<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997
REGISTRATION NO. 333-26399
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOME SECURITY INTERNATIONAL, INC.
(NAME OF REGISTRANT IN ITS CHARTER)
DELAWARE 1731 98-0169495
(STATE OR JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
LEVEL 7, 77 PACIFIC HIGHWAY
NORTH SYDNEY, NSW 2060
(011) (61-2) 9936-2424
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
RALPH STEPHENSON
50 CENTRAL PARK SOUTH
NEW YORK, NEW YORK
(212) 486-2713
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
ARTHUR DON, ESQ. ALAN I. ANNEX, ESQ.
FERNANDO R. CARRANZA, ESQ. MARTHA ZAWACKI, ESQ.
D'ANCONA & PFLAUM CAMHY KARLINSKY & STEIN LLP
30 NORTH LASALLE STREET 1740 BROADWAY, SIXTEENTH FLOOR
SUITE 2900 NEW YORK, NEW YORK 10019-4315
CHICAGO, ILLINOIS 60602 (212) 977-6600
(312) 580-2000 FAX (212) 977-8389
FAX (312) 580-0923
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [X]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 25, 1997
PROSPECTUS
3,000,000 SHARES
LOGO
HOME SECURITY INTERNATIONAL, INC.
COMMON STOCK
-----------
Of the 3,000,000 shares (the "Shares") of Common Stock, $.001 par value (the
"Common Stock"), offered hereby (the "Offering"), 250,000 Shares are being sold
by Home Security International, Inc., a Delaware corporation (the "Company"),
and 2,750,000 Shares are being sold by FAI Home Security Holdings Pty Ltd.
("FAI" or the "Selling Shareholder"), a wholly owned subsidiary of FAI
Insurances Ltd. ("FAI Insurance"). See "Principal and Selling Shareholders".
The Company will not receive any proceeds from the sale of Shares by the
Selling Shareholder. Prior to this Offering, there has been no public market
for the Common Stock and there can be no assurance that an active trading
market will develop or be maintained after the completion of this Offering. It
is currently estimated that the initial public offering price will be between
$12.00 and $14.00 per Share. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Company has
applied for listing of the Common Stock on the American Stock Exchange and has
requested the symbol "HSI".
-----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION" ON
PAGE 14.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
COMPANY'S
UNDERWRITING PROCEEDS SELLING SHAREHOLDER'S PROCEEDS TO
PRICE TO DISCOUNTS AND TO UNDERWRITING DISCOUNTS SELLING
THE PUBLIC COMMISSIONS(1) COMPANY(2) AND COMMISSIONS(1) SHAREHOLDER(2)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share............... $ $ $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3)................ $ $ $ $ $
- ----------------------------------------------------------------------------------------------------
</TABLE>
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(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Excludes a non-
accountable expense allowance payable to National Securities Corporation
("National") and Nolan Securities Corporation ("Nolan"), the
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), equal to 2% of the proceeds of this Offering and the value
of the five year warrants (the "Representatives' Warrants") entitling the
Representatives to purchase up to 300,000 shares of Common Stock at an
exercise price of 165% of the initial public offering price. See
"Underwriting".
(2) Before deducting estimated expenses payable by the Selling Shareholder of
approximately $1,452,000, including the Representatives' non-accountable
expense allowance of $715,000 (assuming that the over-allotment option is
not exercised) and estimated expenses payable by the Company of
approximately $132,000, including the Representatives' non-accountable
expense allowance of $65,000 (assuming that the over-allotment option is
not exercised).
(3) The Company and the Selling Shareholder have granted the Underwriters a 45-
day option to purchase up to an aggregate of 450,000 additional shares of
Common Stock to cover over-allotments, if any. If the over-allotment option
is exercised, the first 250,000 shares of the over-allotment will be sold
by the Selling Shareholder and the remaining 200,000 shares will be sold by
the Company. If the Underwriters exercise such option in full, the total
Price to the Public, Company's Underwriting Discounts and Commissions,
Proceeds to the Company, Selling Shareholder's Underwriting Discounts and
Commissions and Proceeds to the Selling Shareholder will be $ ,
$ , $ , $ $ and $ , respectively.
See "Underwriting".
-----------
The Shares offered by this Prospectus are offered by the several Underwriters
subject to prior sale, when and if delivered to and accepted by the
Underwriters, and subject to the right to reject any order in whole or in part
and to certain other conditions. It is expected that delivery of the Shares
will be made at the offices of National, 1001 Fourth Avenue, Seattle,
Washington, on or about , 1997.
NATIONAL SECURITIES CORPORATION
NOLAN SECURITIES CORPORATION
JUNE , 1997
<PAGE>
[INSIDE FRONT COVER]
[Picture of the Company's [Picture of the Company's
SecurityGuard Alarm System] technological and design awards]
The Company's award-winning SecurityGuard Alarm System.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON
STOCK OF THE COMPANY INCLUDING ENTERING STABILIZING BIDS OR
IMPOSING PENALTY BIDS. SEE "UNDERWRITING".
----------------
THE COMPANY INTENDS TO FURNISH TO ITS SHAREHOLDERS ANNUAL REPORTS CONTAINING
FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
----------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this Prospectus. As used throughout the Prospectus, unless the
context otherwise requires, the term "Company" refers to Home Security
International, Inc., its wholly owned subsidiaries and its predecessor
entities. Each prospective investor is urged to read this Prospectus in its
entirety. Except as otherwise indicated, the information in this Prospectus (i)
assumes the Underwriters' over-allotment option is not exercised, (ii) excludes
shares of Common Stock issuable upon exercise of the Representatives' Warrants
and (iii) assumes the consummation of the Reorganization immediately prior to
the effectiveness of the Offering.
THE COMPANY
The Company is a direct sales company which, through an extensive distributor
network, sells, installs and services residential security alarm systems,
principally in Australia and New Zealand, with expanding international
operations in North America, Europe and South Africa. The Company's mission is
to offer consumers a quality home security alarm package to protect their
families and property. The Company intends to expand its business services to
include, in addition to residential alarm systems, on-line monitoring services
and extended warranties. Outside of Australia and New Zealand, the Company has
established distributor networks in the United Kingdom, Belgium, the
Netherlands, Germany, Canada and South Africa. The Company has also
successfully test marketed its product in the United States through a sales
representative, and anticipates opening a U.S. distribution office by September
1997. The Company believes it is one of the fastest growing residential
security alarm businesses in Australia and New Zealand and that the
characteristics of the Australian and New Zealand market are representative of
the conditions that exist in other countries in which the Company operates or
plans to commence operations.
The Company's SecurityGuard Alarm system (the "SecurityGuard Alarm") provides
home protection to a customer's premises through an interior heat sensitive
detector, a centralized processing unit with the ability to communicate signals
to the Company's central monitoring station, a battery back-up, a siren and
window decals. In addition to the installation of the SecurityGuard Alarm, the
Company provides customers with a "Home Protection Package" which contains
smoke alarm/detectors featuring dual ionization chambers to limit false alarms.
The SecurityGuard Alarm is a two time winner of the prestigious Australian
Design Award (1992 and 1996) and a winner of the Australian Design Mark (1996).
See "Business--Overview".
The Company's growth is in large part due to its extensive distributor
network which focuses on recruitment, training, and motivation of its sales
force (the "Distributor Network"). See "Business--Distribution Network". The
Distributor Network is an incentive/performance based reward system giving
individuals the opportunity to begin as sales agents and, through a clearly
defined step program, progress towards owning their own business. The
Distributor Network provides Company personnel with the motivation to achieve
more than just monetary rewards: they work for recognition, peer respect and to
attain the goal of becoming authorized distributors. The Company believes the
Distributor Network provides advantages over traditional distributorship
arrangements. Specifically, the Distributor Network allows the Company to grow
rapidly with minimal capital investment, which enhances the Company's long term
relationship with its distributors and minimizes the overhead costs normally
associated with an employee-based sales and marketing force.
The Company's major operations are currently carried on in Australia and New
Zealand through wholly owned subsidiaries in those countries. The principal
executive office of the Company is located at Level 7, 77 Pacific Highway,
North Sydney, NSW 2060 Australia and its telephone number is (011) (61-2) 9936-
2424.
3
<PAGE>
THE REORGANIZATION
The Company, wholly owned by FAI, is a newly organized Delaware corporation
incorporated on April 11, 1997. Immediately prior to the effective date of this
Offering, the Company acquired FAI's Australian and New Zealand operations by
purchasing the outstanding stock of two of its wholly owned subsidiaries, FAI
Home Security Pty Ltd., an Australian corporation, and FAI Home Security
(ENZED) Ltd., a New Zealand corporation, (collectively, the "Australia and New
Zealand Group"). The Company also acquired FAI's international operations
outside Australia and New Zealand by purchasing substantially all of the assets
of FAI's operations in Belgium, the Netherlands, Germany, Canada, the United
Kingdom, South Africa and the United States (the "International Assets"). See
"Certain Transactions--Purchase of International Assets". In order to effect
this transaction (the "Reorganization"), the Company (i) entered into a share
purchase agreement (the "Share Purchase Agreement") through which the Company,
in exchange for the International Assets and 100% of the issued capital of the
Australia and New Zealand Group, executed an $833,251 non-interest bearing note
payable within thirty days of the effective date of this Offering to FAI (the
"FAI Note"), assumed a $131,615 non-interest bearing note payable within thirty
days of the effective date of this Offering to FAI (the "NZ Note") and issued
4,499,999 shares of Common Stock of the Company to FAI and (ii) through its
wholly owned subsidiary, FAI Home Security Pty Ltd., an Australian Corporation,
entered into a license agreement (the "License Agreement") through which the
Company obtained a no cost license from FAI Insurance to use the "FAI" name and
logo. Immediately prior to the effective date of this Offering, the Company
will also make a final dividend distribution to FAI (representing the retained
earnings of FAI Home Security Pty Ltd. on the date of the Reorganization) in
the amount of approximately $3 million. See "Dividend Policy", "Certain
Transactions--The Reorganization" and "Business--The Reorganization". As of the
Reorganization, the Company had 4,500,000 shares of Common Stock outstanding,
all of which were owned by FAI. The information contained in this Prospectus,
unless otherwise indicated, gives effect to the Reorganization as if completed
prior to the date hereof and assumes that the Company, as a separate legal
entity, owned and operated the assets acquired in the Reorganization during the
periods presented.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by:
The Company................... 250,000 shares of Common Stock.
The Selling Shareholder....... 2,750,000 shares of Common Stock.
Common Stock to be Outstanding
Prior to the Offering (2)...... 4,750,000 shares of Common Stock.
Common Stock to be Outstanding
After the Offering (1)(2)...... 5,000,000 shares of Common Stock.
Use of Proceeds................. The net proceeds of the shares of Common Stock
sold by the Company will be used to retire
debt acquired by the Company pursuant to the
reorganization and for general corporate
purposes. The Company will receive no proceeds
from the sale of the shares of Common Stock
sold by the Selling Shareholder.
Proposed American Stock Exchange HSI
Symbol.........................
</TABLE>
- --------
(1) Assumes no exercise of (i) the Underwriters' over-allotment option or (ii)
the Representatives' Warrants issued to the Representatives to acquire
300,000 shares of Common Stock at an exercise price of $ per share
(165% of the initial public offering price of the Common Stock). See
"Description of Securities--Representatives' Warrants".
(2) Assumes the purchase of 250,000 shares of Common Stock by Bradley D. Cooper
prior to the commencement of this Offering at the initial public offering
price. See "Certain Transactions--Transactions Involving Bradley D.
Cooper".
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
All the data presented in the Summary Financial Information is prepared from
the financial data of the Company's predecessor entities (without giving effect
to the Reorganization) rather than the financial data of the Company. The
unaudited pro forma financial data is prepared from the financial data of the
Company's predecessor entities after giving effect to the Reorganization. See
"--Footnote (2)". The selected combined financial data of the Australia and New
Zealand Group for the fiscal years ended June 30, 1994, 1995 and 1996 have been
derived from the audited combined financial statements of FAI Home Security Pty
Limited and FAI Home Security (NZ) Trust. The selected combined financial data
of the Australia and New Zealand Group for the fiscal years ended June 30, 1992
and 1993 have been derived from the audited financial statements of FAI Home
Security Pty Limited. The selected combined financial data of the International
Group for the fiscal years ended June 30, 1995 and 1996 have been derived from
the audited combined financial statements of FAI Home Security (UK) Trust and
FAI Home Security (Canada) Unit Trust. The selected combined financial data for
the nine month periods ended March 31, 1996 and March 31, 1997, are unaudited
for the Australia and New Zealand Group and the International Group, and in the
opinion of management include all adjustments necessary for a fair presentation
of such data. The selected combined financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements and
notes thereto included elsewhere in the Prospectus. There were no cash
dividends or distributions made by the Company or its predecessor entities
during the periods presented below:
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
YEARS ENDED JUNE 30, NINE MONTHS NINE MONTHS
------------------------------------- ENDED MARCH 31, ENDED MARCH 31,
1992 1993 1994 1995 1996 1996 1997
$US $US $US $US $US $US $US
------ ------ ------ ------ ------ --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA AND NEW
ZEALAND GROUP
- -----------------
Statement of Income Data
Net sales.............. 4,475 11,093 10,629 21,437 26,701 18,806 23,232
Net income (loss)...... 316 492 (74) 1,470 1,659 1,215 1,838
Balance Sheet Data
Total assets........... 546 1,748 2,281 7,671 13,384 20,985
Long term assets....... 97 687 927 2,228 6,443 9,196
Total long term
liabilities........... -- -- 557 -- -- 47
Shareholders' equity
(deficit)............. (93) 408 369 3,912 9,894 14,044
INTERNATIONAL GROUP
- -------------------
Statement of Income Data
Net sales.............. -- -- -- 877 1,750 1,392 1,398
Net income (loss)...... -- -- -- (2,155) (2,470) (1,774) (1,357)
Balance Sheet Data
Total assets........... -- -- -- 743 847 1,048
Long term assets....... -- -- -- 142 110 103
Total long term
liabilities........... -- -- -- -- -- --
Shareholders' equity
(deficit)............. -- -- -- 47 (2,103) (3,524)
<CAPTION>
UNAUDITED UNAUDITED
UNAUDITED YEARS ENDED JUNE 30, NINE MONTHS PRO FORMA NINE
------------------------------------- ENDED MARCH 31, MONTHS ENDED
1992 1993 1994 1995 1996 1996 MARCH 31, 1997
$US(1) $US(1) $US(1) $US(1) $US(1) $US(1) $US(2)
------ ------ ------ ------ ------ --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA AND NEW
ZEALAND AND
INTERNATIONAL GROUP
COMBINED
- -------------------
Statement of Income Data
Net sales.............. 4,475 11,093 10,629 22,314 28,451 20,198 24,630
Net income (loss)...... 316 492 (74) (685) (811) (559) 2,104
Earnings per common
share (3)............. $0.42
Balance Sheet Data
Total assets........... 546 1,748 2,281 8,413 14,231 19,079
Long term assets....... 97 687 927 2,370 6,553 11,472
Total long term
liabilities........... -- -- 557 -- -- 47
Shareholders' equity
(deficit)............. (93) 480 369 3,959 7,791 13,559
</TABLE>
- --------
(1) Information presented is historical combined only without giving effect to
the Reorganization or any pro forma adjustments.
(2) Adjusted to give effect to the Reorganization, the issuance of the 250,000
shares offered hereby, assuming an estimated initial public offering price
of $13.00 per share, after the deduction of estimated underwriting
discounts and Offering expenses and assuming Bradley D. Cooper's purchase
of 250,000 shares of Common Stock at the estimated initial public offering
price prior to the commencement of this Offering. See "Pro Forma
Consolidated Financial Statements for Home Security International."
(3) Pro forma earnings per share is computed by dividing pro forma net income
by 5,000,000, the number of shares to be issued.
5
<PAGE>
RISK FACTORS
An investment in the Shares being offered hereby involves a high degree of
risk and is not recommended for any investor who cannot bear to lose his or her
entire investment. In evaluating an investment in the Shares, investors should
carefully consider the following factors, in addition to the other information
in this Prospectus.
Risk of International Expansion. Although the Company's sales historically
have been focused on the Australian and New Zealand markets, the Company has
initiated an aggressive expansion program in Europe, South Africa and North
America. Although the Company anticipates opening a distribution office in the
United States, the Company has to date conducted no material operations in the
United States. The Company's sales are subject to certain risks inherent in
operating globally, including international monetary conditions, tariffs,
import licenses, trade policies, domestic and foreign tax policies and foreign
manufacturing regulations. A key component of the Company's strategy is its
deployment of its direct sales marketing program (the "Direct Sales Marketing
Program") in markets outside of Australia and New Zealand. In addition,
climatic conditions in countries in which the Company operates or intends to
commence operations may affect the performance of the alarm system requiring
modification of its design. There can be no assurance that the Company will be
able to market, sell and deliver its products and services successfully in
these new markets. Expansion into new markets also requires an investment by
the Company in distributor offices and personnel necessary to service the
customer accounts. The expenses associated with the opening of new offices will
be expensed in the period in which they are incurred and thus may substantially
affect the Company's operating results during that period. For the Company to
expand successfully into a new market, the Company must obtain a sufficient
number and density of customers in that market to support the additional
investment. There can be no assurance that the required customer numbers and
density will be achieved or that expansion into new markets will not adversely
affect the Company's future business and results of operations. If the revenues
generated by the Company and any joint ventures formed in new and existing
markets are not sufficient to offset the expense of establishing and
maintaining the infrastructure to facilitate expansion of the operations, the
Company's business, operating results and financial condition could be
materially adversely affected.
Reliance upon Major Supplier. Over 90% of the Company's purchases during
fiscal year 1996 and fiscal year 1995 were made directly from Ness Security
Products Pty Ltd. ("Ness"), which manufactures the Company's SecurityGuard
Alarm. The Company currently has a manufacturing agreement with Ness which in
the ordinary course of events cannot be terminated until the year 2007, and
thereafter only upon 12 months notice of an intention to terminate. In
addition, the Company shares with Ness non-exclusive sales and distribution
rights to the United States market. The Company has the exclusive right to sell
the SecurityGuard alarm system throughout the world (except the United States).
Ness may market and sell the SecurityGuard Alarm within the Company's exclusive
territory, but only upon the Company's written consent, which shall not be
unreasonably withheld. The manufacturing agreement further provides that Ness
will be permitted to market and sell the SecurityGuard alarm in places where
the Company does not intend to carry on business. Ness's rights to sell the
SecurityGuard Alarm in such areas terminate if it supplies or sells to
companies that sell products in that country using a marketing method or
strategy which is similar in nature to that used by the Company. Ness has given
no indication of establishing any sales presence in Australia, New Zealand or
any other market. If Ness establishes a sales agency in any major potential
market this may in turn adversely affect the Company. The loss of the Company's
relationship with Ness, or a significant reduction of Ness's manufacturing
capability, or a lack of progress in new product development, could have a
material adverse effect upon the Company. See "Business--Ness Supply
Agreement".
Government Regulation. The Company must receive approval from the various
regulatory and licensing authorities for each country, state or local area in
which it operates. The Company may be required to obtain formal approval to
operate the Direct Sales Marketing Program and for the construction, design,
functionality, acceptability or merchantable quality of the SecurityGuard Alarm
itself. Securing these approvals may take some time, which will affect the
speed of the Company's potential growth and its ability to establish a presence
in new markets. In certain jurisdictions, the Company has been required to
obtain licenses or permits, to comply
6
<PAGE>
with standards governing employee selection and training, and to meet certain
standards in the conduct of its business. The loss of such licenses, or the
imposition of conditions to the granting or retention of such licenses, could
have a material adverse effect on the Company. Although the Company believes
that it presently holds the required licenses and is in substantial compliance
with all licensing and regulatory requirements in each jurisdiction in which it
operates, there can be no assurance the Company will be able to secure
regulatory approval in all the countries or smaller geographic areas in which
it seeks to operate or that it will continue receiving regulatory approval for
its existing activities.
Recently, a trend has emerged on the part of local governmental authorities
to adopt various measures aimed at reducing the number of false alarms. Such
measures include: (i) subjecting alarm monitoring companies to fines or
penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revoking of such licenses following a specified number of false
alarms, (iii) imposing fines on alarm customers for false alarms, (iv) imposing
limitations on the number of times the police will respond to alarms at a
particular location, and (v) requiring verification of an alarm signal before
the police will respond. Enactment of such laws could adversely affect the
Company's future business and results of operations. See "Business--Government
Regulation".
Dependence On Key Management Executives. The success of the Company's
business is largely dependent upon the active participation of Bradley D.
Cooper and other executive officers. Although Mr. Cooper's principal occupation
is his employment with the Company, Mr. Cooper has significant interests in
other operating companies, and periodically gives speeches and writes articles
on sales motivation techniques, for which the Company receives no payment. The
loss or interruption of the continued services for any reason of one or more of
the Company's key officers or the inability of the Company to hire or retain
qualified executives may have a material adverse effect on the Company's
business. The Company intends to purchase, subject to availability, "key-man"
life insurance policies on Bradley D. Cooper (Chairman of the Board and Chief
Executive Officer), Terrence J. Youngman (President) and David Appleby (Vice
President of International Business Development) for $5 million, $1 million and
$2 million respectively. See "Management".
Competition. The security alarm industry is highly competitive and there can
be no assurance that the Company will be able to compete successfully in the
future. Although the Company has achieved rapid growth in the sale of
residential alarm systems in Australia and New Zealand, there is no assurance
that the Company will continue to have a competitive advantage or continued
success in these countries. The loss of any such competitive position would
have a material adverse effect on the Company. In marketing the SecurityGuard
Alarm outside Australia and New Zealand, the Company will compete with larger
national and international companies who are better capitalized and who conduct
media advertising, which the Company does not currently utilize. In the United
States, the Company will face competition from alarm installation and
monitoring companies which are better capitalized than the Company and which
offer low-priced, subsidized installations of security systems. Competitive
pressure may require the Company to reduce its prices to maintain the growth
rate it has experienced in Australia and New Zealand. Furthermore, new
competitors are continuing to enter the industry and the Company may encounter
additional competition from such future industry entrants. See "Business--
Competition".
Quarterly Variations In Operating Results. The Company has historically
experienced fluctuations in its quarterly operating results and expects to
experience fluctuations of its quarterly operating results in the future. These
fluctuations have been caused by many factors, including, among others, the
opening and closing of branch and distributor offices, the volume and timing of
customer generation, competitive pricing pressures, local and national crime
rates, general economic conditions and seasonality. The Direct Sales Marketing
Program can be hampered by unfavorable weather conditions, holidays and reduced
hours of daylight. The Company's budgeted expenses are based, to some extent,
on its expectations of future sales and customer growth. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall due to levels of new sales that are lower than anticipated.
Given the possibility of quarterly fluctuations, the Company believes that
comparisons of the results of its operation for preceding quarters are not
necessarily meaningful and that the results for any one quarter should not be
relied upon as an indication of future performance. In the event that the
7
<PAGE>
Company's revenues or operating results for any quarter are lower than
expected by securities analysts or the market in general, such shortfall could
have an immediate and significant adverse impact on the market price of the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Dependence on Consumer Financing. Approximately 74% of the Company's sales
made through distributors to consumers are financed on an installment basis.
The Company's distributors have the option of offering potential consumers
financing from an affiliate of FAI Insurance or other financing organizations.
Any changes in interest rates or credit quality requirements of financing
organizations, including affiliates of FAI Insurance, may adversely affect
sales of the Company's products and therefore have a material adverse effect
on the Company. The availability of appropriate consumer financing in new
international markets and the continued availability of consumer finance in
existing markets will be a significant factor of the Company's success and
growth in these markets. There can be no assurance that financing will be
available on terms which are attractive to consumers and suitable for the
Company's operations.
Dependence On Customer Accounts for Growth. From January 1993 through the
nine months ended March 31, 1997, the Company added approximately 108,000
accounts through the Direct Sales Marketing Program, including over 9,000 new
accounts during the third fiscal quarter of 1997. The Company intends to offer
extended warranty packages and on-line monitoring services to existing
customers and new customers once an alarm is installed, and has begun
initiatives to do so. The Company's growth in revenues and earnings may in
part be dependent on the successful implementation of these programs.
Management of Growth. The Company's business strategy is to grow through the
addition of distributors and customers and through the establishment of
international operations outside of its current base of operations in
Australia and New Zealand. This expansion and the Reorganization have placed
and will continue to place substantial demands on the Company's management,
operational resources and its system of financial and internal controls. The
Company's future operating results will depend in part on the Company's
ability to continue to implement and improve operating and financial controls
and to expand, train and manage its employee, independent contractor and
distributor base. Additionally, management of growth may limit the time
available to the Company's management to attend to other operational,
financial and strategic issues. There can be no assurance that the Company
will successfully implement and maintain such operational and financial
systems or successfully obtain, integrate and utilize the required employees
and management, operational and financial resources to manage a developing and
expanding business in new markets. Failure to implement such systems
successfully and use such resources effectively could have a material adverse
effect on the Company's results of operations and financial condition.
Currency Fluctuations and Duty Rates. The Company's operations are conducted
throughout the world. Accordingly, the Company's financial performance could
be adversely affected by fluctuations in currency exchange rates as well as
changes in duty rates. The Company has had foreign currency transaction gains
and losses in recent periods. The Company has no hedging program, although it
may in the future hedge a portion of its foreign exchange risk. However, there
can be no assurance that the Company will engage in such transactions or, if
the Company does engage in such transactions, that it will be successful in
limiting such risk and that changes in exchange rates will not have a material
adverse effect on the Company or its results of operations. As the Company
will report its results in U.S. dollars, a significant movement in the value
of the U.S. dollar against certain international currencies and cross-
movements between the currencies of the countries in which the Company
operates could have a material adverse effect on the Company's reported
financial position and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Risks of Liability. Most of the Company's alarm installation and monitoring
agreements and other agreements pursuant to which it sells its products and
services contain provisions and disclaimers limiting liability to customers.
These provisions and disclaimers are intended to reduce the risk of Company
liability for the acts or omissions of employees and Distributor Network
representatives or system failures. However, in the event of litigation with
respect to such matters, there can be no assurance that these liability
limiting provisions and disclaimers will be enforceable. While the Company
currently carries insurance of various types, including general liability and
errors and omissions insurance, the loss experience of the Company and other
security
8
<PAGE>
service companies may affect the availability and cost of such insurance in
the future. Certain of the Company's insurance policies and the laws of some
states or countries may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence or
wanton behavior. The cost and effect of litigation could have an adverse
material effect on the Company.
Geographic Concentration. Sales in Australia and New Zealand for the three
calendar years ending on December 31, 1996 and for the three fiscal quarters
ending on March 31, 1997 accounted for approximately 95% and 94%,
respectively, of the Company's net sales. The Company expects that such sales
will continue to account for a significant portion of the Company's net sales
in the future. At March 31, 1997, over 90% of the Company's existing customers
were located in Australia and New Zealand. The performance of the Company may
be adversely affected by any change in regional economic conditions or other
factors affecting these markets. See "Business--Overview".
Product Concentration. Sales of the SecurityGuard Alarm system and related
products and services accounted for substantially all of the Company's sales
in the current fiscal year and fiscal 1996, and will continue to account for
substantially all sales in the foreseeable future. Decline in the demand for
this product, whether as a result of competition, technological change or
otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--The
SecurityGuard Alarm".
Recruitment of Sales Consultants. The Company is dependent on the continued
recruitment of new sales consultants for the Distributor Network. The Company
will face competition in the recruitment of sales consultants from other
organizations, not necessarily in the same industry. The Company's ability to
maintain or increase its sales growth in the future will depend in part upon
the number and quality of sales consultants that the Company can recruit,
train and retain. There can be no assurance that the Company will be able to
attract, train and retain a sufficient number of sales consultants.
Adverse Publicity. Companies in the direct sales industry are occasionally
the subject of print articles and broadcast programs which present a negative
view of such companies and that emphasize the use of high pressure sales
practices. Although the Company maintains an active training and compliance
program to deter abusive sales practices by its distributors and sales agents,
the Company and its agents occasionally have received adverse publicity. The
Company has been the subject of isolated news articles accusing its sales
agents of high pressure sales practices including focusing on customers' fears
by using photographs of burglarized homes to encourage purchases of the
product, and selling security systems at above market financing rates to
consumers who cannot afford such systems. Publicity of this nature could have
a material adverse affect on the Company's sales and earnings.
Benefits to Affiliates. A significant portion of the proceeds of this
Offering will be paid to the Selling Shareholder. Prior to the effectiveness
of this Offering, and after giving effect to the Reorganization, FAI will own
4,500,000 shares of the outstanding Common Stock of the Company. Pursuant to
this Offering, FAI will then immediately sell 2,750,000 of such shares of
Common Stock to the public and the proceeds of such sale will go directly to
FAI. See "Use of Proceeds", "Dilution" and "Certain Transactions".
Voting Control. Following completion of this Offering and the completion of
the Reorganization, approximately 40% of the Company will be owned by the
Selling Shareholder and Bradley D. Cooper and 60% will be owned by the public
(assuming no exercise of the Underwriters' over-allotment option). As a result
of its minority ownership interest, the Selling Shareholder may be able to
control the election of the Company's directors and to determine corporate
actions requiring stockholder approval, including significant corporate
transactions, and to exercise control over the other affairs of the Company.
The Selling Shareholder may also be able to block any proposal put to a vote
of the shareholders including proposals which require a supermajority. See
"Principal and Selling Shareholders".
Limitations on Enforceability of Judgments. A substantial portion of the
assets of the Company are, and for the foreseeable future will be, located
outside the United States. In addition, all or a substantial portion of the
assets of directors, executive officers and experts residing outside the
United States are or may be located outside of the United States, primarily in
Australia and New Zealand. As a result, it may not be possible to effect
service of process in the United States on such directors and executive
officers, such experts or on the Company's subsidiaries or to enforce, collect
or realize upon, in United States courts, judgments against such persons
obtained in United States courts and predicated upon civil liability under
United States Securities Laws. The Company has been advised by its special
Australian counsel, Minter Ellison, that there are doubts as to the
9
<PAGE>
enforceability of civil liabilities of United States courts or the ability of
stockholders to pursue claims based on the contents of this Prospectus or
otherwise predicated on United States Federal Securities Laws against the
Company or its directors, executive officers and experts in Australian courts.
Foreign Taxation. Because the Company is a United States corporation which
has historically generated substantially all income from non-U.S. operations,
its income will generally be subject to taxation in different jurisdictions.
Certain operations of the Company conducted outside the United States or by
foreign subsidiaries are subject to taxation in foreign jurisdictions as well
as under various provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), which impose special taxes in certain circumstances on foreign
subsidiaries of United States corporations. While generally the Company will
receive foreign tax credits for taxes paid in foreign jurisdictions which can
be offset against United States tax liabilities, there can be no assurance
that the Company will generate sufficient United States income to fully
utilize such foreign tax credits.
Possible Need for Additional Equity Capital or Borrowings. Although the
Company believes that it currently has sufficient capital and cash flow to
finance its existing operations, the Company's program of international
expansion may create a need for additional equity capital or borrowings which
may result in higher leverage or the dilution of then existing holders'
investments in the Common Stock. There can be no assurance that such external
funding, if necessary, will be available to the Company on favorable terms.
Any inability of the Company to obtain additional capital may adversely affect
the Company's ability to continue its international expansion and in the worst
case might affect the ongoing viability of the Company's existing operations.
Anti-takeover Considerations. Certain provisions of the Company's By-Laws
and Delaware law could discourage potential acquisition proposals, delay or
prevent a change in control of the Company, and limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock. For example, these provisions allow a staggered board of
directors and the issuance, without stockholder approval, of preferred stock
with rights and privileges senior to the Common Stock. The issuance of
preferred stock could result in the dilution of the voting power of the shares
of Common Stock purchased in this Offering and could have a dilutive effect on
earnings per share. The Company is also subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
ventures with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Securities--Certain Provisions of the Company's Charter and
Delaware Law".
Dilution. As of the effective date of this Offering, the Company had a pro
forma net tangible book value per share of Common Stock of $0.02 (after giving
effect to the Reorganization and the sale of 250,000 shares of Common Stock to
Bradley D. Cooper prior to the commencement of the Offering). Based on the
estimated initial public offering price of $13.00 per share, purchasers of
Common Stock in the Offering will experience an immediate dilution of $12.41
per share. Additional dilution to future net tangible book value per share may
occur upon the exercise of the Representatives' Warrants, and other options
and warrants that are outstanding or will be issued by the Company. The
Selling Shareholder of the Company acquired its shares of Common Stock for
$2.25 per share, consideration substantially less than the public offering
price of the shares of Common Stock offered hereby. See "Capitalization",
"Dilution" and "Certain Transactions".
Potential Adverse Effect of Representatives' Warrants and Other Company
Options. In connection with this Offering, the Company has authorized the
issuance of the Representative's Warrants and has reserved 300,000 shares of
Common Stock for issuance upon exercise of such warrants. The Representatives'
Warrants will entitle the holders thereof to acquire 300,000 shares of Common
Stock at an exercise price of 165% of the initial public offering price per
share ($21.45 per share assuming an initial public offering price of $13.00
per share). The Representatives' Warrants will be exercisable at any time from
the first anniversary of the date of this Prospectus until the fifth
anniversary of the date of this Prospectus. Additionally, upon completion of
this Offering, the Company shall issue additional options to purchase Common
Stock under a director's stock option plan and employee stock options under an
employee stock option plan. The Company has reserved 50,000 shares of Common
Stock for issuance under its 1997 Non-Employee Director Stock Option Plan and
750,000 shares of
10
<PAGE>
Common Stock for issuance under its employee 1997 Stock Option Plan. See
"Management--Stock Compensation Plans". For the term of the Representatives'
Warrants and other Company options, the holders thereof will have, at nominal
cost, the opportunity to profit from a rise in the market price of the Shares
without assuming the risk of ownership, with a resulting dilution in the
interest of the other security holders. As long as the Representatives'
Warrants and other Company options remain unexercised, the Company's ability to
obtain additional capital might be adversely affected. Moreover, the holders of
the Representatives' Warrants and other Company options may be expected to
exercise such warrants or options at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of its
securities on terms more favorable than those under which the existing warrants
or options are exercisable. See "Description of Securities" and "Certain
Transactions".
Shares Eligible For Future Sale. Sales of shares of Common Stock by existing
shareholders, or by existing holders of the Warrants, under Rule 144 of the
Securities Act, or pursuant to the exercise of registration rights or
otherwise, could have an adverse effect on the price of the Shares. The Company
and the Selling Shareholder have agreed with the Representatives to have the
current shareholders of the Company, including Bradley D. Cooper, prior to this
Offering execute lock-up agreements with the Representatives that restrict the
sale or disposition of such shares for 360 days following the date of this
Prospectus. National may consent to a waiver of the lock-up period without any
public notice. One year after the date of the Reorganization, approximately
1,750,000 shares held by the Selling Shareholder, and one year after the shares
sold to Bradley D. Cooper are fully paid approximately 250,000 shares held by
Mr. Cooper, will become eligible for sale in the public market subject to
compliance with Rule 144 under the Securities Act. In addition, the holders of
warrants to purchase Common Stock will, subject to the satisfaction of certain
conditions, be able to sell Common Stock publicly through the exercise of
certain registration rights. See "Description of Securities" and
"Underwriting".
No Dividends. The Company does not anticipate paying dividends on its Common
Stock for the foreseeable future. Dividends will only be paid at such time as
the cash flow of the Company is sufficient to justify such payments, and
provided that there are no restrictions on payment of dividends under credit or
other agreements.
Possible Illiquidity of Trading Market. Prior to this Offering there has been
no public market for the Common Stock, and there can be no assurance that an
active public market for the Shares will develop or be sustained after this
Offering. The Company has applied for listing of the Shares on the American
Stock Exchange. To continue to be listed on the American Stock Exchange, the
Company must continue to satisfy certain maintenance standards. If the Company
is unable to maintain the standards for continued quotation on the American
Stock Exchange, the Shares could be subject to removal from the American Stock
Exchange. As a result, an investor would find it more difficult to dispose of
the Shares, or to obtain accurate quotations as to their price.
Arbitrary Determination of Offering Price. The initial public offering price
for the Common Stock, as well as the exercise price of the Representatives'
Warrants, were determined by negotiations between the Company and the
Representatives, and should not be regarded as indicative of any future market
price of the Shares. Among the factors considered in determining the initial
public offering price were the history and the prospects of the Company and the
industry in which it operates, the past and present operating results of the
Company and the trends of such results, the previous experience of the
Company's executive officers and the general condition of the securities
markets at the time of this Offering. However, the public offering price of the
Common Stock and the exercise price of the Representatives' Warrants do not
necessarily bear any relationship to the Company's assets, book value, earnings
or any other established criterion of value. See "Underwriting".
Representatives' Influence on the Market. A significant amount of the Shares
offered hereby may be sold to customers of the Representatives. Such customers
subsequently may engage in transactions for the sale or purchase of such Shares
through or with the Representatives. If they participate in the market, the
Representatives may exert a dominating influence on the market for the Shares.
Such market making activity may be discontinued at any time. The price and
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Representatives' participation in such market. See "Description of
Securities" and "Underwriting".
11
<PAGE>
Possible Volatility of Stock Price. The stock market has, from time to time,
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the market
price of the Shares may prove to be highly volatile. Announcements of
innovations or new commercial products by the Company or its competitors,
developments or disputes concerning proprietary rights, regulatory
developments in the United States or in foreign countries, as well as period-
to-period fluctuations in financial results, among other factors, may have a
significant impact on the market price of the Shares.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 250,000 shares of
Common Stock being offered by the Company are estimated to be approximately
$2,858,000, assuming an estimated initial public offering price of $13.00 per
share and after deducting the underwriting discounts and commission and
Offering expenses payable by the Company. The Company intends to use the net
proceeds: (i) to retire the FAI Note in the amount of $833,251 (as of March
31, 1997) representing the partial purchase price (fixed assets and
inventories) of the International Assets and (ii) to retire the NZ Note
(representing the fixed assets and inventories of the New Zealand operations)
in the amount of $131,615 (as of March 31, 1997) due to FAI, resulting from
the Company's purchase of 100% of the issued capital of FAI's Australia and
New Zealand Group. Both notes are non-interest bearing, payable within thirty
days from the effective date of this Offering, and subject to change based on
the inventory values and currency exchange rates in effect at the time of
Reorganization. The remaining proceeds of $1,893,134 will be used for general
corporate purposes, including working capital. See "Business--The
Reorganization". Pending such use, the net proceeds received by the Company in
the Offering may be invested in short-term, investment-grade, interest bearing
securities.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholder in this Offering.
DIVIDEND POLICY
Except for a final dividend distribution to FAI in the amount of
approximately $3 million, the Company has paid no dividends on the Common
Stock and does not anticipate doing so for the foreseeable future. Dividends
will only be paid at such time as the cash flow of the Company is sufficient
to justify such payments. The Company anticipates that all earnings, if any,
for the foreseeable future will be retained to finance the growth and
development of the business. See "Business--The Reorganization" and "Certain
Transactions".
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997: (i) on an actual basis prior to the Reorganization, (ii) as adjusted
to give effect to the Reorganization and the sale of 250,000 shares of Common
Stock to Bradley D. Cooper prior to the commencement of this Offering, and
(iii) pro forma as adjusted to reflect the issuance and sale by the Company of
250,000 shares of Common Stock (assuming an initial public offering price of
$13.00 per share) after deducting estimated underwriting discounts and
commissions and Offering expenses payable by the Company. The capitalization
information set forth in the table below is unaudited and qualified by, and
should be read in conjunction with, the financial statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------
AS ADJUSTED AS FURTHER
FOR THE ADJUSTED FOR
ACTUAL REORGANIZATION (1) THIS OFFERING (2)
$ $ $
------ ------------------ -----------------
<S> <C> <C> <C>
Short Term Debt .................. -- 964,866 --
Long Term Debt ................... -- 47,280 47,280
Stockholder's Equity:
Preferred Stock, $.001 value;
1,000,000 shares authorized;
none outstanding .............. -- -- --
Common Stock, $.001 value;
20,000,000 shares authorized; 1
share outstanding, 4,750,000
shares outstanding as adjusted
for the Reorganization and the
sale of 250,000 shares of
Common Stock to Bradley D.
Cooper prior to the
commencement of this Offering;
5,000,000 pro forma shares
outstanding as further adjusted
for this Offering.............. 1 4,750 5,000
Additional Paid in Capital........ 10,695,963 13,553,713
---- ---------- ----------
Total Shareholder's Equity........ 1 10,700,713 13,558,713
Total Capitalization.............. 1 11,712,859 13,605,993
==== ========== ==========
</TABLE>
- --------
(1) Does not include: (i) 300,000 shares issuable upon exercise of the
Representatives' Warrants to be issued upon completion of this Offering at
an exercise price of $ (165% of the initial public offering price per
share) and (ii) up to 200,000 shares subject to the Underwriter's over-
allotment option to be sold by the Company. See "Underwriting" and
"Certain Transactions".
(2) Assumes the Company's: (i) execution and completion of the Share Purchase
Agreement (which provides for the purchase of the International Assets),
and (ii) execution of the License Agreement (through the Company's wholly
owned subsidiary, FAI Home Security Pty Ltd.) See "Business--The
Reorganization".
13
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1997 was $75,019
or $0.02 per share of Common Stock (after giving effect to the issuance of
4,499,999 shares of Common Stock to FAI pursuant to the Reorganization and the
sale of 250,000 shares of Common Stock to Bradley D. Cooper prior to the
commencement of the Offering). See "Prospectus Summary--The Reorganization".
Net tangible book value per share is determined by dividing the tangible net
worth of the Company (tangible assets less all liabilities) by the total
number of outstanding shares of Common Stock. Dilution per share is determined
by subtracting pro forma net tangible book value per share from the amount
paid for a share of Common Stock in the Offering. After giving effect to the
issuance and sale by the Company of the 250,000 shares of Common Stock offered
hereby (at an estimated initial public offering price of $13.00), and the
application of the estimated net proceeds therefrom after deducting Offering
expenses payable by the Company, the pro forma net tangible book value of the
Company as of March 31, 1997 would have been $2,933,019 or $0.59 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Estimated initial public offering price..................... $13.00
Net tangible book value per share after Reorganization and
before Offering............................................ $0.02
Increase per share attributable to the new investors........ $0.57
-----
Pro forma net tangible book value per share after the Of-
fering................................................... $ 0.59
------
Dilution to purchasers of Common Stock in this Offering... $12.41
======
</TABLE>
The computations in the table set forth above assume that the over-allotment
option is not exercised. If the over-allotment option is exercised in full,
the pro forma net tangible book value at March 31, 1997 would have been
$5,325,019 or $1.02 per share of Common Stock.
The following table summarizes, as of the completion of this Offering (after
giving effect to the issuance of 4,499,999 shares of Common Stock to FAI
pursuant to the Reorganization), the difference between the effective cash
contribution paid by the existing shareholders of the Company and the
purchaser of securities in this Offering with respect to the number of shares
purchased, the total consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)(2).... 4,750,000 95% $10,700,713 77% $ 2.25
New investors (1)............... 250,000 5% $ 3,250,000 23% $13.00
--------- ---- ----------- ----
Total........................... 5,000,000 100% $13,950,713 100%
========= ==== =========== ====
</TABLE>
- --------
(1) Sales by the Selling Shareholder in this Offering will reduce the number
of shares held by existing shareholders to 2,000,000 shares or 40% of the
total number of shares of Common Stock outstanding after this Offering,
and will increase the number of shares held by new investors to 3,000,000
or 60% of the total number of shares of Common Stock outstanding after
this Offering. See "Principal and Selling Shareholders". The calculations
in the tables set forth above assume: (i) no exercise of the Underwriters'
over-allotment option by either the Company or the Selling Shareholder;
(ii) no exercise of the Representatives' Warrants described herein and
(iii) no issuance of any management or employee stock options by the
Company. See "Description of Securities--Warrants and Options".
(2) Includes the sale of 250,000 shares of Common Stock of the Company to
Bradley D. Cooper prior to the commencement of this Offering at an
estimated initial public offering price of $13.00 for an estimated total
purchase price of $3,250,000, payable $162,500 in cash and the balance in
the form of a promissory note payable. Average Price Per Share is
calculated using only the cash consideration of $162,500. See "Certain
Transactions--Transactions Involving Bradley D. Cooper".
14
<PAGE>
SELECTED COMBINED FINANCIAL DATA
All the data presented in the Selected Combined Financial Data is prepared
from the financial data of the Company's predecessor entities rather than the
financial data of the Company. The unaudited pro forma financial data is
prepared from the financial data of the Company's predecessor entities after
giving effect to the Reorganization. See "--Footnote (2)". The selected
combined financial data of the Australia and New Zealand Group for the fiscal
years ended June 30, 1994, 1995 and 1996 have been derived from the audited
combined financial statements of FAI Home Security Pty Limited and FAI Home
Security (NZ) Trust. The selected combined financial data of the Australia and
New Zealand Group for the fiscal years ended June 30, 1992 and 1993 have been
derived from the audited financial statements of FAI Home Security Pty
Limited. The selected combined financial data of the International Group for
the fiscal years ended June 30, 1995 and 1996 have been derived from the
audited combined financial statements of FAI Home Security (UK) Trust and FAI
Home Security (Canada) Unit Trust. The selected combined financial data for
the nine month periods ended March 31, 1996 and March 31, 1997, are unaudited
for the Australia and New Zealand Group and the International Group, and in
the opinion of management include all adjustments necessary for a fair
presentation of such data. The selected combined financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the combined financial
statements and notes thereto included elsewhere in the Prospectus. There were
no cash dividends or distributions made by the Company or its predecessor
entities during the periods presented below:
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
YEARS ENDED JUNE 30, NINE MONTHS NINE MONTHS
------------------------------------- ENDED MARCH 31, ENDED MARCH 31,
1992 1993 1994 1995 1996 1996 1997
$US $US $US $US $US $US $US
------ ------ ------ ------ ------ --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA AND NEW
ZEALAND GROUP
- -----------------
Statement of Income Data
Net sales.............. 4,475 11,093 10,629 21,437 26,701 18,806 23,232
Net income (loss)...... 316 492 (74) 1,470 1,659 1,215 1,838
Balance Sheet Data
Total assets........... 546 1,748 2,281 7,671 13,384 20,985
Long term assets....... 97 687 927 2,228 6,443 9,196
Total long term
liabilities........... -- -- 557 -- -- 47
Shareholders' equity
(deficit)............. (93) 408 369 3,912 9,894 14,044
INTERNATIONAL GROUP
- -------------------
Statement of Income Data
Net sales.............. -- -- -- 877 1,750 1,392 1,398
Net income (loss)...... -- -- -- (2,155) (2,470) (1,774) (1,357)
Balance Sheet Data
Total assets........... -- -- -- 743 847 1,048
Long term assets....... -- -- -- 142 110 103
Total long term
liabilities........... -- -- -- -- -- --
Shareholders' equity
(deficit)............. -- -- -- 47 (2,103) (3,524)
<CAPTION>
UNAUDITED UNAUDITED
UNAUDITED YEARS ENDED JUNE 30, NINE MONTHS PRO FORMA NINE
------------------------------------- ENDED MARCH 31, MONTHS ENDED
1992 1993 1994 1995 1996 1996 MARCH 31, 1997
$US(1) $US(1) $US(1) $US(1) $US(1) $US(1) $US(2)
------ ------ ------ ------ ------ --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
AUSTRALIA AND NEW
ZEALAND AND
INTERNATIONAL GROUP
COMBINED
- -------------------
Statement of Income Data
Net sales.............. 4,475 11,093 10,629 22,314 28,451 20,198 24,630
Net income (loss)...... 316 492 (74) (685) (811) (559) 2,104
Earnings per common
share (3)............. $0.42
Balance Sheet Data
Total assets........... 546 1,748 2,281 8,413 14,231 19,079
Long term assets....... 97 687 927 2,370 6,553 11,472
Total long term
liabilities........... -- -- 557 -- -- 47
Shareholders' equity
(deficit)............. (93) 480 369 3,959 7,791 13,559
</TABLE>
- --------
(1) Information presented is historical combined only without giving effect to
the Reorganization or any pro forma adjustments.
(2) Adjusted to give effect to the Reorganization, the issuance of the 250,000
shares offered hereby, assuming an estimated initial public offering price
of $13.00 per share, after the deduction of estimated underwriting
discounts and Offering expenses and assuming Bradley D. Cooper's purchase
of 250,000 shares of Common Stock at the estimated initial public offering
price prior to the commencement of this Offering. See "Pro Forma
Consolidated Financial Statements for Home Security International".
(3) Pro forma earnings per share is computed by dividing pro forma net income
by 5,000,000, the number of shares to be issued.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a direct sales company which, through an extensive
distributor network, sells, installs and services residential security alarm
systems principally in Australia and New Zealand, with expanding international
operations in North America, Europe and South Africa. The Company's mission is
to offer consumers a quality home security alarm package to protect their
families and property. In addition to residential alarm systems, the Company
is expanding its business services to include on-line monitoring services and
extended warranties. Outside of Australia and New Zealand, the Company has
established distributor networks in the United Kingdom, Belgium, the
Netherlands, Germany and Canada. The Company has also successfully test
marketed its product in the United States where it anticipates opening a
distribution office by September 1997. To date the Company has not conducted
any material operations in the United States.
In 1993, the Company changed its organization structure from one based upon
Company owned and operated branches, with Company employed sales
representatives making sales to end users at high margins, to the Distributor
Network model. The change to the Distributor Network model resulted in a
decline in gross margin from approximately $625 to $350 for each SecurityGuard
Alarm system sold, based on 1993 prices. However, under the Distributor
Network structure, the Company no longer incurs selling costs and overhead
related to the distribution of its SecurityGuard Alarm product, and the
capital costs of opening new operations are passed on to its distributors.
Accordingly, this change provided the Company with the capability of expanding
rapidly with minimal funding requirements. Since this change in structure, the
Company has experienced significant increases in unit sales of alarm systems.
Unit sales in Australia and New Zealand for fiscal years 1992, 1993, 1994,
1995 and 1996 were 5,069, 11,744, 12,235, 25,280 and 31,669, respectively.
Unit sales for the International Operations for fiscal years 1995 and 1996
were 1,157 and 2,797, respectively.
Revenues are currently derived primarily from SecurityGuard Alarm sales in
Australia and New Zealand through the Distributor Network in which
distributors sell to the end users on a direct sales basis, rather than
through retail outlets. The percentage of revenues attributable to sales in
Australia and New Zealand during the fiscal years 1994, 1995 and 1996 and for
the nine months ended March 31, 1997 were 100%, 96%, 94% and 94%,
respectively. The Company assumes the responsibility of servicing the end user
once an alarm has been installed by the distributor. After installation the
end users are considered to be the customers of the Company. To a much lesser
extent, revenue is derived from sales of promotional, training and marketing
material to the Distributor Network, and from the recent introduction of
extended warranties to end users. In addition, the Company expects that the
planned introduction of on-line monitoring in Australia will provide an
additional revenue stream from the existing and future base of installed
alarms. Additionally, while the Company expects that an increased proportion
of its revenue will be derived from its international expansion, there can be
no assurance that the success of the Distributor Network and corresponding
operating results in Australia and New Zealand can be replicated throughout
the world. The Company expects international expansion efforts outside
Australia and New Zealand and entry into additional services including
extended warranties and on-line monitoring will cause an increase in expenses
from time to time, without a corresponding increase in revenue.
The Company's revenues from SecurityGuard Alarm sales are recorded net of
any discounts and withdrawals (the cancellation of an installation that has
been sold by an agent on behalf of an end user). Revenues related to on-line
monitoring services and extended warranties are recognized over the life of
the agreement with the customer. In September 1996, the Company implemented a
price increase throughout Australia and New Zealand of AUD$200 (US$160) which
increased the price of the home protection package to the end user from
AUD$1,892 (US$1,507) to AUD$2,092 (US$1,666). In the face of increased
competition in the industry, there can be no assurance that the Company will
not face increased pricing pressure, which in turn could lead to changes in
the selling price of the Company's SecurityGuard Alarm or other services. The
impact of any such price changes on the Company's revenue or operating results
cannot be accurately determined. In addition, prior to the Reorganization, the
Company had an existing royalty agreement with FAI Insurance which provided
for the payment of commissions for each alarm unit sold in exchange for the
use of "FAI" name and logo. Pursuant to the Reorganization, the agreement was
replaced by the no cost License Agreement with FAI Insurance for the use of
the "FAI" name and logo. In July 1996, the number of senior executives
receiving
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commissions based on the number of alarm units sold, as well as the rate of
such commissions payable to these executives increased substantially. See
"Business--Executive Employment Agreements." This caused a material increase
in the cost of goods sold. There can be no assurance that these types of
changes will not occur in the future. If any such changes do not, in turn,
generate sufficient increases in the number of final users, the Company's
results could be materially adversely affected.
The Company expects to experience continued, although not significant,
increased profits in the near future from alarm sales in Australia and New
Zealand, and a gradual improvement from loss to profitability in operating
results from the expansion of its operations in the United Kingdom, Belgium,
the Netherlands, Germany, Canada and South Africa and the expected
commencement of a Distributor office in the United States. The introduction of
extended warranties and on-line monitoring are expected to make a positive
contribution to the Company's overall operating results in the near future.
RESULTS OF OPERATION
AUSTRALIA AND NEW ZEALAND OPERATIONS
Comparison of nine months ended March 31, 1997 and March 31, 1996
Revenue: Total revenue increased by $4.4 million or 24% from $18.8 million
for the nine months ended March 31, 1996 to $23.2 million for the nine months
ended March 31, 1997. This increase was primarily due to continued growth of
unit sales in the New Zealand market.
Cost Of Goods Sold: Cost of goods sold increased by $4.6 million or 38% of
total revenue from $12.2 million to $16.8 million. This represented an
increase in the percentage of total revenue by approximately 7% from 65% to
72% for the nine months ended March 31, 1996 and 1997, respectively. This
increase was due, in part, to increases in royalty fees charged to related
parties for use of the FAI brand name. This royalty is based on retail sale
prices, which increased 10% per unit in the period, rather than the sale price
charged to distributors. Royalty charges as a percentage of sales increased
from 10% for the nine months ended March 31, 1996 to 11% for the nine months
ended March 31, 1997. See "Certain Transactions--Transactions with FAI".
Cost of goods sold (excluding related party expenses such as royalty
charges), as a percentage of sales, increased from 54% of total revenue for
the nine months ended March 31, 1996 to 61% for the nine months ended March
31, 1997. This was due to the increased cost of goods from the manufacturer
for an updated version of the SecurityGuard Alarm with enhanced features, and
an increase in commission and bonus payments to senior executives related to
sales volumes. See "Business--Executive Employment Agreements".
The Company expects product costs, excluding royalty charges, to increase in
proportion to annual increases in the Australian Consumer Price Index. The
increase will be in accordance with the terms of the supply agreement with the
manufacturer.
General and Administrative Expenses: General and administrative expenses
were $4.0 million for the nine months ended March 31, 1997, compared to $4.7
million for the nine months ended March 31, 1996. As a percentage of revenue,
total general and administrative expenses decreased to 17% in the nine months
ended March 31, 1997 compared to 25% for the nine months ended March 31, 1996.
This decrease as a percentage of revenue for the nine months ended March 31,
1997 compared to the nine months ended March 31, 1996, reflected the economies
of scale of operating the Distributor Network since increases in revenue did
not entail a proportionate increase in overhead. Furthermore, the decrease in
General and Administrative Expenses reflects changes to the Chief Executive
Officer's employment agreement, which made him responsible for all costs of
support staff, travel, accommodation and other expenses related to the
performance of his duties as Chief Executive Officer of the Company. In
addition, the Company received a management fee of $0.5 million from FAI in
connection with the management of the international operations. See "Certain
Transactions--Transactions Involving Bradley D. Cooper".
Net Income from Operations: Net income from operations increased from $1.9
million for the nine months ended March 31, 1996 to $2.4 million for the nine
months ended March 31, 1997.
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If royalty payments to related parties for the use of the FAI brand name, and
other related party charges, were excluded, net income from operations would
have increased from $3.8 million for the nine months ended March 31, 1996 to
$5.1 million for the nine months ended March 31, 1997. See "Certain
Transactions--Transactions with FAI".
Interest Income: Interest income was approximately $0.6 million for the nine
months ended March 31, 1997 compared to $0.2 million for the nine months ended
March 31, 1996. This was due to interest received on loans to a related party
FAI Finance Corporation (NZ) Limited which increased significantly between the
periods. See "Certain Transactions--Transactions with FAI".
Income Tax Expense: The effective rate of tax decreased from 40% for the nine
months ended March 31, 1996 to 38% for the nine months ended March 31, 1997.
Net Income: Net income increased from $1.2 million for the nine months ended
March 31, 1996 to $1.8 million for the nine months ended March 31, 1997.
Comparison of fiscal year ended June 30, 1996 and June 30, 1995
Revenue: Total revenue increased by 25% from $21.4 million for the fiscal
year ended June 30, 1995 to $26.7 million for the fiscal year ended June 30,
1996. Revenues in the fiscal year ended June 30, 1995 included $6.2 million in
direct retail sales and in-house finance sales, as compared to $1.8 million in
fiscal year ended June 30, 1996. This increase in revenues was primarily the
result of the increase in the amount of units sold into the Australian market
during the fiscal year ended June 30, 1996 compared to the fiscal year ended
June 30, 1995.
Cost Of Goods Sold: Cost of goods sold remained stable at 66% of total
revenue although increasing in absolute terms from $14.2 million to $17.6
million for the fiscal years ended June 30, 1995 and 1996, respectively.
Product costs from the manufacturer remained stable throughout the fiscal year
ended June 30, 1996.
General and Administrative Expenses: General and administrative expenses were
$6.6 million in the fiscal year ended June 30, 1996 and $5.1 million for the
fiscal year ended June 30, 1995. As a percentage of revenue, general and
administrative expenses increased 1% to 25% during the fiscal year ended June
30, 1996 compared to the fiscal year ended December 31, 1995. This increase
reflects the completion of the shift to the Distributor Network for fiscal year
ended June 30, 1996 from direct retail sales utilized during the year ended
June 30, 1995, and the benefits of certain economies of scale.
Net Income from Operations: Net income from operations remained relatively
constant as a percentage of revenue at 10%, but showed an increase in absolute
figures from $2.1 million for fiscal year ended June 30, 1995 to $2.5 million
for fiscal year ended June 30, 1996. If royalty payments to related parties for
the use of the FAI brand name are excluded, net income from operations
increased 29% to $5.3 million for fiscal year ended June 30, 1996 from $4.1
million for the fiscal year ended June 30, 1995. See "Certain Transactions--
Transactions with FAI".
Interest Income: Interest income was approximately $251,000 for the fiscal
year ended June 30, 1996, compared to $65,000 for the fiscal year ended June
30, 1995. This increase was due to an increase in funds on deposit during the
year and a significant increase in interest received on loans to a related
party, FAI Finance Corporation (NZ) Limited. See "Certain Transactions--
Transactions with FAI".
Income Tax Expense: The effective rate of tax increased to 39% for the fiscal
year ended June 30, 1996 from 33% for the fiscal year ended June 30, 1995. This
was due to an increase in Australia's basic corporate tax rate.
Net Income: Net income increased by $190,000, or by 13%, from $1.5 million
for the fiscal year ended June 30, 1995 to $1.7 million for the fiscal year
ended June 30, 1996.
Comparison of fiscal year ended June 30, 1995 and June 30, 1994
Revenue: Total revenue increased by $10.8 million from $10.6 million for the
fiscal year ended June 30, 1994 to $21.4 million for the fiscal year ended June
30, 1995. This increase in revenue represents a 102% sales
18
<PAGE>
increase. The increase in revenue does not reflect fully the increase in
actual number of units sold due to lower margins as a result of the gradual
change in the Company structure and distribution strategy to the Distributor
Network.
Cost Of Goods Sold: Cost of goods sold increased from $6.7 million to $14.2
million. This increase in cost of goods represented an increase as a
percentage of revenue from 63% to 66% of total revenue for the fiscal years
ended June 30, 1994 and June 30, 1995 respectively. During this period the
Company began to implement the Distributor Network. Product costs per alarm
unit from the manufacturer remained stable throughout the fiscal year ended
June 30, 1995.
General and Administrative Expenses: General and administrative expenses
were $5.1 million in the fiscal year ended June 30, 1995, compared to $4.0
million for the fiscal year ended June 30, 1994. As a percentage of revenue,
total general and administrative expenses decreased to 24% for the fiscal year
ended June 30, 1995 as compared to 37% for the fiscal year ended December 31,
1994. This decrease as a percentage of sales reflected in part the economies
of scale and improved cost effectiveness of operating through the Distributor
Network.
Net Income/(Loss) from Operations: Net income from operations increased from
a loss of $0.1 million for the fiscal year ended June 30, 1994 to income of
$2.1 million for the fiscal year ended June 30, 1995. This improvement of $2.2
million in net income as a percentage of revenue represents a change from a
percentage loss of 1% to income of 10%. If royalty payments to related parties
for the use of the FAI brand name are excluded, net income from operations
increased from $0.9 million for the fiscal year ended June 30, 1994 to $4.1
million for the fiscal year ended June 30, 1995. See "Certain Transactions--
Transactions with FAI".
Interest Income: Interest income was approximately $65,000 for the fiscal
year ended June 30, 1995 compared to approximately $7,000 for the fiscal year
ended June 30, 1994. This change was due to a significant increase in funds
being placed upon deposit.
Income Tax Expense: The effective rate of tax decreased from 51% to 33% due
to the utilization of prior tax losses.
Net Income: Net income increased from a loss of $0.1 million for the fiscal
year ended June 30, 1994 to $1.5 million for the fiscal year ended June 30,
1995.
OPERATIONS OUTSIDE AUSTRALIA AND NEW ZEALAND
Comparison of nine months ended March 31, 1996 and nine months ended March
31, 1997
Revenue: Total revenue remained stable at $1.4 million for the nine months
ended March 31, 1996 compared to the nine months ended March 31, 1997. During
the period six unprofitable distributors throughout the UK were closed and one
branch operation assumed Distributor status. Four new operators were
established in the UK, the Netherlands and Belgium. The retail price of the
SecurityGuard Alarm was increased 22% from (Pounds)899 (US$1,392) to
(Pounds)1099 (US$1,702) to further increase operating revenues in the UK.
Cost Of Goods Sold: Cost of goods sold has decreased from 77% of revenue for
the nine months ended March 31, 1996 to 55% for the nine months ended March
31, 1997. This decrease was primarily attributable to the settlement of a
claim of $202,835 with its major supplier, Ness, arising from Ness' failure to
fill confirmed orders for the SecurityGuard product to the Company's European
operations. In addition, the cost of goods sold as a percentage of revenue
declined due to an increase in the retail price of the product.
General and Administrative Expenses: General and administrative expenses
were $1.7 million for the nine months ended March 31, 1997 compared to $2.0
million for the nine months ended March 31, 1996. As a percentage of sales,
this figure represented an improvement or decrease in expenses from 150% for
the nine months ended March 31, 1996 compared to 122% for the nine months
ended March 31, 1997. The decrease in expenses primarily reflects the
restructuring of the international operations outside of Australia and New
Zealand. In addition, a charge of $0.6 million was charged by FAI Home
Security Holdings Pty Ltd. to the Cooper International Group (not a related
party to FAI Home Security Holdings Pty Ltd.) for the provision of management
services in the nine months ended March 31, 1997. This charge included an
amount of $0.4 million for the provision of management services during the
nine month period ended March 31, 1996, but was charged during the nine month
period ended March 31, 1997. See "Certain Transactions--Transactions involving
Bradley D. Cooper".
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Net Loss from Operations: Net loss from operations decreased from $1.8
million for the nine months ended March 31, 1996 to $1.1 million for the nine
months ended March 31, 1997. As a percentage of revenue, this is an improvement
from 127% to 77%.
Interest Expense: Interest expense was $0.3 million for the nine months ended
March 31, 1997, due to interest payable on loans from FAI Home Security
Holdings Pty Ltd., partially consisting of $0.1 million related to the nine
month period ended March 31, 1996 which was brought to account in the period
ended March 31, 1997.
Income Tax Benefit: Tax losses relating to the nine months ended March 31,
1996 and for the nine months ended March 31, 1997 have not been recognized as a
future tax benefit. As a result of the Reorganization, the Company will not be
able to use these tax credits.
Net Loss: Net loss from operations was reduced by 24%, from $1.8 million for
the nine months ended March 31, 1996 to $1.4 million for the nine months ended
March 31, 1997. This represents an improvement in performance as a percentage
of revenue from 127% to 97% for the nine months ended March 31, 1995 and 1996
respectively. The net loss for the nine month period ended March 31, 1997 would
have decreased to $0.8 million if management charges and interest charged by
FAI Home Security Holdings Pty Ltd. and reflected in the period ended March 31,
1997, but relating to the nine month period ended March 31, 1996, were
eliminated.
Comparison of fiscal year ended June 30, 1996 and seven month period ended
June 30, 1995
Revenue: Total revenue increased by $0.9 million or 100% from $0.9 million
for the seven month period ended June 30, 1995 to $1.8 million for the fiscal
year ended June 30, 1996. Only seven months of revenues are shown as of June
1995 because the Canadian sales only commenced in November 1994 and the UK
sales commenced in February 1995. If these seven month figures are annualized
and it is assumed that revenues were generated at a stable rate, revenues for a
full fiscal year ended June 30, 1995 would be approximately $1.5 million,
compared to $1.8 million for the fiscal year ended June 30, 1996.
Cost Of Goods Sold: Cost of goods sold increased $0.6 million, from $0.4
million to $1.0 million. This represented an increase in cost of goods sold as
a percentage of total revenue from 51% for the seven month period ended June
30, 1995 to 59% for the fiscal year ended June 30, 1996. This increase is
mainly attributable to the conversion of the Canadian operation from a branch
operation to a distributorship utilizing the Distributor Network system.
Another factor in this increase was the cost of lead generation trials
conducted in the United Kingdom in the fiscal year ended June 30, 1996 in order
to determine market acceptance and feasibility in different areas.
General and Administrative Expenses: General and administrative expenses
increased by $0.6 million to $3.2 million in the fiscal year ended June 30,
1996 compared to $2.6 million for the seven month period ended June 30, 1995.
As a percentage of revenue, this represented a decrease of 112% from 295% in
the seven month period ended June 30, 1995 compared to 183% in the fiscal year
ended June 30, 1996. If these seven month figures are annualized and it is
assumed that expenses were incurred at a stable rate, expenses for a full
fiscal year ended June 30, 1995 would be approximately $4.4 million, compared
to $3.2 million for the fiscal year ended June 30, 1996.
Net Loss from Operations: The net loss from operations increased from $2.2
million for the seven month period ended June 30, 1995 to $2.5 million for the
fiscal year ended June 30, 1996.
Income Tax Benefit: Tax losses relating to the seven month period ended June
30, 1995 and for the fiscal year ended June 30, 1996 have not been recognized
as a future tax benefit. As a result of the Reorganization, the Company will
not be able to use these tax credits.
Net Loss: Net loss increased from $2.2 million for the fiscal year ended June
30, 1995 to $2.5 million for the fiscal year ended June 30, 1996. If these
seven month figures applicable to the fiscal year ended June 30, 1995 are
annualized and it is assumed that revenues and expenses were generated and
incurred at a stable rate,
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the net loss for a full fiscal year ended June 30, 1995 would be approximately
$3.7 million, compared to $2.5 million for 1996, suggesting an improvement in
performance of an estimated $1.2 million or 32%.
LIQUIDITY AND CAPITAL RESOURCES
Australia and New Zealand Operations
The Australian and New Zealand operation's principal source of liquidity
historically has been, and the Company's principal source is expected to
continue to be, cash flows from operations. Cash flow provided by operating
activities increased from approximately $190,000 for the nine month period
ending March 31, 1996 to approximately $3,346,000 for the nine month period
ending March 31, 1997. This was primarily due to the extension of commercial
payment terms by Ness, the Company's major supplier. Under a previous
commercial arrangement with Ness, its trade account was paid before it was
due, resulting in a reduction of cash (as a result of the reduction in
accounts payable) of approximately $801,000 during the nine months ended March
31, 1996. The return to ordinary commercial terms during the nine month period
ended March 31, 1997 is reflected in the increase in accounts payable of
approximately $934,000. Additionally, the improvement in cash flow provided by
operating activities also reflects improved profitability of the operations
during the nine month period ended March 31, 1997, as compared to the nine
month period ended March 31, 1996. Specifically, the Company improved its
economies of scale, improved recruitment with the Distributor Network and
enhanced its training programs resulting in a higher ratio of installed alarms
to sales calls.
Additionally, the historical cash flow and operating profit of the
Australian and New Zealand operations have been significantly reduced through
the charging of a royalty by FAI Insurance Ltd. The royalty charges levied
upon the Australian and New Zealand operations were approximately $1,922,000
and $2,669,000 during the nine month periods ending March 31, 1996, and March
31, 1997, respectively. The cash flow generated from operating activities by
the Australian and New Zealand operations have historically been used to make
loans to other entities within the FAI Insurances group. See "Certain
Transactions--Transactions with FAI".
Following the completion of the Reorganization, the cash flow generated from
operating activities by the Australian and New Zealand operations will be at
the disposal of the Company. Additionally, upon completion of the
Reorganization, the Company will no longer be required to make royalty
payments to FAI Insurances Ltd. See "Certain Transactions--Transactions with
FAI".
Net Cash flow provided by Operating Activities was $98,590, $3,507,594 and
$489,229 for the fiscal years ending June 1994, 1995 and 1996, respectively.
The increase in cashflow from fiscal year 1994 to 1995 was a result of the
change in net earnings of $1,543,679 and an increase in the accounts payable
relating to improved trading terms with the major supplier. The decrease in
cash flow from fiscal year 1995 to 1996 relates to the decrease in accounts
payable and the payment of outstandings in advance to Ness.
Net Cash flow generated by (used in) investing activities was ($29,979),
($43,632), $41,361 for the fiscal years ending June 1994, 1995, 1996. The
surplus in fiscal year 1996 relates to the sale of fixed assets in NZ
resulting from the conversion of branch operations to distributorships. Net
Cash flow provided by (used in) financing activities was $164,866,
($2,510,102), ($1,432,697) for the fiscal years ending June 1994, 1995 and
1996, respectively. The provision and use of funds relate to receipts and
borrowings from related parties.
Operations outside Australia and New Zealand ("International Operations")
The International Operations have been net users of cash due to the
incurring of operating losses associated with the start up nature of these
businesses. The cash used in operating activities was reduced from
approximately $2,225,000 during the nine month period ended March 31, 1996 to
approximately $1,296,000 during the nine month period ended March 31, 1997.
This was primarily due to the reduction in operating losses
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<PAGE>
as the start up operations have begun to mature and unsuccessful distribution
operations have been discontinued; a slow down in the growth of trade
receivables due to the reduction of extended credit terms provided to start up
distributors; and an increase in the use of trade credit due to the return to
commercial payment terms with Ness.
The cash flow requirements of the International operations have historically
been funded through the subscription of capital and loans from shareholders
and their related parties. See "Certain Transactions--Transactions involving
Bradley D. Cooper". The Company expects that the International Operations will
contribute to profits of the Company in fiscal 1998.
The net cash used in operating activities was ($2,333,645) and ($2,417,465)
for the fiscal years ending June 30, 1995 and 1996, respectively, and was due
to the losses incurred during both fiscal years.
The net cash used in investing activities was ($152,878), ($15,475) for the
fiscal years ending June 30, 1995 and 1996, respectively. The use of funds
related mainly to the additions of plant and equipment.
The net cash provided by financing activities was $2,563,407 and $2,446,740
for the fiscal years ending June 1995 and 1996, respectively. The receipt of
funds was in part attributable to borrowings from related parties to fund
shortfalls relating to trading losses. See "Certain Transactions--Transactions
Involving Bradley D. Cooper".
Post Reorganization Company Operations
Following the Reorganization, the Company will no longer be required to make
loans to other entities within the FAI group nor will it be required to make
royalty payments to FAI Insurances Ltd. See "Business--The Reorganization--The
License Agreement".
The Company currently has no credit facility with a bank or other financial
institution, although it believes appropriate facilities would be available on
reasonable terms if needed. The Company believes that internally generated
cash flows and the proceeds of this Offering will be adequate to support
currently planned business operations over the next twelve months. The
Company's strategy for growth is based on the expansion of its Distribution
Network into existing and new markets, with the costs of such expansion
largely borne by the distributors. For the forseeable future, the Company's
expansion into such existing and new markets should not require the Company to
seek additional financing or capital, thereby limiting any adverse impact on
the Company's liquidity on a long-term basis.
Notwithstanding that the Company's costs in expanding its Distribution
Network are expected to be minimal, the Company may be required to obtain
additional capital to fund growth outside of its existing operations if the
cash flow generated by the Australian and New Zealand operations is
insufficient to meet the cash requirements of developing the International
Operations. Potential sources of such capital may include proceeds from bank
financing or additional offerings of the equity or debt securities of the
Company. There can be no assurance that such capital will be available on
acceptable terms from these or other potential sources. The lack of such
capital could have a material adverse effect on the Company's operations. See
"Risk Factors--Possible Need for Additional Equity Capital or Borrowings".
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BUSINESS
OVERVIEW
The Company is a direct sales company which, through an extensive
Distributor Network, sells, installs and services residential security alarm
systems, principally in Australia and New Zealand, with expanding
international operations in North America, Europe and South Africa. The
Company's mission is to offer consumers a quality home security alarm package
to protect their families and property. The Company is expanding its business
services to include, in addition to residential alarm systems, on-line
monitoring services and extended warranties. Outside of Australia and New
Zealand, the Company has established Distributor Networks in the United
Kingdom, Belgium, the Netherlands, Germany, Canada and South Africa. The
Company has also successfully test marketed its product in the United States
through a sales representative, and anticipates opening a U.S. distribution
office by September 1997. The Company believes it is one of the fastest
growing residential security alarm businesses in Australia and New Zealand and
that the characteristics of the Australian and New Zealand market are
representative of the conditions that exist in other countries in which the
Company operates or plans to commence operations.
The Company's SecurityGuard Alarm system provides home protection to a
customer's premises through an interior heat sensitive detector, a centralized
processing unit with the ability to communicate signals to the Company's
central monitoring station, a battery back-up, a siren and window decals. In
addition to the installation of the SecurityGuard Alarm, the Company provides
customers with a "Home Protection Package" which contains smoke
alarm/detectors featuring dual ionization chambers to limit false alarms. The
SecurityGuard Alarm is a two time winner of the prestigious Australian Design
Award (1992 and 1996) and a winner of the Australian Design Mark (1996). The
Australian Design Mark and the Australian Design Award are awarded by
Standards Australia, an independent not-for-profit organization which utilizes
industry and design experts to evaluate products for excellence. To attain the
Australian Design Mark, a product must achieve excellence in four key areas:
(i) the design process; (ii) the product; (iii) the manufacture of the
product; and (iv) the product lifecycle. Generally, a product must first
achieve the Australian Design Mark to be eligible to receive the Australian
Design Award. In special circumstances products that are innovative and
original in design can achieve the Australian Design Award without first
receiving the Australian Design Mark. Due to its innovative design, in 1992
the SecurityGuard Alarm received the Australian Design Award directly. In
1996, the SecurityGuard Alarm was only one of 37 products to achieve the
Australian Design Mark, and thereafter was only one of eight products to
achieve Australian Design Award status in that year.
The Company's growth is in large part due to its extensive Distributor
Network which focuses on recruitment, training, and motivation of its sales
force. The Distributor Network is an incentive/performance based reward system
giving individuals the opportunity to begin as sales agents and, through a
clearly defined step program, progress toward owning their own business. The
Distributor Network provides Company personnel with the motivation to achieve
more than just monetary rewards: they work for recognition, peer respect and
to attain the goal of becoming authorized distributors. The Company believes
the Distributor Network provides advantages over traditional distributorship
arrangements. Specifically, the Distributor Network allows the Company to grow
rapidly with minimal capital investment, which enhances the Company's long
term relationship with its distributors and minimizes the overhead costs
normally associated with an employee-based sales and marketing force.
The Company commenced business in Australia in 1988. At its inception, the
Company sold alarms through part-time dealers who purchased franchises from
the Company. In May 1991, the Company adopted a more traditional sales
structure by shifting to commission-based compensation for its agents, who
were given extensive in-house sales training. Although the Company achieved
enough success with this approach to expand and establish an office in
Melbourne, Australia and had grown to five offices nationally a year and a
half later, its growth and the income generation of its sales force plateaued.
In response to this development, in early 1993, the Company implemented the
Distributor Network strategy which converted the existing Company owned and
operated branches and agents to independent distributor networks responsible
for their own costs. This change to the Distributor Network strategy is
responsible for the rapid growth in unit sales since that time. Specifically,
the Distributor Network launched by its first distributor in September 1993,
has brought the Company to a total of eighty-eight distribution outlets in
Australia and New Zealand, with additional offices in Canada, South Africa,
Belgium, Holland, Germany and the United Kingdom.
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In 1990, 50% of the Company was sold to FAI Insurance. On September 5, 1994
and on June 1, 1995, FAI Insurance acquired an additional 4.18% and 5.98% of
the Company, respectively, and entered into an agreement to acquire the
remaining 39.84% of the Company, resulting in FAI Home Security Holdings Pty
Ltd. becoming a wholly owned subsidiary of FAI Insurance. In November 1995, FAI
Insurance sold its home security operations outside Australia and New Zealand
to Mr. Cooper. As a result of this transaction, FAI was responsible for
conducting the security alarm business in Australia and New Zealand, and Mr.
Cooper was responsible for conducting the security alarm business outside
Australia and New Zealand. While these operations were initially conducted in
Canada and England, they now include the United States, South Africa, Belgium,
the Netherlands and Germany. Pursuant to the June 1, 1995 agreement, Mr. Cooper
agreed to continue as Chairman of the Board and Chief Executive Officer of the
Australian and New Zealand operations to ensure the continued dedication of his
executive team to achieving the current and projected profitability of the
Australian and New Zealand operations. In July 1996 the Company and Mr. Cooper
(through his wholly owned management company, Speakeasy Pty Ltd.) entered into
a management agreement providing for, among other items, that Mr. Cooper be
remunerated on a commission per unit sold and bear all expenses and overheads,
including rent, administrative support and travel costs, related to the
performance of his duties as Chairman of the Board and Chief Executive Officer
of the Company. The management agreement will terminate upon the completion of
this Offering and will be replaced by an executive employment agreement. See
"Management--Executive Employment Agreements". On March 31, 1997, FAI acquired
the business and substantially all of the assets of the international
operations from Mr. Cooper for a purchase price of approximately $2,784,431.
See "Certain Transactions--Transactions Involving Bradley D. Cooper" and
"Management--Executive Employment Agreements".
THE REORGANIZATION
The Company, wholly owned by FAI, is a Delaware corporation incorporated on
April 11, 1997. Immediately prior to the effectiveness of this Offering, the
Company acquired FAI's Australian and New Zealand operations by purchasing the
outstanding stock of the Australia and New Zealand Group. The Company also
acquired FAI's international operations outside Australia and New Zealand by
purchasing the International Assets. See "Certain Transactions--Purchase of
International Assets". In order to effect the Reorganization, the Company (i)
entered into the Share Purchase Agreement through which the Company, in
exchange for the International Assets and 100% of the issued capital of the
Australia and New Zealand Group, executed the $833,251 FAI Note, assumed the
$131,615 NZ Note and issued 4,499,999 shares of Common Stock of the Company to
FAI and (ii) through its wholly owned subsidiary, FAI Home Security Pty Ltd.,
entered into the License Agreement through which the Company obtained a no cost
license from FAI Insurance to use the "FAI" name and logo. After the
Reorganization, the Company had 4,500,000 shares of Common Stock outstanding
all of which were owned by FAI. Immediately prior to the effective date of this
Offering, the Company will also make a final dividend distribution to FAI in
the amount of approximately $3 million representing the retained earnings of
FAI Home Security Pty Ltd. on the date of the Reorganization. See "Certain
Transactions--The Reorganization".
The Share Purchase Agreement. In June 1997, subject to certain conditions,
the Company entered into a Share Purchase Agreement pursuant to which the
Company agreed to purchase from FAI, a wholly owned subsidiary of FAI
Insurance, all of the outstanding shares of the Australia and New Zealand Group
plus the International Assets, which included all of the fixed assets,
inventories and intangible assets previously owned by the Cooper International
Group. See "Certain Transactions--Purchase of International Assets". In
exchange, FAI would receive 4,499,999 shares of Common Stock of the Company
plus the FAI Note in the amount of $833,251 representing: (i) the net book
value of the tangible (fixed assets and inventories) International Assets
(approximately $562,497) and (ii) partial consideration for the intangible
International Assets (approximately $270,754). In addition, the Company
(through its assumption of the NZ Note) agreed to pay FAI the sum of $131,615
which represents the fixed assets and inventory of the New Zealand operations.
The FAI Note and the NZ Note which will be retired out of the proceeds of this
Offering are subject to change based on the inventory valuation and currency
exchange rates in effect at the time of the Reorganization. See "Use of
Proceeds". FAI Insurance is the guarantor of FAI's obligations under the Share
Purchase Agreement. The completion of Share Purchase Agreement was contingent
on FAI Home Security Pty Ltd.'s execution of a supply agreement with
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Ness granting to FAI Home Security Pty Ltd., the exclusive right to sell the
SecurityGuard products throughout the world (except the United States) and the
non-exclusive right to sell the SecurityGuard products in the United States
through the year 2007. The Share Purchase Agreement was also subject to the
condition subsequent that the Company, FAI and the Representatives enter into a
firm commitment underwriting agreement pursuant to which the Representatives
agrees to sell 3,000,000 shares of Common Stock of the Company in an initial
public offering, consisting of 250,000 shares to be sold by the Company and
2,750,000 shares to be sold by FAI, and that such initial public offering
became effective.
Prior to the effectiveness of this Offering, the Company fulfilled its
obligations under the Share Purchase Agreement including the completion of the
internal restructuring of the New Zealand operations and the execution of a
revised manufacturing agreement with Ness, and acquired 100% of the outstanding
shares of the Australia and New Zealand Group and the International Assets. See
"Business--Ness Supply Agreement". In connection with the acquisition of the
outstanding shares of the Australia and New Zealand Group, the Company acquired
the NZ Note payable to FAI from FAI Home Security (ENZED) Ltd. in the amount of
$131,615 (at March 31, 1997) representing the net book value of FAI Home
Security (ENZED) Ltd.'s, the New Zealand entity in the Australia and New
Zealand Group, inventory and fixed assets less any liabilities related to
warranty premiums.
The License Agreement. The Company, through its wholly owned subsidiary FAI
Home Security Pty Ltd., an Australian corporation, entered into the License
Agreement with FAI pursuant to which FAI granted to the Company a non-
exclusive, non-transferrable, royalty free license to use the FAI name and logo
and certain other intellectual property solely for the purposes of selling the
SecurityGuard Alarm systems. The License Agreement has a perpetual term and
will terminate only upon breach by the Company. See "Certain Transactions--
Transactions with FAI".
BUSINESS STRATEGY
The Company's strategy is to grow by increasing its Distributor Network in
its existing markets as well as in new international markets. In addition, the
Company plans to expand its product and service offerings with extended
warranties and on-line alarm monitoring. The Company also seeks to become more
efficient and cost-effective by taking advantage of the increased economies of
scale afforded by its growth.
International Expansion. The Company plans to model its international
expansion on the Distributor Network which has largely driven the success of
its Australian operations and its first international expansion into New
Zealand. This plan will be implemented by the Company's existing senior
management team. The Company's Executive Vice President of International
Business Development will relocate to England in order to more effectively
direct the growth of the European operations, and a similar strategy will be
implemented for the North American business when appropriate. The Company
intends to appoint a "Master Distributor" for each new country, who will be
responsible for operations in that country and will report directly to the
Company's head office in Australia. Prior to appointment, each Master
Distributor will have successfully completed an intensive twelve week training
program in Australia. Master Distributors will be required to bear all costs of
commencing operations in their respective jurisdiction, other than initial
recruitment and product approval expenses. This process will enable the Company
to expand rapidly into international markets without incurring significant cost
to the Company's management or financial resources.
Direct Approach To Households. The Company's growth strategy has been based
upon internal growth. The Company solicits sales mainly through a systematic
process of lead generation followed by telemarketing, as opposed to sales
through cold calling. The Company emphasizes customer satisfaction, in part
because satisfied customers generate additional customers.
Increasing Account Density In Existing Markets. The Company believes that
increasing account density in the regions it currently serves, principally
Australia and New Zealand, will enhance the efficiency of its operations and of
its distributors. The Company's objective is to increase the number of
SecurityGuard Alarm installations in each distributor area in which it has
already secured customers. By servicing and marketing a higher number of
accounts in a given area, the Company believes that it will improve the
incremental operating margins associated with that area.
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Additional Services and Recurring Revenue. The Company is also seeking to
sell enhanced services to new and existing customers, thereby increasing the
Company's average income per customer. The Company currently offers 24 hour
emergency response and access to local security patrol services upon telephonic
notification that an alarm has sounded. During 1997, the Company began offering
enhanced services such as extended warranties and on-line monitoring of alarm
equipment. If successful, these programs will provide the Company with a
recurring revenue stream to complement the unit sales growth.
SECURITY ALARM INDUSTRY
The residential security alarm industry in Australia and New Zealand is
fragmented, consisting of a mixture of major international companies such as
Brambles Industries Limited, Chubb Security Holdings Australia Ltd. and Tempo
Services Ltd. and a number of small owner/operators. The residential market is
characterized by a low level of market penetration and rapid growth. An
industry trend toward subsidizing installation costs to increase affordability,
combined with other factors such as heightened concern about crime and
favorable demographic trends, have resulted in increased demand for residential
alarm services. In particular, the IBIS Information Service Report on the
Security and Investigative Services L7864, printed 14 April 1997 (the "IBIS
Report") states that, "The Household market remains the largest area of
untapped potential for the industry. Much of this market at present is left to
alarms with neighbors monitoring the system and checking the premises or
calling the police when the alarm is triggered. Increasingly a new service,
usually in the higher income suburbs, is to have homes of executives monitored
when they travel interstate or overseas."
The Company's management believes that growth in the residential security
alarm industry is attributable to a number of factors. First, it appears that
media coverage of crime, along with political discussions concerning its causes
and remedies, have increased public awareness of crime. Second, a number of
insurance companies offer premium discounts to customers with security and fire
detection systems or require companies to maintain such systems as a condition
of coverage. Third, although the residential security alarm industry has
experienced significant growth in the last decade, the residential worldwide
market remains relatively unpenetrated.
The products and services marketed in the residential security alarm industry
range from alarm systems that provide basic intrusion and fire detection to
sophisticated systems incorporating features such as closed circuit television
and access control. Products provided use either hardwired or wireless
technology for systems installed on subscribers' premises and digital,
multiplex and wireless (radio) technologies for the transmission of alarm
signals to a central monitoring center. The Company believes that the security
alarm services industry is characterized by the following attributes:
High Degree of Fragmentation. While residential security alarm services in
Australia, New Zealand and worldwide are consolidating, the industry remains
highly fragmented, consisting of a large number of local and regional companies
within each jurisdiction. The fragmented nature of the industry can be
attributed to the low capital requirements associated with performing basic
installation and maintenance of security alarm systems. However, the business
of a full service, integrated security services company providing central
station monitoring services is capital intensive, and the Company believes that
the high fixed costs of establishing both central monitoring stations and full
service operations contribute to the small number of national competitors in
each international market.
Continued Product Diversification and Integration of Services. A recent trend
in the residential security alarm industry has been increased integration of
different types of products into single systems provided by single vendors. The
Company believes that this trend has resulted from the need for enhanced
security services on a more cost-effective basis. Whereas basic alarm systems
were once adequate for many businesses and homes, it appears that many
consumers now demand access control and monitoring systems integrated into a
single system to provide for their overall security needs. A security alarm
system which provides burglar and fire alarm monitoring and access control, all
integrated into one central system, not only provides enhanced security
services, but also is more cost-effective than separate systems installed by
separate vendors. In this environment, the Company believes that it can gain a
competitive advantage over smaller companies in the industry that do
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not have the infrastructure or the expertise to support the larger and more
sophisticated integrated systems. Hence, the Company is aggressively
positioning itself to take advantage of this trend by expanding the services
offered to its customers to include the 24-hour monitoring services.
Advances in Digital Communications Technology. Prior to the development of
digital communications technology, alarm monitoring required a dedicated
telephone line, which made long-distance monitoring uneconomic. Consequently,
alarm monitoring companies were required to maintain a large number of
geographically dispersed monitoring stations in order to achieve a national or
regional presence. The development of digital communications technology
eliminated the need for dedicated telephone lines, reducing the cost of
monitoring services to the subscriber and permitting the monitoring of
subscriber accounts over a wide geographic area from a central monitoring
station. The elimination of local monitoring stations has not only decreased
the cost of providing alarm monitoring services, has also substantially
increased the economies of scale for larger alarm service companies. In
addition, the concurrent development of microprocessor-based control panels
has substantially reduced the cost of the subscriber equipment available to
consumers in the residential and commercial markets and has substantially
reduced service costs because many diagnostic and maintenance functions can be
performed from a company's office without sending a technician to the
customer's premises.
THE SECURITYGUARD ALARM AND SERVICES
The Company's SecurityGuard Alarm is the only two-time winner of the
prestigious Australian Design Award within the security industry (1992 and
1996), and was the winner of the Australian Design Mark in 1992. The
SecurityGuard Alarm is molded in an extruded polycarbonate casing and features
double soldered circuitry, a sealed independent power source and automatic
testing of battery power supply. It is radio controlled with access through a
radio transmitted, sixteen digit, binary code bit stream. It has a security
key override switch, and a 120db (at 1 metre) horn speaker installed within
the alarm plus an external siren and blue flashing strobe light. The
oscillating siren is designed to prompt distress to an intruder. The alarm
system features infra-red detection cells that respond effectively to body
temperature and remote controls which are factory sealed and a tuner set to
optimum range, signal and strength. The SecurityGuard Alarm complies with the
relevant Australian/NZ Standards AS2201.1/5. The system carries guarantees of
quality and service on the terms and conditions comparable to others in the
industry.
The basic SecurityGuard Alarm system provides protection for two openings to
the premises through an interior heat sensitive motion detector, a centralized
processing unit ("CPU") with the ability to communicate signals to the
Company's central monitoring station, a battery back-up, a siren and window
decals. The Company provides a one year limited warranty on system parts and a
one year limited warranty on labor. Customers have the option of protecting
additional openings and adding additional sirens and motion detectors, remote
control "panic buttons" and fire protection by means of smoke and heat
detectors and alarms. The Company's average fee for a SecurityGuard Alarm
system, including systems purchased with such customer options, was
approximately AUD$2092 (US$1650) per account customer during 1996, including
all installation service charges.
The SecurityGuard Alarm installed by the Company is a custom-configured
wireless alarm system manufactured by Ness, a leading manufacturer of security
alarm systems in Australia. Wireless devices use radio signals from
transmitters incorporated into the protective devices to communicate
activation signals from such devices to the customer's CPU. By comparison,
hard-wire devices, which are characterized by substantially higher initial
costs to the customer, use actual wires to connect each of the protective
devices to the customer's CPU. Wireless devices can generally be installed
more simply and quickly than those that require alarm wiring, thus reducing
labor costs. In addition, wireless devices are also easy to relocate when the
customer changes homes.
24 Hour Alarm Monitoring Services. The Company is beginning to market 24-
hour alarm monitoring services to its Australian customers. The Company is
planning to outsource monitoring to a central monitoring station in Sydney,
Australia which will incorporate the use of advanced communications and
computer systems that route incoming alarm signals and telephone calls to
operators. Other international operations centers will be
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established as required. Depending upon the type of service chosen by the
customer, central monitoring station personnel will respond to alarms by
relaying information to local security patrols or police departments, notifying
the customer, or taking other appropriate action. Non-emergency administrative
signals will include power failures, low battery signals, deactivation and
reactivation of the alarm monitoring system, and test signals, and will be
processed automatically by central monitoring station computers.
Extended Warranty. The Company is beginning to offer an extended warranty
service, initially only in Australia, to cover the normal cost of repair and
maintenance of the alarm system after the expiration of the initial one year
warranty.
Fire Safety. In addition to the installation of the SecurityGuard Alarm, the
Company provides customers with a "Home Protection Package" which contains
smoke alarm/detectors featuring dual ionization chambers to limit false alarms.
The smoke alarm/detectors incorporate low battery warning beeps and when
activated emit a loud persistent siren noise in the high frequency range of the
audible sound spectrum. Smoke alarm/detectors are recommended by all fire and
emergency services, and are now compulsory in new homes in certain areas. In
addition to the smoke alarm/detectors, the SecurityGuard Alarm is sold with a
rechargeable fire extinguisher and a one square meter fire blanket.
Installation And Field Services. The Company requires the maintenance of
installation and field service personnel in each distributor office.
Distributors subcontract services and installation to third parties who are
trained by the Company to install and maintain the customer's SecurityGuard
Alarm. Installations of new alarm systems are performed promptly after the
completion of the sale. After completing an installation, the technician
instructs the customer on the use of the system and furnishes a written manual
and, in many instances, an instruction video. Additional follow-up instruction
is provided by sales consultants in the distributor offices as needed. The
increasing density of the Company's customer base as a result of the Company's
continuing strategy to "infill" its existing distributor service areas with new
customers permits more efficient scheduling and routing of field service
technicians, resulting in economies of scale at the distributor level. The
increased efficiency in scheduling and routing also allows the Company to
provide faster field service response and support, which leads to a higher
level of customer satisfaction.
"We Care" Culture. In 1995, the Company implemented its "We Care" customer
satisfaction program by recruiting, as its Director of Customer Care and
Compliance, an individual who had previously been a Senior Investigation
Officer of an Australian state government consumer affairs organization. The We
Care program consists of a number of measures intended to maximize customer
satisfaction, including an annual survey of customers, periodic awards to
distributors who maintain superior customer satisfaction, and the installation
of a toll-free number which customers can call with any questions or
complaints. The We Care program also includes a total quality management
program through which the Company analyzes and documents all processes critical
to customer satisfaction, including sales, installations, monitoring, billing
and customer service. The Company then implements improvements and repeats the
analysis process.
DISTRIBUTOR NETWORK
The Company's expected growth is based mainly upon the expansion of the
Distributor Network. The Company believes that this organization strategy
generates greater enthusiasm on the part of the sales people by giving them the
opportunity to eventually run and develop their own businesses. This motivation
results from a compensation structure in which, as an individual moves up the
selling structure, he or she receives a greater proportion of the final selling
price, and eventually can be entitled to receive a bonus or commission override
of units sold by subordinate distributor networks. The Distributor Network
consists of the following structured selling and training levels which are
designed to motivate and provide a clearly defined path to advancement:
Level 1--Independent Agent. The majority of the sales force or distribution
network are Independent Agents who contract directly with Distributors and Area
Distributors. Independent Agents are compensated solely by commissions and are
required to generate leads from which telemarketers arrange appointments with
potential
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clients. Independent Agents then follow up on the pre-arranged appointments
with potential purchasers with visits to their homes where planned and scripted
on-site presentations are made. Distributors and Area Distributors pay
Independent Agents a commission based on their performance. For an Independent
Agent to be promoted to a Dealer they are required to achieve a predetermined
level of sales within a specified period. As of March 31, 1997, the Company had
437 Independent Agents.
Level 2--Dealers. Dealers are authorized by the Company to sell security
systems directly to the public, and are supported by Area Distributors in
implementing the Company's SecurityGuard Direct Marketing Program. Dealers must
sell personally to the customer and cannot contract the sales process to
Independent Agents. Dealers follow up on pre-arranged appointments with
potential purchasers and make a planned and scripted on-site presentation
during a home visit. Dealers are compensated based upon their profit derived
from the difference in their selling price to the public and their purchase
cost per alarm unit, after paying for their own operating costs. For Dealers to
be promoted to Area Distributors they are required to achieve a predetermined
level of sales within a specified period. As of March 31, 1997, the Company had
30 Dealers.
Level 3--Area Distributors. Area Distributors sell security systems to the
public through the Level 1 Independent Agents for which they receive profit
margins after commission, and Level 2 Dealers for which they receive commission
overrides for every sale. Area Distributors are responsible for the
implementation of the Direct Sales Marketing Program which includes
telemarketing, lead generation and recruitment. Prior to promotion, Area
Distributors are given the opportunity to assume more responsibility and run
the distributorship and contract with Level 2 Dealers. Level 1 Independent
Agents operate from the Area Distributor's premises and are paid performance
based commissions. The Area Distributors earn their profits from Independent
Agents after the payment of commission, cost of goods sold and operating
expenses. Level 2 Dealers, however, operate independently of the Area
Distributor and are merely supervised by the Area Distributor. For this
supervision, the Area Distributor receives a fixed commission override per
system purchased by the Level 2 Dealer in their network. There is no limit to
the number of Independent Agents or Dealers an Area Distributor can have. For
Area Distributors to be promoted to Distributors, they are required to achieve
a predetermined level of sales within a specified period. As of March 31, 1997,
the Company had 34 Area Distributors.
Level 4--Distributors. Distributors, with support from the Company, are
responsible for ensuring that Dealers and Independent Agents are motivated and
proficient in all aspects of direct sales by, among other items: (i) ensuring
all new sales consultants go through a specified training program which
includes proficiency tests, video taping and "on the job" observation and
critical analysis; (ii) organizing major conferences annually as well as
running weekly internal training seminars; (iii) professionally videotaping
major training conferences and seminars; (iv) professionally taping tele-
conferences of "distributed" meetings where distributors discuss topics on
business enhancement, such as lead generation; (v) running reward programs for
the introduction or recruitment of new staff members; and (vi) recognizing and
rewarding other staff for securing new customers. Distributors operate the same
as Area Distributors within their network and may purchase stock from the
Company at a slightly lower price per share than the Area Distributors.
Distributors receive a commission override for all purchases by Dealers or Area
Distributors within their network. Independent Agents working within a
distributorship are paid the same commission structure as those working for an
Area Distributor. As of March 31, 1997, the Company had 27 Distributors.
SALES AND MARKETING.
The Company's growth strategy is based upon the internal generation of
customer accounts by direct sales through the Direct Sales Marketing Program by
the Company's sales team. The Company believes that its Direct Sales Marketing
Program represents an effective internal growth strategy and is the Company's
primary competitive advantage over other security alarm companies. From January
1993 through March 31, 1997, the Company generated approximately 118,000
customer accounts internally through the Direct Sales Market Program, including
over 9,000 new customer accounts during the third fiscal quarter of 1997. The
training, sales and distribution program involves on-going recruitment,
training and defined qualification levels for greater recognition, commission
and substantial bonus income, as an integral part of the Company's successful
growth and market penetration strategy.
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The Company markets the SecurityGuard Alarm system through a direct marketing
campaign conducted by the Distributor Network, targeting a demographic group
consisting of "average moms and dads." The Company does not generally use media
advertising to advertise the alarm systems. Instead, the Distributor Network
representatives are required to generate leads through running community crime
awareness programs and shopping center promotions, installing neighborhood
"drop boxes", conducting periodic give-aways, and distributing questionnaires.
Telemarketers then telephone individuals who respond to these measures and make
appointments for home visits by sales representatives from the Distributor
Network. During these home visits, the Distributor Network representative
presents a mounted display of the alarm system and related equipment and a
description of their features. The Distributor Network also establishes "Crime
Awareness Programs" in order to educate residents in a targeted neighborhood
with regard to the crime level of the area and the utility of the Company's
products in preventing crime and reducing losses. The Company believes that by
making sales to multiple homes in a neighborhood and establishing a Crime
Awareness Program, crime prevention synergies and additional sales
opportunities are achieved as neighbors begin to work together to minimize
crime.
The Company's sales and marketing approach stresses three aspects of its
SecurityGuard Alarm system: deterrence, detection and ejection. The Company
believes that the mere existence of a security alarm system in a home deters
burglars and home invaders from attempting entry. If they do persist and enter
a home protected by a SecurityGuard Alarm, the device's heat and movement
sensors will detect their presence and activate the alarm. SecurityGuard
Alarm's volume is deliberately set at a level that causes extreme discomfort to
human beings and that should result in the invader leaving the premises. In
addition, the volume of the alarm is sufficient to alert not just those who
dwell in the invaded home, but their neighbors, increasing the likelihood that
the home invader will be seen and possibly apprehended. The alarm system reacts
instantaneously on detecting an intruder, reducing the intruder's ability to
search for or remove valuables. Unlike silent alarms which are linked to police
stations or other patrols, the SecurityGuard Alarm's immediate shrill alarm
does not furnish the home invader with a pre-established or known response
time. The Company's focus in designing its systems has been not to assist in
catching burglars or home intruders, but to prevent protected homes from being
burgled or invaded in the first place and to minimize losses if they are
invaded.
COMPETITION
The security alarm industry is highly competitive and fragmented. The Company
competes with numerous other companies for new customers. Although the Company
believes that it is the leading seller of residential alarm systems in
Australia and New Zealand, there is no assurance that the Company will continue
to have a competitive advantage in these countries. According to the IBIS
Report, the industry in Australia derives 90 percent of its revenue from
business and 10 percent from households, and is concentrated among four
manufacturers who account for approximately 68 percent of the market. The IBIS
report indicated that gross sales for the entire industry for 1995-1996 were
AUD$866 million (US$689.68 million) and that the real rate of growth during
that year was estimated at 3.5 percent. The loss of any competitive position by
the Company in its target market would have a material adverse effect on the
Company. In marketing the SecurityGuard Alarm outside of Australia and New
Zealand, the Company will compete with larger national and international
companies that are better capitalized than the Company.
The Company's three major competitors for first-time purchasers of alarm
systems in Australia are Brambles Industries Ltd, Chubb Security Holdings
Australia Ltd, and Tempo Services Ltd. Competition for new accounts by many of
these competitors is based primarily on installation price, monthly monitoring
fee, the range of services offered, and reputation for quality. However, the
Company believes it has a superior marketing strategy because of its policy of
selling directly to the end user through the Distributor Network.
The Company believes that similar competition exists in markets throughout
the areas in which it seeks to operate. In the United States, the Company will
face competition from alarm installation and monitoring companies which are
better capitalized than the Company and which offer low-priced, subsidized
installations of security systems. However, the Company believes that it will
be able to successfully penetrate and compete in such markets using the same
system that it uses in Australia and New Zealand. The Company has expanded its
business services to include, in addition to residential alarm systems, on-line
monitoring services and extended
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warranties in Australia. Outside of Australia and New Zealand, the Company has
established distributor networks in the United Kingdom, Belgium, the
Netherlands, Germany, Canada and South Africa.
NESS SUPPLY AGREEMENT
Ness is a leading manufacturer of security alarms in Australia and New
Zealand, and is certified under ISO 9000. It has won six Australian designer of
the year awards, among other achievements. Only one other alarm manufacturer in
Australia has won an Australian design of the year award. Ness has recently
expanded with the opening of its Nesstronics plant, which manufactures all of
the printed circuit boards for SecurityGuard Alarm products. Naz Circosta, a
director of Ness, sits on the Board of Australian Alarm Standards. Since the
inception of Ness' relationship with the Company in 1989, senior management of
the two companies have met regularly.
In September 1990, the Company entered into the manufacturing/supply
agreement with Westinghouse Brake and Signal Company (Australia) Pty Limited
(predecessor company to Ness) under which Ness agreed to manufacture the
SecurityGuard Alarm for the Company. That agreement, which was due to terminate
in the year 2000, also granted the Company the exclusive right to sell the
SecurityGuard Alarm throughout the world (except the United States) and a non-
exclusive right to the United States market. Prior to the effectiveness of this
Offering, the Company, through its wholly owned subsidiary, FAI Home Security
Pty Ltd., superseded this agreement with a new manufacturing agreement which
granted to the Company essentially the same rights which it had under the
previous agreement. This new agreement included a provision which precludes
termination prior to the year 2007 under normal circumstances. The new
agreement provides further that Ness may market and sell the SecurityGuard
Alarm within the Company's exclusive territory, but only upon the Company's
written consent. The Company shall not unreasonably withhold such consent. The
manufacturing agreement further provides that Ness will be permitted to market
and sell the SecurityGuard alarm in places where the Company does not intend to
carry on business. Ness's rights to sell the SecurityGuard Alarm in such areas
terminate if it supplies or sells to companies that sell products in that
country using a marketing method or strategy which is similar in nature to that
used by the Company. Ness currently manufactures and distributes security alarm
products other than the SecurityGuard Alarm. Ness does not currently
manufacture and distribute, nor has it given any indication that it intends to
manufacture and distribute, a wireless alarm product similar to the
SecurityGuard Alarm. Ness has given no indication of establishing any sales
presence in Australia, New Zealand or any other market. If Ness establishes a
sales agency in any major potential market this may in turn adversely affect
the Company. The loss of the Company's relationship with Ness, or a significant
reduction of Ness's manufacturing capability, or a lack of progress in new
product development, could have a material adverse effect upon the Company.
TRADEMARKS AND INTELLECTUAL PROPERTY
The Company operates under the registered Company name "FAI Home Security" in
Australia, New Zealand, the United States, Europe and South Africa. The Company
has licensing arrangements with FAI Insurance to permit it to use the "FAI"
name and logos. The Company holds copyrights to significant marketing,
training, promotional and organizational material. See "Certain Transactions--
Transactions with FAI".
GOVERNMENT REGULATION
The Company's domestic operations in Australia and New Zealand, as well as
its other worldwide operations, are subject to a variety of laws, regulations
and licensing requirements of federal, state and local authorities. In certain
jurisdictions, the Company is required to obtain licenses or permits, to comply
with standards governing employee selection and training, and to meet certain
standards in the conduct of its business. Many jurisdictions also require
certain of the Company's employees to obtain licenses or permits.
The alarm industry is also subject to requirements imposed by various
insurance, approval, licensing and standards organization. Depending upon the
type of customer served, the type of security service provided and the
requirements of the applicable local governmental jurisdiction, adherence to
the requirements and standards of such organizations is mandatory in some
instances and voluntary in others.
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<PAGE>
In most countries, the Company's advertising and sales practices are
regulated by various consumer protection laws. Such laws and regulations
include restrictions on the manner in which the Company promotes the sale of
its security alarm systems and the obligation of the Company to provide
purchasers of its alarm systems with certain rescission rights.
Recently, a trend has emerged on the part of local governmental authorities
to adopt various measures aimed at reducing the number of false alarms. Such
measures include (i) subjecting alarm monitoring companies to fines or
penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm customers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms
at a particular location and (v) requiring further verification of an alarm
signal before the police will respond. See "Risk Factors--Government
Regulation".
EMPLOYEES
At March 31, 1997, the Company employed 52 individuals, including 51 on a
full-time basis and 1 on a part-time basis. Currently, none of the Company's
employees are represented by a labor union or covered by a collective
bargaining agreement. The Company believes it has an excellent relationship
with its employees.
PROPERTY
The Company's executive office, administrative, sales and service office and
central monitoring station are located at Levels 7 and 3, 77 Pacific Highway,
North Sydney, Australia. The executive offices constitute approximately 661
square meters at a rental rate of AUD$380 (approximately US$298) per square
meter per annum. The Company's lease at 77 Pacific Highway has expired,
however, the Company has entered into a letter of intent to execute a lease
for an additional 2.5 years over Level 7, 77 Pacific Highway and is seeking to
enter into a further long term lease when floor space contiguous to Level 7
becomes available. In the interim, the Company rents Level 3, 77 Pacific
Highway on a month by month basis. The Company believes that its existing
office space will be adequate to meet its needs of the immediate future. The
Company has offices in England at the second floor of Lodge House Kay Street,
Burnley, Lancashire. The lease expires on April 12, 2000 and has an annual
rent of STG(Pounds) 6,640 (approximately US$10,283). The Company believes this
leased space is adequate to meet its needs in Europe for the immediate future.
LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any currently pending or
threatened litigation will have a material adverse effect on the financial
condition and results of operations of the Company.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company and their ages as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Bradley D. Cooper 38 Chairman of the Board of Directors, Chief
Executive Officer
Terrence J. Youngman 44 President
Robert D. Appleby 47 Executive Vice President of International
Business Development
Mark Whitaker 30 Chief Financial Officer, Treasurer,
Executive Vice President of Finance
Geoffrey D. Knowles 32 Executive Vice President of Marketing
Felicity A. Hilbert 27 Executive Vice President of Operations
Timothy M. Mainprize 47 Director
Steven A. Rothstein 46 Director
Steven Rabinovici 45 Director
Dennis J. Puleo 51 Director
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Bradley D. Cooper is the founder of the Company and has been its Chief
Executive Officer since its inception in 1985. In 1997, Mr. Cooper became
Chairman of the Board of the Company. Cooper is also a director and major
shareholder of the Phoenix Leisure Group Pty Ltd, which holds the Australian
license for Rossignol Skis. He is the founding director and major shareholder
of Theme Products Pty Ltd which holds exclusive licenses in Australia for such
childhood favorites as Warner Bros. (Looney Tunes), Sesame Street, and Thomas
the Tank Engine to manufacture, market and distribute children's furniture. He
is Chairman of Vision Publishing Pty Ltd, a business publishing and conference
company, as well as being a director of the Elizabethan Theatre Trust (of which
Her Majesty Queen Elizabeth II is patron).
Mr. Terrence J. Youngman is the President of the Company responsible for
management of all senior departmental managers and overall Company operations,
a position he has held since 1996. Mr. Youngman served as General Manager from
1995 to 1996 and Finance Administration Manager from 1992 to 1995. In 1991 and
1992 Mr. Youngman served as a Finance Accountant for Furniture Australia (BTS
Subsidiaries).
Mr. Robert D. Appleby is the Executive Vice President of International
Business Development for the Company and has served in this position since
1993. His responsibilities include the recruitment, training, development and
motivation of the Company's distributors in Australia and overseas. Prior to
his present position, Mr. Appleby served as the Company's International Sales
Director.
Mr. Mark Whitaker is the Company's Chief Financial Officer, Treasurer and
Executive Vice President of Finance and has served in this capacity since
December 1996. In 1995 and 1996, Mr. Whitaker served as Assistant General
Manager, from 1993 to 1995 as a Group Accountant and from 1992 to 1993 as a
Financial Accountant for the Company. Prior to his employment with the Company,
Mr. Whitaker was employed by
33
<PAGE>
Hewlett Packard (in England) as a financial accountant from 1991 to 1992.
Mr. Geoffrey D. Knowles has served as Executive Vice President of Marketing
for the Company since 1994. As Executive Vice President of Marketing, Mr.
Knowles is responsible for the development and implementation of all sales and
marketing material, training programs and internal competitions for all sales
personnel. Mr. Knowles served as Assistant General Manager of the Company in
1993 to 1994 and National Sales Manager during 1993. From 1986 to 1992 Mr.
Knowles was the Managing Director of Knowles Enterprises Pty. Ltd., a company
which sold electrical appliances.
Ms. Felicity A. Hilbert has served as the Company's Executive Vice President
of Operations, responsible for the operational management of the Company, the
Customer Service department and the Extended Services department in Australia
and overseas, since 1996. From 1994 to 1996 Ms. Hilbert served as the
International Operations Manager and from 1993-1994 served as Distributor
Relations Manager and National Administration Manager. From 1992 to 1993 Ms.
Hilbert served as an Administrative Assistant for the Company's Melbourne
branch. From 1988 to 1992 Ms. Hilbert was employed by Tilt Lift Equipment Pty.
Ltd., a company which specializes in providing commercial construction products
and services.
Mr. Timothy M. Mainprize was elected a director of the Company in April 1997,
and was appointed as a director of FAI in January 1995. Mr. Mainprize had been
with FAI Insurance since 1988 and was appointed a director of FAI Insurance in
1993. Mr. Mainprize is Chief Financial Officer of FAI Insurance and he is also
responsible for the Information Technology and is a member of the Investment
Committee of FAI Insurance.
Mr. Steven Rothstein was elected a director of the Company in April 1997. He
became a member of the Board of National Securities Corporation in May 1995 and
was appointed Chairman on August 1, 1995. He is also the Chairman, CEO,
President and a director of Olympic Cascade Financial Corporation, the parent
company of National. From 1979 through 1989, Mr. Rothstein was a registered
representative and limited partner at Bear Stearns and Company, Inc. in
Chicago, Illinois and Los Angeles, California. From 1989 to 1992, Mr. Rothstein
was a Senior Vice President in the Chicago office of Oppenheimer and Company,
Inc. In December 1992 he joined Rodman and Renshaw, Inc., a Chicago-based
broker/dealer serving as Managing Director, and joined H.J. Meyers, Inc. in
Beverly Hills, California, a New York Stock Exchange member firm in March 1994.
Mr. Rothstein is a 1972 graduate of Brown University, Providence, Rhode Island.
Presently, Mr. Rothstein is a board member of American Craft Brewing
International Limited, Gateway Data Sciences, Inc., New World Coffee, Inc.,
SigmaTron International, Inc. and Vita Food Products, Inc. Mr. Rothstein was
designated a director of the Company pursuant to the Underwriting Agreement.
Mr. Steven Rabinovici was elected a director of the Company in April 1997. He
has been Chairman of the Board and Chief Executive Officer of Complete
Management, Inc. ("CMI"), since December 28, 1995. From December 31, 1992
through December 27, 1995 he was the President, Chief Executive Officer and a
director of CMI. From July 1990 through December 31, 1992, he was an
independent health care and business consultant. On July 21, 1992, MEBE
Enterprises, Inc., the owner and operator of a single Roy Rogers fast food
restaurant, filed for protection under Chapter 11 of the Bankruptcy Code. Mr.
Rabinovici was a founder and principal of MEBE Enterprises, Inc. Earlier in his
career, Mr. Rabinovici had more than 10 years experience in hospital
administration, including approximately two years as associate administrator of
Brookdale Hospital Medical Center, a 1,000 bed teaching hospital, and two years
as the administrator of the Division of Psychiatry, Cornell University New York
Hospital. Mr. Rabinovici has a Bachelors degree from City University of New
York, Brooklyn College, a Masters degree in Public Health from Columbia
University School of Public Health and a Juris Doctorate degree from New York
Law School.
Mr. Dennis Puleo was elected a director of the Company in April 1997. He has
worked as a real estate agent for Century 21 since 1991 and holds real estate
licenses in Florida and Massachusetts. During this time, Mr. Puleo has also
worked as an independent consultant in the areas of sales, marketing and
franchising.
34
<PAGE>
STAGGERED BOARD OF DIRECTORS
Pursuant to the Company's Certificate of Incorporation, upon the closing of
this offering the Board of Directors will be divided into three classes of
directors serving staggered three-year terms.
Class I Directors. The following people will serve as Class I directors with
their term expiring in 1998: Steven A. Rothstein and Steven Rabinovici.
Class II Directors. The following people will serve as Class II directors
with their term expiring in 1999: Timothy M. Mainprize and Dennis J. Puleo.
Class III Directors. The following people will serve as Class III directors
with their term expiring in 2000: Bradley D. Cooper.
All directors of each class will hold their positions until the annual
meeting of shareholders held during the year in which the terms of the
directors in such class expire, or until their respective successors are
elected and qualified.
EXECUTIVE EMPLOYMENT AGREEMENTS
Executive Employment Agreements Prior to Offering
Presently, the Company has executive employment agreements for the period
July 1, 1996 to June 30, 1997 with Messrs. Bradley D. Cooper, David Appleby
and Geoffrey Knowles.
Pursuant to an existing executive employment agreement between FAI Home
Security Pty Ltd. and Speakeasy Pty Ltd. ("Speakeasy"), a company beneficially
owned by Mr. Cooper, Mr. Cooper receives, on a monthly basis, a commission of
approximately $19.25 for each sale of a Security Guard product within
Australia and New Zealand to a member of the public (provided the product has
not been returned by the consumer and no refund of purchase price has been
made). Speakeasy bears all of Mr. Cooper's business expenses including rent,
administrative support and travel costs, and the Company is not obligated to
pay or reimburse Mr. Cooper for any out of pocket expenses while he is on
Company business. The total remuneration received by Speakeasy in the nine
month period ended March 31, 1997 was approximately $416,000. See "Certain
Transactions--Transactions Involving Bradley D. Cooper." Mr. Cooper's current
agreement will continue until completion of this Offering.
The existing executive employment agreement with Mr. Appleby provides that
he shall receive no base salary. Instead, Mr. Appleby receives, on a monthly
basis, a commission of approximately $13 for each sale of a SecurityGuard
product within Australia and New Zealand to a member of the public (provided
the product has not been returned by the consumer and no refund of purchase
price has been made). For the nine months ended March 31, 1997, Mr. Appleby
has received a remuneration, based on the number of units sold, of $205,498.
The existing executive employment agreement with Mr. Knowles provides that
Mr. Knowles shall receive a base salary of approximately $98,138, plus the use
of a fully maintained motor vehicle. Pursuant to the agreement, Mr. Knowles is
also entitled to a bonus based upon the achievement of sales targets. For the
nine months ended March 31, 1997 this bonus was calculated based on $1.58 per
unit on unit sales exceeding 7500 per quarter and $4.70 per unit on unit sales
exceeding 8750 in any quarter. For the nine months ended March 31, 1997, Mr.
Knowles has received remuneration, based on the number of units sold, of
$126,772.
Mr. Youngman is employed on a base salary of $120,222 and is currently not
entitled to any bonus entitlement.
Executive Employment Agreement Upon Effectiveness of Offering
In addition, certain executive employment agreements, which will become
effective upon the completion of this Offering and continue through June 30,
2000, have been executed with the Company by the following key
35
<PAGE>
executives: Messrs. Bradley D. Cooper, Terrence J. Youngman, David Appleby,
Mark Whitaker, Geoffrey Knowles and Ms. Felicity Hilbert.
The executive employment agreement with Mr. Cooper will provide that Mr.
Cooper shall receive a base salary of $700,000 per year plus a bonus
equivalent to 10% of Net Profit After Tax ("NPAT"), as calculated prior to his
bonus entitlement. In addition, Mr. Cooper may receive an additional bonus, as
may be determined by the Company's Board of Directors and its Compensation
Committee. Mr. Cooper bears all expenses including rent, administrative
support and travel costs and the Company is not obligated to pay or reimburse
Mr. Cooper for any out of pocket expenses incurred while he is on Company
business. Mr. Cooper will also be eligible to receive stock options in
accordance with the Company's 1997 Stock Option Plan or any other executive
stock option plan as may be established from time to time by the Company's
board of directors. The total remuneration received by Mr. Cooper will be
reviewed by the Company's Compensation Committee on an annual basis, and is
subject to adjustment based on such review. In the event of termination during
the first three years of the agreement, the Company must pay to Mr. Cooper an
amount equal to Mr. Cooper's total remuneration (exclusive of bonuses)
received or earned during the 12 month period preceding such termination.
Messrs. Appleby and Knowles' executive employment agreements will provide
for them to receive certain commissions per alarm unit sold. The terms of such
agreements will be substantially similar to those of the executive employment
agreements in effect before the effective date of the Offering, and will also
allow Messrs. Appleby and Knowles to participate in the Company's 1997 Stock
Option Plan or any other executive stock option plan as may be established
from time to time by the Company's board of directors. They may also be paid a
bonus. The total remuneration, including any bonus, received by Messrs.
Appleby and Knowles under their respective agreements is reviewed by the
Company's Compensation Committee on an annual basis, and is subject to
adjustment based on such review.
The executive employment agreements for Messrs. Youngman, Whitaker and Ms.
Hilbert will be similar to the executive employment agreement with Messrs.
Cooper, Appleby and Knowles, with the exception that they do not receive a
commission on each alarm unit sold.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees, but are entitled to reimbursement for
travel expenses incurred in traveling to and from board meetings. Following
completion of this Offering, non-employee directors will receive $10,000
annual compensation and be reimbursed for out-of-pocket expenses incurred in
attending each committee or board meeting. Upon the closing of this Offering,
each non-employee director will receive options to purchase 5,000 shares of
the Company's Common Stock at an exercise price equal to the initial public
offering price. Thereafter, commencing with the 1997 Annual Meeting of
Stockholders, each non-employee director will be granted options to purchase
2,500 shares of Common Stock at an exercise price equal to the closing market
price on the date of such meeting. All options will be exercisable six months
after the effective date of grant of said options and expire on the fifth
anniversary of such date.
DIRECTORS COMMITTEES
Effective upon completion of this Offering, the Board of Directors will
establish an Executive Committee, an Audit Committee and a Compensation
Committee, each consisting exclusively of non-employee directors. The
Executive Committee is empowered to act with all authority granted to the
Board of Directors between board meetings, except with respect to those
matters required by Delaware law or by the Company's By-laws, to be subject to
the power and authority of the Board of Directors as a whole. The Audit
Committee will be responsible for recommending to the Board of Directors the
engagement of the independent auditors of the Company and reviewing with the
independent auditors the scope and results of the audits, the internal
accounting controls of the Company, audit practices and the professional
services furnished by the independent auditors. The Compensation Committee
will be responsible for reviewing and approving all compensation arrangements
for officers of the Company, and will also be responsible for administering
the Employee Stock Option Plan.
36
<PAGE>
LIMITATION OF DIRECTOR'S LIABILITY AND INDEMNIFICATION
Article Ninth of the Company's Certificate of Incorporation provides that the
liability of the Company's directors to the Company for monetary damages is
eliminated to the fullest extent permissible under Delaware law. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief, rescission or damages. The Company's By-laws provide
that the Company shall indemnify its directors and officers to the fullest
extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. At the present time, there is no pending litigation involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to the
Chief Executive Officer and to the other executive officers of the Company
whose total annual salary and bonus for the year ended June 30, 1996 exceeded
$100,000 (together, the "Named Executive Officers"). The salaries listed below
are annualized.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS BONUS
- --------------------------- ------------------- ------------ ---------
<S> <C> <C> <C> <C>
Bradley D. Cooper................... 1996 US$ 59,708 0 0
Chairman of the Board and Chief
Executive Officer
Terry J. Youngman................... 1996 US$ 120,227 0 0
President
Robert D. Appleby................... 1996 US$ 113,826 0 US$78,860
Executive Vice-President of
International Business Development
Geoffrey D. Knowles................. 1996 US$ 110,693 0 0
Vice President of Marketing
</TABLE>
On July 1, 1996, Messrs. Cooper, Appleby and Knowles agreed with the Company
to change their compensation packages so that in the future they will be paid a
bonus commission for each alarm unit sold by the Company. This will
significantly increase the compensation packages for these individuals for the
current and future fiscal years. See "Management--Executive Employment
Agreements".
STOCK COMPENSATION PLANS
1997 Stock Option Plan. The Company has adopted the 1997 Stock Option Plan
(the "1997 Plan"), under which the Compensation Committee may grant options to
purchase up to an aggregate of 750,000 shares of Common Stock to management,
employees and advisors of the Company. The 1997 Plan provides for the grant of
incentive stock options ("Incentive Options") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), and non-
statutory stock options that do not qualify as incentive stock options under
Section 422 of the Code ("Non-Statutory Options"). Immediately upon the
commencement of the Offering, the Company will reserve 250,000 Incentive
Options for issuance to Bradley D. Cooper, exercisable at a rate of 20% per
year commencing on the first anniversary date of the effective date of the
Offering, at an exercise price equivalent to the initial public offering price.
In addition, the Company has reserved an additional
37
<PAGE>
250,000 Incentive Options for issuance to key employees of the Company,
excluding Bradley D. Cooper, which will also be exercisable at a rate of 20%
per year commencing on the first anniversary date of the effective date of the
Offering, to be granted upon the commencement of the Offering at an exercise
price equivalent to the initial public offering price. Such options are
subject to authorization by the Company's Compensation Committee.
1997 Non-Employee Director Stock Option Plan. The Company has adopted the
1997 Non-Employee Director Stock Option Plan (the "Director Plan"), under
which 50,000 shares of Common Stock have been authorized for issuance.
Immediately upon the closing of this Offering, all non-employee directors will
receive options to purchase 5,000 shares of Common Stock at the initial public
offering price under the Director Plan. Thereafter, on the day after each
annual meeting of the shareholders of the Company, provided that he or she
then continues to serve as a member of the Board of Directors, all non-
employee directors will receive options to purchase 2,500 shares of Common
Stock at an exercise price equivalent to the market price of the stock on the
date of such grant. All such grants will be Non-Statutory Options. The options
granted under the Director Plan are exercisable beginning six months from the
date of grant. To date, no options have been granted under the Director Plan.
38
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING BRADLEY D. COOPER
Prior to September 1994, FAI Insurance acquired 50% of FAI Home Security
Holdings Pty Ltd. from Bradley D. Cooper. On September 5, 1994 and June 1,
1995 FAI Insurance acquired from Mr. Cooper an additional 4.18% and 5.98% of
FAI Home Security Holdings Pty Ltd., respectively, for approximately
$2,552,000. Further, on June 1, 1995, FAI Insurance acquired from Mr. Cooper
the remaining 39.84% of FAI Home Security Holdings Pty Ltd. (including the
operations outside Australia and New Zealand) which it did not already own.
The agreement was set out in a letter dated June 1, 1995 and more fully
documented in agreements dated November 11, 1995 and April 24, 1996. The
agreements provided for a purchase price of approximately $6,280,800 payable
over 49 months (subject to downward adjustment in the event certain Earnings
Before Interest and Taxes (EBIT) targets were not achieved). As of March 31,
1997 the balance of purchase price owed to Mr. Cooper was approximately
$935,580. In May 1997, this remaining balance of the purchase price was paid
in full by the Company. As a result of these transactions the Company became a
wholly owned subsidiary of FAI Insurances Limited.
On November 11, 1995, Mr. Cooper through the Cooper International Group (See
"Certain Transactions--Purchase of International Assets") acquired the FAI
Home Security Holdings Pty Ltd. operations outside of Australia and New
Zealand for $220. At the time of acquisition by Mr. Cooper, the operations
outside Australia and New Zealand were indebted to their immediate parent, FAI
Home Security Holdings Pty Ltd., for approximately $2.0 million. Pursuant to
the purchase agreement this intercompany debt was assumed by the Cooper
International Group and was converted to a fixed term loan bearing interest at
10% and repayable by November 11, 1997.
Since November 11, 1995 the loan to the Cooper International Group has
increased by approximately $850,000 representing interest charges and charges
for management services provided by FAI Home Security Holdings Pty Ltd. to the
Cooper International Group. The balance of the loan outstanding for the fiscal
year ended June 30, 1996 and for the nine months ended March 31, 1997 were
$2,012,472 and $2,845,560, respectively.
On March 31, 1997 FAI Home Security Holdings Pty Ltd. reacquired from Mr.
Cooper the Cooper International Group. See "Certain Transactions--Purchase of
International Assets". FAI's purchase of the International Assets did not
include the amount due under the fixed term loan to FAI.
On July 1, 1996, FAI entered into a management agreement with Speakeasy Pty
Ltd. (as the trustee for the Speakeasy Investment Trust, of which Bradley D.
Cooper is the primary beneficiary), whereby the services of Mr. Cooper were
made available to the Company. In exchange for services provided, Speakeasy
Pty Ltd. was paid a commission of approximately $19.25 on each alarm unit sold
by the Company. For the nine months ended March 31, 1997, the Company paid to
Speakeasy Pty Ltd. approximately $415,707. This management will terminate on
the closing of the Offering and be replaced by the Cooper Executive Agreement.
See "Business--Executive Employment Agreements".
Subsequent to the Reorganization and prior to the commencement of the
Offering, Mr. Cooper will purchase 250,000 shares of the Company's Common
Stock at the initial public offering price of the Common Stock. Five percent
(5%) of the purchase price for the shares will be paid by Mr. Cooper in cash
and the remainder will be paid through a five-year note to the Company bearing
interest at 7.0% per annum, payable semi-annually, secured by the shares
purchased. The note is repayable on the fifth anniversary of its issuance. The
interest payable on the note is due on a full recourse basis.
During the fiscal year ended June 30, 1996 and the nine month period ended
March 31, 1997, the Company made certain personal loan advances to Mr. Cooper.
These loan advances were on a non-interest bearing basis and repayable on
demand. The balance of these personal loans on June 30, 1996 and on March 31,
1997 were $105,432 and $168,112, respectively. These loan balances were repaid
in full in May 1997.
TRANSACTIONS WITH FAI
The Company leases from FAI General Insurances Ltd, a subsidiary of FAI
Insurances Ltd, approximately 661 square meters of office space for its
principal executive and operational offices located at Levels 7 and 3, 77
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<PAGE>
Pacific Highway, North Sydney NSW 2060. Under the terms of the agreement, the
Company pays an annual rent of AUD$380 (approximately US$298) per square meter
per annum. See "Business--Property".
Prior to the Reorganization, the Company had an existing royalty agreement
with FAI Insurance which provided for the payment of royalty commissions for
each alarm unit sold for the use of the "FAI" name and logo. For the fiscal
years ended June 30, 1995 and June 30, 1996 the royalty fee paid by the
Company to FAI Insurance was $1,989,371 and $2,750,468, respectively. For the
nine months ended March 31, 1997 the Company paid to FAI Insurance a royalty
fee of approximately $2,668,985. Pursuant to the Reorganization, the Company
terminated the old agreement with FAI Insurance and entered into the no cost
License Agreement with FAI Insurance for the use of the "FAI" name and logo.
See "Business--The Reorganization".
From time to time the Company entered into intercompany loan transactions
with other companies within the FAI Group. The balance of these inter-company
loans as of June 30, 1995, 1996 and as of March 31, 1997 amounted to
$2,675,655, $4,380,060, and $8,887,455, respectively.
PURCHASE OF INTERNATIONAL ASSETS
On March 31, 1997, FAI acquired substantially all of the assets of Bradley
D. Cooper's international operations (the "International Assets"), owned by
Mr. Cooper (via his beneficial ownership in the Cooper Investment Trust)
through a Canadian Trust, FAI Home Security (CANADA) Unit Trust, and a United
Kingdom trust, FAI Home Security (UK) Trust, (which include operations in
Belgium, the Netherlands and Germany) and their respective United States and
South African corporate subsidiaries, FAI Home Security USA, Inc. and FAI Home
Security (AFRICA) (PROPRIETARY) Ltd., respectively (collectively, the "Cooper
International Group"). Pursuant to an Asset Purchase Agreement, to which each
member of the Cooper International Group was a party, the Cooper International
Group sold to FAI all of its intangible assets, inventories and fixed assets
for the purchase price of approximately $2,784,431. The intangible assets
purchased included a license from FAI to distribute the SecurityGuard product
worldwide, outside Australia and New Zealand including Belgium, the
Netherlands, Germany, Canada, the United Kingdom, South Africa and the United
States. Prior to the effective date of the Offering, the Company acquired the
International Assets from FAI pursuant to the Share Purchase Agreement. See
"Business--The Reorganization".
THE REORGANIZATION
During April 1997, the Board of Directors and sole stockholder of the
Company approved the Reorganization which was implemented immediately prior to
the effectiveness of this Offering. The closing of this Offering will not
occur without implementation of the Reorganization. In addition, immediately
prior to the effective date of this Offering, the Company will make a final
dividend distribution to FAI in the amount of approximately $3,057,280
representing the retained earnings of FAI Home Security Pty Ltd. on the date
of the Reorganization. See "Business--The Reorganization".
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and affiliates will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
TRANSACTIONS BETWEEN FAI INSURANCE AND NATIONAL
In April 1997, FAI Insurance loaned $200,000 to Steven A. Rothstein, a
director of the Company and the Chairman of National, pursuant to a three-
month promissory note bearing interest at 12% per annum. In May 1997, FAI
Overseas Investments Pty Limited, an affiliate of FAI Insurance ("FAI
Overseas"), loaned Olympic Cascade Financial Corporation ("Olympic"), of which
Mr. Rothstein is chairman and which is the parent company of National,
approximately $900,000 in exchange for an 18-month promissory note bearing
interest at 15% and the issuance to FAI Overseas of a warrant to acquire
30,000 shares of Olympic common stock. See "Underwriting".
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of the date of this Prospectus by
(i) each executive officer of the Company, (ii) each director of the Company or
nominee for director, (iii) all executive officers and directors as a group,
(iv) each person known by the Company to be the beneficial owner of more than
five percent of the Common Stock, and (v) the Selling Shareholder, and as
adjusted to reflect the sale of the shares offered pursuant to this Offering.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) AFTER OFFERING(2)
---------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENT SHARES OFFERED SHARES PERCENT
------------ --------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Bradley D. Cooper(3).... 250,000 5.2% 0 250,000 5%
Level 7, 77 Pacific
Highway
North Sydney, NSW 2060
Australia
Terrence J. Youngman(4). 0 0 0 0 *
Robert D. Appleby(4).... 0 0 0 0 *
Mark Whitaker(4)........ 0 0 0 0 *
Geoffrey D. Knowles(4).. 0 0 0 0 *
Felicity A. Hilbert(4).. 0 0 0 0 *
Steven Rabinovici....... 0 0 0 0 *
Timothy M. Mainprize.... 0 0 0 0 *
Dennis J. Puleo......... 0 0 0 0 *
Steven A. Rothstein..... 0 0 0 0 *
All executive officers
and directors as a
group
(10 persons)........... 250,000 5.2% 250,000 5%
FIVE PERCENT SELLING
SHAREHOLDER
FAI Home Security
Holdings Pty Ltd.(5)... 4,500,000 94.8% 2,750,000 1,750,000 35%
Level 7, 77 Pacific
Highway
North Sydney, NSW 2060
Australia
</TABLE>
- --------
*Less than one percent.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting power and sole investment power with respect to all
the shares beneficially owned.
(2) Subject to stock option grants which may be awarded to officers and
directors under the 1997 Stock Option Plan and the 1997 Non-Employee
Director Stock Option Plan, none of which will be exercisable within 60
days of this Offering. See "Management--Stock Compensation Plans".
(3) Does not include options expected to be granted to Mr. Cooper for 250,000
shares of Common Stock. See "Management--Stock Compensation Plans".
(4) Does not include options for an aggregate of 250,000 shares of Common Stock
expected to be granted to Messrs. Youngman, Appleby, Whitaker and Knowles
and Ms. Hilbert. See "Management--Stock Compensation Plans".
(5) Controlled by FAI Insurance, a publicly traded company in Australia with
American Depository Receipts traded on the New York Stock Exchange.
41
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company is 20,000,000 shares of Common
Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par
value. Immediately prior to the commencement of this Offering, after giving
effect to the Reorganization and the purchase of 250,000 shares of Common
Stock by Bradley D. Cooper, 4,750,000 shares of Common Stock of the Company
will be issued and outstanding and held by two (2) shareholders of record.
Upon the closing of this Offering, there will be no shares of Preferred Stock
outstanding. The holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets available therefor at such time and in such
amounts as the Board may, from time to time, determine. Each stockholder is
entitled to one vote for each share of Common Stock held of record, on all
matters submitted to a vote of stockholders. As is permitted by Delaware law,
there will not be cumulative voting in connection with the election of
directors. Holders of Common Stock have no preemptive rights or rights to
convert their Common Stock into any other securities under the Company's
charter documents. There are no sinking fund provisions applicable to the
Common Stock. Upon liquidation, dissolution or winding up of the Company, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock outstanding at that time. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of this Offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number
of shares constituting any series and the designation of such series, without
any further vote or action by the stockholders. The Board of Directors,
without stockholder approval, may issue Preferred Stock with voting and
conversion rights which could materially adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock could also
decrease the amount of earnings and assets available for distribution to
holders of Common Stock. In addition, the issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. At present, the Company has no plans to issue any shares of Preferred
Stock. See "Risk Factors--Anti-Takeover Considerations".
REPRESENTATIVES' WARRANTS
In connection with this Offering, the Company has authorized the issuance of
the Representatives' Warrants and has reserved 300,000 shares of Common Stock
for issuance upon exercise of such warrants (including the shares issuable
upon exercise of the Representatives' Warrants). The Representatives' Warrants
will entitle the holders thereof to acquire 300,000 shares of Common Stock at
an exercise price of 165% of the initial offering price per share of Common
Stock ($21.45 per share of Common Stock assuming an estimated initial public
offering price of $13.00 per share of Common Stock). The Representatives'
Warrants will be exercisable at any time from the first anniversary of the
date of this Prospectus until the fifth anniversary of the date of this
Prospectus. The Representatives' Warrants contain provisions that protect the
holders against dilution by adjustment of the exercise price. Such adjustments
will occur in the event, among others, that the Company makes certain
distributions to holders of its Common Stock. The Company is not required to
issue fractional shares upon the exercise of the Representatives' Warrant. The
holder of a Representatives' Warrant will not possess any rights as a
shareholder of the Company until such holder exercises the Representatives'
Warrant.
For the life of the Representatives' Warrants, the holders thereof have the
opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership of the shares of Common Stock issuable
upon the exercise of the warrants or options. These warrant and option holders
may be expected to exercise their warrants or options at a time when the
Company would, in all likelihood, be able to obtain any needed capital by an
offering of Common Stock on terms more favorable than those provided for by
the warrants or options. Further, the terms on which the Company could obtain
additional capital during the life of the warrants or options may be adversely
affected.
42
<PAGE>
The Representatives' Warrants provide certain rights with respect to the
registration under the Securities Act of the 300,000 shares of Common Stock
issuable upon exercise of the Representatives' Warrants. The Company has
agreed that during the entire period between the first anniversary and fifth
anniversary of the date of this Prospectus it will register the issuance of
such shares upon the exercise of the Representatives' Warrants (and, if
necessary, their resale) so as to permit their public resale without
restriction. These holders of the Representatives' Warrants have, for a term
of five years from the date of this Prospectus, the right to demand two
registrations by the Company of their shares and unlimited number of
incidental, or "piggyback," registration rights. These registration rights
could result in substantial future expense to the Company and could adversely
affect the Company's ability to complete future equity or debt financing.
Furthermore, the registration and sale of Common Stock of the Company held by
or issuable to the holders of registration rights, or even the potential of
such sales, could have an adverse effect on the market price of the securities
offered hereby.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND DELAWARE LAW
Classified Board of Directors. The Company's By-laws provides for the Board
of Directors to be divided into three classes of directors, as nearly equal in
number as is reasonably possible, serving staggered terms so that directors'
initial terms will expire at the 1998, 1999 or 2000 annual meeting of the
stockholders. Starting with the 1997 annual meeting of the stockholders, one
class of directors will be elected each year for a three-year term. See
"Management--Directors and Executive Officers." The Company believes that a
classified Board of Directors will help to assure the continuity and stability
of the Board of Directors and the Company's business strategies and policies
as determined by the Board of Directors, since a majority of the directors at
any given time will have had prior experience as directors of the Company. The
Company believes that this, in turn, will permit the Board of Directors to
more effectively represent the interests of stockholders. See "Management--
Limitation of Director's Liability and Indemnification".
Delaware Anti-Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or after such
date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or
associate of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is the Bank of New York, 101
Barclay Street, New York, New York 10286.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,000,000 shares of Common Stock. All of the 3,000,000 shares sold in this
Offering will be freely tradeable without restriction or further registration
under the Securities Act unless held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act. The remaining 2,000,000
shares will be subject to certain restrictions, as defined under Rule
43
<PAGE>
144 (the "Restricted Shares"). Specifically, 1,750,000 shares issued to the
Selling Shareholder pursuant to the Reorganization will be restricted for one
year after the Reorganization. The 250,000 shares sold to Bradley D. Cooper
will also be restricted for a period of one year following the date on which
full payment of such shares is made. The Restricted Shares were issued and
sold by the Company in private transactions in reliance upon exemptions under
the Securities Act. Restricted Shares generally may be sold in the public
market only if registered under the Securities Act and sold in compliance with
Rule 144. After the one year holding periods applicable to the shares held by
the Selling Shareholder and Mr. Cooper, the Restricted Shares may be subject
to volume and other resale limitations described below.
SALE OF RESTRICTED SHARES
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted shares with respect to which at least one year has elapsed since
the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period
commencing 90 days after the date of this Prospectus, a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock of the Company (approximately 30,000 shares immediately after this
Offering), or (ii) the average weekly trading volume in Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 also are
subject to certain manner-of-sale provisions and notice requirements and to
the availability of current public information about the Company. A person who
is not an affiliate, has not been an affiliate within three months prior to
sale and who beneficially owns restricted securities with respect to which at
least two years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company, is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations or other requirements described above.
Restricted Shares that have been issued in reliance on Rule 701 (such as
shares of Common Stock issued under the Company's stock option plans) may be
resold by persons other than affiliates of the Company, beginning
approximately 90 days after the date of this Prospectus, subject only to the
manner of sale provisions of Rule 144, and may be resold by affiliates of the
Company under Rule 144 without compliance with its one-year holding period
requirement.
Rule 144 under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of their shares to certain "qualified institutional buyers," as
defined in Rule 144A.
LOCK-UP AGREEMENT
Except as noted, all current shareholders of the Company, including the
Selling Shareholder and all of the Company's directors and officers and
affiliates of certain of the Company's directors, have agreed with the Company
at the request of the Underwriters not to sell or otherwise dispose of any
shares of Common Stock in the public market for a period of 360 days after the
date of this Prospectus without the prior written consent of the
Representative. See "Underwriting". Subject to the 360 day period described
above and subject to compliance with the volume and other limitations of Rule
144 described above, the Restricted Shares will be eligible for sale in the
public market on various dates beginning on , 1997 with respect to the
1,750,000 issued to the Selling Shareholder pursuant to the Reorganization
and, with respect to the 250,000 shares sold to Bradley D. Cooper, beginning
on the date one year after such shares are fully paid for.
EFFECT OF SALES OF SHARES
Prior to this Offering there has been no public market for the Common Stock.
The Company cannot predict the effect, if any, that sales of shares of Common
Stock, or the availability of such shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock in the public market could adversely affect prevailing market
prices and could enjoin the Company's ability to raise capital through a sale
of its securities.
44
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation and Nolan Securities Corporation are acting as the
representatives (together, the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement among the
Company, the Representatives and the Selling Shareholder (the "Underwriting
Agreement"), to purchase from the Company, and the Company and the Selling
Shareholder have agreed to sell to the Underwriters, the shares of Common
Stock set forth in the table below at the price set forth on the cover of page
of this Prospectus under "Proceeds to Company" and "Proceeds to Selling
Shareholder".
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
National Securities Corporation
Nolan Securities Corporation
Total....................................................... 3,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Common Stock are subject to certain conditions. The
Underwriters are committed to purchase all the Common Stock offered by this
Prospectus, if any are purchased by the Representatives.
The Representatives have advised the Company and the Selling Shareholder
that the Underwriters propose to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to selected dealers at such price less a concession not in excess of
$ per share of Common Stock [8% of the initial public offering Price],
and that the Underwriters and such dealers may reallow a concession to other
dealers, including the Underwriters, not in excess of $ per share of
Common Stock. After the commencement of the Offering, the public offering
price, the concessions to selected dealers and the reallowance to other
dealers may be changed by the Representatives.
The Company and the Selling Shareholder have granted the Underwriters an
option, expiring at the close of business 45 days after the closing of this
Offering to purchase up to an aggregate of 200,000 additional shares of Common
Stock from the Company and 250,000 shares of Common Stock from the Selling
Shareholder at the public offering price set forth on the cover page of this
Prospectus less underwriting discounts and the 2% non-accountable expense
allowance. If the over-allotment option is exercised, the first 250,000 shares
to be purchased by the Representatives shall be sold to them by the Selling
Shareholder. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional Common Stock as the percentage it was
obligated to purchase pursuant to the Underwriting Agreement. The Underwriters
may exercise the option only to cover over-allotments, if any, incurred in the
sales of the Common Stock.
The Representatives have informed the Company and the Selling Shareholder
that they do not expect the Underwriters to confirm sales of shares of Common
Stock offered by this Prospectus to any accounts over which they exercise
discretionary authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company, the Selling Shareholder and their respective controlling persons
on the one hand, and the Underwriters and their respective controlling persons
on the other hand, against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Company and the Selling Shareholder have agreed to pay the
Representatives a non-accountable expense allowance equal to two percent (2%)
of the gross proceeds from the sale of the Company's Common Stock.
45
<PAGE>
The Company has agreed to sell to the Representatives, for an aggregate of
$60, warrants to purchase from the Company up to 300,000 shares of Common
Stock at an exercise price per share initially equal to 165% of the public
offering price. The Representatives' Warrants are exercisable beginning one
year from the effective date of this Prospectus, expire five years from the
effective date of this Prospectus, and are not transferable, except to either
a partner or an officer of an Underwriter or by will or by operation of law.
The Representatives' Warrant provides for adjustment in the exercise price of
the Representatives' Warrant in the event of certain mergers, acquisitions,
stock dividends and capital changes. In addition, the Company has granted
rights to the holders of the Representatives' Warrants to register the Common
Stock underlying the Representatives' Warrants under the Securities Act.
The Company and its officers and directors and all shareholders have agreed
with the Representatives that for a period of 360 days following the closing
of this Offering (the "Lock-up Period"), neither the Company nor any such
persons shall offer, issue, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of any securities of the Company without the
consent of National. See "Description of Securities".
The Company has agreed that, for a period of five (5) years from the closing
of the sale of Common Stock offered hereby the Representatives shall have the
right to designate for election one member of the Company's Board of
Directors. However, if the Representatives so chooses, the Representatives may
instead designate an observer, who shall receive all notices of meeting by the
Company's Board of Directors and all other correspondence and communications
sent by the Company to its Board of Directors and be entitled to attend all
meetings of the Company's Board of Directors. The Company has agreed to
reimburse the Representatives' designee for out-of-pocket expenses incurred in
connection with attending meetings of the Company's Board of Directors. Steven
A. Rothstein has been designated by the Representatives for nomination for
election to the Company's Board of Directors.
Certain persons participating in this Offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids, which may involve the purchase of Common Stock of the Company
on the American Stock Exchange or otherwise. Such transactions may stabilize
or maintain the market price of the Common Stock at a level about that which
might otherwise prevail in the open market and, if commenced, may be
discontinued at any time.
The offering price set forth on the cover page of this Prospectus should not
be considered an indication of the actual value of the Common Stock. Such
price is subject to change as a result of market conditions and other factors
and no assurance can be given that the Common Stock can be resold at the
offering price.
Prior to this Offering, there has been no public market for the Shares.
Accordingly, the initial public offering price was determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining the initial public offering price were the history and the
prospects of the Company and the industry in which it operates, the past and
present operating results of the Company and the trends of such results, the
previous experience of the Company's executive officers and the general
condition of the securities markets at the time of the Offering.
In April 1997, FAI Insurance loaned $200,000 to Steven A. Rothstein, a
director of the Company and the Chairman of National, pursuant to a three
month promissory note bearing interest at 12% per annum.
In May 1997, FAI Overseas Investments Pty Limited, an affiliate of FAI
Insurance ("FAI Overseas"), loaned Olympic Cascade Financial Corporation
("Olympic"), of which Steven A. Rothstein is chairman and which is the parent
company of National, approximately $900,000 pursuant to an 18-month promissory
note bearing interest at 15%. In connection with such loan, Olympic issued to
FAI Overseas a warrant to acquire 30,000 shares of Olympic common stock at an
exercise price of $5.25 per share, the market price on the date of grant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to
copies of each such agreement, which are filed as exhibits to the registration
statement filed in connection with this Offering.
46
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Company by D'Ancona & Pflaum. Certain legal matters will be
passed upon for the Underwriters by Camhy Karlinsky & Stein LLP, New York, New
York. Arthur Don, a member of D'Ancona & Pflaum, will act as the initial
Secretary for the Company, a non-executive position as defined in the Company's
By-laws.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Arthur Andersen, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in auditing and accounting in giving such
reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Statement under the Securities
Act, with respect to the shares of Common Stock offered hereby. This Prospectus
omits certain information contained in the Registration Statement and the
exhibits and schedules thereto for further information with respect to the
Company and the Common Stock offered hereby. Statements contained herein
concerning the provisions of any documents are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits and
schedules filed therewith, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the public reference section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of the prescribed fees. Such materials may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Home Security International, Inc.:
Australia and New Zealand Operations:
Report of Independent Public Accountants................................ F-3
Combined Statements of Income for the Years Ended June 30, 1994, 1995
and 1996 and the Nine Months Ended March 31, 1996 and 1997............. F-5
Combined Balance Sheets as at June 30, 1995 and 1996 and as at March 31,
1997................................................................... F-6
Combined Statements of Cashflows for the Years Ended June 30, 1994, 1995
and 1996 and the Nine Months Ended March 31, 1996 and 1997............. F-7
Combined Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1994, 1995 and 1996 and the Nine Months Ended March 31,
1997................................................................... F-8
Notes to Financial Statements........................................... F-9
International Operations:
Report of Independent Public Accountants................................ F-18
Combined Statements of Income for the Period Ended June 30, 1995, Year
Ended June 30, 1996 and the Nine Months Ended March 31, 1996 and 1997.. F-20
Combined Balance Sheets as at June 30, 1995 and 1996 and the Nine Months
Ended March 31, 1997................................................... F-21
Combined Statements of Cashflows for the Period Ended June 30, 1995,
Year Ended June 30, 1996 and the Nine Months Ended March 31, 1996 and
1997................................................................... F-22
Combined Statements of Changes in Shareholders' Equity for the Period
Ended June 30, 1995, Year Ended June 30, 1996 and the Nine Months Ended
March 31, 1997......................................................... F-23
Notes to Financial Statements........................................... F-24
Proforma Consolidated Financial Statements for Home Security
International, Inc..................................................... F-34
Report of Independent Public Accountants for Home Security
International, Inc..................................................... F-39
Balance Sheet of Home Security International, Inc. for the Period Ended
April 11, 1997......................................................... F-40
Statement of Changes in Shareholders' Equity of Home Security
International, Inc. for the Period Ended April 11, 1997................ F-40
Notes to Financial Statements........................................... F-41
</TABLE>
F-1
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the reorganization transactions discussed in Note 13 to the combined
financial statements of FAI Home Security Pty Limited, FAI Home Security (NZ)
Limited and FAI Home Security (NZ) Trust have been completely effected, we
expect to be in a position to render the following audit report.
Arthur Andersen
Sydney
May 2, 1997
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Boards of Directors and Trustees of FAI Home Security Pty Limited, FAI
Home Security (NZ) Limited and FAI Home Security (NZ) Trust ("FAI Home
Security Australia and New Zealand Group"):
We have audited the accompanying combined balance sheets of the FAI Home
Security Australia and New Zealand Group as of June 30, 1996 and 1995, and
related combined statements of income, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Group'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 in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the FAI Home Security
Australia and New Zealand Group as of June 30, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles in the United States of America.
The financial statements of the FAI Home Security Australia and New Zealand
Group as of and for the nine months ended March 31, 1997 and 1996, which are
presented solely for comparative purposes, were not audited by Independent
Public Accountants.
Arthur Andersen
Sydney,
May 2, 1997 except with respect to the reorganization transaction as discussed
in Note 13, as to which the date is 1997
F-4
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
------------------------
YEAR ENDED JUNE 30 (UNAUDITED)
------------------------------------
NOTE 1994 $US 1995 $US 1996 $US 1996 $US 1997 $US
---- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 2 10,629,018 21,437,325 26,700,922 18,806,320 23,232,294
Cost of goods sold
--related party........ 12 (937,922) (1,989,371) (2,750,468) (1,921,984) (2,668,985)
--other................ (5,790,471) (12,229,324) (14,834,094) (10,246,933) (14,109,950)
---------- ----------- ----------- ----------- -----------
Gross profit............ 3,900,625 7,218,630 9,116,360 6,637,403 6,453,359
General and
administrative
expenses............... (3,954,935) (5,091,498) (6,606,377) (4,736,804) (4,045,935)
---------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. (54,310) 2,127,132 2,509,983 1,900,599 2,407,424
Interest income--related
party.................. 12 -- -- 75,087 20,364 491,051
- --other................. 6,973 65,211 175,719 135,400 63,951
Interest expense--
related party.......... 12 (1,542) (47,625) (20,279) --
---------- ----------- ----------- ----------- -----------
Income (loss) before
taxes.................. (48,879) 2,192,343 2,713,164 2,036,084 2,962,426
Income tax expense...... 11 (24,980) (722,523) (1,054,170) (820,873) (1,124,066)
---------- ----------- ----------- ----------- -----------
Net income (loss)....... (73,859) 1,469,820 1,658,994 1,215,211 1,838,359
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
--------------------- MARCH 31
1995 1996 1997
ASSETS NOTE $US $US $US
- ------ ---- --------- ---------- -----------
<S> <C> <C> <C> <C>
Current assets (UNAUDITED)
Cash and cash equivalents............. 1,229,501 369,837 236,485
Accounts receivable--related party.... 12 2,675,655 4,380,060 8,887,455
Accounts receivable--trade, net....... 3 1,090,412 1,099,733 1,112,840
Inventories........................... 4 90,040 339,602 599,873
Prepaid expenses and other current
assets............................... 5 357,072 751,426 952,413
--------- ---------- -----------
Total current assets................ 5,442,680 6,940,658 11,789,066
--------- ---------- -----------
Non-current assets......................
Plant and equipment, net.............. 6 65,124 12,706 739,840
Intangibles, net...................... 7 2,038,980 5,948,255 7,933,713
Deferred income taxes................. 11 120,989 475,505 518,152
Other non-current assets.............. 2,987 6,531 3,951
--------- ---------- -----------
Total non-current assets............ 2,228,080 6,442,997 9,195,656
--------- ---------- -----------
Total assets........................ 7,670,760 13,383,655 20,984,722
========= ========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
Current liabilities
Bank overdraft........................ -- -- --
Payables--related parties............. 12 -- -- 1,749,570
Payables--trade....................... 2,711,243 2,414,042 3,379,768
Accrued liabilities................... 293,598 956,307 1,031,383
Lease liability....................... -- -- 23,303
Income tax payable.................... 753,873 -- 336,987
Deferred income....................... -- 119,479 372,484
--------- ---------- -----------
Total current liabilities........... 3,758,714 3,489,828 6,893,495
--------- ---------- -----------
Non-current liabilities
Lease liability....................... -- -- 47,280
--------- ---------- -----------
Total liabilities................... 3,758,714 3,489,828 6,940,775
Shareholders' equity
Common stock.......................... 2 2 2
Additional paid-in capital............ 2,085,090 6,016,944 8,332,079
Foreign currency translation
adjustment........................... (4,240) 386,693 383,319
Retained earnings..................... 1,831,194 3,490,188 5,328,547
--------- ---------- -----------
Total shareholders' equity.......... 3,912,046 9,893,827 14,043,947
--------- ---------- -----------
Total liabilities and shareholders'
equity............................. 7,670,760 13,383,655 20,984,722
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
COMBINED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31
JUNE 30 ---------------------
-------------------------------- (UNAUDITED)
1994 1995 1996 1996 1997
$US $US $US $US $US
-------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Cashflow from operating
activities
Net Income (Loss)..... (73,859) 1,469,820 1,658,994 1,215,211 1,838,359
Adjustments to
reconcile net income
(loss) to net cash
from operating
activities:
Depreciation.......... 2,868 12,350 11,192 8,103 33,422
Amortization of
goodwill............. -- 47,884 226,498 167,808 273,685
Deferred taxes and
income tax payable... 84,938 478,995 (1,143,650) (313,421) 322,492
Provision for losses
on accounts
receivable........... 61,703 9,552 58,213 147,617 23,895
(Increase) decrease in
operating assets:
Accounts receivable--
trade................ (162,833) (245,402) (21,925) (251,936) (14,959)
Inventories........... 148,884 60,656 (239,731) (122,904) (259,667)
Prepaid expenses and
other assets......... 35,498 (262,407) (305,224) (200,929) (201,814)
Increase (decrease) in
operating
liabilities:
Accounts payable...... 22,425 1,740,323 (489,880) (801,465) 933,636
Accrued liabilities... (21,034) 195,823 734,742 341,758 396,959
-------- ---------- ---------- --------- ----------
Net cash provided by
(used in) operating
activities............. 98,590 3,507,594 489,229 189,842 3,346,008
-------- ---------- ---------- --------- ----------
Cashflow from investing
activities
Proceeds from sale of
plant and equipment.. -- -- 112,062 111,128 --
Additions to plant and
equipment............ (29,979) (43,632) (70,701) (68,889) (762,408)
-------- ---------- ---------- --------- ----------
Net cash provided
by/(used in) investing
activities............. (29,979) (43,632) 41,361 42,239 (762,408)
-------- ---------- ---------- --------- ----------
Cashflow from financing
activities
Provided by (payments
on) short-term debt.. (920) (927) (3,129) (3,091) 2,559
Increase (decrease) in
bank overdraft....... (44,036) -- -- -- --
Receipts/(payments)
from/(to) related
parties.............. 209,822 (2,509,175) (1,429,568) (789,243) (2,722,800)
-------- ---------- ---------- --------- ----------
Net cash provided
by/(used in) financing
activities............. 164,866 (2,510,102) (1,432,697) (792,334) (2,720,241)
-------- ---------- ---------- --------- ----------
Net increase/(decrease)
in cash held........... 233,477 953,860 (902,107) (560,253) (136,642)
-------- ---------- ---------- --------- ----------
Cash at the beginning of
the financial year..... 1,009 247,000 1,229,501 1,229,501 369,838
Effect of exchange rate
change on cash held.... 12,514 28,641 42,443 41,128 3,289
-------- ---------- ---------- --------- ----------
Cash at the end of the
financial year......... 247,000 1,229,501 369,837 710,376 236,485
======== ========== ========== ========= ==========
Supplemental disclosures
of cash flow
information:
Interest paid........... 2,458 874 59,945 62,494 314,915
Income taxes paid....... -- 212,736 1,279,393 973,484 595,981
</TABLE>
The accompanying notes are an integral part of these financial statements
F-7
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL STOCK ISSUED
-----------------------
($1 AUSTRALIAN DOLLAR FOREIGN
PAR VALUE) ADDITIONAL CURRENCY RETAINED TOTAL
----------------------- PAID-IN TRANSLATION EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL RESERVE UNAPPROPRIATED EQUITY
---------- ---------- ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993.. 2 2 -- -- 435,233 435,235
Foreign currency
translation adjustment.
Additional paid in
capital................
Net income 1994......... (73,859) (73,859)
---------- ---------- --------- ------- --------- ----------
BALANCE, JUNE 30, 1994.. 2 2 -- -- 361,374 361,376
Foreign currency
translation adjustment. (4,240) (4,240)
Additional paid-in
capital................ 2,085,090 2,085,090
Net income 1995......... 1,469,820 1,469,820
---------- ---------- --------- ------- --------- ----------
BALANCE, JUNE 30, 1995.. 2 2 2,085,090 (4,240) 1,831,194 3,912,046
Foreign currency
translation adjustment. 390,933 390,933
Additional paid-in
capital................ 3,931,854 3,931,854
Net income 1996......... 1,658,994 1,658,994
---------- ---------- --------- ------- --------- ----------
BALANCE, JUNE 30, 1996.. 2 2 6,016,944 386,693 3,490,188 9,893,827
Foreign currency
translation adjustment. (3,374) (3,374)
Additional paid-in
capital................ 2,315,135 2,315,135
Net income nine months
to March 31, 1997...... 1,838,359 1,838,359
---------- ---------- --------- ------- --------- ----------
BALANCE, MARCH 31, 1997
(Unaudited)............ 2 2 8,332,079 383,319 5,328,547 14,043,947
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business--
FAI Home Security Pty Limited was incorporated in New South Wales, Australia
on August 13, 1990 and FAI Home Security (NZ) Trust was declared in Auckland,
New Zealand on June 30, 1995.
The main business activity of FAI Home Security Pty Limited and FAI Home
Security (NZ) Trust, collectively "the Group", is the sale, service and
monitoring of security alarm systems, which are sold via a distributor network
to residential and small business premises in Australia and New Zealand.
The security alarm system, "SecurityGuard", and other major components are
supplied exclusively by Ness Security Products Pty Limited, an unrelated
company based in Sydney, Australia.
b) Principles of Consolidation and Combined Statements--
The two entities are subsidiaries of the same current ultimate parent, FAI
Insurances Limited. Accordingly, the accompanying financial statements have
been presented on a combined basis, and include the accounts of FAI Home
Security (NZ) Trust and the consolidated accounts of FAI Home Security Pty
Limited, and its wholly owned subsidiary, FAI Home Security (NZ) Ltd.
All intercompany accounts and transactions have been eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America.
c) Cash and Cash Equivalents--
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost which approximates market.
d) Net Income/(Loss) per Common Share--
There has been no calculation of Net Income/(Loss) per common share because
of the combined group structure.
e) Foreign Currencies--
The combined financial statements of the Group are translated into US
dollars to reflect the local currency of the proposed ultimate parent entity,
Home Security International Inc. The assets and liabilities of the Group are
translated at the balance sheet date exchange rate. The profit and loss items
of the Group have been translated at the average exchange rates throughout
each period. The resulting translation effects are reflected in shareholders'
equity.
The local currency of FAI Home Security (NZ) Trust and FAI Home Security
(NZ) Limited is New Zealand dollars and the local currency of FAI Home
Security Pty Limited is Australian dollars.
f) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
F-9
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
g) Income Taxes--
The group accounts for income taxes under Statement of Financial Accounting
Standards (SFAS No. 109 "Accounting for Income Taxes") which requires an asset
and liability method of accounting for income taxes. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
h) Revenue Recognition--
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates. The Group warrants its products against defects in
design, materials and workmanship for one year and provides a security call-
out service for emergency response for five years. A provision for estimated
future costs relating to warranty expenses and security call-outs is recorded
when products are shipped. FAI Home Security Pty Limited also sells extended
product warranties for periods of one to two years and the income derived is
recognized on a straight-line basis over the life of the warranties. FAI Home
Security (NZ) Ltd has previously provided finance to customers for a period of
one to four years and the interest component of the sale has been deferred and
is recognized on a diminishing balance basis.
I) Allowance for Doubtful Accounts--
Management reviews the collectibility of accounts receivable on a regular
basis. Amounts, if any, which are determined to be uncollectible are provided
for in the financial statements in the period such determination is made.
j) Inventories--
Inventories consist of sales aids, service stock and stock for re-sale and
are stated at the lower of cost (first-in, first-out method), or market. No
stock for re-sale is held by FAI Home Security Pty Limited as units are
shipped straight from the supplier, Ness Security Pty Limited. Stock for re-
sale is warehoused by FAI Home Security (NZ) Trust.
k) Plant and Equipment--
Plant and equipment are recorded at cost. Maintenance and repairs are
expensed in the period to which they relate. Depreciation on plant and
equipment is calculated using the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................... 8
Office equipment................................................. 8
Plant............................................................ 5
Computer equipment............................................... 3.5
Motor Vehicles................................................... 6.5
</TABLE>
l) Research and Development--
The Group has no significant research and development activities.
F-10
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
m) Pension and Other Benefit Plans--
The Group contributes to a pension plan on behalf of its employees. The
pension plan is an accumulation fund and the Group has no liability to members
under the plan. The Group has no other pension or other post-employment
benefit plans.
n) Intangible Assets--
Intangible assets represent the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over twenty years.
The carrying value of intangible assets is periodically reviewed by the Group
based on the expected future undiscounted operating cash flows of the related
business unit. Based upon its most recent analysis, the Group believes that no
material impairment of intangible assets exists at March 31, 1997.
NOTE 2: NET SALES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 MARCH 31
---------------------------------- ----------------------
1994 1995 1996 1996 1997
$US $US $US $US $US
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Direct retail sales..... 6,511,763 5,773,208 1,366,926 1,301,848 --
Distributor sales....... 3,832,356 15,452,646 25,053,110 17,311,308 23,019,224
Other................... 367,879 426,901 497,637 342,835 340,363
---------- ---------- ---------- ---------- ----------
Gross sales............. 10,711,998 21,652,755 26,917,673 18,955,991 23,359,587
Less: returns and
rebates................ (82,980) (215,430) (216,751) (149,671) (127,293)
---------- ---------- ---------- ---------- ----------
Net sales............... 10,629,018 21,437,325 26,700,922 18,806,320 23,232,294
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE--TRADE
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
--------- --------- -----------
<S> <C> <C> <C>
Accounts receivable..... 1,150,273 1,245,808 1,264,258
Less: allowances for
doubtful accounts...... (59,861) (146,075) (151,418)
--------- --------- ---------
1,090,412 1,099,733 1,112,840
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------ ------- -----------
<S> <C> <C> <C>
Service stock.................................. -- 39,430 35,312
Sales aids..................................... -- 222,487 261,640
Goods for re-sale.............................. 90,040 77,685 302,921
------ ------- -------
90,040 339,602 599,873
</TABLE>
F-11
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------- -----------
<S> <C> <C> <C>
Prepayments......................................... 60,029 50,620 55,564
Director's loan..................................... -- 105,432 168,112
Sundry debtors...................................... 297,043 595,374 728,737
------- ------- -------
357,072 751,426 952,413
</TABLE>
The Directors loan relates to costs incurred by FAI Home Security Pty Limited
on behalf of Mr. Bradley Cooper, and is unsecured, repayable on demand and
non-interest bearing. The loan was repaid in full in May 1997.
NOTE 6: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------ -----------
<S> <C> <C> <C>
Furniture and fixtures............................. 31,454 3,098 160,071
Office equipment................................... 43,359 11,966 235,933
Plant.............................................. -- -- 24,419
Motor vehicles..................................... -- -- 186,490
Computer equipment................................. 6,736 4,329 173,072
Less: Accumulated depreciation..................... (16,425) (6,687) (40,145)
------- ------ -------
65,124 12,706 739,840
</TABLE>
NOTE 7: INTANGIBLES
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
--------- --------- -----------
<S> <C> <C> <C>
Initial goodwill on investment................ 2,086,864 2,086,864 2,086,864
Increment of goodwill......................... -- 4,135,773 6,394,926
Amortization of goodwill...................... (47,884) (274,382) (548,077)
--------- --------- ---------
2,038,980 5,948,255 7,933,713
</TABLE>
Goodwill represents the excess of the purchase price paid by the ultimate
parent entity, FAI Insurances Limited, and intermediate parent entities, FAI
Home Security Holdings Pty Limited and FAI Home Security (Aust) Unit Trust,
over the fair value of assets acquired when FAI Insurances Limited acquired
its additional shareholding in FAI Home Security Holdings Pty Limited from Mr.
Bradley Cooper in 1995. The goodwill associated with this acquisition,
including additional consideration paid in 1996 under the purchase agreement,
has been pushed down to the Group. Additional consideration of $928,000 has
been negotiated with Mr. Bradley Cooper subsequent to March 31, 1997 to
satisfy all the remaining obligations under the agreement. This amount has not
been brought to account at March 31, 1997.
NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the combined balance sheets for cash and
cash equivalents, and accounts receivable and payable approximate their
respective fair values due to the short maturities of those instruments.
F-12
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: LEASE COMMITMENTS
The operating lease commitments of the Group consist of property rentals and
computer equipment leases. The property lease for the Sydney offices expired
in July 1996 and continued on a month to month basis until commitments were
signed to commence on April 1, 1997 for a 2.5 year period.
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------ -----------
<S> <C> <C> <C>
Payable not later than one year..................... 175,650 47,243 170,644
Payable later than one year but not later than two
years.............................................. 49,651 18,194 155,201
Payable later than two years but not later than
three years........................................ 38,197 5,325 72,333
Payable later than three years but not later than
four years......................................... 38,197 -- --
Payable later than four years but not later than
five years......................................... 22,282 -- --
------- ------ -------
323,977 70,762 398,178
------- ------ -------
</TABLE>
NOTE 10: SEGMENT INFORMATION
The Group operates principally in one industry segment which includes the
sale, service and monitoring of security alarm systems. The Group's area of
operations is in Australia and New Zealand and no single customer accounts for
more than 10% of the Group's revenues. Information about the Group's
operations split by geographic location is shown below.
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 ---------------------
--------------------------------- (UNAUDITED)
1994 1995 1996 1996 1997
$US $US $US $US $US
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales:
--Australia........... 9,802,521 17,358,783 21,937,533 15,533,189 15,847,086
--New Zealand......... 826,497 4,078,542 4,763,389 3,273,131 7,385,208
---------- ---------- ---------- ---------- ----------
10,629,018 21,437,325 26,700,922 18,806,320 23,232,294
Operating profit before
related party royalty
payment:
--Australia........... 719,189 3,012,295 3,707,419 2,967,607 3,257,754
--New Zealand......... 164,423 1,104,208 1,553,032 854,977 1,818,655
---------- ---------- ---------- ---------- ----------
883,612 4,116,503 5,260,451 3,822,584 5,076,409
Operating profit/(loss):
--Australia........... (138,226) 1,393,175 1,448,608 1,368,257 1,436,009
--New Zealand......... 83,916 733,957 1,061,375 532,342 971,415
---------- ---------- ---------- ---------- ----------
(54,310) 2,127,132 2,509,983 1,900,599 2,407,424
Capital expenditure..... 29,979 43,632 70,701 68,889 762,408
Depreciation............ 2,868 12,350 11,192 8,103 33,422
Amortization............ -- 47,884 226,498 167,808 273,685
</TABLE>
F-13
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
--------- ---------- -----------
<S> <C> <C> <C>
Identifiable Assets:
--Australia............................... 5,371,593 8,441,011 13,752,258
--New Zealand............................. 1,192,778 6,485,114 13,615,611
--------- ---------- ----------
6,564,371 14,926,125 27,367,869
Less:
Eliminations.............................. (123,112) (1,912,307) (6,619,633)
Corporate assets.......................... 1,229,501 369,837 236,485
--------- ---------- ----------
Total Assets............................ 7,670,760 13,383,655 20,984,722
</TABLE>
Identifiable assets are those assets that are identified with the operation
in each geographic area. Corporate assets are principally cash and short-term
deposits.
NOTE 11: INCOME TAX
The actual income tax expense attributable to net income differed from the
amounts computed by applying the local federal tax rate to net income/(loss)
before taxes as a result of the following:
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 ------------------
--------------------------- (UNAUDITED)
1994 1995 1996 1996 1997
$US $US $US $US $US
------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Expected income tax expense at
statutory rates.............. (16,130) 723,473 940,639 707,269 1,030,975
Tax effect of permanent and
other differences:...........
Over provision for income tax
in prior years............... (3,744) (21,192) (862) (852) (8,606)
Other......................... 44,854 12,820 32,854 55,560 15,507
Amortization of goodwill...... -- 17,238 81,539 58,896 86,190
Change in tax rates in
deferred tax benefits........ -- (9,816) --
------- ------- --------- ------- ---------
24,980 722,523 1,054,170 820,873 1,124,066
</TABLE>
The federal tax rate was 33% in New Zealand throughout this period whereas
the Australian federal tax rate rose from 33% to 36% subsequent to June 1995.
The tax expense is split between:
<TABLE>
<S> <C> <C> <C> <C> <C>
Current............................ 17,107 643,893 699,653 639,620 1,081,419
Deferred........................... 7,873 78,630 354,517 181,253 42,647
</TABLE>
F-14
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Tax losses have been purchased by FAI Home Security Pty Limited at June 30,
1996 from FAI Home Security Holdings Pty Limited and FAI Insurances Limited for
$110,202 and $766,344 respectively.
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
---------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------- -----------
<S> <C> <C> <C>
Deferred tax assets are comprised of timing
differences on:
Provisions not currently deductible for tax
purposes for:
Doubtful debts.............................. 23,343 35,803 26,807
Warranty.................................... 42,583 124,203 122,372
Security call-out........................... -- 143,860 150,725
Extended warranty........................... -- 14,946 121,216
Other ...................................... 39,722 72,122 52,260
Sundry accruals............................... 16,953 23,546 35,700
Quarantined overseas expenses................. 20,063 70,345 --
Tax losses carried forward.................... -- 8,903 9,072
Prepayments................................... (21,675) (18,223) --
------- ------- -------
Net deferred tax assets......................... 120,989 475,505 518,152
</TABLE>
NOTE 12: RELATED PARTY TRANSACTIONS
FAI Home Security (NZ) Trust Ltd was established in July 1995 and the initial
trust settlement was made by FAI Home Security (NZ) Ltd which is the trustee of
FAI Home Security (NZ) Trust.
FAI Finance Corporation (NZ) Ltd, FAI Home Security (NZ) Trust and FAI Home
Security (NZ) Limited are related by the ultimate holding of the ultimate
parent entity, FAI Insurances Limited.
FAI Home Security (UK) Trust and FAI Home Security (Canada) Unit Trust were
formerly related to FAI Home Security Pty Limited by the ultimate holdings of
the ultimate parent entity, FAI Insurances Limited.
Interest has been charged on all amounts due to or payable from all related
parties with the exception of the amount payable to FAI Home Security Pty
Limited by its intermediate parent, FAI Home Security Holdings Pty Limited,
which is non-interest bearing. Interest has been charged in arrears at an
annualized commercial rate on a monthly balance.
Management fees charged to or received from related parties are an
apportionment of overhead costs incurred by the relevant related entity. FAI
Home Security Pty Limited incurs staff and administration costs, whereas a
related entity FAI Finance Corporation (NZ) Ltd incurs costs to administer the
New Zealand customer loans book.
Royalties are paid to the ultimate parent entity, FAI Insurances Limited for
naming rights in relation to all business conducted by the FAI Home Security
Group. The basis of royalty payments is 6% of the final retail value of sales
made by the FAI Home Security Group entities and its distributors. Pursuant to
the restructuring and the initial public offering becoming effective, no
further royalties will be charged for the use of the FAI trade name.
FAI General Insurances Ltd, a subsidiary of FAI Insurances Ltd, leases office
space to FAI Home Security Pty Limited at a commercial rate.
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
--------- --------- -----------
<S> <C> <C> <C>
Amounts due from related parties:
Current Assets:
FAI Home Security Holdings Pty Limited........ 2,609,651 1,465,364 --
FAI Finance Corporation (NZ) Ltd.............. -- 2,877,353 8,860,232
FAI Secure Home Finance Pty Limited........... 66,004 37,343 27,223
--------- --------- ---------
2,675,655 4,380,060 8,887,455
</TABLE>
F-15
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The above loans are unsecured, bear interest at the Westpac Bank indicator
rate with the exception of FAI Home Security Holdings Pty Limited which is
non-interest bearing, and are repayable on demand.
Amounts due to related party:
<TABLE>
<S> <C> <C> <C>
Current Liabilities
FAI Home Security Holdings Pty Limited...................... -- -- 1,749,570
</TABLE>
The above loan is unsecured, non-interest bearing and is repayable on
demand.
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 -------------------
--------------------------- (UNAUDITED)
1994 1995 1996 1996 1997
$US $US $US $US $US
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest on direct advances
paid by FAI Home Security Pty
Limited to:
FAI Insurances Limited...... 1,542 -- 47,625 20,279 --
Royalty fees paid by FAI Home
Security Pty Limited to:
FAI Insurances Limited...... 937,922 1,989,371 2,750,468 1,921,984 2,668,985
Interest on loans received by
FAI Home Security (NZ) Trust
from:
FAI Finance Corporation (NZ)
Ltd........................ 67,174 18,021 464,790
Interest on loans received by
FAI Home Security (NZ) Limited
from:
FAI Finance Corporation (NZ)
Ltd........................ 7,913 2,343 26,261
Management fees paid by FAI
Home Security (NZ) Ltd to:
FAI Finance Corporation (NZ)
Ltd........................ 43,628 24,778 44,650
Management fees received by
FAI Home Security Pty Limited
from:
FAI Home Security Holdings
Pty Limited................ 508,813
Management fees received by
FAI Home Security Pty Limited
from:
FAI Home Security (UK)
Trust...................... 74,198
FAI Home Security (Canada)
Unit Trust................. 140,977
FAI Secure Home Finance Pty
Limited.................... 5,323 106,180
Office rentals paid by:
FAI Home Security Pty
Limited to--
FAI General Insurances Ltd.. 186,525 150,652 218,613 162,373 158,533
Computer rentals paid by:
FAI Home Security Pty
Limited to--
FAI Home Security Holdings
Pty Limited................ 292,396 76,923 96,925 92,937
</TABLE>
NOTE 13: POST BALANCE SHEET EVENTS
Prior to the completion of the float of Home Security International Inc.
(HSI), the following agreements or events will occur which affect the Group:
(a) FAI Home Security Holdings Pty Limited has entered into a share
purchase agreement with HSI under which it has agreed to sell its shares in
FAI Home Security Pty Limited and FAI Home Security (ENZED) Limited plus
the note receivable from FAI Home Security (ENZED) Limited in the amount of
$131,615 in exchange for the issue of 4,499,999 shares in HSI plus a note
payable to FAI Home Security Holdings Pty Limited in the amount of
$131,615. A portion of the 4,499,999 shares is attributable to a
transaction external to the Australia and New Zealand Group. The agreement
is conditional on the completion of the New Zealand asset and share sale
agreement described in (b) below. The agreement may be terminated in the
event that the underwriting agreement is terminated prior to its
completion, the float of HSI is not effective or an underwriting agreement
is not executed.
F-16
<PAGE>
FAI HOME SECURITY AUSTRALIA AND NEW ZEALAND GROUP
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(b) FAI Home Security (NZ) Trust has entered an asset sale agreement with
FAI Home Security (ENZED) Ltd under which it has agreed to sell its
intangible assets for the issue of 999,999 fully paid ordinary shares in
FAI Home Security (ENZED) Ltd. The other assets, including fixed assets and
inventories but excluding business receivables, are to be purchased for
market value net of the warranty provision and FAI Home Security (ENZED)
Limited must pay FAI Home Security (NZ) Trust, within thirty days following
the completion date ("NZ Debt"). The NZ Debt created by the sale will be
assigned to FAI Home Security Holdings Pty Limited for an amount equal to
its book value. Further, the NZ Debt is to be assigned by FAI Home Security
Holdings Pty Limited to HSI at an amount equal to its book value.
(c) FAI Home Security (NZ) Trust has entered a share sale agreement with
FAI Home Security Holdings Pty Limited under which it has agreed to sell
its shares in FAI Home Security (ENZED) Ltd for market value as agreed
between the parties.
(d) FAI Home Security Pty Limited will declare a dividend payable to FAI
Home Security Holdings Pty Limited prior to completion under the share
purchase agreement. The dividend payable will be equal to its retained
profits at completion date.
NOTE 14: CONTINGENT LIABILITIES
FAI Home Security Pty Limited is a party to a deed of cross guarantee with
FAI Home Security Holdings Pty Limited and other wholly-owned subsidiaries of
FAI Insurances Limited. As a condition of the deed all parties have guaranteed
the repayments to all current and future creditors in the event of these
companies being wound up.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the reorganization transactions discussed in Note 12 to the combined
financial statements of FAI Home Security (UK) Trust and FAI Home Security
(Canada) Unit Trust have been completely effected, we expect to be in a
position to render the following audit report.
Arthur Andersen
Sydney
May 2, 1997
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees of
FAI Home Security (Canada) Unit Trust and FAI Home Security (UK) Trust ("FAI
Home Security International Group"):
We have audited the accompanying combined balance sheets of the FAI Home
Security International Group as of June 30, 1996 and 1995, and related
combined statements of income, shareholders' equity and cash flows for the
year ended June 30, 1996 and for the period from date of declaration to June
30, 1995. These financial statements are the responsibility of the Group'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 in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the FAI Home Security
International Group as of June 30, 1996 and 1995, and the results of its
operations and its cash flows for the year ended June 30, 1996 and for the
period from date of declaration to June 30, 1995, in conformity with generally
accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
FAI Home Security International Group will continue as a going concern. As
discussed in Note 14 to the financial statements, the FAI Home Security
International Group has suffered recurring losses from operations and has a
capital deficiency that raises substantial doubt about its ability to continue
as a going concern. In the event that the sale of the FAI Home Security
International Group's businesses to FAI Home Security Holdings Pty Limited
were to occur in accordance with the agreements outline in Note 12, then the
FAI Home Security International Group would not own any businesses to enable
it to generate sufficient cashflows to enable it to repay its remaining
liabilities. The FAI Home Security International Group will be dependent upon
future business development or obtaining support from other sources to enable
it to continue to operate as a going concern. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or the amounts and classification of
liabilities that might be necessary should the International Group be unable
to continue as a going concern.
The financial statements of the FAI Home Security International Group as of
and for the nine months ended March 31, 1997 and 1996, which are presented
solely for comparative purposes, were not audited by Independent Public
Accountants.
Arthur Andersen
Sydney, NSW
May 2, 1997 except with respect to
the reorganization transactions as discussed
in Note 12, as to which the date is , 1997
F-19
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
PERIOD ENDED YEAR ENDED ----------------------
JUNE 30 JUNE 30 (UNAUDITED)
1995 1996 1996 1997
NOTE $US $US $US $US
---- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............... 2 876,693 1,750,028 1,392,142 1,397,997
Cost of goods sold...... (446,246) (1,028,583) (1,076,801) (770,155)
---------- ---------- ---------- ----------
Gross profit............ 430,447 721,445 315,341 627,842
General and
administrative expenses
--other............... (2,378,947) (3,199,590) (2,088,969) (1,140,054)
--related party....... 11(a) (206,344) -- -- --
--FAI Group........... 11(b) -- -- -- (560,172)
---------- ---------- ---------- ----------
Income (loss) from
operations............. (2,154,844) (2,478,145) (1,773,628) (1,072,384)
Interest income......... -- 7,927 -- 6,514
Interest expense-FAI
Group.................. 11(b) -- -- -- (290,997)
---------- ---------- ---------- ----------
Income (loss) before
taxes.................. (2,154,844) (2,470,218) (1,773,628) (1,356,867)
Income tax expense...... 10 -- -- -- --
---------- ---------- ---------- ----------
Net income (loss)....... (2,154,844) (2,470,218) (1,773,628) (1,356,867)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
---------------------- (UNAUDITED)
1995 1996 1997
NOTE $US $US $US
---- ---------- ---------- -----------
ASSETS
- ------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents......... 69,982 82,214 60,206
Accounts receivable--trade, net... 3 169,633 93,177 309,380
Inventories....................... 4 349,287 435,278 459,868
Prepaid expenses and other current
assets........................... 5 11,645 126,556 115,955
---------- ---------- ----------
Total current assets............ 600,547 737,225 945,409
---------- ---------- ----------
Non-current assets
Plant and equipment, net.......... 6 142,059 109,627 102,629
---------- ---------- ----------
Total assets........................ 742,606 846,852 1,048,038
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
Current liabilities
Bank overdraft.................... -- 21,205 --
Payables--related parties......... 11(a) 357,181 439,503 949,163
Payables--FAI Group............... 11(b) -- 2,012,472 2,845,560
Payables--trade................... 282,008 417,880 724,008
Accrued liabilities............... 56,696 58,771 53,454
---------- ---------- ----------
Total current liabilities........... 695,885 2,949,831 4,572,185
---------- ---------- ----------
Shareholders' equity
Trust settlement.................. 1,516,990 1,861,588 1,861,588
Trust units issued................ 690,446 690,446 690,446
Foreign currency translation
adjustment....................... (5,871) (29,951) (94,252)
Accumulated losses................ (2,154,844) (4,625,062) (5,981,929)
---------- ---------- ----------
Total shareholders' equity...... 46,721 (2,102,979) (3,524,147)
---------- ---------- ----------
Total liabilities and shareholders'
equity............................. 742,606 846,852 1,048,038
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-21
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
COMBINED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
PERIOD ENDED YEAR ENDED ----------------------
JUNE 30 JUNE 30 (UNAUDITED)
1995 1996 1996 1997
$US $US $US $US
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cashflow from operating
activities
Net Income (Loss)........... (2,154,844) (2,470,218) (1,773,628) (1,356,867)
Adjustments to reconcile net
income (loss) to net cash
from operating activities:
Depreciation................ 11,307 45,847 34,720 21,119
Provision for losses on
accounts receivable........ 15,810 129,602 (178,082) 123,773
(Increase) decrease in
operating assets:
Accounts receivable--trade.. (184,230) (38,558) (439,966) (366,219)
Inventories................. (347,800) (115,504) (33,325) 15,026
Prepaid expenses and other
assets..................... (11,645) (114,911) 85,223 (21,051)
Increase (decrease) in
operating liabilities:
Accounts payable............ 281,256 143,349 28,900 206,385
Accrued liabilities......... 56,501 2,928 51,388 82,066
---------- ---------- ---------- ----------
Net cash used in operating
activities................... (2,333,645) (2,417,465) (2,224,771) (1,295,768)
---------- ---------- ---------- ----------
Cashflow from investing
activities
Proceeds from sale of plant
and equipment.............. -- -- -- 8,472
Additions to plant and
equipment.................. (152,878) (15,475) (27,496) (19,569)
---------- ---------- ---------- ----------
Net cash used in investing
activities................... (152,878) (15,475) (27,496) (11,097)
---------- ---------- ---------- ----------
Cashflow from financing
activities
Increase (decrease) in bank
overdraft.................. -- 20,943 -- --
Provided by (payments on)
FAI Group debt............. -- 1,655,291 1,687,571 805,179
Receipts from related
parties.................... 355,971 425,908 191,321 481,752
Capital subscribed.......... 2,207,436 344,598 344,598 --
---------- ---------- ---------- ----------
Net cash provided by financing
activities................... 2,563,407 2,446,740 2,223,490 1,286,931
---------- ---------- ---------- ----------
Net increase/(decrease) in
cash held.................... 76,884 13,800 (28,777) (19,934)
---------- ---------- ---------- ----------
Cash at the beginning of the
financial year............... -- 69,982 69,982 61,010
Effect of exchange rate change
on cash held................. (6,902) (1,568) (2,341) 19,130
---------- ---------- ---------- ----------
Cash at the end of the period. 69,982 82,214 38,864 60,206
---------- ---------- ---------- ----------
Supplemental disclosures of
cash flow information:
Interest paid................. -- -- -- 290,997
Income taxes paid............. -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-22
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRUST TRUST UNITS TRANSLATION ACCUMULATED SHAREHOLDERS'
SETTLEMENT ISSUED RESERVE LOSSES EQUITY
---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
October 14, 1994........ 15 690,446 -- -- 2,207,436
March 28, 1995.......... 1,516,975 1,516,975
Foreign currency
translation adjustment. (5,871) (5,871)
Net loss 1995........... (2,154,844) (2,154,844)
--------- ------- ------- ---------- ----------
Balance June 30, 1995... 1,516,990 690,446 (5,871) (2,154,844) 46,721
Foreign currency
translation adjustment. (24,080) (24,080)
Forgiveness of debt..... 344,598 344,598
Net loss 1996........... (2,470,218) (2,470,218)
--------- ------- ------- ---------- ----------
Balance June 30, 1996... 1,861,588 690,446 (29,951) (4,625,062) (2,102,979)
Foreign currency
translation adjustment. (64,301) (64,301)
Net loss nine months to
March 1997............. (1,356,867) (1,356,867)
--------- ------- ------- ---------- ----------
Balance March 31, 1997
(Unaudited)............ 1,861,588 690,446 (94,252) (5,981,929) (3,524,147)
========= ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business--
FAI Home Security (UK) Trust was declared in Manchester, England on March
28, 1995 and FAI Home Security (Canada) Unit Trust was declared in Toronto,
Canada on October 14, 1994.
The main business activity of FAI Home Security (UK) Trust and FAI Home
Security (Canada) Unit Trust, collectively "the Group", is the sale, service
and monitoring of security alarm systems, which are sold via a distributor
network to residential and small business premises in North America, Europe
and South Africa.
The security alarm system, "SecurityGuard", and other major components are
supplied exclusively by Ness Security Products Pty Ltd, an unrelated company
based in Sydney, Australia.
b) Principles of Consolidation and Combined Statements--
The two entities are subsidiaries of the current ultimate beneficiary,
Cooper Investment Trust. Accordingly, the accompanying financial statements
have been presented on a combined basis, and include the consolidated accounts
of FAI Home Security (UK) Trust, and its wholly-owned subsidiary, FAI Home
Security (Africa) Pty Ltd, and the consolidated accounts of FAI Home Security
(Canada) Unit Trust, and its wholly-owned subsidiary, FAI Home Security (USA)
Inc.
All intercompany accounts and transactions have been eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America.
c) Cash and Cash Equivalents--
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost which approximates market.
d) Net Income/(Loss) per Common Share--
There has been no calculation of Net Income/(Loss) per common share because
of the combined group structure.
e) Foreign Currencies--
The combined financial statements of the Group are translated into US
dollars to reflect the local currency of the proposed ultimate parent entity,
Home Security International Inc. The assets and liabilities of the Group are
translated at the balance sheet date exchange rate. The profit and loss items
of the Group have been translated at the average exchange rates throughout
each period. The resulting translation effects are reflected in shareholders'
equity.
The local currency of FAI Home Security (UK) Trust is British Pound
Sterling, the local currency of FAI Home Security (Canada) Unit Trust is
Canadian dollars, and the local currency of FAI Home Security (Africa) Pty Ltd
is South African Rand. FAI Home Security (USA) Inc. reports its financial
statements in United States dollars.
f) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
F-24
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
g) Income Taxes--
The group accounts for income taxes under Statement of Financial Accounting
standards (SFAS No. 109 "Accounting for Income Taxes") which requires an asset
and liability method of accounting for income taxes. Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in
which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
h) Revenue Recognition--
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates.
i) Allowance for Doubtful Accounts--
Management reviews the collectibility of accounts receivable on a regular
basis. Amounts, if any, which are determined to be uncollectible are provided
for in the financial statements in the period such determination is made.
j) Inventories--
Inventories consist of sales aids, service stock and stock for resale and
are stated at the lower of cost (first-in, first-out method), or market. Stock
for resale is warehoused by both entities.
k) Plant and Equipment--
Plant and equipment are recorded at cost. Maintenance and repairs are
expensed in the period to which they relate. Depreciation on plant and
equipment is calculated using the straight-line method with the exception of
Canada which uses the declining balance method for all assets except leasehold
improvements, over the following estimated useful lives:
<TABLE>
<CAPTION>
UNITED KINGDOM CANADA
YEARS YEARS
-------------- ------
<S> <C> <C>
Furniture and fixtures............................. 4 5
Office equipment................................... 4 5
Plant.............................................. 4 --
Computer equipment................................. -- 3.33
Motor vehicles..................................... 4 --
Leasehold improvements............................. -- 5
</TABLE>
l) Research and Development--
The Group has no significant research and development activities.
m) Pension and Other Benefit Plans--
The Group has no pension or other post-employment benefit plans.
F-25
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: NET SALES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD YEAR MARCH 31
ENDED ENDED --------------------
JUNE 30 JUNE 30 (UNAUDITED)
1995 1996 1996 1997
$US $US $US $US
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Direct retail sales................... 377,983 539,845 569,322 88,626
Distributor sales..................... 513,368 1,251,325 867,300 1,330,031
Other................................. -- 12,996 9,152 1,834
------- --------- --------- ---------
Gross sales........................... 891,351 1,804,166 1,445,774 1,420,491
Less: returns and rebates (14,658) (54,138) (53,632) (22,494)
------- --------- --------- ---------
Net sales............................. 876,693 1,750,028 1,392,142 1,397,997
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE--TRADE
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
----------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- -------- -----------
<S> <C> <C> <C>
Accounts receivable.............................. 185,443 238,589 578,706
Less: allowances for doubtful accounts........... (15,810) (145,412) (269,326)
------- -------- --------
169,633 93,177 309,380
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------- -----------
<S> <C> <C> <C>
Service stock....................................... -- 30,023 10,600
Sales aids.......................................... 47,274 37,372 111,705
Goods for resale.................................... 302,013 367,883 337,563
------- ------- -------
349,287 435,278 459,868
</TABLE>
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------ ------- -----------
<S> <C> <C> <C>
Prepayments.......................................... 5,193 19,934 47,307
Pre-paid VAT......................................... -- 106,622 65,536
Sundry debtors....................................... 6,452 -- 3,112
------ ------- -------
11,645 126,556 115,955
</TABLE>
NOTE 6: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
---------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------- -----------
<S> <C> <C> <C>
Furniture and fixtures............................ 42,739 65,718 82,395
Plant and equipment............................... 98,775 98,117 97,117
Motor vehicles.................................... 11,895 -- --
less: Accumulated depreciation.................... (11,350) (54,208) (76,883)
------- ------- -------
142,059 109,627 102,629
</TABLE>
F-26
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the combined balance sheets for cash and
cash equivalents, and accounts receivable and payable approximate their
respective fair values due to the short maturities of these instruments.
NOTE 8: LEASE COMMITMENTS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------ ------ -----------
<S> <C> <C> <C>
Operating leases exist for the premises and motor
vehicles in Canada and United Kingdom.
The future minimum payments on operating leases are
as follows:
Payable no later than one year.................... 21,004 45,163 53,620
Payable later than one year but not later than two
years............................................ 14,988 35,836 39,124
Payable later than two years but not later than
three years...................................... 5,749 7,688 13,081
Payable later than three years but not later than
four years....................................... -- -- --
Payable later than four years but not later than
five years....................................... -- -- --
------ ------ -------
41,741 88,687 105,825
</TABLE>
F-27
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: SEGMENT INFORMATION
The Group operates principally in one industry segment which includes the
sale, service and monitoring of security alarm systems. The Group's area of
operations includes Canada, South Africa, United Kingdom and United States and
no single customer accounts for more than 10% of the Group's revenues.
Information about the Group's operations split by geographic location is shown
below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PERIOD MARCH 31
ENDED YEAR ENDED ----------------------
JUNE 30 JUNE 30 (UNAUDITED)
1995 $US 1996 $US 1996 $US 1997 $US
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales:
--United Kingdom.............. 386,639 698,508 539,297 960,847
--South Africa................ -- -- -- 23,975
--Canada...................... 490,054 999,268 850,888 437,647
--United States............... -- 52,252 1,957 34,148
---------- ---------- ---------- ----------
876,693 1,750,028 1,392,142 1,456,617
less: Eliminations -- -- -- (58,620)
---------- ---------- ---------- ----------
Total Net Sales................. 876,693 1,750,028 1,392,142 1,397,997
Operating Profit/(Loss):
--United Kingdom.............. (1,606,332) (1,995,479) (1,547,913) (597,883)
--South Africa................ -- -- -- (3,917)
--Canada...................... (548,512) (429,911) (205,144) (391,521)
--United States............... -- (52,755) (20,571) (79,063)
---------- ---------- ---------- ----------
(2,154,844) (2,478,145) (1,773,628) (1,072,384)
less: Eliminations -- -- -- --
---------- ---------- ---------- ----------
Total Operating Profit/(Loss)... (2,154,844) (2,478,145) (1,773,628) (1,072,384)
Capital Expenditure
--United Kingdom.............. 91,042 10,350 21,331 --
--South Africa................ -- -- -- 661
--Canada...................... -- -- 5,130 18,908
--United States............... -- -- 1,035 --
---------- ---------- ---------- ----------
91,042 10,350 27,496 19,569
Depreciation
--United Kingdom.............. 5,371 28,280 21,532 8,800
--South Africa................ -- -- -- --
--Canada...................... 5,936 17,567 13,188 12,319
--United States............... -- -- -- --
---------- ---------- ---------- ----------
11,307 45,847 34,720 21,119
</TABLE>
F-28
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 (UNAUDITED)
----------------
1995 1996 1997
$US $US $US
------- -------- -----------
<S> <C> <C> <C>
Identifiable Assets:
--United Kingdom................................ 346,555 402,887 707,491
--South Africa.................................. -- -- 18,791
--Canada........................................ 326,069 406,303 484,260
--United States................................. -- 63,366 16,819
------- -------- ---------
672,624 872,556 1,227,361
less:
Eliminations.................................... -- (107,918) (239,529)
Corporate Assets................................ 69,982 82,214 60,206
------- -------- ---------
Total Assets.................................. 742,606 846,852 1,048,038
</TABLE>
Identifiable assets are those assets that are identified with the operations
in each geographic area. Corporate assets are principally cash and short-term
deposits.
NOTE 10: INCOME TAXES
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
-------- ---------- -----------
<S> <C> <C> <C>
Deferred tax assets are comprised of:
Deferred tax benefits associated with
losses.................................... 695,472 1,492,539 1,919,240
Valuation allowance........................ (695,472) (1,492,539) (1,919,240)
-------- ---------- ----------
Net deferred tax assets.................... -- -- --
</TABLE>
The Group has income tax loss carry forwards available to offset future
taxable income, the tax benefit of which has not been recorded in these
financial statements, expiring as follows (using the balance sheet date
exchange rate):
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
------------------- (UNAUDITED)
1995 1996 1997
$US $US $US
--------- --------- ---------
<S> <C> <C> <C> <C>
2002................................... 2,154,997 2,154,997 2,154,997
2003................................... -- 2,470,150 2,470,150
2004................................... -- -- 1,356,867
--------- --------- ---------
2,154,997 4,625,147 5,982,014
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
(a) RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
--------------- (UNAUDITED)
1995 1996 1997
$US $US $US
------- ------- -----------
<S> <C> <C> <C>
Current Liabilities:
Cooper Investment Trust........................... -- 439,503 949,163
FAI Home Security Holdings Pty Limited............ 357,181 -- --
------- ------- -------
357,181 439,503 949,163
</TABLE>
F-29
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Cooper Investment Trust loan is unsecured, non-interest bearing and
subordinated to June 30, 1998.
The amount due to FAI Home Security Holdings Pty Limited is non-interest
bearing and repayable on demand.
FAI Home Security (UK) Trust and FAI Home Security (Canada) Unit Trust were
related to FAI Home Security Holdings Pty Limited by the ultimate holdings of
the ultimate parent company FAI Insurances Ltd. until November 15, 1995 at
which time the trusts were sold to entities related to Mr. Cooper.
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 (UNAUDITED)
--------------- ------------
1995 1996 1996 1997
$US $US $US $US
------- ------- ------- ----
<S> <C> <C> <C> <C>
Portion of debt forgiven by FAI Home Security
Holdings Pty Limited
to--
FAI Home Security (UK) Trust..................... -- 344,598 344,598 --
The debt forgiven by FAI Home Security Holdings Pty Limited was part of the
total consideration for the sale of international operations that occurred on
November 15, 1995.
Management fees paid to FAI Home Security Pty
Limited by--
FAI Home Security (UK) Trust..................... 71,283 -- -- --
FAI Home Security (Canada) Trust................. 135,061 -- -- --
</TABLE>
The management fees relate to an apportionment of costs incurred by FAI Home
Security Pty Limited on behalf of FAI Home Security (UK) Trust and FAI Home
Security (Canada) Unit Trust.
(b) TRANSACTIONS WITH FAI GROUP
On November 15, 1995 the FAI Group sold its interest in the International
Group to Mr. Cooper at which time it ceased to be related to the FAI Group.
FAI Home Security Holdings Pty Ltd. contracted to provide management services
to the International Group at market rates. The loans outstanding from the
International Group to FAI Home Security Holdings Pty Ltd. became interest
bearing after the sale carrying an interest rate of 10% per annum.
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
-------------- (UNAUDITED)
1995 1996 1997
$US $US $US
---- --------- -----------
<S> <C> <C> <C>
Current Liabilities:
FAI Home Security Holdings Pty Limited............. -- 2,012,472 2,845,560
</TABLE>
The amount due to FAI Home Security Holdings Pty Limited has been
subordinated to June 30, 1998.
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 (UNAUDITED)
--------- ------------
1995 1996 1996 1997
$US $US $US $US
---- ---- ---- -------
<S> <C> <C> <C> <C>
Management fees received by FAI Home Security Holdings
Pty Limited from--
FAI Home Security (UK) Trust........................... -- -- -- 448,138
FAI Home Security (Canada) Trust....................... -- -- -- 112,034
</TABLE>
F-30
<PAGE>
FAI HOME SECURITY INTERNATIONAL GROUP
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The management fees relate to an apportionment of costs incurred by FAI Home
Security Holdings Pty Limited on behalf of FAI Home Security (UK) Trust and
FAI Home Security (Canada) Unit Trust.
<TABLE>
<CAPTION>
MARCH 31
JUNE 30 (UNAUDITED)
--------- ------------
1995 1996 1996 1997
$US $US $US $US
---- ---- ---- -------
<S> <C> <C> <C> <C>
Interest paid to FAI Home Security Holdings Pty Limited
by:
FAI Home Security (UK) Trust........................... -- -- -- 238,246
FAI Home Security (Canada) Trust....................... -- -- -- 52,751
</TABLE>
The interest charged on the balance of the loans outstanding from FAI Home
Security Holdings Pty Limited from June 30, 1996.
NOTE 12: POST BALANCE SHEET EVENTS
The Group has entered into the International asset purchase agreement with
FAI Home Security Holdings Pty Limited. Under the agreement FAI Home Security
Holdings Pty Limited has agreed to purchase from the Group all of its
intangible and tangible assets, (including but not limited to inventories,
fixed assets, licences, goodwill but excluding accounts receivable) in
exchange for a cash payment of approximately $2,784,431 as at March 31, 1997.
The Group's liabilities to related parties are not to be assumed by FAI Home
Security Holdings Pty Limited under the agreement.
NOTE 13: CONTINGENT LIABILITIES
In the United Kingdom an estimated 400 alarm units have been sold with an
extended warranty period of 10 years by a distributor of FAI Home Security
(UK) Trust. FAI Home Security (UK) Trust has undertaken with the Office of
Fair Trading to honor this warranty in full.
The Company's historical experience with these warranties has been that less
than 10% of units sold will require a service call outside the normal 12 month
warranty period. Based upon these assumptions 400 units at the maximum service
cost of US$70 per visit over the 10 year period would give rise to a potential
liability of $28,000.
NOTE 14: GOING CONCERN
At March 31, 1997 the Group's liabilities exceeded its assets by $3,524,147.
As a consequence of the sale of its businesses as outlined in Note 12, the
Group will still have a net asset deficiency and not own any businesses to
enable it to generate sufficient cashflows to enable it to repay its remaining
liabilities. Whilst the Group's loans payable to related parties have been
subordinated to the repayment of all other creditors for the period to June
30, 1998, the Group will be dependent upon future business acquisitions and
obtaining continuing support from other sources to enable it to continue to
operate as a going concern.
F-31
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The unaudited proforma financial statements of the Company comprising the
proforma consolidated balance sheet at March 31, 1997 and proforma statements
of income for the nine months ended March 31, 1997 and year ended June 30,
1996 have been prepared in accordance with US generally accepted accounting
principles (GAAP), based upon the historical combined statements of income of
FAI Home Security Pty Limited and FAI Home Security (ENZED) Ltd (previously
trading through the FAI Home Security (NZ) Trust), (collectively the Australia
and New Zealand, ANZ Group), and FAI Home Security (UK) Trust, FAI Home
Security (Canada) Unit Trust and their respective South African and United
States subsidiaries (collectively Cooper International Group), after giving
effect to the pro forma adjustments described in the notes thereto as if the
reorganization had been in effect on July 1, 1995 in respect of the statements
of income and March 31, 1997 in respect of the balance sheet. Accordingly, the
goodwill and the other assets and liabilities recognised in the proforma will
differ from those existing when the reorganization is effective. A summary of
the reorganization transactions follows:
(I) FAI Home Security Pty Limited sells its shares in FAI Home Security
(NZ) Ltd to FAI Deposit Co. Pty Limited for $1,950 which is settled in
cash;
Payment of a dividend by FAI Home Security Pty Limited to FAI Home
Security Holdings Pty Limited equal to the retained earnings at the date of
the reorganization;
(II) FAI Home Security (NZ) Trust has entered into an asset sale
agreement with FAI Home Security (ENZED) Ltd under which it has agreed to
sell its intangible assets for the issue of 999,999 fully paid ordinary
shares in FAI Home Security (ENZED) Ltd. The other assets including fixed
assets and inventories but excluding business receivables, are purchased
for market value, net of the warranty provision, ("NZ Debt") which is
$131,615 based on the March 31, 1997 financial statements;
(III) FAI Home Security (NZ) Trust sells its note receivable from FAI
Home Security (ENZED) Ltd and shares in FAI Home Security (ENZED) Ltd to
FAI Home Security Holdings Pty Ltd for the market value of the shares plus
an amount equal to the value of the NZ Debt;
(IV) FAI Home Security Holdings Pty Limited has entered into the
International asset purchase agreement to acquire from the Cooper
International Group all of its intangible and tangible assets, (including
but not limited to inventories, fixed assets, licences, goodwill, but
excluding accounts receivable) in exchange for a cash payment of $2,784,431
based on March 31, 1997 financial statements. The Cooper International
Group liabilities to related parties are not assumed by either FAI Home
Security Holdings Pty Limited or Home Security International Inc. ("HSI").
The acquisition of Cooper International Group is accounted for under the
purchase method;
(V) FAI Home Security Pty Limited and FAI Home Security (ENZED) Ltd, plus
the note receivable from FAI Home Security (ENZED) Ltd and the assets of
Cooper International Group (defined in (IV) above) are acquired by HSI from
FAI Home Security Holdings Pty Limited in exchange for the issue of
4,499,999 shares, the issue of a note payable to FAI Home Security Holdings
Pty Limited equivalent to the book value of assets acquired, being
$562,497, plus $270,754, and a further note payable by HSI to FAI Home
Security Holdings Pty Limited in the amount of $131,615 based on the March
31, 1997 financial statements. The amalgamation of the Australia and New
Zealand Group and the Cooper International Group with HSI has been
accounted for as a reorganization of entities under common control and as
such the assets and liabilities are recognised at their book values;
(VI) HSI via its shareholding in FAI Home Security Pty Limited acquires a
licence from FAI Insurances Limited to use the name FAI Home Security
throughout its operations at no ongoing charge.
F-32
<PAGE>
The unaudited proforma statements of income do not purport to represent what
the results of operations of the Company would actually have been if the
events or transactions described above had in fact been in effect throughout
the entire said periods or to project the results of operations of the Company
for any future date or period.
The unaudited proforma statements of income and balance sheet should be read
in conjunction with the historical combined financial statements of the ANZ
Group and International Group, including the notes thereto, and other
financial information included elsewhere in the Prospectus.
F-33
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF UNAUDITED HISTORICAL STATEMENTS OF INCOME TO REORGANIZED
UNAUDITED HISTORICAL STATEMENT OF INCOME FOR NINE MONTHS ENDED MARCH 31, 1997.
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL REORGANIZATION REORGANIZED
INTERNATIONAL ANZ COMBINED ADJUSTMENTS HISTORICAL
$US $US $US $US NOTE $US
------------- ----------- ----------- -------------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 1,397,997 23,232,294 24,630,291 (537) (1) 24,629,754
---------- ----------- ----------- -----------
Cost of sales--related
party.................. -- (2,668,985) (2,668,985) (2,668,985)
--other............. (770,155) (14,109,950) (14,880,105) (14,880,105)
---------- ----------- ----------- ------- -----------
Gross profit............ 627,842 6,453,359 7,081,201 (537) 7,080,664
General and
administration
expenses............... (1,700,226) (4,045,935) (5,746,161) 65,812 (1) (5,680,349)
---------- ----------- ----------- ------- -----------
Income from operations.. (1,072,384) 2,407,424 1,335,040 65,275 1,400,315
Interest income, net.... (284,483) 555,002 270,519 (60,728) (1) 209,791
---------- ----------- ----------- ------- -----------
Income before income
taxes.................. (1,356,867) 2,962,426 1,605,559 4,547 1,610,106
Income tax expense...... -- (1,124,066) (1,124,066) (1) (1,124,066)
---------- ----------- ----------- ------- -----------
Net income (loss)....... (1,356,867) 1,838,359 481,493 4,547 486,040
</TABLE>
RECONCILIATION OF UNAUDITED HISTORICAL STATEMENTS OF INCOME TO REORGANIZED
UNAUDITED HISTORICAL STATEMENT OF INCOME FOR YEAR ENDED JUNE 30, 1996.
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL REORGANIZATION REORGANIZED
INTERNATIONAL ANZ COMBINED ADJUSTMENTS HISTORICAL
$US $US $US $US NOTE $US
------------- ----------- ----------- -------------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 1,750,028 26,700,922 28,450,950 21,278 (1) 28,472,228
---------- ----------- ----------- -----------
Cost of sales--related
party.................. -- (2,750,468) (2,750,468) (2,750,468)
--other............. (1,028,583) (14,834,094) (15,862,677) 20,468 (1) (15,842,209)
---------- ----------- ----------- -------- -----------
Gross profit............ 721,445 9,116,360 9,837,805 41,746 9,879,551
General and
administration
expenses............... (3,199,590) (6,606,377) (9,805,967) 122,420 (1) (9,683,547)
---------- ----------- ----------- -------- -----------
Income from operations.. (2,478,145) 2,509,983 31,838 164,166 196,004
Interest income, net.... 7,927 203,181 211,108 (107,016) (1) 104,092
---------- ----------- ----------- -------- -----------
Income before income
taxes.................. (2,470,218) 2,713,164 242,946 57,150 300,096
Income tax expense...... -- (1,054,170) (1,054,170) (14,615) (1) (1,068,785)
---------- ----------- ----------- -------- -----------
Net income (loss)....... (2,470,218) 1,658,994 (811,224) 42,535 (768,689)
</TABLE>
- --------
(1) Represents the statement of income for nine months ended March 31, 1997 and
year ended June 30, 1996 of FAI Home Security (NZ) Ltd which is sold as
part of the reorganization.
F-34
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA STATEMENT OF INCOME FOR NINE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
REORGANIZED PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (UNAUDITED)
$US $US NOTES $US
----------- ----------- ----- ------------
<S> <C> <C> <C> <C>
Net sales......................... 24,629,754 24,629,754
----------- ------------
Cost of sales--related parties.... (2,668,985) 2,668,985 (1) --
--other...................... (14,880,105) (14,880,105)
----------- ------------
Gross profit...................... 7,080,664 9,749,649
General and administrative
expenses......................... (5,680,349) (83,323) (2) (5,763,672)
----------- ------------
Income from Operations............ 1,400,315 3,985,977
Interest income, net.............. 209,791 (173,791) (3) 36,000
----------- ------------
Income before income taxes........ 1,610,106 4,021,977
Income tax expense................ (1,124,066) (793,511) (4) (1,917,577)
----------- ------------
Net Income........................ 486,040 2,104,400
Pro forma Number of Common stock
Outstanding...................... 5,000,000
Pro forma Earnings per common
share............................ $ 0.421
</TABLE>
- --------
(1) Reversal of royalty expenses charged by FAI Home Security Holdings Pty
Limited of $2,668,985 for use of FAI name as FAI Insurances Limited has
agreed to provide the license for no ongoing charge.
(2) Represents amortization of intangible assets of $2,221,934 from the
purchase of assets of the Cooper International Group using an amortization
period of 20 years. This amortization period has been used as it is
consistent with the period used by FAI Home Security Pty Limited for
similar assets acquired. Amortization charge for the period is $83,323.
(3) Reversal of interest charge on loan with FAI Home Security Holdings Pty
Limited for $290,997 as the loan will not be assumed by the company when
it acquires the Cooper International Group operations, similarly interest
income, $464,788, on Australia and New Zealand Group loans within the FAI
Group will no longer be received on reorganization.
(4) The tax effect of the royalty reversal, and interest income reversal from
ANZ Group. The interest charge reversal and amortization of intangible
assets have no tax effect. Taxation expense has been calculated at the
Australian tax rate of 36%.
F-35
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED PROFORMA STATEMENT OF INCOME FOR YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
REORGANIZED PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (UNAUDITED)
$US $US NOTES $US
----------- ----------- ----- -----------
<S> <C> <C> <C> <C>
Net sales.................. 28,472,228 28,472,228
----------- -----------
Cost of sales--related
parties................... (2,750,468) 2,750,468 (5) --
--other............... (15,842,209) (15,842,209)
----------- -----------
Gross profit............... 9,879,551 12,630,019
General and administrative
expenses.................. (9,683,547) (194,684) (6)(a)(b)(c) (9,878,231)
----------- -----------
Income from Operations..... 196,004 2,751,788
Interest income, net....... 104,092 (19,220) (7) 84,872
----------- -----------
Income before income taxes. 300,096 2,836,660
Income tax expense......... (1,068,785) (936,013) (8) (2,004,798)
----------- -----------
Net Income (loss).......... (768,689) 831,862
Pro Forma Number of Common
stock Outstanding......... 5,000,000
Pro Forma Earnings per
common share.............. $ 0.166
</TABLE>
- --------
(5) Reversal of royalty expenses charged by FAI Home Security Holdings Pty
Limited of $2,750,468 for use of FAI name as FAI Insurances Limited has
agreed to provide the licence for no ongoing charge.
(6)(a) Represents depreciation and amortization on fixed assets acquired by
FAI Home Security Pty Limited as at March 31, 1997 from FAI Home
Security Holdings Pty Limited of $180,512.
(6)(b) Represents amortization of intangible assets of $2,221,934 from the
purchase of assets of the Cooper International Group using an
amortization period of 20 years. Amortization charge for the period is
$111,097.
(6)(c) Reversal of computer rental charge of $96,925 incurred previously for
use of FAI Home Security Holdings Pty Limited fixed assets which have
been purchased as part of the reorganization.
(7) Reversal of interest charge on loan with FAI Insurances Limited for
$47,625 and the interest income on the loans with FAI Finance Corporation
(NZ) Ltd for $66,845 as the loans will not be assumed by the company when
it acquires the Australia and New Zealand operations.
(8) The tax effect of the depreciation and amortization on fixed assets,
computer rental, royalty and interest income reversal; the interest charge
reversal and amortization of intangible assets having no tax effect. The
taxation expense has been calculated at the Australian rate of 36%.
F-36
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF UNAUDITED HISTORICAL BALANCE SHEET OF FAI HOME SECURITY
PTY LIMITED TO UNAUDITED PROFORMA BALANCE SHEET OF ANZ GROUP PRIOR TO
ACQUISITION BY HSI.
<TABLE>
<CAPTION>
ACQUISITION
OF COOPER
REORGANIZATION ANZ GROUP INTERNATIONAL
HISTORICAL ADJUSTMENTS REORGANIZED GROUP PRO FORMA PROFORMA
ANZ $US $US $US ADJUSTMENTS (UNAUDITED)
ASSETS $US (1) NOTE (2) (3) $US NOTE $US
- ------ ---------- -------------- ---- ----------- ------------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash
equivalents........... 236,485 (193,288) (a)(b) 43,197 4,858,228 (4)(5)(6) 4,901,425
Accounts receivable,
net--trade............ 1,112,840 (410,109) (b) 702,731 702,731
Accounts receivable,
net--related party.... 8,887,455 (2,242,877) (b) 6,644,578 (6,644,578) (5) --
Note receivable--
related party......... -- 131,615 (b) 131,615 (131,615) (7) --
Inventories............ 599,873 -- 599,873 459,868 1,059,741
Other current assets... 952,413 (9,871) (b) 942,542 942,542
---------- ---------- ---------- --------- ---------- ----------
Total current assets. 11,789,066 (2,724,530) 9,064,536 459,868 (1,917,965) 7,606,439
Plant and equipment,
net.................... 739,840 -- 739,840 102,629 842,469
Deferred income taxes... 518,152 (48,105) (b) 470,047 470,047
Other long term assets.. 3,951 -- 3,951 3,951
Intangibles, net........ 7,933,713 -- 7,933,713 2,221,934 10,155,647
Investments............. -- -- (a) -- --
---------- ---------- ---------- --------- ---------- ----------
Total assets......... 20,984,722 (2,772,635) 18,212,087 2,784,431 (1,917,965) 19,078,553
========== ========== ========== ========= ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Current liabilities
Accounts payable--
trade................. 3,379,768 (663,996) (b) 2,715,772 2,715,772
Accounts payable--
related party......... 1,749,570 3,057,280 (c) 4,806,850 (4,806,850) (5) --
Note payable--related
party................. -- 263,230 (b) 263,230 833,251 (131,615) (7) 964,866
Accrued liabilities.... 1,031,383 (26,841) (b) 1,004,542 1,004,542
Income taxes payable... 336,987 54,606 (b) 391,593 391,593
Deferred income........ 372,484 -- 372,484 372,484
Lease liability........ 23,303 -- 23,303 23,303
---------- ---------- ---------- --------- ---------- ----------
Total current
liabilities......... 6,893,495 2,684,279 9,577,774 833,251 (4,938,465) 5,472,560
Long term lease
liability.............. 47,280 -- 47,280 47,280
---------- ---------- ---------- --------- ---------- ----------
Total liabilities.... 6,940,775 2,684,279 9,625,054 833,251 (4,938,465) 5,519,840
Shareholders' equity
Common stock........... 2 (2) (b) -- 5,000 (4)(6) 5,000
Additional paid-in
capital............... 8,332,079 254,954 (b) 8,587,033 1,951,180 6,103,000 (4) 16,641,213
Secured note issue..... -- -- -- -- (3,087,500) (6) (3,087,500)
Foreign currency
translation
adjustment............ 383,319 (383,319) -- --
Retained earnings...... 5,328,547 (5,328,547) (b)(c) -- --
---------- ---------- ---------- --------- ---------- ----------
Total shareholders'
equity.............. 14,043,947 (5,456,914) 8,587,033 1,951,180 3,020,500 13,558,713
---------- ---------- ---------- --------- ---------- ----------
Total liabilities and
shareholders'
equity.............. 20,984,722 (2,772,635) 18,212,087 2,784,431 (1,917,965) 19,078,553
========== ========== ========== ========= ========== ==========
</TABLE>
- -------
(1) Represents the reorganization of the Australia and New Zealand Group,
which is accounted for as a reorganization of entities under common control
including the following adjustments;
F-37
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) The sale of the investment of FAI Home Security Pty Limited in FAI Home
Security (NZ) Ltd for book value of $1,950 which has been eliminated from
the combined historical ANZ balance sheets.
(b) The acquisition of FAI Home Security (ENZED) Ltd. Prior to this
transaction FAI Home Security (ENZED) Ltd purchases fixed assets,
inventories, intangible assets and contract liabilities of FAI Home
Security (NZ) Trust in exchange for the issue of 999,999 fully paid
ordinary shares and an agreement to pay an amount equal to the market
value of fixed assets, inventories, net of warranty provision (NZ Debt).
Using the historic financial statements of March 31, 1997 the NZ debt
would total $131,615. The remaining assets and liabilities of FAI Home
Security (NZ) Trust and the total balance sheet of FAI Home Security (NZ)
Ltd which are not purchased or assumed by FAI Home Security (ENZED) Ltd
are eliminated from the historical ANZ Group combined balance sheet.
(c) Payment of a dividend by FAI Home Security Pty Limited to FAI Home
Security Holdings Pty Limited out of retained earnings at March 31, 1997
of $3,057,280.
(2) Represents the purchase by HSI of FAI Home Security Pty Limited and FAI
Home Security (ENZED) Ltd from FAI Home Security Holdings Pty Limited in
exchange for the issue of 4,499,999 shares in HSI and the purchase of the
NZ Debt of $131,615 for an amount equal to its book value. The NZ Debt was
previously purchased by FAI Home Security Holdings Pty Limited from FAI
Home Security (NZ) Trust for $131,615.
(3) Represents HSI's purchase of fixed assets, inventories and intangible
assets of Cooper International Group from FAI Home Security Holdings Pty
Limited in exchange for the issue of shares in HSI described in (2) above,
and the issue of a note payable equivalent to the book value of assets,
plus $270,754 (FAI Note). Based on the financial statements as at March
31, 1997 the total note payable is $833,251.
(4) HSI issues 250,000 shares, par value $0.001, to the public at $13.00 per
share with total proceeds of $3,250,000 and pays share issue costs of
$392,000, representing net issue proceeds of $2,858,000.
(5) Repayment of all balances due to and receipt of all balances due from FAI
Insurances Group excluding the notes payable to the FAI Insurances Group
that have been issued as part of the reorganization.
(6) HSI issues 250,000 shares at par value $0.001 to Bradley Cooper in
exchange for cash of $162,500 and the issue of a 5 year 7.0% semi-annual
interest bearing note secured by the shares issued to the value of
$3,087,500.
(7) Represents the elimination of the note payable from FAI Home Security
(ENZED) Ltd to HSI in the amount of $131,615 and the note receivable by
HSI from FAI Home Security (ENZED) Ltd in the amount of $131,615.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Home Security International, Inc.:
We have audited the accompanying balance sheet of the Home Security
International, Inc. and statement of shareholders' equity as of April 30,
1997. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Home Security
International, Inc. as of April 30, 1997 in conformity with generally accepted
accounting principles in the United States of America.
Arthur Andersen
Sydney, NSW
June 5, 1997
F-39
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, 1997
$US
--------------
<S> <C>
ASSETS
Cash and cash equivalents........................................ 1
---
Total assets................................................. 1
===
SHAREHOLDERS' EQUITY
Common stock..................................................... 1
---
Total shareholders' equity................................... 1
===
</TABLE>
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
CAPITAL STOCK ISSUED EQUITY
----------------------- APRIL 30, 1997
SHARES AMOUNT $US
---------- ---------- --------------
<S> <C> <C> <C>
Authorized capital......................
--Preferred stock (1,000,000 at par
value $0.001 per share)..............
--Common stock (20,000,000 at par
value $0.001 per share)..............
Issued capital..........................
Common stock (par value $0.001 per
share)............................... 1 -- --
Share premium reserve................. 1 1
---------- ---------- ---
1 1 1
========== ========== ===
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Home Security International, Inc ("HSI" or "the company") was incorporated
in Delaware, United States of America on April 11, 1997.
The company did not trade from the date of incorporation to April 30, 1997.
One share has been issued for $1.00 to FAI Home Security Holdings Pty
Limited on April 28, 1997.
NOTE 2: POST BALANCE SHEET EVENTS
Prior to the completion of the float of the company the following agreements
or events will occur which affect the company:
(a) HSI has entered into a share purchase agreement with FAI Home
Security Holdings Pty Limited under which FAI Home Security Holdings Pty
Limited has agreed to sell its shares in FAI Home Security Pty Limited and
FAI Home Security (ENZED) Limited and a note receivable from FAI Home
Security (ENZED) in the amount of $131,615 plus the tangible and intangible
assets of the Cooper International Group, in exchange for the issue of
4,499,999 shares in the company plus a note payable to FAI Home Security
Holdings Pty Limited in the amount of $964,866.
The agreement is conditional on the completion of the New Zealand asset
and share agreement described in (b) below. The agreement may be terminated
prior to its completion, the float of HSI is not effective or an
underwritten agreement is not executed.
(b) FAI Home Security (NZ) Trust has entered an asset sale agreement with
FAI Home Security (ENZED) Ltd under which it has agreed to sell its
intangible assets for the issue of 999,999 fully paid ordinary shares in
FAI Home Security (ENZED) Ltd. The other assets, including fixed assets and
investments but excluding business receivables, are purchased for book
value net of the warranty provision and FAI Home Security (ENZED) Limited
must pay FAI Home Security (NZ) Trust, within thirty days following the
completion date ("NZ Debt"). The NZ Debt created by the sale will be
assigned to FAI Home Security Holdings Pty Limited for an amount equal to
its book value. Further, the NZ Debt is assigned by FAI Home Security
Holdings Pty Limited to HSI at an amount equal to its book value.
(c) FAI Home Security (NZ) Trust has entered a share sale agreement with
FAI Home Security Holdings Pty Limited under which it has agreed to sell
its shares in FAI Home Security (ENZED) Ltd for market value as agreed
between the parties.
F-41
<PAGE>
[INSIDE BACK COVER]
[HSI LOGO]
[Picture of world map indicating locations of the Company's
distribution operations]
The Company has established
distribution operations in the
countries indicated in the dark
blue shading.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITA-
TION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DE-
LIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Combined Financial Data.......................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 23
Management................................................................ 33
Certain Transactions...................................................... 39
Principal and Selling Shareholders........................................ 41
Description of Securities................................................. 42
Shares Eligible for Future Sale........................................... 43
Underwriting.............................................................. 45
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
HOME SECURITY INTERNATIONAL, INC.
LOGO
COMMON STOCK
----------------
PROSPECTUS
----------------
NATIONAL SECURITIES
CORPORATION
NOLAN SECURITIES CORPORATION
JUNE , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the Representatives' nonaccountable
expense allowance, payable in connection with the sale of the Shares being
registered hereby. All amounts are estimates, except the registration fee and
the NASD filing fee:
<TABLE>
<S> <C>
SEC Registration Fees (includes State)......................... $ 16,736
NASD Listing Fee............................................... $ 5,629
Blue Sky expenses and legal fees............................... $ 15,000
Accountants' Fees and Expenses................................. $ 200,000
American Stock Exchange Listing Fee............................ $ 50,000
Legal Fees and Expenses........................................ $ 250,000
Printing and Engraving......................................... $ 150,000
Transfer Agent and Registration Fees........................... $ 6,000
Miscellaneous.................................................. $ 110,635
---------
Total...................................................... $ 804,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 102(b) of the Delaware General Corporations Law (the "DGCL") permits
a provision in the certificate of incorporation of each corporation organized
thereunder eliminating or limiting, with certain exceptions, the personal
liability of a director to the corporation or its stockholders for monetary
damages for certain breaches of fiduciary duty as a director. The Certificate
of Incorporation of the Registrant eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection
with the defense or settlement of such action or suit, provided such person
meets the standard of conduct described in the preceding paragraph, except
that no indemnification is permitted in respect of any claim where such person
has been found liable to the corporation, unless the Court of Chancery or the
court in which such action or suit as brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Reference is made to Section 7 of Article VII of the Registrant's By-laws
and Article Seventh of the Certificate of Incorporation of the Registrant for
the provisions which the Registrant has adopted relating to indemnification of
officers, directors, employees and agents, which provides for the
indemnification of such persons to the full extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
Reference is also made to Section 7 of the Underwriting Agreement filed as
Exhibit 1 to this Registration Statement which provides for the
indemnification of the Company, its controlling persons, directors and certain
of its officers by the Underwriters against certain liabilities, including
liabilities under the securities laws.
Prior to the close of this Offering, the Registrant will have purchased
directors' and officers' liability insurance.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Number of Aggregate Form of
Purchasers Date of Sale Securities Shares Purchase Consideration
- ---------- -------------------- ---------- --------- Price -----------------------
-----------
FAI Home Security
Holdings Pty Ltd. 4/11/97 Common Stock 1 $ .001 Cash
FAI Home Security [at Reorganization] Common Stock 4,499,999 $10,538,213 Common Stock of FAI
Holdings Pty Ltd. Home Security Pty Ltd.
and FAI Home Security
(ENZED) Ltd.
Bradley D. Cooper [Prior to completion Common Stock 250,000 $ 3,250,000 $162,500 Cash and
of Offering] $3,087,500 Note Payable
</TABLE>
The sales of all of the aforementioned securities were made, or at the time
the Reorganization and prior to the completion of the Offering will be made,
in reliance upon the exemption from the registration provisions of the Act
afforded by section 4(2) thereof and/or Regulation D promulgated thereunder,
as a transaction by an issuer not involving a public offering. To the best of
the Registrant's knowledge, the purchasers of securities described above
acquired them, or will acquire them, for their own account.
ITEM 16. EXHIBITS
(a) EXHIBITS
<TABLE>
<C> <S>
+ 1 Form of Underwriting Agreement
2.1 Form of Share Purchase Agreement between the Company and FAI
2.2 Form of Asset Purchase Agreement between FAI Home Security Holdings
New Zealand Limited and FAI Home Security (ENZED) Limited
2.3 Form of NZ Share Sale Agreement between FAI Home Security Holdings New
Zealand Limited and FAI
+ 2.4 Form of Trade Mark License Agreement with FAI
+ 3.1 Certificate of Incorporation
+ 3.2 Bylaws of Registrant
+ 4.1 Form of Representatives' Warrant Agreement including Form of
Representatives' Warrant
4.2 Form of Registrant's Common Stock Certificate
5.1 Opinion and Consent of D'Ancona & Pflaum
+10.1 Form of 1997 Stock Option Plan
10.2 Form of 1997 Non-Employee Directors' Stock Option Plan
+10.3 International Asset Purchase Agreement between FAI and Cooper
International Group
+10.4 Form of Manufacturing Agreement between FAI Home Security Pty Ltd.,
and Ness
+10.5 Form of Executive Service Agreement with Bradley D. Cooper
+10.6 Form of Executive Service Agreement for Messrs. Youngman, Appleby,
Whitaker, Knowles and Hilbert
+10.7 Option Agreement Between Bradley D. Cooper and FAI Insurances Limited.
(FAI Insurance's purchase of 10.16% of FAI Home Security Holdings Pty
Ltd. from Bradley D. Cooper).
+10.8 Sale Agreement between Bradley D. Cooper, FAI Insurances Ltd, FAI Home
Security Holding Pty Ltd. and Kamarasi Pty Ltd. (FAI Insurance's
purchase of 39.84% of FAI Home Security Holdings Pty. Ltd. from
Bradley D. Cooper).
+10.9 Management Services Agreement with Speakeasy Ltd.
10.10 Form of Promissory Note Payable to Bradley D. Cooper
+21 List of Subsidiaries
23.1 Consent of D'Ancona & Pflaum--included in Exhibit 5.1
23.2 Consent of Arthur Andersen
+24.1 Power of Attorney--Contained on Page II-4 of this Registration
Statement
</TABLE>
- --------
+Previously Filed.
II-2
<PAGE>
<TABLE>
<C> <S>
27.1 Financial Data Schedule--FAI Home Security Australia and NZ Group
(Nine Months Ended
March 31, 1997)
27.2 Financial Data Schedule--FAI Home Security Australia and NZ Group
(Fiscal Year Ended
June 30, 1996)
27.3 Financial Data Schedule--FAI Home Security International Group (Nine
Months Ended
March 31, 1997)
27.4 Financial Data Schedule--FAI Home Security International Group (Fiscal
Year Ended
June 30, 1997)
27.5 Financial Data Schedule--Home Security International Inc. (Period of
April 11, 1997 through
April 30, 1997)
</TABLE>
ITEM 17. UNDERTAKINGS
a) The Company will file, during any period in which it offers or sells
securities, all post-effective amendments to this Registration Statement as
to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in this Prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
b) For determining liability under the Securities Act, the company will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
c) The Company will file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
Offering.
d) The Company will provide to any underwriter at the closing specified in
any underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to each
purchaser.
e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
f) In the event that a claim for indemnification against such liabilities is
asserted (other than the expenses of a successful defense), the Company will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and the Company will be governed by the final adjudication of
such issues.
g) The Company will treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
For determining any liability under the Securities Act, treat each post-
effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that is has reasonable grounds to believe the registrant
meets all of the requirements of filing on Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned in the
city of New York, NY on June 25, 1997.
Home Security International, Inc.,
/s/ Bradley D. Cooper
By: _________________________________
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bradley D. Cooper Chairman and Chief Executive June 25, 1997
____________________________________ Officer (Principal
Bradley D. Cooper Executive Officer)
/s/ Mark Whitaker Chief Financial Officer, June 25, 1997
____________________________________ Executive Vice President of
Mark Whitaker Finance and Treasurer
(Principal Financial and
Accounting Officer)
* Director June 25, 1997
____________________________________
Timothy M. Mainprize
* Director June 25, 1997
____________________________________
Steven A. Rothstein
* Director June 25, 1997
____________________________________
Steve Rabinovici
* Director June 25, 1997
____________________________________
Dennis J. Puleo
</TABLE>
/s/ Bradley D. Cooper
*By: ________________________________
Bradley D. Cooper
Attorney in Fact
II-4
<PAGE>
EXHIBIT 2.1
FAI HOME SECURITY HOLDINGS PTY LIMITED (ACN 003 125 264)
('VENDOR')
HOME SECURITY INTERNATIONAL INC.
('PURCHASER')
FAI INSURANCES LIMITED (ACN 004 304 545)
('FAI')
CERVALE PTY LIMITED (ACN 056 258 201)
('CERVALE')
SHARE PURCHASE AGREEMENT
RELATING TO THE PURCHASE OF SHARES IN FAI HOME SECURITY PTY LIMITED
AND FAI HOME SECURITY (ENZED) LIMITED
MINTER ELLISON
Lawyers
Minter Ellison Building
44 Martin Place
SYDNEY NSW 2000
DX 117 SYDNEY
Telephone (02) 9210 4444
Facsimile (02) 9235 2711
Ref: MAP
<PAGE>
SHARE PURCHASE AGREEMENT
AGREEMENT dated 1997
BETWEEN FAI HOME SECURITY HOLDINGS PTY LIMITED (ACN 003 125 264) a company
incorporated in New South Wales and having its registered office at
185 Macquarie Street, Sydney NSW 2000 ('VENDOR')
AND HOME SECURITY INTERNATIONAL INC. a company incorporated in Delaware,
United States of America and having its registered office at St
Moritz Hotel, 50 Central Park South, New York, NY 10019
('PURCHASER')
AND FAI INSURANCES LIMITED (ACN 004 304 545) a company incorporated in
New South Wales and having its registered office at 185 Macquarie
Street, Sydney NSW 2000 ('FAI')
AND CERVALE PTY LIMITED (ACN 056 258 201) in its own capacity and as
trustee of the Cooper Investment Trust of 28 Coronation Avenue,
Mosman, New South Wales ('CERVALE')
RECITALS
A. The Australian Company has an authorised share capital of
A$1,000,000 divided into 1,000,000 ordinary shares of $1.00 each, of
which 2 fully paid ordinary shares are on issue.
B. The NZ Company at Completion will have 1,000,000 ordinary shares on
issue.
C. The Vendor has agreed to sell and the Purchaser has agreed to
purchase the Shares subject to and on the terms and conditions
contained in this agreement.
D. FAI has agreed to guarantee certain obligations of the Vendor under
this agreement.
E. Cervale has agreed to provide certain warranties under this
agreement.
AGREEMENT
1. DEFINITIONS AND INTERPRETATION
1.1 In this agreement except where the context otherwise requires the
following words and expressions have the meanings indicated.
<PAGE>
'ACCOUNTING STANDARDS' means the Australian Accounting Standards from time
to time and if and to the extent that any matter is not covered by
Australian Accounting Standards means generally accepted accounting
principles applied from time to time in Australia for a company similar to
the Company.
'ACCOUNTS' means the audited balance sheet of each of the Group Companies
as at the First Accounts Date and the unaudited balance sheet of each of
the Group Companies as at the Second Accounts Date and the audited profit
and loss statement of each of the Group Companies for the financial year
ended on the First Accounts Date and the unaudited profit and loss
statement of each of the Group Companies for the six months ending on the
Second Accounts Date, together with the reports of the directors in respect
of those accounts.
'ARTICLES' means the articles of association of the Australian Company.
'ASSETS' has the meaning given in the Asset Purchase Agreement, except that
in relation to the Canada Tangible Assets, the SA Tangible Assets, the UK
Tangible Assets and the USA Tangible Assets (together, the 'Tangible
Assets'), means the Tangible Assets held by the Vendor and in existence on
the Completion Date.
'ASSET WARRANTIES' means those Warranties set out in SCHEDULE 7.
'ASSET PURCHASE AGREEMENT' means the agreement between the Vendor, Cervale
Pty Limited and various entities associated with Cervale Pty Limited, a
copy of which forms Annexure A to this agreement.
'AUSTRALIAN COMPANY' means FAI Home Security Pty Limited (ACN 050 064 214),
full details of which are set out in part 1 of SCHEDULE 1.
'AUSTRALIAN SHARES' means all of the issued shares in the capital of the
Australian Company as at the Completion Date.
'BUSINESS' means the business of selling, installing and servicing
residential security alarm systems through a distributorship network
conducted by the Group.
'BUSINESS CONTRACTS' has the meaning given in the Asset Purchase Agreement.
'BUSINESS LIABILITIES' has the meaning given in the Asset Purchase
Agreement.
'CLAIM' includes a claim, notice, demand, action, proceeding, litigation,
investigation, judgment, damage, loss, cost, expense or liability however
arising, whether present, unascertained, immediate, future or contingent,
whether based in contract, tort or statute and whether involving a third
party or party to this agreement.
'COMPANIES' means the Australian Company and the NZ Company, and in
SCHEDULE 6, 'Company' has the meaning given in CLAUSE 7.3.
'COMPANY WARRANTIES' means those Warranties set out in SCHEDULE 6.
2
<PAGE>
'COMPLETION' means completion of the sale and purchase of the Shares in
accordance with CLAUSE 6.
'COMPLETION DATE' means the day upon which Completion occurs under CLAUSE
6.
'CONDITIONS PRECEDENT' means the conditions precedent to Completion of this
agreement set out in CLAUSE 3.1.
'CONDITIONS SUBSEQUENT' means the conditions subsequent to this agreement
set out in CLAUSE 3.4.
'CONFIDENTIAL INFORMATION' means:
(a) all data bases, source codes, methodologies, manuals, artwork,
advertising manuals, trade secrets and all financial, accounting,
marketing and technical information, customer and supplier lists,
know-how, technology, operating procedures and other information, used
by or relating to any Group Company and its transactions and affairs
which is not in the public domain;
(b) all notes and reports incorporating or derived from information
referred to in paragraph (a); and
(c) all copies of the information, notes and reports referred to in
paragraphs (a) and (b).
'CONSIDERATION' means the consideration referred to in CLAUSE 4.
'CONSTITUTION' means the constitution of the NZ Company.
'CONTINGENT LIABILITIES' has the meaning given in the Accounting
Standards.
'DELIVER' includes procure the delivery of.
'EQUIPMENT LEASES' has the meaning given in the Asset Purchase Agreement.
'FIRST ACCOUNTS DATE' means 30 June 1996.
'FLOAT' means the initial public offer registered under the Securities
Act 1933 (US) by the Purchaser of 250,000 ordinary shares in the
Purchaser and concurrent sale of 2,750,000 ordinary shares in the
Purchaser by the Vendor.
'GROUP' means the Australian Company, the NZ Company, the NZ Trust and
FAI Home Security (NZ) Limited in its capacity as trustee of the NZ
Trust.
'GROUP COMPANY' means any entity forming part of the Group.
3
<PAGE>
'INTELLECTUAL PROPERTY RIGHTS' means all intellectual property and
proprietary rights (whether registered or unregistered) including:
(a) business names;
(b) trade or service marks (whether registered or unregistered);
(c) any right to have information kept confidential; and
(d) patents, patent applications, drawings, discoveries, inventions,
improvements, trade secrets, technical data, formulae, computer
programs, data bases, know-how, logos, registered and unregistered
designs, design rights, copyright and similar industrial or
intellectual property rights.
'INTERNATIONAL PROPERTY LEASES' has the same meaning as is given to
'Property Leases' in the Asset Purchase Agreement.
'LIABILITIES' means all liabilities, losses, damages, outgoings, costs and
expenses of whatever description.
'NESS CONTRACT' means a contract to be entered into between the Australian
Company and Ness Security Products Pty Limited granting to the Australian
Company and its nominees, the exclusive right to sell the SecurityGuard
product throughout the world (except the United States of America) and the
non-exclusive right to sell the SecurityGuard product in the United States
of America.
'NZ ASSET SALE AGREEMENT' means the agreement entered into in respect of
the sale of the assets and other items of the FAI Home Security (NZ) Trust
to FAI Home Security (ENZED) Limited dated on or about the date of this
agreement.
'NZ COMPANY' means FAI Home Security (ENZED) Limited, full details of which
are set out in part 2 of SCHEDULE 1.
'NZ COMPLETION' means the completion of all transactions contemplated by
the following agreements:
(a) the NZ Asset Sale Agreement;
(b) the NZ Share Sale Agreement.
'NZ DEBT' has the meaning given in the NZ Asset Sale Agreement.
'NZ SHARE SALE AGREEMENT' means the agreement entered into in respect of the
sale of the NZ Shares by FAI Home Security (NZ) Trust to the Vendor dated on
or about the date of this agreement.
4
<PAGE>
'NZ SHARES' means all of the issued shares in the capital of the NZ
Company as at the Completion Date.
'NZ TRUST' means the trust known as the FAI Home Security (NZ) Trust, as
established by a deed of trust dated 30 June 1995.
'PARTIES' means the parties to this agreement.
'PLANT AND EQUIPMENT' means all computer equipment, scanners, printers,
plant, equipment, motor vehicles, machinery, furniture, fixtures and
fittings used by any Group Company, including without limitation, the
plant and equipment described in SCHEDULE 3.
'PROPERTY LEASES' means the property leases referred to in SCHEDULE 5.
'RECORDS' means all original and copy records, documents, books, files,
reports, accounts, plans, correspondence, letters and papers of every
description and other material belonging or relating to or used by any
Group Company, including certificates of incorporation, minute books,
statutory books and registers, books of account, taxation returns, title
deeds, customer lists, price lists, computer programs and software, trading
and financial records.
'RELATED BODY CORPORATE' has the meaning given to that term by sections 9
and 50 of the Corporations Law.
'SEC' means the Securities Exchange Commission.
'SECOND ACCOUNTS DATE' means 31 December 1996.
'SECURITYGUARD' means the home security alarm devices which at the date of
this Agreement are manufactured by Ness Security Products Pty Limited and
known as 'SecurityGuard' and SecurityGuard II'.
'SELL' includes procure the sale of.
'SHARES' means all of the NZ Shares and the Australian Shares.
'TAX', 'TAXES' or 'TAXATION' means all forms of taxes, duties (including
without limitation, state stamp duties), imposts, charges, withholdings,
rates, levies or other governmental impositions of whatever nature whenever
and by whatever authority imposed, assessed or charged together with all
costs, charges, interest, penalties, fines, expenses and other additional
statutory charges incidental or related to the imposition.
'UNDERWRITING AGREEMENT' means an agreement in the form set out in SCHEDULE
9 pursuant to which the Underwriter underwrites the Float.
'UNDERWRITER' means National Securities Corporation, Inc.
5
<PAGE>
'Warranties' means each of the covenants, representations and warranties
referred to in clause 7 and set out in Schedule 6 and Schedule 7.
1.2 In this agreement unless the contrary intention appears:
(a) the singular includes the plural and vice versa and words importing a
gender include other genders;
(b) reference to any legislation or any provision of any legislation
includes any amendment, modification, consolidation or re-enactment of
the legislation or any legislative provision substituted for, and all
legislation and statutory instruments of, and regulations issued
under, the legislation;
(c) other grammatical forms of defined words and expressions have
corresponding meanings;
(d) a reference to a clause, paragraph, schedule or annexure is a
reference to a clause or paragraph of, or schedule or annexure to,
this agreement and a reference to this agreement includes its
schedules and annexures;
(e) words importing persons include firms, bodies corporate,
unincorporated associations or authorities;
(f) a reference to a person includes a reference to the person's
executors, administrators, successors, substitutes and assigns;
(g) an agreement, representation, warranty or indemnity given or
undertaken by 2 or more persons binds them and is given jointly and
severally;
(h) headings are for ease of reference only and do not affect the
construction of this agreement;
(i) a reference to an amount of money is a reference to the amount in the
lawful currency of the Commonwealth of Australia;
(j) a reference to writing includes typewriting, printing, lithography,
photography and any other mode of representing or reproducing words,
figures or symbols in a permanent and visible form;
(k) a document expressed to be an annexure means a document a copy of
which has been initialled for the purposes of identification by or on
behalf of the parties.
6
<PAGE>
2. SALE AND PURCHASE
2.1 Subject to the terms and conditions of this agreement, the Vendor as
beneficial owner agrees to sell the Shares to the Purchaser and the
Purchaser agrees to purchase the Shares from the Vendor for the
Consideration.
2.2 The Shares must be transferred at Completion free from all liens, mortgages
charges and encumbrances whatsoever and together with all rights, including
dividend rights, attached or accruing to them after the Completion Date.
2.3 FAI guarantees the obligations of the Vendor under this agreement including
without limitation clause 2.1.
2.4 Subject to the terms and conditions of this agreement, the Vendor agrees to
assign the benefit of the NZ Debt to the Purchaser on Completion.
2.5 Subject to the terms and conditions of this agreement, the Vendor agrees
to assign the Assets to the Purchaser on Completion.
3. CONDITIONS PRECEDENT AND SUBSEQUENT
3.1 Completion of the sale of the Shares is conditional upon the satisfaction
of each of the following conditions precedent:
(a) NZ Completion has occurred;
(b) the Ness Contract has been entered into by the Australian Company; and
(c) if necessary, the Purchaser has obtained approval on terms
satisfactory to it to Completion of the sale to the Purchaser of the
NZ Shares from the Overseas Investment Commission of New Zealand
pursuant to the Overseas Investment Regulations 1985.
3.2 If the Conditions are not satisfied on or before 31 July 1997 or a later
date agreed by the parties in writing then either the Purchaser or the
Vendor may at any time before Completion terminate this agreement by giving
notice in writing to the other.
3.3 On service of a notice under clause 3.2 this agreement has no further
effect and all parties are released from their obligations to further
perform this agreement.
3.4 The Purchaser or the Vendor may terminate this agreement by giving notice
to the other if:
(a) the Underwriting Agreement is terminated before completion of the
Underwriting Agreement; or
7
<PAGE>
(b) either or both of the following conditions subsequent are not
fulfilled within 14 days after Completion:
(i) the Float has gone effective;
(ii) the Underwriting Agreement has been executed.
3.5 If this agreement terminates in accordance with clause 3.4, the rights and
obligations of the Parties under this agreement, except for this clause
3.5, will terminate and,unless the Vendor waives its rights under this
clause 3.5, the Parties must take all necessary steps to:
(a) vest title and possession of the Shares in the Vendor;
(b) divest the Vendor of the shares in the Purchaser referred to in
clause 4; and
(c) otherwise restore the rights and obligations of the Parties to those
rights and obligations that they would have had if this agreement had
not been entered into without loss or gain to any of the Parties,
including without limitation taking all steps necessary to obtain a
refund of any stamp duty paid in accordance with section 41(7) of the
Stamp Duties Act 1920.
4. CONSIDERATION
4.1 In consideration for the sale of the Shares and the Assets, the Purchaser
agrees to issue and allot to the Vendor on Completion 4,499,999 ordinary
shares in the capital of the Purchaser and to pay the Vendor within 30 days
after the Completion Date an amount in Australian currency equal to the sum
of A$368,982 and the book value of the Tangible Assets (denominated in
Australian Currency) at the Completion Date.
4.2 In consideration for the assignment of the benefit of the NZ Debt, the
Purchaser agrees to pay to the Vendor within 30 days after the Completion
Date an amount equal to the value of the NZ Debt, as determined in
accordance with the NZ Asset Sale Agreement.
5. POSITION PENDING COMPLETION
5.1 Subject to clause 5.2, Pending Completion the Vendor must procure that the
Business is carried on in all respects in the ordinary and usual course and
in the same manner as prior to the date of this agreement including,
without limitation, maintaining all insurance policies current at the time
of this agreement and, in particular, procure that no Group Company, except
with the prior written consent of the Purchaser:
(a) transfers or otherwise disposes or agrees to transfer or dispose of
the whole or any part of the Business;
(b) makes a material change in the nature of, or ceases carrying on, the
Business;
(c) sells or otherwise disposes of any material asset of the Group; or
8
<PAGE>
(d) enters into any material, unusual or abnormal contract or commitment.
5.2 The Purchaser acknowledges that:
(a) the Purchaser is not entitled to the retained profits of the
Australian Company up to and including the Completion Date and that
there will be a dividend declared and paid out prior to Completion. If
the Australian Company has insufficient cash to pay the dividend, the
Purchaser agrees to procure payment of the amount outstanding at the
earliest opportunity but within six months of the Completion Date;
(b) the NZ Company has not traded and will not trade prior to the
Completion Date;
(c) notwithstanding paragraphs 5.1(b), (c) and (d), NZ Completion must
occur prior to Completion;
(d) any loans outstanding to the Vendor or its Related Bodies Corporate
from either of the Companies or the Purchaser or to either of the
Companies or the Purchaser from the Vendor or its Related Bodies
Corporate will be repaid within 30 days after Completion.
6. COMPLETION
6.1 Completion will occur immediately prior to the verification by the SEC to
the Underwriter and the Purchaser that the Float become effective.
6.2 At Completion the Vendor must:
(a) deliver to the Purchaser duly executed and completed transfers in
favour of the Purchaser, or as it directs in writing, of the Shares in
registrable form (except for the impression of stamp duty) together
with the relevant share certificates;
(b) deliver to the Purchaser any power of attorney or other authority
under which the transfers of the Shares are executed;
(c) cause a meeting of the board of directors of each Company to be held
and procure the board of directors of each Company to resolve that the
transfers of the Shares (subject to the payment of stamp duty on the
transfers) be approved and registered;
(d) cause the persons named in part 1 of Schedule 2 (or such other persons
as the Purchaser notifies to the Vendor prior to Completion) to be
validly appointed respectively as directors and the secretary of the
Australian Company and immediately on such appointment, cause each of
the persons named in part 2 of Schedule 2 against whose name it is
indicated that the person is to resign, to:
(i) resign from office as director or secretary of the Australian
Company; and
9
<PAGE>
(ii) deliver to the Purchaser a letter executed under seal (in the
form required by the Purchaser) acknowledging that he or she has
no claim against any Group Company for breach of contract, loss
of office, redundancy, unfair dismissal, compensation, loans or
otherwise except payments properly payable to him or her as an
employee for accrued and unpaid salary, holiday pay and long
service leave up to the Completion Date;
(e) deliver to the Purchaser all Records complete and up-to-date and
complying with all statutory requirements;
(f) deliver to the Purchaser the common seal of each Company; and
(g) deliver to the Purchaser any ASC Forms 312 and any analogous forms
under NZ legislation necessary to convey to the Purchaser clear title
to the Shares;
(h) stamped original counterparts of the International Property Leases
and, to the extent available to the Vendor, of the Business Contracts
and Equipment Leases;
(i) any documents required to transfer the Statutory Licences to the
Purchaser or its nominees; and
(j) do all other things necessary or desirable to place the Purchaser in
effective control of each of the Companies and the Business.
6.3 At Completion the Purchaser must allot to the Vendor 4,499,999 ordinary
shares in the capital of the Purchaser.
6.4 Immediately after Completion:
(a) the Vendor will enter into the Underwriting Agreement; and
(b) the Vendor will sell 2,750,000 ordinary shares in the Purchaser to the
Underwriter in accordance with the terms of the Underwriting
Agreement.
6.5 After Completion and until the Shares are registered in the name of the
Purchaser, the Vendor must convene and attend general meetings of the
Company, vote at those meetings and take all other action in the capacity
of the registered holder of the Shares as the Purchaser may lawfully
require from time to time by notice in writing to the Vendor.
6.6 For the purposes of clause 6.5 only, the Vendor appoints the Purchaser as
its attorney to convene and attend general meetings of the Company, vote at
those meetings and take all other action in the capacity of the registered
holder of the Shares.
10
<PAGE>
6.7 The Vendor assigns, and the Purchaser accepts the assignment of the benefit
of the NZ Debt with effect from the Completion Date.
7. WARRANTIES
7.1 The Vendor and FAI jointly and severally represent and warrant to the
Purchaser that each of the Company Warranties is true and accurate at the
date of this agreement and will be true and accurate on each day up to and
including the Completion Date.
7.2 The Vendor and Cervale jointly and severally represent and warrant to the
Purchaser that each of the Asset Warranties is true and accurate at the
date of this agreement and will be true and accurate on each day up to and
including the Completion Date.
7.3 Each of the Warranties is separate and independent and is not limited by
reference to any other Warranty or any other provision in this agreement.
7.4 Each of the Company Warranties:
(a) applies in relation to each Group Company and, except where expressly
otherwise provided, separately in relation to each Group Company as if
each reference in SCHEDULE 6 to the 'Company' is a reference to that
Group Company; and
(b) remains in full force and effect on and after the Completion Date
despite Completion.
7.5 Each of the Asset Warranties remains in full force and effect on and after
the Completion Date despite Completion.
7.6 Provided that all matters disclosed in SCHEDULE 8 have been disclosed
separately to the Purchaser at least three days prior to the date of
execution of this agreement, the Purchaser acknowledges that none of the
matters disclosed in SCHEDULE 8 or any other matter referred to or
contemplated by this agreement, including, without limitation, NZ
Completion, can give rise to a breach of Warranty. No other information
relating to any Group Company of which the Purchaser has knowledge, actual
or constructive, prejudices any Claim of the Purchaser under the Warranties
nor operates to reduce any amount recoverable.
7.7 Subject to CLAUSE 7.8, if there is a breach of or inaccuracy in any of the
Warranties on or before Completion the Purchaser may immediately terminate
this agreement by notice in writing to the Vendor but is not entitled to
any other remedy.
7.8 The Vendor must immediately notify the Purchaser in writing of any facts or
circumstances of which it becomes aware which constitute or may constitute
a breach of any Warranty ('NOTIFIED BREACH'). The Purchaser must notify the
Vendor within 15 days of receipt of such notice, or before Completion,
whichever occurs earlier, whether or not it has elected to terminate this
agreement as a result of a Notified Breach in accordance with CLAUSE 7.7.
The Purchaser acknowledges that if it
11
<PAGE>
makes no election within 15 days of receipt of such notice, or before
Completion, whichever occurs earlier, then the Purchaser waives any rights
it may have to terminate this Agreement in respect of the Notified Breach.
7.9 The rights and remedies of the Purchaser in respect of any breach of the
Warranties or of the terms of this agreement are not affected by
Completion.
7.10 The Vendor and FAI jointly and severally indemnify the Purchaser from all
Claims:
(a) made by any third party in relation to a matter which constitutes, or
in circumstances that constitute, a breach of any of the Company
Warranties or any other covenant or representation in this agreement;
or
(b) which the Purchaser or any Company suffers or incurs by reason of any
of the Company Warranties or any other covenant or representation made
in this agreement being untrue or inaccurate in any respect or by
reason of any failure by the Vendor or FAI to fulfil its obligations
under this agreement.
7.11 The Vendor and Cervale jointly and severally indemnify the Purchaser from
all Claims:
(a) made by any third party in relation to a matter which constitutes, or
in circumstances that constitute, a breach of any of the Asset
Warranties or any other covenant or representation in this agreement;
or
(b) which the Purchaser or any Company suffers or incurs by reason of any
of the Asset Warranties or any other covenant or representation made
in this agreement being untrue or inaccurate in any respect or by
reason of any failure by the Vendor or Cervale to fulfil its
obligations under this agreement.
7.12 Notwithstanding any other provision of this agreement:
(a) the Vendor shall not have any liability in respect of any Claim under
the Warranties unless reasonable particulars of the Claim are given to
the Vendor before the third anniversary of Completion;
(b) the liability of the Vendor in respect of any Claim under the
Warranties shall be reduced to the extent that the Claim has arisen as
a result of any act or omission after Completion by the Purchaser;
(c) the Vendor shall not be liable in respect of any Claim under the
Warranties unless the aggregate of all Claims made against the Vendor
under the Warranties exceeds the sum of $1,000,000, but thereafter the
Vendor will be liable for the whole amount payable in respect of all
claims, and not just the excess over $1,000,000.
12
<PAGE>
7.13 The Purchaser acknowledges and agrees that, except for the Warranties, the
Vendor has not given, nor has the Purchaser relied upon, any
representation, warranty, statement or document or other conduct by the
Vendor or its representatives in connection with the Companies or the
Business.
7.14 The Purchaser must (at the cost of the Vendor) take such action as the
Vendor may request in relation to a Notified Breach, including without
limitation:
(a) prosecute any action or proceedings, including the making of any
counter-claim or cross-claim against any person;
(b) conduct any negotiations and participate in any investigation in
respect of such notified breach;
(c) not accept, pay or compromise such notified breach without the
Vendor's prior written consent; and
(d) co-operate and procure its solicitors, accountants and other
representatives to co-operate with the Vendor and its counsel,
accountants or other representatives in respect of such notified
breach.
8. BUSINESS CONTRACTS AND EQUIPMENT LEASES
8.1 Subject to Completion and the Vendor at its cost obtaining all necessary
consents, the Vendor assigns and the Purchaser accepts an assignment of the
benefit of the Business Contracts, International Property Leases and the
Equipment Leases with effect from the Completion Date.
8.2 The Purchaser must assume, perform and observe the covenants and
obligations of the Vendor under the Business Contracts, International
Property Leases and Equipment Leases arising after Completion and
indemnifies the Vendor against any Liabilities arising as a result of any
breach or non-performance or non-observance of any terms and conditions of
any Business Contract or of any International Property Lease or of any
Equipment Lease after the Completion Date.
8.3 The Vendor and Cervale jointly and severally indemnify the Purchaser
against all Liabilities incurred by the Purchaser as a result of any breach
or default under any of the Business Contracts, International Property
Leases or Equipment Leases occurring on or prior to the Completion Date.
8.4 The Vendor must use its reasonable endeavours to obtain all required
transfers to the Purchaser of all Statutory Licences, International
Property Leases, Equipment Leases and Business Contracts but if, despite
their reasonable endeavours, the Vendor is unable to procure any such
transfers the Vendor must:
(a) hold the benefit of the relevant Statutory Licence, International
Property Lease, Equipment Lease or Business Contract on trust for the
benefit of the Purchaser; and
13
<PAGE>
(b) fully co-operate with the Purchaser in any reasonable arrangements
designed to provide for the Purchaser the benefit of the relevant
Statutory Licence, International Property Lease, Equipment Lease or
Business Contract.
8.5 On Completion, the Purchaser must assume the obligations of the Vendor
under CLAUSES 9 AND 10 of the Asset Purchase Agreement as if references to
'HSI' are references to 'the Purchaser' and references to the 'Vendor' or
'Vendors' are references to the Vendor (as defined in this agreement).
9. COSTS
The Purchaser must pay all costs in relation to the preparation and
execution of this agreement, including, without limitation, all stamp duty
on this agreement and any other instrument or other document executed to
give effect to any provisions of this agreement.
10. DURATION OF PROVISIONS
The covenants, conditions, provisions and Warranties contained in this
agreement do not merge or terminate at Completion and to the extent that
they have not been fulfilled and satisfied remain in full force and effect.
11. ASSIGNMENT
None of the rights of the parties under this agreement may be assigned or
transferred.
12. ENTIRE AGREEMENT
This agreement contains the entire understanding of the parties as to its
subject matter and any and all previous understandings or agreements on
that subject matter cease to have any effect from the date of this
agreement.
13. NO WAIVER
13.1 The failure of a party to exercise or delay in exercising a right, power or
remedy under this agreement does not prevent its exercise.
13.2 A provision of or right under this agreement may not be waived except by a
waiver in writing signed by the party granting the waiver, and will be
effective only to the extent specifically set out in that waiver.
14
<PAGE>
14. GOVERNING LAW AND JURISDICTION
14.1 This agreement is governed by the law of New South Wales.
14.2 Each party irrevocably and unconditionally submits to the non-exclusive
jurisdiction of the courts of New South Wales.
15. FURTHER ACTION
Each party must, both before and after the Completion Date, do everything
reasonably necessary or desirable to give full effect to this agreement.
16. COUNTERPARTS
This agreement may be executed in any number of counterparts and all those
counterparts taken together are regarded as one instrument.
17. NOTICES
17.1 A notice required or authorised to be given or served on a party under this
agreement must be in writing and may be given or served by facsimile, post
or hand to that party at its facsimile number or address appearing in this
clause or such other facsimile number or address as the party may have
notified the other party or parties in writing:
Vendor
Attention: Mr Terry Youngman
Address: Level 7, 77 Pacific Highway, North Sydney, NSW, 2000
Facsimile No: 612 9936 2425
Purchaser
Attention: Mr Ralph Stephenson
Address: St Moritz
50 Central Park South
New York, NY 10019
FAI
Attention: Mr Chris MacDonnell
Address: 185 Macquarie Street, Sydney, NSW, 2000
Facsimile No: 9373 0012
17.2 A notice is deemed to have been given or served on the party to whom it was
sent:
(a) in the case of hand delivery, on delivery;
15
<PAGE>
(b) in the case of pre-paid post, four days after the date of despatch;
(c) in the case of facsimile transmission, at the time of despatch if,
following transmission, the sender receives a transmission
confirmation report or, if the sender's facsimile machine is not
equipped to issue a transmission confirmation report, the recipient
confirms in writing that the notice has been received.
17.3 A notice given or served under this agreement is sufficient if:
(a) in the case of a company, it is signed by a director, officer or
secretary of that company; or
(b) in the case of an individual, it is signed by that party.
17.4 The provisions of this clause are in addition to any other mode of service
permitted by law.
17.5 In this clause 'NOTICE' includes a demand, request, consent, approval,
offer and any other instrument or communication made, required or
authorised to be given under this agreement.
16
<PAGE>
SCHEDULE 1
DETAILS OF THE COMPANIES
PART 1 - AUSTRALIAN COMPANY
NAME: FAI Home Security Pty Limited
ACN: 050 064 214
REGISTERED OFFICE: 12th Floor, FAI Insurance Building, 185
Macquarie Street, Sydney
DATE OF INCORPORATION: 13 August 1990
AUTHORISED SHARE CAPITAL: $1,000,000 divided into 1,000,000 shares of
$1.00 each of which 2 fully paid ordinary
shares are on issue.
ISSUED CAPITAL: 2 fully paid ordinary shares of $1.00 each
PART 2 - NZ COMPANY
NAME: FAI Home Security (ENZED) Limited
COMPANY NO: AK 852342
REGISTERED OFFICE: Level 15, Coopers & Lybrand Tower, 23-29
Albert Street, Auckland
DATE OF INCORPORATION: 24 April 1997
ISSUED CAPITAL AS AT COMPLETION: 1,000,000 ordinary shares
17
<PAGE>
SCHEDULE 2
PART 1
DIRECTORS AND SECRETARIES TO BE APPOINTED - AUSTRALIAN COMPANY
DIRECTORS Terence James Youngman
PART 2
CURRENT DIRECTORS AND SECRETARIES - AUSTRALIAN COMPANY
DIRECTORS Current: Timothy Maxwell Mainprize
Bradley David Cooper
To Resign:
SECRETARY Current: Robert Frederick Baulderstone
To Resign
18
<PAGE>
SCHEDULE 3
PLANT AND EQUIPMENT
(clause 1.1)
PART 1 - AUSTRALIAN COMPANY
19
<PAGE>
PART 2 - NZ COMPANY
SHARE PURCHASE AGREEMENT - SCHEDULE 3 PART 2 - NZ COMPANY
<TABLE>
<CAPTION>
FAI Home Security (NZ) Trust Depreciation Schedule Y/E 30/6/96
Fixed Assets retained at warehouse after sales to Distributors Sep 95 and move from ASB Bldg. Nov 95.
Date Open Cost of Sale Sale Profit/Loss Deprec
---- ---- ------- ---- ---- ----------- ------
Details Cost Purchased Wdv 1/7/95 additions Date Proceeds on disposal Rate red. Val
- ------- ------ --------- ---------- --------- ---- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Furniture $ $ $ $
- ---------
Hydestar shelving 890 01/07/95 890 9.50%
Canteen chairs 6, desk/chair 1,451 01/07/95 1,451 15.00%
Bookcase 253 01/07/95 253 9.50%
Appleton Sign 704 01/09/95 704 9.50%
Hydestar shelving 1,233 01/03/96 1,233 9.50%
Computer Software
Attache Modules 1,531 01/07/95 1,531 40.00%
Purchase Order Module 2,973 01/07/95 2,973 40.00%
Wordperfect 663 01/07/95 663 40.00%
Datagroup 991 01/07/95 991 40.00%
Windows for Workgroups 175 01/09/95 175 40.00%
Office Equipment
- ----------------
DX2-66 and Lotus 4,037 01/07/95 4,037 40.00%
Nokia Road Fitting 332 01/07/95 332 50.00%
Fax 516 01/07/95 516 33.00%
PCXB Computer, software 10,176 01/07/95 10,178 40.00%
Modem 0 01/07/95 1,271 30 Nov 95 1,271 40.00%
Ansutek weighing scale 340 01/07/95 340 33.00%
Photo-copier 2,100 01/07/95 2,100 33.00%
Shelving 699 31/08/96 699
Depreciation charge to March 97
29,064 0 30,335 1,271 0
</TABLE>
<TABLE>
<CAPTION>
Accum. Clos
------ ----
Details Months Deprec Deprec. Wdv 30/6/96
- ------- ------ ------ ------- -----------
<S> <C> <C> <C> <C>
Furniture $ $ $
- ---------
Hydestar shelving 12 85 805
Canteen chairs 6, desk/chair 12 218 1,233
Bookcase 12 24 229
Appleton Sign 10 56 648
Hydestar shelving 4 39 1,194
Computer Software
Attache Modules 12 612 919
Purchase Order Module 12 1,189 1,784
Wordperfect 12 265 398
Datagroup 12 396 595
Windows for Workgroups 12 70 105
Office Equipment
- ----------------
DX2-66 and Lotus 12 1,615 2,422
Nokia Road Fitting 12 166 166
Fax 12 170 346
PCXB Computer, software 12 4,070 6,106
Modem 0 0 0
Ansutek weighing scale 12 112 228
Photo-copier 12 693 1,407
Shelving
Depreciation charge to March 97 4,800 (4,800)
14,580 0 14,484
</TABLE>
155180/1
20
<PAGE>
SCHEDULE 4
INTELLECTUAL PROPERTY RIGHTS
(Company Warranty 12)
1. Copyright and Confidential Information in all databases, source codes,
software, methodologies, training material, promotional material, system
manuals, compilations, artwork and advertising materials used in the
Business, including without limitation the following:
2. Business Names
FAI Home Security
21
<PAGE>
SCHEDULE 5
PROPERTY LEASES
PART 1 - AUSTRALIAN COMPANY
PROPERTY: Level 7, 77 Pacific Highway, North Sydney, NSW, 2000
PROPERTY: Level 3, 77 Pacific Highway, North Sydney, NSW, 2000
22
<PAGE>
SCHEDULE 6
COMPANY WARRANTIES
Note: Pursuant to clause 7.4, each of the Warranties applies in relation to each
Group Company and, except where expressly otherwise provided, separately in
relation to each Group Company as if each reference in this SCHEDULE 6 to the
'Company' is a reference to that Group Company;
WARRANTY 1
(Vendor authority to sell)
1.1 The Vendor is the registered and beneficial owner of the Australian Shares
and will at Completion be the registered and beneficial owner of the NZ
Shares and there will be at Completion no mortgages, liens, claims, charges
or other encumbrances, or interests of any person, over or affecting the
Shares.
1.2 The Vendor has the power to enter into and perform this agreement and the
agreement constitutes a legal, valid and binding obligation on the Vendor
enforceable in accordance with its terms.
WARRANTY 2
(The Company)
2.1 The Australian Company and the NZ Company:
(a) are accurately described in SCHEDULE 1;
(b) have full corporate power to own their properties, assets and business
and to carry on their businesses as now conducted; and
(c) have or will at Completion have good and marketable title to all of
the assets included in the Accounts.
2.2 No meeting has been convened, resolution proposed, petition presented or
order made for the winding up of the Company and no receiver,
administrator, receiver and manager, provisional liquidator, liquidator or
other officer of the court has been appointed or threatened to be appointed
in relation to the Company or any part of its undertaking or assets.
WARRANTY 3
(Share capital)
3.1 The Australian Shares comprise the whole of the issued share capital of the
Australian Company, are fully paid and were properly issued.
3.2 At Completion, the NZ Shares will comprise the whole of the issued share
capital of the NZ Company, and will be fully paid and properly issued.
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3.3 There are no options or other entitlements over the Shares or any unissued
shares of the Company or securities convertible into shares of the Company.
WARRANTY 4
(Financial statements)
4. The Accounts:
(a) disclose a true and fair view of the affairs, financial position and
assets and liabilities of the Group as at the First Accounts Date and
the Second Accounts Date and of the income, expenses and results of
operations of the Group for the financial year ended on the First
Accounts Date and the Second Accounts Date;
(b) were prepared in accordance with the Accounting Standards, the
requirements of the Corporations Law, analogous New Zealand
requirements and standards, and all other applicable laws and on a
basis that is materially consistent with the audited accounts of the
Group for the financial year preceding the financial year ended on the
First Accounts Date.
WARRANTY 5
(Liabilities including, without limitation, Tax liabilities)
5.1 Otherwise than as set out in the Articles, the Company has not given any
guarantees, indemnities or letters of comfort in respect of the
obligations of any person.
5.2 The Company has not granted or created any mortgage, charge, debenture,
lien, finance lease or other encumbrance.
5.3 The Company does not have any material commitments and is not aware of any
unusual or actual or Contingent Liabilities except as disclosed in the
Accounts.
WARRANTY 6
(No changes since accounts date)
6.1 Since the Second Accounts Date:
(a) there has been no material adverse change in the assets, liabilities,
turnover, earnings, financial condition, trading position or prospects
of the Company;
(b) the Australian Company and the NZ Trust have carried on the Business
in the ordinary and usual course and have not entered into any
contracts or arrangements other than in the ordinary course of
carrying on the Business;
(c) the Company has not incurred or undertaken any actual or contingent
liabilities or obligations, including Taxation, that have not been
paid or satisfied except in the ordinary course of business. For the
purposes of this warranty and warranty 9.2,
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the Vendor and FAI acknowledge that any corporate restructuring
occurring within or involving the Group prior to the sale of Shares
contemplated by this agreement does not form part of the ordinary
course of business of the Company and therefore any liabilities,
including without limitation, in respect of Taxation arising in
connection with any such corporate restructuring shall be to the
account of the Vendor and/or FAI, and not to the account of the
Companies;
(d) the Company has not acquired or disposed of or dealt with any assets
nor has it entered into any agreement or option to acquire or dispose
of any assets other than in the normal course of business for full
market value;
(e) except in the ordinary course of business, the Company has not
borrowed money;
(f) the Company has not paid or agreed to pay any retiring allowance,
superannuation or benefit to any of its officers or employees except
where the law requires it or in accordance with a superannuation or
retirement scheme in force at the Accounts Date;
(g) the Company has not entered into any contract of service with any of
its officers or employees or increased, or agreed to increase, the
rate of compensation payable to any of its officers, employees or
agents;
(h) the rights attaching to the Shares have not altered and no alteration
has been made to the capital structure of the Company;
(i) the Company has not implemented any new accounting or valuation method
for its business, assets, property or rights;
(j) no major supplier of the Company has:
(i) materially reduced the level of its supplies to the Company;
(ii) indicated an intention to cease or materially reduce the volume
of its trading with the Company after Completion; or
(iii) materially altered the terms on which it trades with the
Company;
(k) no major customer of the Company has:
(i) materially reduced the level of its custom from the Company;
(ii) indicated an intention to cease or materially reduce the volume
of its trading with the Company after Completion;
(iii) materially altered the terms on which it trades with the
Company;
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(l) no loans have been made nor bonuses paid by the Company to employees,
nor have any advances or loan money been accepted from any employees;
(m) no resolutions have been passed by the members or directors of the
company except in the ordinary course of business of the Company and
those necessary to give effect to this agreement.
WARRANTY 7
(Records)
7.1 The Records:
(a) are in the possession of the Australian Company and the NZ Company;
(b) have been fully, properly and accurately kept and maintained and are up
to date;
(c) accurately record the details of all of the transactions, finances,
assets and liabilities of the Company; and
(d) as far as necessary, have been prepared in accordance with the
requirements of the Corporations Law and the Accounting Standards and
where applicable, analogous New Zealand requirements and standards.
WARRANTY 8
(Debts)
8.1 All debts owed to the Company at Completion, less the amount of any
relevant provision for bad and doubtful debts made on a basis consistent
with the provision for bad and doubtful debts in the Accounts, will be
good and fully collectable in the ordinary course of business.
WARRANTY 9
(Taxation)
9.1 The Company has paid, or the Accounts fully provide for, all Taxes which
the Company is or may become liable to pay for the period up to and
including the Second Accounts Date.
9.2 The only liabilities for Tax of the Company arising in respect of the
period after the Second Accounts Date and ending on the Completion Date
will be liabilities arising out of the ordinary course of carrying on the
Business.
9.3 All Tax information required by law (including but not limited to records,
returns, elections and notices) to be lodged or kept by the Company has
been lodged with the appropriate authorities or kept as required.
9.4 The Company is not involved in any audit of any of its tax returns or any
dispute with any Taxation authority responsible for the assessment and
collection of Tax and neither FAI nor the Vendor is aware of any
circumstances which may give rise to such an audit or dispute.
9.5 The Company has maintained sufficient and accurate records and all other
information required to support all Tax information which has been or may
be lodged with any Taxation authority
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9.6 All documents and transactions to which the Company is a party that are
required to be stamped, or that the Company has an interest in enforcing,
have been duly stamped.
9.7 The Company has lodged or supplied all information regarding Taxes as and
when requested by a Taxation authority.
WARRANTY 10
(Ownership of assets)
10.1 Except for those assets the subject of the equipment leases listed in
SCHEDULE 3, all of the property and assets included in the Accounts or
which the Company uses in the conduct of the Business are legally and
beneficially owned by the Company.[need to disclose Ness Romalpa clause]
WARRANTY 11
(Properties and property leases)
11.1 The Property described in SCHEDULE 5 comprises all the land and buildings
used by the Company. The Company does not own any real property.
11.2 The Company beneficially owns the benefit of a valid and enforceable
leasehold interest under the Property Lease in accordance with its terms.
The Property Lease has not been amended or modified and is not liable to
forfeiture or termination.
11.3 The Company has duly and punctually performed and is not in breach of any
covenants or conditions of any lease, licence or other occupational
arrangement granted to it and there are no circumstances which exist which
may cause any such lease or other occupational arrangement to be
terminated.
WARRANTY 12
(Plant, machinery and equipment)
12.1 Other than the equipment or vehicles the subject of the equipment leases
described in SCHEDULE 3 ('EQUIPMENT LEASES'), the Company owns all Plant
and Equipment.
12.2 Each item of Plant and Equipment is:
(a) in a good and safe state of repair and condition and satisfactory
working order for its age and has been regularly and properly
maintained;
(b) in the Company's possession or control; and
(c) recorded in the plant register of the Company.
12.3 The Company has duly and punctually observed and performed the terms and
conditions of each Equipment Lease. No Equipment Lease is liable to
forfeiture or termination.
12.4 Except for the Equipment Leases the Company has not entered into any hire
purchase, leasing or credit sale agreement.
WARRANTY 13
(Intellectual property rights)
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13.1 SCHEDULE 4 contains a complete and accurate list of all Intellectual
Property Rights used by the Group.
13.2 Except under the licences disclosed in SCHEDULE 7, the Company owns all the
Intellectual Property Rights used by it including the Intellectual Property
Rights listed in SCHEDULE 4 ('OWNED INTELLECTUAL PROPERTY RIGHTS').
13.3 Except for licences of its data bases and owned software granted by the
Company in the ordinary course of business, the Company has not dealt with
or granted to any person any rights in respect of the Owned Intellectual
Property Rights by way of licence or in any other way.
13.4 Neither FAI nor the Vendor is aware of any infringements by the Company of
the Intellectual Property Rights of any other person, nor are they aware of
any infringements of the Owned Intellectual Property Rights.
13.5 Neither FAI nor the Vendor is aware of any allegation or basis on which an
allegation could be made that the Company has infringed the Intellectual
Property Rights of any person or on which the validity or effectiveness of
the Owned Intellectual Property Rights may be challenged.
13.6 Other than in the ordinary course of business, there are no outstanding
royalties, licence fees or other similar fees payable by the Company in
connection with the use of any Intellectual Property Rights.
13.7 Each of the licences under which the Company uses the Intellectual Property
Rights is valid, binding and enforceable. The Company has complied at all
times with the terms of each licence and no licensor has any right to
terminate any licence.
WARRANTY 14
(Compliance with applicable laws)
14.1 The Business is and has been conducted in accordance with all applicable
laws, does not contravene any laws and no allegation of any contravention
of any applicable laws is known to the Company, FAI or the Vendor.
14.2 The Company holds all statutory licences, consents, registrations,
approvals, permits and authorisations necessary for the carrying on of the
Business. So far as the Vendor and FAI are aware, there is no fact or
matter which might prejudice the continuance or renewal, or result in the
revocation or variation in any material respect, of any such licences,
consents, registrations, approvals, permits and other authorisations.
WARRANTY 15
(Contracts)
15.1 The Company has duly performed and observed all its obligations, and the
other parties have duly performed and observed all their obligations, under
all contracts, arrangements or understandings to which the Company is a
party.
WARRANTY 16
(Litigation)
16.1 Neither the Company nor any person for whose acts or defaults the Company
may be vicariously liable is involved in, or threatened with, any claim,
litigation, prosecution or arbitration in any court, tribunal or otherwise
with an individual value in excess of
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$100,000 which have been brought other than in the ordinary course of
business and there are no facts or circumstances of which either the Vendor
or FAI is aware which are likely to give rise to any such litigation or
arbitration.
16.2 There are no unsatisfied judgments, awards, claims or demands against the
Company, with an individual value in excess of $100,000 which have been
brought other than in the ordinary course of business.
16.3 To the knowledge of the Vendor and FAI, the Company is not being
investigated for any breach or alleged breach of the law.
WARRANTY 17
(Superannuation and employee benefits)
17.1 Except for its commitments to contribute to the FAI Staff Productivity
Superannuation ('FUND'), the Company has no obligation, liability or duty
to make any payment to any person in respect of any superannuation,
retirement benefits, pensions, annuities, life assurance schemes or
arrangements for the benefit of any present or former directors or
employees of the Company or their respective dependants.
17.2 The Fund is established under a trust deed dated 17 November 1988, as
amended from time to time ('TRUST DEED').
17.3 The Company has complied with all of its obligations under the Trust Deed
including making all contributions to the Fund required to be made under
the Trust Deed. There is no outstanding liability of the Company and the
Fund is fully funded to meet all potential claims for benefits by the
members of the Fund.
17.4 The assets of the Fund are sufficient, having regard to appropriate
actuarial valuation methods and assumptions, to provide prospective
benefits to the extent to which they will relate to periods of service or
membership prior to Completion.
17.5 Full and proper records and accounts of the Fund have been kept, are up-to-
date, and disclose a true and fair view of the affairs of the Fund.
17.6 Neither the Company nor the trustees of the Fund have received notice of
any claim or dispute in relation to the Fund.
17.7 The transfer of the Shares to the Purchaser will not cause an increase in
the obligations of the Company to make contributions to the Fund.
WARRANTY 18
(Employees)
18.1 Except as disclosed in SCHEDULE 7, all contracts of employment to which the
Company is a party can be terminated by the Company by notice of 30 days or
less.
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18.2 The Company has complied in all material respects with all contractual,
statutory, legal and fiscal obligations of and in relation to its
employment of its employees, including without limitation all withholding
obligations, all codes of practice, collective agreements and awards.
18.3 The Company does not operate any bonus, profit share or employee incentive
plans or schemes for its employees other than pursuant to individual
employment contracts.
18.4 All employee entitlements have been provided for in the Accounts.
WARRANTY 19
(Conduct of business)
19.1 To the knowledge of the Vendor and FAI, no practice carried on by the
Company or contract, arrangement or understanding to which the Company is a
party:
(a) is or should be notified or authorised under the Trade Practices Act
1974 or has been the subject of an inquiry under that Act; or
(b) infringes any other competition, anti-restrictive trade practice,
anti-trust or other consumer protection laws applicable to the Company
in Australia or overseas.
19.2 Neither FAI nor the Vendor is aware that any of the Company's officers,
agents or employees have paid or been paid any bribe or used any of the
Company's assets unlawfully to obtain any advantage for any person.
WARRANTY 20
(No Subsidiaries)
20.1 The Company:
(a) neither holds nor beneficially owns shares or other securities in the
capital of another company;
(b) has not agreed to buy any securities in any other Australian, NZ or
overseas company; or
(c) is not and has not agreed to become a member of any partnership,
unincorporated association, joint venture or consortium.
WARRANTY 21
(Effect of sale of shares)
21.1 To the knowledge of the Vendor and FAI the transfer of the Shares to the
Purchaser will not result in any supplier or customer of the Company
ceasing or being entitled to substantially reduce its level of business
with the Company.
21.2 The entry into and performance of this agreement does not and will not:
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(a) result in the breach of any of the terms, conditions or provisions of
any agreement or arrangement to which the Company is a party;
(b) relieve any person from any obligation to the Company;
(c) result in the creation, imposition, crystallisation or enforcement of
any encumbrance on any of the assets of the Company;
(d) result in any indebtedness of the Company becoming due and payable;
(e) contravene the Articles or the Constitution.
WARRANTY 22
(Accuracy and completeness of disclosed information)
22.1 All information which the Vendor, FAI, their advisers or the Company have
given to the Purchaser or its advisers relating to the Business,
activities, affairs, assets and liabilities of the Company, as well as the
facts in the Recitals and Schedules, was when given and is now complete and
accurate in all respects.
22.2 All information which is known to the Vendor and FAI relating to the
Shares, the Company, the Business or otherwise the subject matter of this
agreement and which is material to a purchaser of the Shares has been
disclosed to the Purchaser.
22.3 Neither FAI nor the Vendor is aware of any fact or circumstance which might
reasonably be expected to effect in any material adverse way the financial
position, operations, profitability or prospects of the Company or the
Business.
WARRANTY 23
(Effect of entering into this agreement)
23.1 Neither the carrying out of the Float nor the entry into or performance of
this agreement or any other agreement or document contemplated by this
agreement will result or has resulted in:
(a) any breach of section 205(1) of the Corporations Law; or
(b) any breach of the Foreign Acquisitions and Takeovers Act (1975)
(Commonwealth).
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SCHEDULE 7
ASSET WARRANTIES
(clause 7)
[Note: References to schedules in this schedule 7 are to schedules in the Asset
Purchase Agreement]
WARRANTY 1
(Vendor)
1.1 The execution, delivery and performance of this agreement by the Vendor
will constitute legally valid and binding obligations on the Vendor,
enforceable in accordance with its terms.
1.2 The sale of the Assets pursuant to this agreement does not result in a
breach of any obligation or constitute a default under or result in the
imposition of any Encumbrance under any agreement or undertaking, by which
the Vendor is bound.
1.3 Neither the Vendor nor any of its members has any interest directly or
indirectly in any company or business which is or is likely to be
competitive with the Business.
1.4 No meeting has been convened, resolution proposed, petition presented or
order made for the winding up of the Vendor and no receiver, receiver and
manager, provisional liquidator, liquidator or other officer of the Court
has been appointed in relation to the Assets or any of them and no
mortgagee has taken or attempted or indicated in any manner an intention to
take possession of any of the Assets.
WARRANTY 2
(Accounts and Records)
2.1 The Accounts:
(a) disclose a true and fair view of the affairs, financial position and
assets and liabilities of the Vendors as at the Accounts Date and of
the income, expenses and results of the operations of the Vendors for
the six month period (or the financial year in the case of FAI Canada)
ended on the Accounts Date; and
(b) were prepared in accordance with applicable accounting standards and
legal requirements on a basis that is materially consistent with the
audited accounts of the Vendors for the twelve month period preceding
the six month period (or the financial year ended in the case of FAI
Canada) ended on the Accounts Date.
2.2 Since the Accounts Date:
(a) the Business has been carried on in the ordinary and usual course and
no contracts or commitments differing from those ordinarily made in
the conduct of the Business have been entered into or incurred;
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(b) there has been no material adverse change in the Assets, the financial
condition or the profitability of the Business.
2.3 The Records:
(a) have been fully, properly and accurately kept and completed; and
(b) do not contain material inaccuracies or discrepancies of any kind.
WARRANTY 3
(Title to Assets)
3.1 The Vendor is the absolute legal and beneficial owner of all the Assets and
at Completion all the Assets will vest in the Purchaser free from all
Encumbrances.
3.2 SCHEDULE 3 contains an accurate list of all of the Plant and Equipment
owned by the Business and used in the conduct of the Business.
WARRANTY 4
(Plant and Equipment)
4.1 The Plant and Equipment:
(a) is in a good and safe state of repair and condition;
(b) is in good working order;
(c) is capable and will be capable, over the period of time during which
it will be written down to a nil value in the accounts of the
Business, of doing the work for which it was designed or purchased;
(d) is used in and not surplus to the requirements of the Business.
4.2 The Assets are:
(a) all located at the Site;
(b) the only assets used by the Vendor in the Business; and
(c) the only assets required for the conduct of the Business.
WARRANTY 5
(Compliance with statutory requirements)
5.1 The Vendor holds all statutory licences, consents, approvals and
authorisations necessary for the carrying on of the Business and the use of
the Site and has complied with the terms of those licences, consents,
approvals and authorisations.
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5.2 The present conduct of the Business and use of the Assets does not, to the
knowledge of the Vendor, breach or contravene any law, statute, ordinance,
rule, regulation, by-law, scheme or permit.
WARRANTY 6
(Property Lease)
6.1 With respect to the Property Lease:
(a) there are no subsisting breaches;
(b) the Vendor has observed the obligations and covenants of the lessee
and has not received a notice which has not been complied with;
(c) it is valid and subsisting;
(d) the Vendor has exclusive occupation and quiet enjoyment of the Site
and holds all necessary licenses, permits and approvals for the
conduct of the Business from the Site.
6.2 The use of the Site for the carrying on of the Business:
(a) does not, to the knowledge of the Vendor, breach any applicable law,
statute, ordinance, rule, regulation, by-law, planning scheme,
development consent, order, permit or determination of any
governmental authority;
(b) is permitted under the terms of the Property Lease; and
(c) is in conformity with all local government building, health, fire and
public utility laws and regulations.
6.3 No development, alterations or works have been carried out in relation to
the Site which would require any permission or consent under any statute or
regulation which has not been obtained and all conditions attaching to any
such permission or consent have been fully complied with.
WARRANTY 7
(Equipment Leases)
7.1 The agreements described in SCHEDULE 5 constitute all the plant and
equipment leases or hire purchase agreements used in the Business.
7.2 With respect to each Equipment Lease:
(a) there are no subsisting breaches and the Vendor has received no notice
of any breach of the Equipment Lease;
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(b) it is valid and subsisting; and
(c) it has not been amended or modified.
WARRANTY 8
(Employees)
8.1 In respect of each Employee:
(a) the details of that Employee's salary, bonus and other benefits and
other material terms of employment listed in SCHEDULE 7 are true and
correct in all respects;
(b) the Vendor has complied in all respects with all obligations imposed
on it by statutes, orders, regulations, collective agreements and
awards;
(c) the Vendor has made all payments in respect of occupational
superannuation required under any statute or award;
(d) except as required by law, that Employee's employment with the
Business may be terminated by the employer by notice of 30 days or
less.
WARRANTY 10
(Superannuation)
10.1 Except for the Vendor's Fund:
(a) there are no superannuation, retirement or provident schemes or other
arrangements providing for any payment to Employees on their
retirement, resignation or death or on the occurrence of any permanent
or temporary disability in operation in relation to the Business;
(b) the Vendor does not contribute to any other schemes which will provide
the Employees or their respective dependants with pensions, annuities
or lump sum payments upon retirement or death or otherwise; and
(c) the Vendor is not under any legal liability or ex-gratia arrangement
or promise to pay pensions, gratuities, superannuation allowances or
the like to any Employees.
WARRANTY 11
(Business Contracts)
11.1 There are no agreements, arrangements or understandings (whether written or
unwritten) affecting the Assets or the carrying on of the Business that:
(a) the Purchaser will be unable to terminate after the Completion Date on
giving 30 days' notice or less without penalty;
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(b) are material to the operation of the Business and have not been
disclosed in writing to the Purchaser;
(c) are outside the ordinary and proper course of business of the Business
or otherwise contain any unusual, abnormal or onerous provision;
(d) are incapable of being fulfilled or performed on time without undue or
unusual expenditure of money or effort;
(e) entitle the other party to terminate the agreement, or impose terms
less favourable to the Business, by reason of the change in ownership
of the Business.
11.2 To the best of the knowledge, information and belief of the Vendor, no
customer or supplier of the Business will cease to purchase from or sell to
the Business by reason of the change in ownership of the Business.
WARRANTY 12
(Litigation)
12.1 To the knowledge of the Vendor, there is no Claim threatened or pending
against the Vendor in respect of the Business or the Assets nor does there
exist or has there occurred any fact, matter or circumstance likely to give
rise to any Claim or Liability which could affect the ability of the
Business to continue operating or which may materially adversely affect the
Goodwill.
12.2 There are no unsatisfied or outstanding judgments, orders or awards
affecting the Vendor, the Business or any of the Assets or to which it is
or may become a party.
WARRANTY 13
(Intellectual Property Rights)
13.1 The Vendor's use of the Intellectual Property Rights does not infringe,
breach an obligation of confidence or wrongfully use any confidential
information, trade secrets, copyright, letters patent, trade marks, service
marks, trade names, designs, business names or other similar industrial,
commercial or intellectual property rights of any corporation or person and
no Claims have been asserted challenging the Vendor's use of the
Intellectual Property Rights.
13.2 The Vendor has not licensed, assigned, authorized or permitted any person
or corporation to use the Intellectual Property Rights or the Business
Name.
WARRANTY 14
(Material disclosure)
14.1 All information concerning the Business and the Assets which might
reasonably be expected to be material for disclosure to a prudent intending
purchaser of the Business in
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determining whether or not to purchase the Business or the price at which a
purchaser would be prepared to purchase the Business has been disclosed in
writing to the Purchaser.
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SCHEDULE 8
DISCLOSURES AGAINST WARRANTIES
(Clause 7.5)
Belgium
Notification was received on April 17, 1997 that the Belgium Distributor, Mr
Guy Iwens, does not have a security licence. This is due to an oversight by our
administration when his operations were being established. Although we are not
directly exposed as it is Mr Iwens company not ours, we are obliged to accept
responsibility for any penalties he may incur. Our advice, yet to be confirmed,
is that the maximum penalty is $45,000 and that product can be legally sold
without an outside siren until the licence is approved. This will take
approximately six months. No provision has been made in the accounts for this
contingent liability.
United Kingdom
Mr Allan Wilson, a distributor in Aberdeen, was giving unauthorised 10 year
warranties when selling systems. There is no way of knowing whether this
happened with every sale, but the total number of systems installed in Aberdeen
was 486. In addition to this monitoring systems were attached in many cases.
These drain the battery on the Security Guard system and result in additional
costs to us.
Allan Wilson also submitted deferred payment credit forms to Avco Finance for
customers who had already paid him by other means. This meant that Avco also
paid him for these systems. To date it is estimated something between 40 to 50
deals for which Avco have had to be reimbursed by our U.K. office.
The number of complaints regarding bad credit deals have definitely declined
in the past few weeks, as the 6 month deferred terms should have all come to
light by now.
Mr Mike Dixon, a distributor in Cheltenham, has also offered extended warranty
at the time of sale. In his case he has offered 5 years warranty including a
free service call every 12 months. To date two customers have emerged and there
is no way of knowing how many such customers exist.
Canada
A Statement of Claim dated November 17, 1995, from the Ontario Court of Justice
(General Division).
The Plaintiff: Mr Robert W. Cooper
The Defendants: FAI Home Security (Canada) Inc and FAI Security Group Pty
Limited (now renamed FAI Home Security Pty Limited)
Mr. R Cooper alleged he left secure employment for a position offered to him at
the Canadian operation. FAI Home Security (Canada) then failed to honour its
commitment. Mr Bill Gadd, the President of FAI Home Security (Canada) Inc.,
advised no such position had ever been offered.
In the Statement of Claim Mr Cooper has claimed:
a) Fraudulent misrepresentation CAN$150,000
b) Negligent misrepresentation CAN$150,000
c) Breach of contract CAN$150,000
d) Reneging on promised work in March 1995 CAN$4,000
Plus interest and legal costs
On 14 March 1997 an Offer to Settle of CAN$40,000 was received from Mr R.
Cooper's solicitor in addition to the Settlement offer was an amendment to the
Statement of Claim to provide for CAN$500,000 for punitive damages. No
provision has been made in the accounts for this contingent liability.
Australia and New Zealand
1. Threat by Security Industry Registrar not to renew Security Industry
License for FAI Home Security (NZ) Ltd
On September 20, 1996, the Asst. Commissioner for NZ Police, Ian Holyoake,
wrote to the company expressing concern at information he had received
concerning the company's sales tactics. The Asst. Commissioner stated that
he was considering lodging an objection to the renewal of the licence held
by FAI Home Security (NZ) Ltd.
All licences are due for renewal on 31st March each year. The said licence
has been subject to an application for renewal and no notification has been
received that any objection has been lodged. At a meeting with the Asst.
Commissioner held in December 1996, it was stated that an investigation of
the information provided did not substantiate the allegations.
It is not necessary for FAI Home Security (NZ) Ltd to hold license to
provide products to NZ distributors. FAI Home Security (NZ) Ltd does not
directly retail its products and services to the NZ public.
An objection has been lodged against the renewal of the security industry
license held by Safetech Ltd the FAI area distributor for Dunedin. That
application for renewal has been withdrawn and no objection hearing will
ensue.
Dunedin and environs will now be serviced by the Christchurch area
distributor.
2. Legal Action against the Consumers Institute of New Zealand and others
During 1996 the Consumers Institute of NZ caused to be published, an
article in its magazine (which is distributed to its members) alleging
unfair selling practices by FAI Home Security (NZ) Ltd. At all relevant
times FAI Home Security (NZ) Ltd has never sold its products and services
to the New Zealand public.
The company's solicitors advised that the article was defamatory and were
instructed to commencing proceedings in the High Court of NZ against the
Consumers Institute, its editor (Mr David Russell) and its directors. These
proceedings, which were commenced in 1996 allege breaches of the Fair
Trading Act and seek damages in the sum of $1.8 million dollars (NZ) on
behalf of all NZ distributors and area distributors.
Due to our continued growth and increased sales the proceedings have been
'stayed' as quantification of financial losses has proved most difficult.
There are no other matters of any material consequence, either current or
pending, known to me for or against either FAI Home Security P/L or FAI
Home Security (NZ) Ltd, as at this date.
Claims Against Ness Security
For Faulty Product
There are two claims against Ness Security that currently exist. It should be
stated that these claims are being settled amicably. These claims are based on
product fault not geographical region. However, the majority of sales are
generated in Australia and New Zealand.
1. A problem exists in Security Guard I which results in "AL" appearing on the
LED screen. This is due to a design fault that indicates one of the Passive
Infrared Detectors has a low battery when in fact it does not. The solution
to this problem is to replace the Printed Circuit Board (PCB) with a
SecurityGuard II PCB. As there are many thousands of these in the field
this claim is an ongoing one currently running at about 80 service visits
per month. Ness reimburse FAI Home Security $30 per service visit and
supply PCBs at no charge.
2. A faulty capacitor was used in the production of the SecurityGuard II PCB.
This resulted in the SecurityGuard II "locking up". We have an agreement
with Ness to be reimbursed at the rate of $50 per call. To date only one
claim has been lodged $52,000 for 1,047 call outs covering the period from
October 1996 till February 1997. It is expected that all faulty capacitors
would be detected by July 1997. Until this time Ness will approve all bulk
claims, after July all faulty capacitor claims will be considered based on
their individual merits. It is estimated up to 20,000 units were installed
prior to the fault being detected. However, not all capacitors are faulty.
Ness Battery Claim
In the second half of 1995 Ness's battery supplier, Century Yuasa, supplied
4,290 batteries that were potentially faulty. The fault resulted in acid leaking
from the battery and dripping from the SecurityGuard housing onto the customers
floor.
Due to the potential damage to both people and property it was decided by the
management of FAI Home Security to replace all potentially faulty batteries.
FAI Home Security negotiated directly with Century Yuasa for a settlement of
$121,909.64 who also supplied the replacement batteries at no charge.
A Deed of Release between FAI Home Security and Century Yuasa on January 10,
1996.
Due to their pro-active approach FAI Home Security received very few claims for
compensation and have no matters outstanding relative to this claim.
Claim for Compensation from Ness for Non-performance
A claim was lodged with Ness by FAI Home Security to recover costs both incurred
and proposed due to Ness's delay in arranging European product approval required
for Belgium, the Netherlands and Germany. This greatly impacted the
international expansion plan as it prevented the commencement of operations in
the stated countries.
After very lengthy negotiations it was agreed the compensation would be made up
of both cash and stock. Cash of $257,000 plus a total of 300 systems supplied
free of charge at the rate of 50 systems per month commencing from February 21,
1997.
A Deed of Settlement was signed and sealed on February 21, 1997.
Changes since Accounts Date
. The Australian Company acquired the assets referred to in Part 1 of
Schedule 3 from the Vendor for book value on 22 April 1997.
. On 18 May 1997, Brad Cooper entered into employment contracts with the
Purchaser and the Australian Company. These have been disclosed separately
to the Purchaser.
. In accordance with clause 3 of the Asset Purchase Agreement, Brad Cooper
has repaid to the Company the sum of A$244,127.
Ownership of Assets
Pursuant to the terms of the NESS Contract, title to certain assets will not
pass until payment is received.
Notification to ACCC
The Ness Agreement provides for notification of the exclusivity arrangements
under that agreement to the Australian Competition and Consumer Commission.
FAI Home Security Pty Limited
Group Insurance Policies
Australia
[CHART]
New Zealand
[CHART]
38
<PAGE>
SCHEDULE 9
UNDERWRITING AGREEMENT
(Clause 3.4(a))
39
<PAGE>
EXECUTED as an agreement
THE COMMON SEAL of HOME )
SECURITY INTERNATIONAL INC. )
is affixed in accordance with its articles )
of association in the presence of )
- --------------------------------- ---------------------------------
Secretary Director
- --------------------------------- ---------------------------------
Name of secretary (print) Name of director (print)
THE COMMON SEAL of FAI HOME )
SECURITY HOLDINGS PTY LIMITED )
is affixed in accordance with its articles )
of association in the presence of )
- --------------------------------- ----------------------------------
Secretary Director
- --------------------------------- ----------------------------------
Name of secretary (print) Name of director (print)
THE COMMON SEAL of FAI )
INSURANCES LIMITED )
is affixed in accordance with its articles )
of association in the presence of )
- --------------------------------- ---------------------------------
Secretary Director
- --------------------------------- ---------------------------------
Name of secretary (print) Name of director (print)
40
<PAGE>
THE COMMON SEAL of )
CERVALE PTY LIMITED )
is affixed in accordance with its articles )
of association in the presence of )
- --------------------------------- -------------------------------
Secretary Director
- --------------------------------- -------------------------------
Name of secretary (print) Name of director (print)
41
<PAGE>
EXHIBIT 2.2
DATED 1997
FAI HOME SECURITY HOLDINGS NEW ZEALAND LIMITED
AND
FAI HOME SECURITY (ENZED) LIMITED
NZ ASSET PURCHASE AGREEMENT
MINTER ELLISON
Lawyers
Minter Ellison Building
44 Martin Place
SYDNEY NSW 2000
DX 117 SYDNEY
Telephone (02) 9210 4444
Facsimile (02) 9235 2711
Ref: MAP:
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. DEFINITIONS AND INTERPRETATION......................................... 1
1.1 Definitions....................................................... 1
1.2 Interpretation.................................................... 4
1.3 Payments.......................................................... 5
2. SALE AND PURCHASE...................................................... 5
2.1 Sale of the Business.............................................. 5
2.2 Business Assets................................................... 5
3. SPECIFIED CONDITIONS................................................... 6
3.1 Condition Precedent............................................... 6
3.2 Termination....................................................... 6
3.3 Termination....................................................... 6
3.4 Condition Subsequent.............................................. 6
3.5 Effect of Termination............................................. 7
4. PURCHASE PRICE......................................................... 7
4.1 Price for Business Assets......................................... 7
4.2 Application of Purchase Price for Business
Assets............................................................ 7
4.3 Final Purchase Price is the Lowest Price.......................... 8
5. COMPLETION............................................................. 8
5.1 Time for Completion............................................... 8
5.2 Possession and title.............................................. 8
5.3 Interdependency................................................... 8
5.4 Delivery by Vendor................................................ 8
5.5 Benefit of Property Leases, Equipment Leases, Business Contracts
and Statutory Licences............................................ 9
5.6 Purchaser's Obligations........................................... 9
6. GENERAL OBLIGATIONS.................................................... 9
6.1 Money Received by Vendor.......................................... 9
6.2 Money Received by Purchaser....................................... 9
6.3 Third Party Consents.............................................. 10
7. CONTRACTS AND LIABILITIES.............................................. 10
7.1 Business Contracts................................................ 10
7.2 Where No Consent.................................................. 10
7.3 Business Liabilities.............................................. 11
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
8. RISK.................................................................... 11
9. EMPLOYEES............................................................... 11
9.1 New Employment..................................................... 11
9.2 Liability.......................................................... 11
9.3 Cooperation........................................................ 11
9.4 Notification to Purchaser of Employees
Transferring....................................................... 12
9.5 Employment Offer................................................... 12
10. GOODS AND SERVICES TAX.................................................. 12
11. BOOKS AND RECORDS....................................................... 12
12. VENDOR'S WARRANTIES..................................................... 12
13. PURCHASER'S WARRANTIES.................................................. 13
14. MISCELLANEOUS........................................................... 13
14.1 Entire Agreement.................................................. 13
14.2 Costs............................................................. 13
14.3 Notices........................................................... 13
14.4 Governing Law..................................................... 14
14.5 Counterparts...................................................... 14
14.6 Non-Waiver........................................................ 14
14.7 Further assurance................................................. 14
14.8 Non-merger........................................................ 15
SCHEDULE 1
LEASED PROPERTIES....................................................... 16
SCHEDULE 2
WARRANTIES.............................................................. 17
</TABLE>
ii
<PAGE>
NZ ASSET PURCHASE AGREEMENT
THIS AGREEMENT dated 1997
BETWEEN FAI HOME SECURITY HOLDINGS NEW ZEALAND LIMITED a company duly
incorporated in New Zealand and having its registered office at
Auckland, as trustee for the FAI Home Security (NZ) Trust ('VENDOR')
AND FAI HOME SECURITY (ENZED) LIMITED a company duly incorporated in New
Zealand and having its registered office at Auckland ('PURCHASER')
RECITALS
A. The Vendor carries on the business of selling, installing and servicing
residential security alarm systems through a distributorship network
operating in Auckland and elsewhere in New Zealand.
B. The Vendor has agreed to sell to the Purchaser and the Purchaser has agreed
to purchase from the Vendor all of the assets of the business described in
Recital A on the terms and conditions set out in this agreement.
AGREEMENT
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this agreement (including the recitals) and the schedules unless the
context otherwise requires the following expressions shall bear the
following meanings:
'AUTHORISATIONS' means any certificate, licence, approval, permit,
authority or exemption from, by or with a Governmental Agency necessary to
carry on the Business as currently operated;
'BOOKS AND RECORDS' include all notices, correspondence, orders, enquiries,
books of account and other documents and all computer disks or tapes or
other records in relation to the Business;
'BUSINESS' means the business described in Recital A carried on by the
Vendor at the date of this agreement and carried on by the Purchaser after
Completion;
'BUSINESS ASSETS' means the assets of the Business agreed to be transferred
to the Purchaser pursuant to CLAUSE 2;
<PAGE>
'BUSINESS CONTRACTS' means all the contracts and engagements of the Vendor
relating to the Business and which are not fully performed as at Completion
together with all other such contracts and engagements which were entered
into by the Vendor after the date of this agreement and prior to the
Completion Date and which are not fully performed as at Completion but
excludes Business Payables;
'BUSINESS DAY' means a day (other than a Saturday or Sunday) on which
registered banks (as that expression is defined in the Reserve Bank of New
Zealand Act 1989) are customarily open for business in Auckland;
'BUSINESS GOODWILL' means all the goodwill of the Vendor in relation to the
Business;
'BUSINESS INFORMATION' means all information and records including all
customer lists and databases, sales information, business plans and
forecasts and all computer software and computer records held by the Vendor
in relation to the Business;
'BUSINESS LIABILITIES' means the obligations of the Vendor under the
Business Contracts, including Warranty Provisions, but excluding Business
Payables;
'BUSINESS PAYABLES' means all liabilities of the Vendor other than the
Warranty Provisions;
'BUSINESS PLANT AND MACHINERY' means all the plant, machinery, equipment,
computer and communication hardware, loose tools, fittings, furniture,
partitioning, books, stationery, vehicles and other goods used by or in the
Business as at Completion;
'BUSINESS RECEIVABLES' means all payments due to the Vendor in relation to
the Business as at Completion;
'BUSINESS STOCKS' means all stocks, stocks in transit, raw materials, work
in progress, finished goods or completed services and other stock in trade
and packaging material held or ordered by the Vendor for the purposes of
the Business as at Completion;
'COMPLETION' means the completion of the sale and purchase of the Business
Assets in the manner specified in CLAUSES 4 AND 5;
'COMPLETION DATE' means the date on which Completion occurs in accordance
with CLAUSE 5;
'EMPLOYEE ENTITLEMENTS' means, in respect of an Employee, all accrued:
(a) wages, salary, commissions and bonuses;
(b) sick leave, loadings and contributions to superannuation, statutory
compensation or other funds;
2
<PAGE>
(c) long service leave and annual leave (including loadings),
owing and due to or in respect of that Employee in respect of that
Employee's contract of employment with the Vendor whether arising under
contract, statute, award or otherwise;
'EMPLOYEES' means all the employees employed by the Vendor in the Business
at the date of this agreement;
'ENCUMBRANCE' means any mortgage, charge, pledge, lien or other security
interest or encumbrance (other than title retention in respect of trading
stock or seller's liens arising in the ordinary course of the Business);
'EQUIPMENT LEASES' means all those leases of, and agreements to hire,
Business Plant and Machinery which is used in the Business but not owned by
the Vendor;
'FAI HSH' means FAI Home Security Holdings Pty Limited (ACN 003 125 264);
'FINAL PURCHASE PRICE' means the final purchase price for the relevant
Business Assets determined pursuant to CLAUSE 4.3;
'FLOAT' means the initial public offer registered under the Securities Act
1933 (US) by HSI of 250,000 ordinary shares in HSI and concurrent sale of
2,750,000 ordinary shares in HSI by FAI HSH;
'HSI' means Home Security International Inc.
'GOVERNMENTAL AGENCY' means the government of any country and any state,
territory, municipality or other political subdivision of a country, and
any administrative or judicial body, department, commission, authority,
tribunal, agency or entity of any such government;
'INTELLECTUAL PROPERTY' means all intellectual property and proprietary
rights (whether registered or unregistered) owned or used by the Vendor in
the conduct of the Business.
'LEASED EQUIPMENT' means the subject matter of the Equipment Leases;
'NZ DEBT' means the debt payable by the Purchaser to the Vendor pursuant to
CLAUSE 4.2(b);
'NZ SHARE SALE AGREEMENT' means the agreement entered into between the
Vendor and FAI HSH on or about the date of this agreement pursuant to which
the Vendor has agreed to sell to FAI HSH and FAI HSH has agreed to buy all
of the issued capital of the Purchaser;
'PROPERTY LEASES' means the leases to the Vendor of the properties, the
principal terms of which are set out in Schedule 1;
3
<PAGE>
'PURCHASE PRICE' means the price payable for the Business specified in
CLAUSE 4.1;
'SPECIFIED CONDITIONS' means the conditions outlined in CLAUSE 3.1;
'STATUTORY LICENCES' means any statutory licences, consents, approvals or
authorisations required to carry on the Business, including without
limitation those referred to in SCHEDULE 3;
'UNDERWRITER' means National Securities Corporation, Inc.
'UNDERWRITING AGREEMENT' means an agreement in the form set out in SCHEDULE
4 pursuant to which the Underwriter underwrites the Float;
'WARRANTIES' means the warranties given by the Vendor, pursuant to CLAUSE
12 and all other warranties, undertakings, covenants and representations
given or made by the Vendor, under this agreement or which have become
terms of this agreement;
'WARRANTY PROVISIONS' means the book value of the provisions for warranty
expenses and security call-out included in the Books and Records of the
Vendor.
1.2 INTERPRETATION
In the construction and interpretation of this agreement and the schedules,
except to the extent that the context requires modification:
(a) references to recitals, clauses and schedules are to recitals, clauses
and schedules of this agreement;
(b) the headings are for convenience only and shall not affect the
interpretation of this deed;
(c) words importing the singular number include the plural and vice versa
and references to any gender includes every gender and references to
persons includes corporations and unincorporated bodies of persons,
government or semi-government bodies or agencies or political
subdivisions of them;
(d) references to 'written' and 'in writing' includes any means of visible
representation;
(e) reference to any document includes all modifications and replacement
documents from time to time;
(f) references to any statute or regulation are to New Zealand statutes
and regulations and shall with all necessary modifications apply to
any modification or re-enactment;
4
<PAGE>
(g) references to time are to New Zealand time;
(h) references to 'dollars' and '$' are references to New Zealand dollars;
and
(i) the schedules form part of this agreement and shall have the same
force and effect as if expressly set out in the body of this agreement
and any reference to this agreement shall include the schedules.
1.3 PAYMENTS
If the date for payment of any amount under this agreement, or the date for
the doing of any act required by this agreement, is not a Business Day,
then that payment shall be made or act shall be done on the next day which
is a Business Day. Unless specified to the contrary in this agreement, all
payments to be made under this agreement shall be paid in immediately
available funds by no later than 3.00 pm on the due date for payment.
2. SALE AND PURCHASE
2.1 SALE OF THE BUSINESS
Subject to the terms and conditions of this agreement, on the Completion
Date the Vendor shall sell and the Purchaser shall purchase the Business
Assets and the Purchaser shall assume the Business Liabilities.
2.2 BUSINESS ASSETS
There shall be included in the sale under CLAUSE 2.1 of this agreement the
following Business Assets:
(a) the Business Goodwill;
(b) the Business Plant and Machinery;
(c) the Business Stocks and (to the extent permitted by law or contract)
the Vendor's rights to (and copies of) advertising and promotional
material held lawfully by the Vendor for the purposes of the Business
as at Completion;
(d) the benefit of the Business Contracts (but not any Business
Receivables);
(e) the Business Information;
(f) to the extent permitted by law, the benefit of the Statutory Licences.
5
<PAGE>
3. SPECIFIED CONDITIONS
3.1 CONDITION PRECEDENT
Completion of this agreement is conditional upon:
(a) the approval by a special resolution of the shareholders of the
Purchaser of the transactions contemplated in this agreement pursuant
to section 129 of the Companies Act 1993; and
(b) if necessary, the approval, on terms satisfactory to HSI, to
Completion of the sale to the Purchaser of the NZ Shares from the
Overseas Investment Commission of New Zealand pursuant to the Overseas
Investment Regulations 1985.
3.2 TERMINATION
If the conditions set out in CLAUSE 3.1 are not satisfied on or before 31
July 1997, or a later date agreed by the parties in writing, then either
the Purchaser or the Vendor may at any time before Completion terminate
this agreement by giving notice in writing to the other.
3.3 TERMINATION
On service of a notice under CLAUSE 3.2 this agreement has no further
effect and all parties are released from their obligations to further
perform this agreement.
3.4 CONDITION SUBSEQUENT
The Purchaser or the Vendor may terminate this agreement by giving notice
to the other if:
(a) the Underwriting Agreement is terminated before completion of the
Underwriting Agreement; or
(b) either or both of the following conditions subsequent are not
fulfilled within 14 days after Completion:
(i) the Float has gone effective;
(ii) the Underwriting Agreement has been executed.
6
<PAGE>
3.5 EFFECT OF TERMINATION
If this agreement terminates in accordance with CLAUSE 3.4, the rights and
obligations of the Parties under this agreement, except for this CLAUSE
3.5, will terminate and, unless the Vendor waives its rights under this
clause 3.5, the Parties must take all necessary steps to:
(a) vest title and possession of the Business Assets in the Vendor; and
(b) otherwise restore the rights and obligations of the Parties to those
rights and obligations that they would have had if this agreement had
not been entered into without loss or gain to any of the Parties.
4. PURCHASE PRICE
4.1 PRICE FOR BUSINESS ASSETS
The consideration for the purchase of the Business Assets ('PURCHASE
PRICE') is:
(a) the market value, as confirmed by an audit certificate to be provided
at Completion by an independent accountant, or failing that, as agreed
by the Parties based upon an independent verifiable methodology, plus
GST (if any) of the intangible assets of the Business, namely:
(i) the Business Information and Statutory Licences;
(ii) the Business Goodwill, including the benefit of the Business
Contracts (but not any Business Receivables); and
(b) the market value of the Business Plant and Machinery and the Business
Stocks, net of the Warranty Provision as confirmed by an audit
certificate to be provided at Completion by an independent accountant,
or failing that, as agreed by the Parties based upon an independent
verifiable methodology.
4.2 APPLICATION OF PURCHASE PRICE FOR BUSINESS ASSETS
The Purchase Price for:
(a) the Business Assets referred to in CLAUSE 4.1(a) shall be paid or
satisfied by the Purchaser issuing to the Vendor 999,999 fully paid
ordinary shares; and
(b) the Business Assets referred to in CLAUSE 4.1(b) shall be paid or
satisfied by the Purchaser paying to the Vendor, within 30 days
following the Completion Date, the amount determined pursuant to
CLAUSE 4.1(b) ('NZ DEBT').
7
<PAGE>
4.3 FINAL PURCHASE PRICE IS THE LOWEST PRICE
The parties agree that the Final Purchase Price for the Business Assets is
the lowest price that the parties would have agreed upon as at the date of
this agreement for this sale by the Vendor of the Business Assets upon the
basis of payment in full on the Completion Date.
5. COMPLETION
5.1 TIME FOR COMPLETION
Completion shall occur immediately prior to completion of the NZ Share Sale
Agreement.
5.2 POSSESSION AND TITLE
Possession of and title to the Business Assets shall be given and taken
with effect from the close of business on the Completion Date at which time
the Vendor sells, transfers and assigns the Business Assets to the
Purchaser and the Purchaser shall buy and take over the Business Assets.
5.3 INTERDEPENDENCY
Completion shall consist of the parties taking all the steps specified in
CLAUSES 5.4 AND 5.5. The carrying out of the Completion steps will be
deemed to take place simultaneously and no delivery or payment will be
deemed to have been made until all deliveries and payments under this
agreement due to be made at Completion have been made.
5.4 DELIVERY BY VENDOR
At Completion the Vendor shall deliver to the Purchaser:
(a) all the Business Assets which are capable of transfer by delivery,
with the intent that title shall pass by delivery;
(b) the Books and Records;
(c) the Business Information;
(d) subject to CLAUSE 5.5 all leases and documents giving rights in
relation to the Property Leases (including any documents varying,
revising or renewing such leases) and duly executed deeds of
assignment of the Property Leases consented to by the Landlords; and
8
<PAGE>
(e) such other documents as may reasonably be required by the Purchaser
(and to be notified to the Vendor, at least five Business Days prior
to the Completion Date) to be produced at Completion to complete the
sale and purchase of the Business Assets.
5.5 BENEFIT OF PROPERTY LEASES, EQUIPMENT LEASES, BUSINESS CONTRACTS AND
STATUTORY LICENCES
The Vendor must use its reasonable endeavours to obtain all necessary
consents to the assignment of the Property Leases, Equipment Leases,
Business Contracts and Statutory Licences but if, despite its reasonable
endeavours, the Vendor is unable to procure any such assignment, the Vendor
must:
(a) hold the benefit of the relevant Property Lease, Equipment Lease,
Business Contract or Statutory Licence on trust for the benefit of the
Purchaser; and
(b) fully co-operate with the Purchaser in any reasonable arrangements
designed to provide for the Purchaser the benefit of the relevant
Property Lease, Equipment Lease, Business Contract or Statutory
Licence.
5.6 PURCHASER'S OBLIGATIONS
At Completion the Purchaser shall:
(a) deliver to the Vendor a share certificate for 999,999 fully paid
ordinary shares in the Purchaser; and
(b) assume responsibility for payments under the Equipment Leases and
Property Leases which are still in force, at the Completion Date,
details of which have been provided to the Purchaser prior to
execution of this agreement.
6. GENERAL OBLIGATIONS
6.1 MONEY RECEIVED BY VENDOR
All money relating to the Business belonging to the Purchaser which is
received by the Vendor after the Completion Date shall be passed or paid to
the Purchaser as soon as practicable.
6.2 MONEY RECEIVED BY PURCHASER
All money relating to the Business belonging to the Vendor which is
received by the Purchaser after the Completion Date shall be passed or paid
to the Vendor as soon as practicable.
9
<PAGE>
6.3 THIRD PARTY CONSENTS
Where any consent or agreement of a third party is required to enable the
Purchaser to perform a Business Contract, the Vendor shall be responsible
for obtaining and shall use its best endeavours (both before and, if
necessary, after the Completion Date) to obtain that consent or agreement
and the Purchaser shall give the Vendor all reasonable assistance and shall
do all reasonable things (both before and after Completion) as the Vendor
may require for that purpose.
7. CONTRACTS AND LIABILITIES
7.1 BUSINESS CONTRACTS
With effect from the Completion Date, the Vendor assigns to the Purchaser
all the rights it may have against the other party or parties to the
Business Contracts (other than the Vendor's right to collect any Business
Receivable) and (to the extent permitted by law) the Authorisations and the
Purchaser accepts responsibility for the performance of the Business
Contracts as and from Completion. The Purchaser shall after the Completion
Date carry out and complete for its own account all of the Business
Contracts to the extent that they have not been performed prior to the
Completion Date. The Vendor covenants to indemnify the Purchaser against
any Loss arising under any of the Business Contracts as a result of any act
or omission of the Vendor before Completion. The Purchaser covenants to
indemnify the Vendor against any Loss arising under any of the Business
Contracts as a result of any act or omission of the Purchaser after
Completion.
7.2 WHERE NO CONSENT
In respect of any Business Contract where the consent of the relevant other
contracting party to the substitution in place of the Vendor of the
Purchaser as a party to the contract with effect from the Completion Date
is not obtained prior to the Completion Date, the Vendor shall continue to
use its best endeavours to have those contracts assigned to the Purchaser,
and in any event, will hold the relevant contracts on trust for the
Purchaser and the Purchaser shall perform those contracts and all money
paid by the relevant other contracting party in respect of those contracts
shall be payable to and be retained by the Purchaser. The Purchaser will
indemnify the Vendor against any Loss arising under the Business Contracts
the subject of this CLAUSE 7.2 as a result of any act or omission of the
Purchaser after the Completion Date (other than any Loss arising due to any
breach by the Vendor of those Business Contracts, including any breach
which may occur as a result of the Vendor having the Purchaser perform the
Vendor's obligations on its behalf).
10
<PAGE>
7.3 BUSINESS LIABILITIES
The Purchaser shall with effect from the Completion Date assume
responsibility for the Business Liabilities remaining after the Completion
Date and shall indemnify the Vendor against all such liabilities after the
Completion Date but all other liabilities (actual or contingent, liquidated
or unliquidated) arising, accruing or assessed in connection with the
Business in respect of any period prior to the Completion Date shall be and
remain the responsibility of the Vendor which covenants to indemnify the
Purchaser and keep the Purchaser indemnified against all such other
liabilities.
8. RISK
Upon Completion being effected in accordance with CLAUSE 5, the Business
shall be at the sole risk of the Purchaser.
9. EMPLOYEES
9.1 NEW EMPLOYMENT
It is the intention of the parties that the employment of all the Employees
with the Vendor shall be terminated with effect from Completion and
Employee Entitlements paid out by the Vendor. The Purchaser shall, before
Completion, offer all the Employees employment with the Purchaser from
Completion on terms and conditions no less favourable than those applying
to the Employees prior to Completion and on a basis which preserves their
accrued rights other than Employee Entitlements and continuity of
employment and in all respects treats service before Completion as part of
their service with the Purchaser.
9.2 LIABILITY
Any Loss suffered or incurred by either party which results from or is
caused by the termination of the Employees' employment with the Vendor as a
result of the transactions contemplated in this agreement, shall be borne
by the Vendor which covenants with the Purchaser to indemnify and keep the
Purchaser indemnified against all such Losses including any liabilities
relating to redundancy or procedural defects in the termination process.
9.3 COOPERATION
The parties shall use all reasonable endeavours to give effect to the
intention expressed in CLAUSE 9.1 and to minimise any Loss referred to in
CLAUSE 9.2.
11
<PAGE>
9.4 NOTIFICATION TO PURCHASER OF EMPLOYEES TRANSFERRING
As soon as possible following execution of this agreement, the Vendor shall
advise the Purchaser, in writing, of the names, positions and current terms
of employment of those Employees who have indicated that they will accept
an offer of employment from the Purchaser.
9.5 EMPLOYMENT OFFER
Not less than one week prior to the Completion Date, the Purchaser's offers
of employment to the Employees shall be made in writing and shall comprise
terms that are no less favourable than those applying to Employees prior to
Completion. The parties shall cooperate to ensure that those offers are
delivered to the Employees on or before the date being one week prior to
the intended Completion Date (or on or before such other date as may be
agreed by the parties). The Vendor will co-operate with the Purchaser in
the making of the offers of employment referred to in this clause and shall
use its best endeavours to persuade each of the Employees to accept the
Purchaser's offer of employment.
10. GOODS AND SERVICES TAX
The parties acknowledge that the Business is intended to be sold as a going
concern and should therefore be zero-rated in terms of section 11 of the
Goods and Services Tax Act 1985 ('ACT') and:
(a) the Purchaser warrants that, on the Completion Date, it will be a
'Registered Person' for the purposes of the Act; and
(b) the Vendor warrants that it is a 'Registered Person' for the purposes
of the Act.
11. BOOKS AND RECORDS
The Vendor shall on Completion deliver to the Purchaser all the Books and
Records relating to the Business.
12. VENDOR'S WARRANTIES
The Vendor warrants to the Purchaser in relation to the Business and the
Business Assets in the terms set out in SCHEDULE 2 as at the Completion
Date.
12
<PAGE>
13. PURCHASER'S WARRANTIES
The Purchaser warrants and represents to the Vendor that:
(a) the Purchaser is a company duly incorporated and organised, validly
existing and in good standing under the laws of New Zealand; and
(b) the Purchaser has the legal right and power to enter into this
agreement and to buy the Business Assets from the Vendor on and
subject to the terms of this agreement.
14. MISCELLANEOUS
14.1 ENTIRE AGREEMENT
This agreement contains all terms of the arrangement between the parties,
and supersedes and extinguishes all prior agreements, discussions and
arrangements between the parties, with respect to the matters covered by
this agreement.
14.2 COSTS
The Purchaser shall bear the legal and other costs in the preparation and
implementation of this agreement.
14.3 NOTICES
Any notice or other written communication requiring to be given to either
of the parties to this agreement in relation to the provisions of this
agreement shall be in writing signed by the party giving the notice or by
any officer of that party and shall be given as follows:
TO THE VENDOR:
Attention: Mr Mark Whittaker
Facsimile: 9936 2425
TO THE PURCHASER:
Attention: Mr Terry Youngman
Facsimile: 9936 2425
or in respect of a party to such other address as that party may by at
least five Business Days' notice advise the other part as its address for
service.
13
<PAGE>
Any notices shall be determined to be duly given or made:
(a) if delivered by hand, upon delivery;
(b) if sent by facsimile, upon transmission being confirmed by the
facsimile machine transmitting the notice or communication;
(c) if sent by airmail post to an address in another country, on the
seventh Business Day after being put in the post, addressed to the
intended recipient; or
(d) if sent by ordinary post to another address in the same country, on
the second Business Day after being put in the post, addressed to the
intended recipient.
14.4 GOVERNING LAW
The governing law of this agreement and of the relations of the parties
arising from it shall be New Zealand law.
The parties to this agreement hereby accept the jurisdiction of the High
Court at Auckland, New Zealand, and any proceedings issued in respect of
any claim, dispute or other matter whatever arising out of this agreement
shall be issued out of the High Court at Auckland.
14.5 COUNTERPARTS
This agreement may be signed in any number of counterparts, all of which
taken together shall constitute one and the same instrument. Any party may
enter into this agreement by signing any counterpart.
14.6 NON-WAIVER
Failure or omission by a party at any time to enforce or require strict or
timely compliance with any provisions of this agreement shall not affect or
impair that provision in any way or the rights of that party to avail
itself of the remedies it may have in respect of any breach of that
provision.
14.7 FURTHER ASSURANCE
Each party undertakes to do all acts and things and execute and sign all
deeds and documents which may be required to be executed or signed or both
to carry out or give effect of the provisions of this agreement.
14
<PAGE>
14.8 NON-MERGER
The warranties, undertakings, agreements, covenants and indemnities given
under or pursuant to this agreement shall not merge on Completion of the
sale and purchase of the Business Assets or otherwise, but shall remain
enforceable to the fullest extent despite any rule of law to the contrary.
15
<PAGE>
SCHEDULE 1
LEASED PROPERTIES
PROPERTY: Unit 3, 66 Hobill Avenue, Manakau City, Auckland
LEASE DATED: 10 February 1995
LESSOR: GA & BM Coe and AD & HR Lewer, Furniss Road, 3RD Waiuku,
New Zealand
RENT: $1,312.50 (incl. GST)
TERM: 2 years plus two further options to renew each of two years.
16
<PAGE>
SCHEDULE 2
WARRANTIES
1. INCORPORATION, QUALIFICATION AND STANDING
1.1 The Vendor is duly incorporated, validly existing and in good standing
under the laws of New Zealand and the Vendor has full corporate power to
own, lease and operate the Business Assets and to conduct the Business in
all jurisdictions where the Business is conducted and to enter into and
perform this agreement.
1.2 The execution, delivery and performance of this agreement by the Vendor has
been duly and validly authorized by all necessary corporate action on its
part and this agreement and each other agreement, document and instrument
delivered or to be delivered by the Vendor in connection with or pursuant
to this agreement will constitute legally valid and binding obligations of
the Vendor, enforceable in accordance with their terms.
1.3 The sale of the Business Assets and the Business pursuant to this agreement
is not in violation of any trust, agreement, judgment or order, does not
result in a breach of any obligation (including but not limited to any
statutory, contractual or fiduciary obligation) or constitute a default
under or result in the imposition of any encumbrance under any agreement or
undertaking, by which the Vendor is bound.
2. THE BUSINESS ASSETS
2.1 Except for the assets covered by the Equipment Leases, the Vendor is the
absolute legal and beneficial owner of and has good, marketable and
insurable title to all the Business Assets and at Completion full title in
all the Business Assets will vest in the Purchaser free from all liens,
mortgages, charges, security interests, restrictions, conditions, claims,
options, imperfections of title or other encumbrances whatsoever (whether
arising by way of statute or otherwise).
3. GOODWILL
3.1 The Vendor has not done or omitted to do any act which would adversely
affect the Business Goodwill.
4. CONDUCT OF BUSINESS UP TO COMPLETION
17
<PAGE>
4.1 The Vendor will between the date of this agreement and Completion:
(i) ensure the Business is prudently carried on in the ordinary and
normal course as a going concern with all due skill and care in a
businesslike manner and, without limitation, that all sums payable
under the Business Contracts are paid on the due date;
(ii) incur for the Business no liabilities (prospective, contingent or
actual) or other obligations which are of an unusual nature or amount
to or constitute a material commitment other than those incurred in
the normal course of business;
(iii) make no alteration to the terms of employment of the Employees
(including the basis of the remuneration payable to them); and
(iv) supply customers of the Business with the usual products and services
of the Business.
EXECUTED as an agreement.
SIGNED by FAI HOME SECURITY )
HOLDINGS NEW ZEALAND LIMITED )
in the presence of )
- ----------------------------------- -----------------------------------
Signature of witness FAI HOME SECURITY HOLDINGS NEW
ZEALAND LIMITED
- -----------------------------------
Name of witness (print)
SIGNED by FAI HOME SECURITY )
(ENZED) LIMITED in the presence of )
- ----------------------------------- -----------------------------------
Signature of witness FAI HOME SECURITY (ENZED) LIMITED
- -----------------------------------
Name of witness (print)
18
<PAGE>
EXHIBIT 2.3
FAI HOME SECURITY HOLDINGS NEW ZEALAND LIMITED
FAI HOME SECURITY HOLDINGS PTY LIMITED
NZ SHARE SALE AGREEMENT
MINTER ELLISON
Lawyers
Minter Ellison Building
44 Martin Place
SYDNEY NSW 2000
DX 117 Sydney
Telephone (02) 9210 4444
Facsimile (02) 9235 2711
MAP: 10603090
<PAGE>
NZ SHARE SALE AGREEMENT
AGREEMENT dated 1997
BETWEEN FAI HOME SECURITY HOLDINGS NEW ZEALAND LIMITED as trustee for the FAI
Home Security (NZ) Trust of Level 15, Coopers & Lybrand Tower, 23-29
Albert Street, Auckland, New Zealand ('VENDOR')
AND FAI HOME SECURITY HOLDINGS PTY LIMITED ACN 003 125 264 of Level 12,
FAI Insurance Building, 185 Macquarie Street, Sydney, New South Wales,
2000 ('PURCHASER')
RECITALS
A. The Company will on completion of the NZ Asset Purchase Agreement have on
issue 1,000,000 ordinary shares.
B. The Shares will at completion of the NZ Asset Purchase Agreement be legally
owned by the Vendor.
C. The Vendor has agreed to sell and the Purchaser has agreed to purchase the
Shares subject to and on the terms and conditions contained in this
Agreement.
AGREEMENT
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
'COMPANY' means FAI Home Security (ENZED) Limited.
'COMPLETION' means completion of the sale and purchase of the Shares in
accordance with CLAUSE 5.
'COMPLETION DATE' means the day upon which the Conditions are satisfied.
'CONDITIONS' means the conditions precedent to completion of this agreement
set out in CLAUSE 3.1.
'FLOAT' has the meaning given in the NZ Asset Purchase Agreement.
'NZ ASSET PURCHASE AGREEMENT' means the agreement between the Vendor and
the Company dated on or about the date of this agreement.
<PAGE>
'NZ DEBT' has the meaning set out in the NZ Asset Purchase Agreement.
'SHARE PURCHASE AGREEMENT' means the agreement for the sale and purchase of
the Shares in the Company and in FAI Home Security Pty Limited (ACN 050 064
214) and certain other assets between the Purchaser, Home Security
International, Inc., FAI Insurances Limited and Cervale Pty Limited.
'SHARES' means all of the issued shares in the capital of the Company.
'UNDERWRITING AGREEMENT' has the meaning given in the NZ Asset Purchase
Agreement.
2. SALE AND PURCHASE
2.1 Subject to the terms and conditions of this agreement, the Vendor as
beneficial owner agrees to sell the Shares to the Purchaser and the
Purchaser agrees to purchase the Shares from the Vendor for the
Consideration.
2.2 The Shares must be transferred at Completion free from all liens,
mortgages, charges and encumbrances whatsoever and together with all
rights, including dividends and rights attached or accruing to them on and
after the date of this agreement.
2.3 Subject to the terms and conditions of this agreement, the Vendor agrees to
assign the benefit of the NZ Debt to the Purchaser on Completion.
3. CONDITIONS PRECEDENT AND SUBSEQUENT
3.1 Completion of the sale of the Shares is conditional upon:
(a) if necessary, the approval, on terms satisfactory to HSI, to
Completion of the sale to the Purchaser of the NZ Shares from the
Overseas Investment Commission of New Zealand pursuant to the Overseas
Investment Regulations 1985; and
(b) completion of the NZ Asset Purchase Agreement.
3.2 If the Conditions are not satisfied on or before 31 July 1997 or a later
date agreed by the parties in writing then either the Purchaser or the
Vendor may at any time before Completion terminate this agreement by giving
notice in writing to the other.
3.3 On service of the notice under CLAUSE 3.2 this agreement has no further
effect and all parties are released from their obligations to further
perform this agreement.
3.4 The Purchaser or the Vendor may terminate this agreement by giving notice
to the other if:
(a) the Underwriting Agreement is terminated before completion of the
Underwriting Agreement; or
(b) either or both of the following conditions subsequent are not fulfilled
within 14 days after Completion:
3
<PAGE>
(i) the Float has gone effective;
(ii) the Underwriting Agreement has been executed.
3.5 If this agreement terminates in accordance with CLAUSE 3.4, the rights and
obligations of the Parties under this agreement, except for this CLAUSE
3.5, will terminate and, unless the Vendor waives its rights under this
clause 3.5, the Parties must take all necessary steps to:
(a) vest title and possession of the Shares in the Vendor;
(b) otherwise restore the rights and obligations of the Parties to those
rights and obligations that they would have had if this agreement had
not been entered into without loss or gain to any of the Parties.
4. CONSIDERATION
4.1 The consideration for the Shares is the market value of the Shares, as set
out in an audit certificate to be provided by an independent accountant at
Completion, or failing that, as agreed by the Parties based upon an
independent verifiable methodology. The consideration is to be paid by way
of loan from the Vendor to the Purchaser repayable within 12 months or as
otherwise agreed and, sending repayment, bearing interest at the Bank Bill
Rate plus two percentage points.
4.2 In consideration for the assignment of the benefit of the NZ Debt, the
Purchaser agrees to pay to the Vendor on Completion an amount equal to the
value of the NZ Debt, as set out in an audit certificate to be provided by
Arthur Andersen at Completion.
5. COMPLETION
5.1 Completion will take place immediately after completion of the NZ Asset
Purchase Agreement and immediately prior to completion of the Share
Purchase Agreement.
5.2 At Completion the Vendor must deliver to the Purchaser duly executed and
completed transfers in favour of the Purchaser, or as it directs in
writing, of the Shares in registerable form, together with the relevant
share certificates;
5.3 The Vendor assigns, and the Purchaser accepts the assignment of, the
benefit of the NZ Debt with effect from the Completion Date.
6. ASSIGNMENT
The rights of the parties under this agreement may not be assigned or
transferred.
7. GOVERNING LAW AND JURISDICTION
7.1 This agreement is governed by the laws of New South Wales.
7.2 Each party irrevocably and unconditionally submits to the non-exclusive
jurisdiction of the courts of New South Wales.
4
<PAGE>
EXECUTED as an agreement.
THE COMMON SEAL of FAI HOME )
SECURITY HOLDINGS NEW ZEALAND LIMITED )
is affixed in accordance with its articles of )
association in the presence of )
................................... ........................................
Secretary Director
................................... ........................................
Name of secretary (print) Name of director (print)
THE COMMON SEAL of FAI HOME )
SECURITY HOLDINGS PTY LIMITED )
is affixed in accordance with its articles of )
association in the presence of )
................................... ........................................
Secretary Director
................................... ........................................
Name of secretary (print) Name of director (print)
5
<PAGE>
Exhibit 4.2
COMMON STOCK COMMON STOCK
[ART WORK] HOME [ART WORK]
SECURITY
HOME SECURITY INTERNATIONAL, INC.
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 437333 10 7
THIS CERTIFIES THAT
is the record holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001
PER SHARE, OF
==========================HOME SECURITY INTERNATIONAL, INC.=====================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[SIG TK] [SIG TK]
Chairman of the Board and Chief Executive Officer Secretary
[CORPORATE SEAL OF HOME SECURITY INTERNATIONAL, INC.]
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________________ Custodian _________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________________________________
in common UNIF TRF MIN ACT -- ______________ Custodian (until age ________)
(Cust)
_____________________ under Uniform Transfers
(Minor)
to Minors Act _______________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________________
X _______________________________________
X _______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
June 30, 1997
Home Security International Inc.
Level 7, 77 Pacific Highway
North Sydney, NSW 2060
Re: Form S-1 Registration Statement
No. 333-26399
Gentlemen:
We have acted as counsel to Home Security International, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement on Form S-1 (the "Registration
Statement") relating to the registration of 3,750,000 shares of the Company's
Common Stock (the "Shares"), (including 300,000 shares issuable upon exercise of
Representative's Warrants).
As such counsel, we have examined the Registration Statement and such other
papers, documents and certificates of public officials and certificates of
officers of the Company as we have deemed relevant and necessary as a basis for
the opinions hereinafter expressed. In such examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals and the conformity to original documents of all documents
submitted to us as conformed or photostatic copies. We have also assumed that
the Reorganization described in the Registration Statement will be consummated
prior to the issuance and sale of the Shares.
Based upon and subject to the foregoing, it is our opinion that the Shares
covered by the Registration Statement to be issued by the Company and sold by
the Company and Selling Stockholders, when issued and delivered in accordance
with the terms described in the Registration Statement and pursuant to the terms
of the Underwriting Agreement to be included as an exhibit thereto, will be
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus constituting a part of the Registration Statement,
and any and all amendments thereto.
Very truly yours,
D'Ancona & Pflaum
By: /s/ Arthur Don
-------------------------------
Arthur Don, Partner
<PAGE>
Exhibit 10.2
HOME SECURITY INTERNATIONAL, INC.
1997 Non-Employee Directors' Stock Option Plan
1. Purpose of the Plan. Under this 1997 Non-Employee Directors' Stock
Option Plan (the "Plan") of Home Security International, Inc. (the "Company"),
options may be granted to eligible non-employee directors to purchase shares of
the Company's capital stock. The Plan is designed to enable the Company and its
subsidiaries to attract, retain, and motivate their non-employee directors by
providing for or increasing the proprietary interest of such individuals in the
Company, and by more closely aligning their interests with those of the
Company's shareholders. The Plan provides for options that do not qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). As such, all options granted under the Plan are to be
nonstatutory options.
2. Stock Subject to Plan. The aggregate number of shares that may be
issued pursuant to options hereunder is 50,000 shares of the Company's common
stock, subject to the adjustments hereinafter provided. Such number of shares
shall be reserved by the Company for options granted under this plan. The shares
that may be issued or delivered under the Plan may be either authorized but
unissued shares or treasury shares or a combination of both types of shares.
Shares of stock subject to the unexercised portions of any options granted under
this Plan that expire or terminate or are canceled may again be subject to
options under the Plan.
3. Eligibility. All members of the Company's Board of Directors (the
"Board") who are not full-time employees of the Company ("Non-Employee
Directors") shall participate in the Plan.
4. Automatic Grants. Each Non-Employee Director shall receive an option to
purchase 2,500 shares of the Company's common stock as of the next business day
following the close of each annual meeting of the Company's shareholders that
occurs after the Effective Date and during the term of the Plan; provided that
such Non-Employee Director continues to serve as a director of the Company on
such business day.
5. Option Price. The purchase price at which each stock option may be
exercised (the "Option Price") shall be 100% of the fair market value of the
Company's stock on the date of such grant, as determined under Section 11.
6. Exercise of Option. The options granted under the Plan shall be
exercisable six months after the date of grant. No option shall be exercisable
after the expiration of ten years from the date of the grant. An option, to the
extent exercisable at any time, may be exercised in whole or in part.
7. Payment of Option Price. Payment for stock purchased under any
exercise of an option granted under this Plan shall be made in full in cash
concurrently with such exercise. Alternatively:
<PAGE>
a. Such payment may be made in whole or in part with shares of the
same class of stock as that then subject to the option and that have
been held by the optionee for at least six months, delivered in lieu
of cash concurrently with such exercise, the shares so delivered to be
valued on the basis of the fair market value of stock (determined in a
manner provided in Section 11 hereof) on the day preceding the date of
exercise provided that the Company is not then prohibited from
purchasing or acquiring shares of such stock; and/or
b. Such payment may be made in whole or in part by delivering to the
Company a promissory note in the form of note attached hereto as
Exhibit A; provided that if the Company becomes subject to the
Securities and Exchange Act of 1934, payment by promissory note shall
be subject to any applicable margin restrictions which may then be in
effect as to the Company and, shall be subject to the provisions of
Section 23 herein. Any such promissory note shall be adequately
secured by property other than the underlying Shares.
Notwithstanding the above, the Company can reject any form of payment that would
cause the Company to recognize a charge to its earnings.
8. Nontransferability. Any option granted under this Plan shall, by its
terms, be nontransferable by the grantee other than by will or the laws of
descent and distribution, and during the grantee's lifetime shall be exercisable
only by him, his guardian, or his legal representative.
9. Termination of Option. An option shall terminate and shall not be
exercised if the grantee ceases to be a member of the Board. Notwithstanding the
above:
a. If the grantee's directorship is terminated by reason other than any
act of (a) fraud or intentional misrepresentation, or (b)
embezzlement, misappropriation, or conversion of assets or
opportunities of the Company or its subsidiaries, grantee may exercise
his option, at any time within the three month period following the
date he ceased to be a director; and
b. If the grantee dies while a director or within three months after
ceasing to be a director, and prior to the expiration date of the
option, his option may be exercised at any time within 18 months
following his death by the person or persons to whom his rights under
the option passed by will or by the laws of descent or distribution,
but only to the extent that it was exercisable on the date that he
ceased to be a director; in no case, however, shall the 18-month
period extend beyond the expiration date of the option.
10. Written Option Agreement. All options granted pursuant to the Plan
shall be evidenced by written option agreements. Such option agreements shall
comply with and be
2
<PAGE>
subject to all of the terms, conditions, and limitations set forth in this Plan
and such further provisions, not inconsistent with this Plan, as the
Administrator shall deem appropriate.
11. Determination of Fair Market Value. Fair market value of the common
stock shall be determined in good faith by the Administrator. Fair market value
shall be determined without regard to any restriction (other than a restriction
that, by its terms, will never lapse).
12. Adjustments. If the outstanding shares of stock of the class then
subject to this Plan are increased or decreased, or are changed into or
exchanged for a different number or kind of shares or securities as a result of
one or more reorganizations, recapitalizations, stock splits, reverse stock
splits, stock dividends or the like, appropriate adjustments shall be made in
the number and/or kind of shares or securities for which options may thereafter
be exercised. The Administrator shall make such adjustments as it may deem fair,
just and equitable to prevent substantial dilution or enlargement of the rights
granted to or available for grantees. No adjustment provided for in this Section
12 shall require the Company to issue or sell a fraction of a share or other
security.
13. Administration. The Plan shall be administered by a person or persons
(the "Administrator") appointed by the Board of Directors of the Company. Any
vacancy occurring in the position of Administrator shall be filled by
appointments by the Board.
The Administrator may interpret the Plan, prescribe, amend and rescind any
rules or regulations necessary or appropriate for the administration of the
Plan, and make any other determination and take any other action as it, in its
sole discretion, deems necessary or advisable, except as otherwise expressly
reserved for the Board of Directors of the Company.
14. Rights as a Shareholder. A grantee, or his executor, administrator or
legatee if he be deceased, shall have no rights as a shareholder with respect to
any stock covered by his option until the date of issuance of the stock
certificate to him or such stock after receipt of the consideration in full set
forth in the option agreement, or as may be approved by the Administrator.
Except as provided in Section 12 hereof, no adjustments shall be made for
dividends, whether ordinary or extraordinary, whether in cash, securities, or
other property, for distributions in which the record date is prior to the date
for which the stock certificate is issued.
15. Modification, Extension and Renewal. The Administrator may modify,
extend or renew options that are outstanding as granted under the Plan if
otherwise consistent herewith. Notwithstanding the foregoing, no modification
shall, without the prior written consent of the grantee, alter, impair or waive
any rights or obligations of any option theretofore granted under the Plan.
16. Investment Purposes, Etc. Prior to the issuance or delivery of any
options or shares of the common stock under the Plan, the person being granted
or exercising the stock option may be required to (a) represent and warrant that
the shares of the common stock to be
3
<PAGE>
acquired upon exercise of the stock option are being acquired for investment for
the account of such person and not with a view to resale or other distribution
thereof; (b) represent and warrant that such person will not, directly or
indirectly, transfer, sell, assign, pledge, hypothecate or otherwise dispose of
any such shares unless the transfer, sale, assignment, pledge, hypothecation or
other disposition of the shares is pursuant to effective registrations under the
Securities Act of 1933 and applicable state or foreign securities laws or
pursuant to appropriate exemptions from any such registrations; (c) execute such
further documents as may be reasonably required by the Administrator upon
exercise of the option or any part thereof, including but not limited to stock
transfer restrictions. The certificate or certificates representing the shares
of the common stock to be issued or delivered upon exercise of a stock option
may bear a legend evidencing the foregoing and other legends required by any
applicable securities laws. Furthermore, nothing herein, nor any option granted
hereunder, shall require the Company or an subsidiary to issue any stock upon
exercise of any option if the issuance would, in the opinion of counsel for the
Company, constitute a violation of the Securities Act of 1933, as amended, the
Illinois or any other state's applicable securities laws, or any other
applicable rule or regulation then in effect.
17. No Right to Service. Neither this Plan nor any option granted under
this Plan shall confer upon any grantee any right with respect to continued
service to the Company or any subsidiary, nor shall they alter, modify, limit or
interfere with any right or privilege of the Company or any subsidiary under any
service contract heretofore or hereinafter executed with any grantee, including
the right to terminate any grantee's directorship, at any time for or without
cause.
18. Compliance with Other Laws and Regulations. The Plan, the options
granted hereunder, and the obligation of the Company to sell and deliver stock
under such options, shall be subject to all applicable federal and state laws,
rules and regulations, and to such approvals by any government or regulatory
authority or investigative agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of stock prior to (a)
the listing of any such stock to be acquired pursuant to the exercise of any
option on any stock exchange on which the stock may then be listed; and (b) the
compliance with any registration requirements or qualification of such shares
under any federal or state securities laws, or the obtaining of any ruling or
waiver from any government body that the Company or it subsidiaries shall, in
their sole discretion, determine to be necessary or advisable, or that, in the
opinion of counsel to the Company or its subsidiaries, is otherwise required.
19. Corporate Reorganizations. Upon the dissolution or liquidation of the
Company, or upon a reorganization, merger or consolidation of the Company as a
result of which the outstanding securities of the class subject to options
hereunder are changed into or exchanged for cash or property or securities not
of the Company's issue, or upon a sale of substantially all the property of the
Company to, or the acquisition of stock representing more than eighty percent
(80%) of the voting power of the stock of the Company then outstanding by
another corporation or person, the Plan shall terminate, and all options
theretofore granted hereunder shall terminate, unless provision be made in
writing in connection with such transaction for the continuance of the
4
<PAGE>
Plan and/or for the assumption of options theretofore granted, or the
substitution for such options of options covering the stock of a successor
employer corporation, or a parent or a subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices, in which event the
Plan and options theretofore granted shall continue in the manner and under the
terms so provided. If the Plan and unexercised options shall terminate pursuant
to the foregoing sentence, all persons entitled to exercise any unexercised
portions of options then outstanding shall have the right, at such time prior to
the consummation of the transaction causing such termination as the Company
shall designate, to exercise the unexercised portions of their options.
20. Withholding. If, upon exercise of any option, the grantee fails
to tender payment to the Company for any federal or state income tax
withholding, the Administrator shall withhold from the grantee sufficient shares
or fractional shares having a fair market value (as determined under Section 11)
equal to any amount that the Company is required to withhold under the Code or
State law.
21. Amendment and Termination. The Board may alter, amend, suspend
or terminate this Plan, provided that no such action shall deprive a grantee,
without his consent, of any option granted to the grantee pursuant to this Plan
or of any of such grantee's rights under such option. Notwithstanding the above,
however, the Plan shall not be amended more than once every six months, other
than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder. Except as herein
provided, no such action of the Board, unless approved by the shareholders of
the Company within twelve months prior to twelve months after such action, may:
a. increase the maximum number of shares for which options granted under this
plan may be exercised;
b. reduce the minimum permissible exercise price;
c. extend the ten-year duration of this Plan set forth herein; or
d. alter the class of directors eligible to receive options under the Plan.
22. No Discretion. No member of the Board shall exercise any
discretion with regard to the amount, price, or timing of option grants under
the Plan in contravention of the formula plan requirements of Rule 16b-3(c)(2).
23. Effective Date and Duration. The Plan shall take effect on April
1, 1997 (the "Effective Date"), subject to the adoption of the Plan by the Board
of Directors and the approval of the Plan by the Company's shareholders within
twelve months of the Effective Date. Options may not be granted under this Plan
more than ten years after the date of the Effective Date.
5
<PAGE>
24. Governing Law. All questions arising with respect to the provisions
of the Plan shall be determined by application of the laws of the State of
Illinois, except to the extent that Illinois laws are preempted by any federal
statute, regulation, judgment or court order, including but not limited to, the
Code.
25. Headings. The titles of Sections of the Plan are provided for
convenience only, and are not to be used in the construction or interpretation
of this document.
HOME SECURITY INTERNATIONAL, INC.
a Delaware corporation
Adopted by the Board of Directors of Home Security International, Inc. on
_____________________, 19_____.
Approved by the Shareholders of Home Security International, Inc. on
____________________________, 19_____.
6
<PAGE>
EXHIBIT A
---------
PROMISSORY NOTE
$____________________ __________________, 19___
FOR VALUE RECEIVED, ________________________ promises to pay to Home
Security International, Inc., a Delaware corporation (the "Company"), or order,
the principal sum of _____________________________________ ($____________),
together with interest on the unpaid principal hereof from the date hereof at
the rate of ________ % per annum, compounded semiannually.
Principal and interest shall be due and payable on_____________________.
Should the undersigned fail to make full payment of any installment of principal
or interest for a period of 10 days or more after the due date thereof, the
whole unpaid balance on this Note of principal and interest shall become
immediately due at the option of the holder of this Note. Payments of principal
and interest shall be made in lawful money of the United States of America.
The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
_________________. This Note is secured by a pledge of the Company's Common
Stock under the terms of a Security Agreement of even date herewith and is
subject to all the provisions thereof.
The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.
In the event the undersigned shall cease to be an employee or consultant of
the Company for any reason, this Note shall, at the option of the Company, be
accelerated, and the whole unpaid balance on this Note of principal and accrued
interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
--------------------------------------
(Name)
<PAGE>
EXHIBIT 10.10
PROMISSORY NOTE
---------------
June ___, 1997
Five (5) years from the date of this Note ("Date"), for value received,
BRADLEY D. COOPER ("Debtor") promises to pay to the order of HOME SECURITY
INTERNATIONAL, INC. ("HSI"), in lawful money of the United States, the Principal
Sum. This Note shall bear interest at the rate of 7% per year compounded
semi-annually. Interest accrued under this Note shall be due and payable
semi-annually commencing on a date 6 months after Date and continuing thereafter
on a semi-annual basis until maturity. The principal and interest on this note
shall be payable at Level 7, 77 Pacific Highway, North Sydney, N.S.W. 2060,
Australia, or at such other place as HSI may otherwise direct in writing.
Principal Sum. The term "Principal Sum" shall mean the purchase price of the
250,000 shares of HSI Common Stock to be purchased by Debtor prior to the
commencement of the initial public offering of 3,000,000 shares of HSI Common
Stock ("Purchase Price"), less the cash payment of 5% of the Purchase Price paid
to HSI by Debtor as of the Date. The Purchase Price shall be determined by
multiplying 250,000 by the initial public offering price as determined by the
representative of the underwriters, National Securities Corporation, and the
Pricing Committee of HSI and FAI Home Security Holdings Pty Ltd on the pricing
date of HSI's initial public offering.
Note Secured by Shares. Debtor will deposit with HSI, as collateral for payment
of the Principal Sum, certificates for 250,000 shares of HSI Common Stock with
endorsed stock powers ("Collateral"). Should any part of Collateral be offered
for sale in satisfaction of Debtor's obligations under this Note and should HSI
become the purchaser Debtor waives and releases all rights of redemption in and
to such Collateral. Notwithstanding anything to the contrary stated herein,
HSI's sole recourse for the payment of the Principal Sum shall be the
Collateral; provided, however, that HSI shall have full recourse against Debtor
for the payment of interest accrued under the Note.
Prepayment. Debtor shall have the right to prepay the Obligation set forth in
this Note in whole or in part at any time without penalty. Prepayments shall
first be applied to accrued interest, and then to the remaining Principal Sum.
Compliance with Usury Laws. If, for any reason, the interest imposed upon
monies owing under the terms of this Note should be in excess of the amount
allowed by applicable law, then such excess monies shall not be deemed to be
usurious or interest, and shall be applied toward the reduction of
<PAGE>
principal to the extent principal monies are owed. Any excess over and above
principal monies owed shall be refunded to Debtor.
No Waivers by HSI. Debtor agrees that its liabilities hereunder are absolute
and unconditional without regard to the liability of any other party and that no
delay on the part of HSI in exercising any power or right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
power or right hereunder preclude other or further exercise thereof or the
exercise of any other power or right.
Default. Any non-payment of interest or principal when due, that is not cured
within 10 calendar days of written notice of HSI to Debtor at Debtor's home
address in HSI records, shall be deemed a default under this Note, and thereby
entitling HSI to exercise all remedies under this Note, including exercising
control over the Collateral, in addition to any other remedies that may be
available to HSI.
Attorneys' Fees. If payment of any portion of this Note shall not be made when
due, and any action is brought to enforce collection, Debtor agrees to pay such
additional sum as attorney fees as the court in such action may adjudge
reasonable.
Construction; Jurisdiction. This Note shall be governed as to validity,
interpretation, construction, effect, and in all other respects by, and
construed in accordance with, the laws and decisions of the State of Delaware
("State"). Debtor hereby submits to personal jurisdiction within the State for
the enforcement of Debtor's obligation hereunder, and waives any and all
personal rights under the law of any other state to object to jurisdiction for
the purpose of litigation to enforce such obligation of Debtor.
Headings. All headings used herein are solely for the convenience of the
parties, are not part of this Note, and shall not be used for the interpretation
or determination of the validity of this Note or any provisions hereof.
IN WITNESS WHEREOF, Debtor, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
DEBTOR:
--------------------------
Bradley D. Cooper
<PAGE>
EXHIBIT 23.2
ARTHUR
ANDERSEN
25 June 1997 ------------------------
Arthur Andersen
A Member Firm of
Andersen Worldwide SC
------------------------
The Board of Directors 141 Walker Street
Home Security International Inc. North Sydney 2060
Level 7 GPO Box 4329 Sydney NSW 2001
77 Pacific Highway 02 9964 6000
NORTH SYDNEY NSW 2060 02 9922 2065 Fax
DX 1340 Sydney
Dear Sirs
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Amendment No. 2 to Form S-1 Registration for Home Security International Inc.
Yours faithfully
/s/ Arthur Andersen
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
FAI Home Security Australia and NZ Group and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 236,485
<SECURITIES> 0
<RECEIVABLES> 1,264,258
<ALLOWANCES> 151,418
<INVENTORY> 599,873
<CURRENT-ASSETS> 11,789,066
<PP&E> 779,985
<DEPRECIATION> 40,145
<TOTAL-ASSETS> 20,984,722
<CURRENT-LIABILITIES> 6,893,495
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 14,043,945
<TOTAL-LIABILITY-AND-EQUITY> 20,984,722
<SALES> 22,891,931
<TOTAL-REVENUES> 23,232,294
<CGS> 16,778,935
<TOTAL-COSTS> 16,778,935
<OTHER-EXPENSES> 4,045,935
<LOSS-PROVISION> 23,895
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,962,426
<INCOME-TAX> 1,124,066
<INCOME-CONTINUING> 1,838,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,838,359
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> There has been no EPS calculated because of the combined group structure.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
FAI Home Security Australia and NZ Group and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1994
<PERIOD-START> JUL-01-1995 JUL-01-1994
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 369,837 1,229,501
<SECURITIES> 0 0
<RECEIVABLES> 1,245,808 1,150,273
<ALLOWANCES> 146,075 59,861
<INVENTORY> 339,602 90,040
<CURRENT-ASSETS> 6,940,658 5,442,680
<PP&E> 19,393 81,549
<DEPRECIATION> 6,687 16,425
<TOTAL-ASSETS> 13,383,655 7,670,760
<CURRENT-LIABILITIES> 3,489,828 3,758,714
<BONDS> 0 0
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 9,893,825 3,912,044
<TOTAL-LIABILITY-AND-EQUITY> 13,383,655 7,670,760
<SALES> 26,203,285 21,010,424
<TOTAL-REVENUES> 26,700,922 21,437,325
<CGS> 17,584,562 14,218,695
<TOTAL-COSTS> 17,584,562 14,218,695
<OTHER-EXPENSES> 6,606,377 5,091,498
<LOSS-PROVISION> 58,213 9,552
<INTEREST-EXPENSE> 47,625 0
<INCOME-PRETAX> 2,713,164 2,192,343
<INCOME-TAX> 1,054,170 722,523
<INCOME-CONTINUING> 1,658,994 1,469,820
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,658,994 1,469,820
<EPS-PRIMARY> 0<F1> 0<F1>
<EPS-DILUTED> 0<F1> 0<F1>
<FN>
<F1> There has been no EPS calculated because of the combined group structure.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
FAI Home Security International Group and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 60,206
<SECURITIES> 0
<RECEIVABLES> 578,706
<ALLOWANCES> 269,326
<INVENTORY> 459,868
<CURRENT-ASSETS> 945,409
<PP&E> 179,512
<DEPRECIATION> 76,883
<TOTAL-ASSETS> 1,048,038
<CURRENT-LIABILITIES> 4,572,185
<BONDS> 0
0
0
<COMMON> 0<F1>
<OTHER-SE> (3,524,147)
<TOTAL-LIABILITY-AND-EQUITY> 1,048,038
<SALES> 1,396,163
<TOTAL-REVENUES> 1,397,997
<CGS> 770,155
<TOTAL-COSTS> 770,155
<OTHER-EXPENSES> 1,700,226
<LOSS-PROVISION> 123,773
<INTEREST-EXPENSE> 290,997
<INCOME-PRETAX> (1,356,867)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,356,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,356,867)
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1> There is no common stock issued as the combined group structure relates to
trusts.
<F2> There has been no EPS calculated because of the combined group structure.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
FAI Home Security International Group and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR OTHER
<FISCAL-YEAR-END> JUN-30-1995 JUN-30-1995
<PERIOD-START> JUL-01-1995 OCT-14-1994
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 82,214 69,982
<SECURITIES> 0 0
<RECEIVABLES> 238,589 185,443
<ALLOWANCES> 145,412 15,810
<INVENTORY> 435,278 349,287
<CURRENT-ASSETS> 737,225 600,547
<PP&E> 163,835 153,409
<DEPRECIATION> 54,208 11,350
<TOTAL-ASSETS> 846,852 742,606
<CURRENT-LIABILITIES> 2,949,831 695,885
<BONDS> 0 0
0 0
0 0
<COMMON> 0<F1> 0<F1>
<OTHER-SE> (2,102,979) 46,721
<TOTAL-LIABILITY-AND-EQUITY> 846,852 742,606
<SALES> 1,737,032 876,693
<TOTAL-REVENUES> 1,750,028 876,693
<CGS> 1,028,583 446,246
<TOTAL-COSTS> 1,028,583 446,246
<OTHER-EXPENSES> 3,199,590 2,585,291
<LOSS-PROVISION> 129,602 15,810
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,470,218) (2,154,844)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,470,218) (2,154,844)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,470,218) (2,154,844)
<EPS-PRIMARY> 0<F2> 0<F2>
<EPS-DILUTED> 0<F2> 0<F2>
<FN>
<F1> There is no common stock issued as the combined group structure relates to
trusts.
<F2> There has been no EPS calculated because of the combined group structure.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Home Security International Inc. and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> APR-11-1997
<PERIOD-END> APR-30-1997
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> There had been no trading by the company from the date of incorporation to
April 30, 1997.
</FN>
</TABLE>
