granted, and to determine (from the class of individuals
eligible under Section 4 to receive Non-Qualified Options) to whom Non-Qualified
Options may be granted; (ii) determine the time or times at which options may be
granted; (iii) determine the option price of shares subject to each option which
price shall not be less than the minimum price specified in Section 6; (iv)
determine whether each option granted shall be an ISO or a Non-Qualified Option;
(v) determine (subject to Section 9) the time or times when each option shall
become exercisable and the duration of the exercise period; and (vi) determine
whether restrictions such as repurchase options are to be imposed on shares
subject to options and the nature of such restrictions.
 
     4. Eligibility.
 
     (a) Options designated as ISOs may be granted only to employees (including
officers who are employees) of the Company or of any of its subsidiaries.
Non-Qualified Options may be granted to any officer, employee, or consultant of
the Company or of any of its subsidiaries.
 
     (b) Directors who are not otherwise employees of the Company or a
subsidiary shall not be eligible to be granted an option pursuant to the Plan.
 
     (c) In determining the eligibility of an individual to be granted an
option, as well as in determining the number of shares to be optioned to any
person, the Committee shall take into account the position and responsibilities
of the person being considered, the nature and value to the Company or its
subsidiaries of his or her service and accomplishments, his or her present and
potential contribution to the success of the Company or its subsidiaries, and
such other factors as the Committee may deem relevant.
 
     (d) No option designated as an ISO shall be granted to any employee of the
Company or any subsidiary if such employee owns, immediately prior to the grant
of an option, stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or a parent or a subsidiary, unless
the purchase price for the stock under such option shall be at least 110% of its
fair market value at the time such option is granted and the option, by its
terms, shall not be exercisable more than five years from the date it is
granted. In determining the stock ownership under this paragraph, the provisions
of Section 424(d) of the Code shall be controlling. In determining the fair
market value under this paragraph, the provisions of Section 6 hereof shall
apply.
 
     (e) The maximum number of shares of Common Stock with respect to which an
Option may be granted to any employee in any taxable year of the Company shall
not exceed 1,300,000 shares, taking into account shares subject to options
granted and terminated, or repriced, during such taxable year, subject to
adjustment as provided in Section 11 hereof.
 
     5. Option Agreement.  Each option shall be evidenced by an option agreement
(the "Agreement") duly executed on behalf of the Company and by the optionee to
whom such option is granted, which Agreement shall comply with and be subject to
the terms and conditions of the Plan. The Agreement may contain such other
terms, provisions and conditions which are not inconsistent with the Plan as may
be determined by the Committee, provided that options designated as ISOs shall
meet all of the conditions for ISOs as defined in Section 422 of the Code. The
date of grant of an option shall be as determined by the Committee. More than
one option may be granted to an individual.
 
     6. Option Price.  The option price or prices of shares of the Company's
Common Stock for options designated as Non-Qualified Options shall be as
determined by the Committee, but in no event shall the option price be less than
the minimum legal consideration required therefor under the laws of the State of
Delaware or the laws of any jurisdiction in which the Company or its successors
in interest may be organized. date after the date of grant in accordance with
Treasury Regulations Section 25.2512-2. If the shares are not then listed on any
such exchange, the fair market value of such shares shall be the mean between
the high and low sales prices, if any, as reported in The Nasdaq National Market
for the date of the grant of the option, or, if none, shall be determined by
taking a weighted average of the means between the highest and lowest sales on
the nearest date before and the nearest date after the date of grant in
accordance with Treasury Regulations
                                       A-2
<PAGE>   65
 
Section 25.2512-2. If the shares are not then either listed on any such exchange
or quoted in The Nasdaq National Market, the fair market value shall be the mean
between the average of the "Bid" and the average of the "Ask" prices, if any, as
reported in the National Daily Quotation Service for the date of the grant of
the option, or, if none, shall be determined by taking a weighted average of the
means between the highest and lowest sales prices on the nearest date before and
the nearest date after the date of grant in accordance with Treasury Regulations
Section 25.2512-2. If the fair market value cannot be determined under the
preceding three sentences, it shall be determined in good faith by the
Committee.
 
     7. Manner of Payment; Manner of Exercise.
 
     (a) Options granted under the Plan may provide for the payment of the
exercise price by delivery of (i) cash or a check payable to the order of the
Company in an amount equal to the exercise price of such options, (ii) shares of
Common Stock of the Company owned by the optionee having a fair market value
equal in amount to the exercise price of the options being exercised, or (iii)
any combination of (i) and (ii), provided, however, that payment of the exercise
price by delivery of shares of Common Stock of the Company owned by such
optionee may be made only under such circumstances and on such terms as may from
time to time be established by the Committee and only if provided for in the
Agreement. The fair market value of any shares of the Company's Common Stock
which may be delivered upon exercise of an option shall be determined by the
Committee in accordance with Section 6 hereof. Payment may also be made by
delivery of a properly executed exercise notice to the Company, together with a
copy of irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds to pay the exercise price if provided for in
the Agreement. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms.
 
     (b) To the extent that the right to purchase shares under an option has
accrued and is in effect, options may be exercised in full at one time or in
part from time to time, by giving written notice, signed by the person or
persons exercising the option, to the Company, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares as provided in subparagraph (a) above. Upon such exercise,
delivery of a certificate for paid-up non-assessable shares shall be made at the
principal office of the Company to the person or persons exercising the option
at such time, during ordinary business hours, after ten business days from the
date of receipt of the notice by the Company, as shall be designated in such
notice, or at such time, place and manner as may be agreed upon by the Company
and the person or persons exercising the option.
 
     8. Exercise of Options.  Subject to the provisions of paragraphs 9 through
11, each option granted under the Plan shall be exercisable as follows:
 
          (a) Vesting.  The option shall either be fully exercisable on the date
     of grant or shall become exercisable thereafter in such installments as the
     Committee may specify;
 
          (b) Full Vesting of Installments.  Once an installment becomes
     exercisable it shall remain exercisable until expiration or termination of
     the option, unless otherwise specified by the Committee;
 
          (c) Partial Exercise.  Each option or installment may be exercised at
     any time or from time to time, in whole or in part, for up to the total
     number of shares with respect to which it is then exercisable; and
 
          (d) Acceleration of Vesting.  The Committee shall have the right to
     accelerate the date of exercise of any installment of any option; provided
     that the Committee shall not, without the consent of an optionee,
     accelerate the exercise date of any installment of any option granted to
     any employee as an ISO if such acceleration would violate the annual
     vesting limitation contained in Section 422(d) of the Code. The Committee,
     in its sole discretion, shall have the right to provide in any Agreement
     for the acceleration of the date of exercise of any installment of any
     option granted hereunder upon the occurrence of any event or circumstance
     as the Committee shall determine.
 
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<PAGE>   66
 
     9. Term of Options; Exercisability.
 
     (a) Term.  Each option shall expire not more than ten (10) years from the
date of the granting thereof, but shall be subject to earlier termination as may
be provided in any Agreement evidencing an option granted hereunder.
 
     (b) Exercisability.  An option granted to an employee optionee who ceases
to be an employee of the Company or one of its subsidiaries shall be exercisable
only to the extent that the right to purchase shares under such option has
accrued and is in effect on the date such optionee ceases to be an employee of
the Company or one of its subsidiaries.
 
     10. Options Not Transferable.  Options granted under the Plan and the right
of any optionee to exercise any option granted to him or her shall not be
assignable or transferable by such optionee otherwise than by will or the laws
of descent and distribution, and any such option shall be exercisable during the
lifetime of such optionee only by him or her. Any option granted under the Plan
shall be null and void and without effect upon any attempted assignment or
transfer, except as herein provided, including without limitation any purported
assignment, whether voluntary or by operation of law, pledge, hypothecation or
other disposition, attachment, divorce, trustee process or similar process,
whether legal or equitable, upon such option.
 
     11. Adjustments.
 
     (a) Upon the occurrence of any of the following events, an optionee's
rights with respect to options granted to him or her hereunder shall be adjusted
as hereinafter provided, unless otherwise specifically provided in the written
agreement between the optionee and the Company relating to such option:
 
          (i) Stock Dividends and Stock Splits.  If the shares of Common Stock
     shall be subdivided or combined into a greater or smaller number of shares
     or if the Company shall issue any shares of Common Stock as a stock
     dividend on its outstanding Common Stock, the number of shares of Common
     Stock deliverable upon the exercise of options shall be appropriately
     increased or decreased proportionately, and appropriate adjustments shall
     be made in the purchase price per share to reflect such subdivision,
     combination or stock dividend; and
 
          (ii) Recapitalization or Reorganization.  In the event of a
     recapitalization or reorganization of the Company (except as otherwise
     provided in any Agreement) pursuant to which securities of the Company or
     of another corporation are issued with respect to the outstanding shares of
     Common Stock, an optionee upon exercising an option shall be entitled to
     receive for the purchase price paid upon such exercise the securities the
     optionee would have received if the optionee had exercised the option prior
     to such recapitalization or reorganization.
 
          (iii) Modification of ISOs.  Notwithstanding the foregoing, any
     adjustments made pursuant to subparagraphs (i) or (ii) with respect to ISOs
     shall be made only after the Committee, after consulting with counsel for
     the Company, determines whether such adjustments would constitute a
     "modification" of such ISOs (as that term is defined in Section 424 of the
     Code) or would cause any adverse tax consequences for the holders of such
     ISOs. If the Committee determines that such adjustments made with respect
     to ISOs would constitute a modification of such ISOs, it may refrain from
     making such adjustments.
 
          (iv) Dissolution or Liquidation.  In the event of the proposed
     dissolution or liquidation of the Company, each option will terminate
     immediately prior to the consummation of such proposed action or at such
     other time and subject to such other conditions as shall be determined by
     the Committee.
 
          (v) Issuances of Securities.  Except as expressly provided herein, no
     issuance by the Company of shares of stock of any class, or securities
     convertible into shares of stock of any class, shall affect, and no
     adjustment by reason thereof shall be made with respect to, the number or
     price of shares subject to options. No adjustments shall be made for
     dividends paid in cash or in property other than securities of the Company.
 
          (vi) Fractional Shares.  No fractional share shall be issued under the
     Plan and the optionee shall receive from the Company cash in lieu of such
     fractional shares.
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<PAGE>   67
 
          (vii) Adjustments.  Upon the happening of any of the events described
     in subparagraphs (i) or (ii) above, the class and aggregate number of
     shares set forth in Section 2 and Section 4 hereof that are subject to
     options which previously have been or subsequently may be granted under the
     Plan shall also be appropriately adjusted to reflect the events described
     in such subparagraphs. The Committee or the Successor Board shall determine
     the specific adjustments to be made under this paragraph 11 and, subject to
     Section 3, its determination shall be conclusive.
 
     (b) If any person or entity owning restricted Common Stock obtained by
exercise of an option made hereunder receives shares or securities or cash in
connection with a corporate transaction described in subparagraphs (i) or (ii)
above as a result of owning such restricted Common Stock, such shares or
securities or cash shall be subject to all of the conditions and restrictions
applicable to the restricted Common Stock with respect to which such shares or
securities or cash were issued, unless otherwise determined by the Committee or
the Successor Board.
 
     12. No Special Employment Rights.  Nothing contained in the Plan or in any
option granted under the Plan shall confer upon any option holder any right with
respect to the continuation of his employment by the Company (or any subsidiary)
or interfere in any way with the right of the Company (or any subsidiary),
subject to the terms of any separate employment agreement to the contrary, at
any time to terminate such employment or to increase or decrease the
compensation of the option holder from the rate in existence at the time of the
grant of an option. Whether an authorized leave of absence, or absence in
military or government service, shall constitute termination of employment shall
be determined by the Committee at the time.
 
     13. Withholding.  The Company's obligation to deliver shares upon the
exercise of any Option granted under the Plan shall be subject to the option
holder's satisfaction of all applicable Federal, state and local income, excise,
employment and any other tax withholding requirements. The Company and employee
may agree to withhold shares of Common Stock purchased upon exercise of an
option to satisfy the above-mentioned withholding requirements. The option
holder may satisfy the foregoing condition by electing to have the Company
withhold from delivery shares having a value equal to the amount of tax to be
withheld in the manner set forth in the Agreement and in compliance with such
rules and regulations as determined by the Committee from time to time. The
Committee shall also have the right to require that shares be withheld from
delivery to satisfy such condition.
 
     14. Restrictions on Issue of Shares.
 
     (a) Notwithstanding the provisions of Section 7, the Company may delay the
issuance of shares covered by the exercise of an option and the delivery of a
certificate for such shares until one of the following conditions shall be
satisfied:
 
          (i) The shares with respect to which such option has been exercised
     are at the time of the issue of such shares effectively registered or
     qualified under applicable Federal and state securities acts now in force
     or as hereafter amended; or
 
          (ii) Counsel for the Company shall have given an opinion, which
     opinion shall not be unreasonably conditioned or withheld, that such shares
     are exempt from registration and qualification under applicable Federal and
     state securities acts now in force or as hereafter amended.
 
     (b) It is intended that all exercises of options shall be effective, and
the Company shall use its best efforts to bring about compliance with the above
conditions within a reasonable time, except that the Company shall be under no
obligation to qualify shares or to cause a registration statement or a
post-effective amendment to any registration statement to be prepared for the
purpose of covering the issue of shares in respect of which any option may be
exercised, except as otherwise agreed to by the Company in writing.
 
     15. Purchase for Investment; Rights of Holder on Subsequent
Registration.  Unless the shares to be issued upon exercise of an option granted
under the Plan have been effectively registered under the Securities Act of
1933, as now in force or hereafter amended, the Company shall be under no
obligation to issue any shares covered by any option unless the person who
exercises such option, in whole or in part, shall give a written representation
and undertaking to the Company which is satisfactory in form and scope to
counsel for
 
                                       A-5
<PAGE>   68
 
the Company and upon which, in the opinion of such counsel, the Company may
reasonably rely, that he or she is acquiring the shares issued pursuant to such
exercise of the option for his or her own account as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares,
and that he or she will make no transfer of the same except in compliance with
any rules and regulations in force at the time of such transfer under the
Securities Act of 1933, or any other applicable law, and that if shares are
issued without such registration, a legend to this effect may be endorsed upon
the securities so issued. In the event that the Company shall, nevertheless,
deem it necessary or desirable to register under the Securities Act of 1933 or
other applicable statutes any shares with respect to which an option shall have
been exercised, or to qualify any such shares for exemption from the Securities
Act of 1933 or other applicable statutes, then the Company may take such action
and may require from each optionee such information in writing for use in any
registration statement, supplementary registration statement, prospectus,
preliminary prospectus or offering circular as is reasonably necessary for such
purpose and may require reasonable indemnity to the Company and its officers and
directors and controlling persons from such holder against all losses, claims,
damages and liabilities arising from such use of the information so furnished
and caused by any untrue statement of any material fact therein or caused by the
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
under which they were made.
 
     16. Loans.  The Company may make loans to optionees to permit them to
exercise options. If loans are made, the requirements of all applicable Federal
and state laws and regulations regarding such loans must be met.
 
     17. Modification of Outstanding Options.  The Committee may authorize the
amendment of any outstanding option with the consent of the optionee when and
subject to such conditions as are deemed to be in the best interests of the
Company and in accordance with the purposes of this Plan.
 
     18. Approval of Stockholders.  The Plan shall be subject to approval by the
vote of stockholders holding at least a majority of the voting stock of the
Company present, or represented, and entitled to vote at a duly held
stockholders' meeting, or by written consent of stockholders holding at least a
majority of the voting stock of the Company, within twelve (12) months after the
adoption of the Plan by the Board of Directors and shall take effect as of the
date of adoption by the Board of Directors upon such approval. The Committee may
grant options under the Plan prior to such approval, but any such option shall
become effective as of the date of grant only upon such approval and,
accordingly, no such option may be exercisable prior to such approval.
 
     19. Termination and Amendment.  Unless sooner terminated as herein
provided, the Plan shall terminate ten (10) years from the date upon which the
Plan was duly adopted by the Board of Directors of the Company. The Board of
Directors may at any time terminate the Plan or make such modification or
amendment thereof as it deems advisable; provided, however, that except as
provided in this Section 19, the Board of Directors may not, without the
approval of the stockholders of the Company obtained in the manner stated in
Section 18, increase the maximum number of shares for which options may be
granted or change the designation of the class of persons eligible to receive
options under the Plan, or make any other change in the Plan which requires
stockholder approval under applicable law or regulations or any applicable rule
or regulation of any stock exchange or over-the-counter market on which the
Company's Common Stock is then listed. The Committee may grant options under the
Plan prior to such approval, but any such option shall become effective as of
the date of grant only upon such approval and, accordingly, no such option may
be exercisable prior to such approval. The Committee may terminate, amend or
modify any outstanding option without the consent of the option holder,
provided, however, that, except as provided in Section 11, without the consent
of the optionee, the Committee shall not change the number of shares subject to
an option, nor the exercise price thereof, nor extend the term of such option.
 
     20. Reservation of Stock.  The Company shall at all times during the term
of the Plan reserve and keep available such number of shares of stock as will be
sufficient to satisfy the requirements of the Plan and shall pay all fees and
expenses necessarily incurred by the Company in connection therewith.
 
                                       A-6
<PAGE>   69
 
     21. Limitation of Rights in the Option Shares.  An optionee shall not be
deemed for any purpose to be a stockholder of the Company with respect to any of
the options except to the extent that the option shall have been exercised with
respect thereto and, in addition, a certificate shall have been issued
theretofore and delivered to the optionee.
 
     22. Notices.  Any communication or notice required or permitted to be given
under the Plan shall be in writing, and mailed by registered or certified mail
or delivered by hand, if to the Company, to its principal place of business,
attention: President, and, if to an optionee, to the address as appearing on the
records of the Company.
 
                                       A-7