<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number
---------------
HOME SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0169495
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Level 7, 77 Pacific Highway
North Sydney, NSW Australia 2060
(Address of principal executive offices) (Zip Code)
(011)(612) 9936-2424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Number of Shares of Common Stock Outstanding on November 14, 1997: 5,150,500
================================================================================
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
-----------------------------
1997 1997
NOTE $US $US
---------------------------------------
<S> <C> <C> <C>
ASSETS (Audited) (Unaudited)
- ------
Current assets
Cash and cash equivalents 118 6,350,555
Accounts receivable--related party 2,025,455 336,618
Accounts receivable--trade, net 3 615,560 1,003,254
Inventories 4 1,277,104 1,857,369
Prepaid expenses and other current assets 449,458 688,488
----------------------------
Total current assets 4,367,695 10,236,284
----------------------------
Non-current assets
Plant and equipment, net 6 869,571 885,219
Intangibles, net 7 10,142,077 10,007,039
Deferred income taxes 549,393 646,059
Other non-current assets 3,748 3,611
Receivable--related party 24,366 10,767
----------------------------
Total non-current assets 11,589,155 11,552,695
----------------------------
Total assets 15,956,850 21,788,978
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft 31,795 0
Payables--trade 4,018,147 3,912,255
Accrued liabilities 1,105,612 995,014
Lease liability 19,068 16,668
Income tax payable 467,961 1,402,879
Deferred income 479,307 399,967
----------------------------
Total current liabilities 6,121,890 6,726,783
----------------------------
Non-current liabilities
Lease liability 44,877 38,816
Accrued liabilities 0 57,541
Deferred income 0 238,123
----------------------------
Total non-current liabilities 44,877 334,480
----------------------------
Total liabilities 6,166,767 7,061,263
============================
Shareholders' equity
Preferred stock $.001 value; 1,000,000
shares authorized, none outstanding
Common stock $.001 value; 20,000,000
shares authorized; 1997: 5,150,500
June 30, 1997 (1996: 4,500,000)
shares outstanding 4,500 5,150
Additional paid-in capital 5 10,238,691 16,111,311
Secured Note 0 (2,375,000)
Foreign currency translation reserve (406,534) (402,613)
Related earnings (accumulated losses) (46,574) 1,388,867
----------------------------
Total shareholders' equity 9,790,083 14,727,715
----------------------------
Total liabilities and shareholders'
equity 15,956,850 21,788,978
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1997
NOTE $US $US
---------------------------------------
<S> <C> <C> <C>
Net Sales 2 7,676,556 11,048,697
Cost of goods sold
--related party (880,228) 0
--other (4,586,427) (6,325,736)
----------------------------
Gross profit 2,209,900 4,722,961
Management fees received--related parties (13,918) 0
General and administrative expenses (1,387,929) (2,498,647)
----------------------------
Income from operations 808,053 2,224,314
Interest income--related party 112,481 0
--other 25,695 90,010
Interest expenses--other (3,778) 0
----------------------------
Income before taxes 942,451 2,314,324
Income tax expense (343,617) (878,882)
----------------------------
Net income 598,834 1,435,442
============================
Net income per common share $ 0.13 $ 0.28
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1997
$US $US
--------------------------------
<S> <C> <C>
Cashflow from operating activities
Net income 598,834 1,435,442
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 1,830 54,910
Amortization of goodwill 97,009 142,880
Deferred taxes and income tax payable 219,109 835,253
Provision for losses on accounts receivable (16,133) 170,427
(Increase) decrease in operating assets:
Accounts receivable--trade (15,889) (580,746)
Inventories (59,525) (615,442)
Prepaid expenses and other assets (518,655) (247,210)
Increase (decrease) in operating liabilities:
Accounts payable 418,823 41,837
Accrued liabilities 27,676 163,206
----------------------------
Net cash provided by operating activities 753,079 1,400,557
----------------------------
Cashflow from investing activities
Short term loans (granted), repayments received 225,722 (197,420)
Additions to plant and equipment (927) (101,163)
Receipt/(payments) from/(to) related parties (878,980) 1,590,066
----------------------------
Net cash provided by/(used in) investing activities (654,185) 1,291,483
----------------------------
Cashflow from financing activities
Capital subscribed 0 4,130,000
Share issue costs 0 (432,262)
Decrease in bank overdraft 0 (30,626)
----------------------------
Net cash (provided by) financing activities 0 3,667,112
----------------------------
Net increase/(decrease) in cash held 98,894 6,359,152
----------------------------
Cash at the beginning of the financial period 369,837 118
Effect of exchange rate change on cash held 4,608 (8,715)
----------------------------
Cash at the end of the financial period 473,339 6,350,555
============================
Supplemental disclosure of cash flow information:
Interest paid 3,778 0
Income taxes paid 0 0
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Capital Stock Issued Additional Currency Retained Total
--------------------- Paid-in Secured Translation Earnings Shareholders'
Shares Amount Capital Note Reserve Unappropriated Equity
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 4,500,000 4,500 10,238,691 0 (406,534) (46,574) 9,790,083
Foreign currency translation
adjustment 3,921 3,921
Additional paid-in-capital 400,500 400 4,004,600 4,005,000
Issue of shares to Bradley
D. Cooper 250,000 250 2,499,750 (2,375,000) 125,000
Less share issue costs (631,730) (631,730)
Net Income July-September 97 1,435,441 1,435,441
----------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 5,150,500 5,150 16,111,311 (2,375,000) (402,613) 1,388,867 14,727,715
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation and Basis of Preparation--
The consolidated financial statements have been prepared by the Company,
without audit, with the exception of the June 30, 1997 consolidated balance
sheet. The financial statements include consolidated balance sheets,
consolidated statements of income, consolidated statement of changes in
shareholders' equity, and consolidated statements of cash flows. In the opinion
of management, all adjustments, which consist of normal recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows for all periods have been made.
The financial statements should be read in conjunction with the
consolidated financial statements as of and for the fiscal year ended June 30,
1997 and the footnotes thereto included in the Company's Annual Report on
Form 10-K.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP").
The consolidated statement of income for the quarter ended 30 September
1996 includes the financial statements of the Company and FAI Home Security (NZ)
Limited and FAI Home Security (NZ) Trust as those entities were under common
control. It does not include the financial statements of the Cooper
International Group which was acquired on March 31, 1997.
All intercompany accounts and transactions have been eliminated.
b) Net Income per Common Share--
Net income per common share for 1997 has been calculated by dividing net
income by the weighted average number of common shares outstanding in the
quarter. Fully diluted earnings per share has been computed based on the
assumption that all stock options have been exercised, and are not materially
different from primary earnings per share.
Weighted average number of shares outstanding for the three months ended:
September 30, 1996 September 30, 1997
Primary 4,500,000 5,050,423
Fully diluted 4,500,000 5,163,995
Net income per common share for 1996 has been calculated by dividing net
income by the number of shares outstanding following the reorganization in 1997.
6
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued)
c) Stock Option plan --
The Company accounts for its stock option plans (the "Option Plans") in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement No. 123, which
became effective in 1996, allows entities to continue to apply the provisions of
APB Opinion No. 25 and require pro forma net earnings and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in FASB Statement No. 123 had been
applied. The Company has determined that the net income per common share would
not be materially affected by the provision of FASB Statement No.123.
Three Months Ended September 30,
--------------------------------
1996 1997
$US $US
--------------------------------
Distributor sales 7,617,751 10,878,651
Other 95,782 239,163
--------------------------------
Gross sales 7,713,533 11,117,814
Less: returns and rebates (36,977) (69,117)
--------------------------------
Net sales 7,676,556 11,048,697
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
June 30, September 30,
--------------------------------
1997 1997
$US $US
--------------------------------
Accounts Receivable 745,280 1,298,832
Less allowances for doubtful debts (129,720) (295,578)
--------------------------------
615,560 1,003,254
NOTE 4: INVENTORIES
June 30, September 30,
--------------------------------
1997 1997
$US $US
--------------------------------
Wholesale stock 879,476 1,517,628
Sales aids 397,628 339,741
--------------------------------
1,277,104 1,857,369
NOTE 5: SECURED NOTE
The Company has issued 250,000 shares at par value $0.001 to Bradley D.
Cooper in exchange for cash of $125,000 and the issue of a 5 year 7.0%
semi-annual interest bearing note secured by the shares issued to the value of
$2,375,000.
7
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTED TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, September 30,
--------------------------------
1997 1997
$US $US
--------------------------------
<S> <C> <C>
Furniture and fixtures 168,457 170,660
Office equipment 157,051 193,735
Plant 47,607 4,003
Motor vehicles 164,884 154,338
Computer equipment 255,764 330,206
Leasehold improvements 114,140 115,231
Less: Accumulated depreciation (38,332) (82,954)
----------------------------
869,571 885,219
</TABLE>
NOTE 7: INTANGIBLES
<TABLE>
<CAPTION>
June 30, September 30,
--------------------------------
1997 1997
$US $US
--------------------------------
<S> <C> <C>
Initial goodwill 2,086,864 2,086,864
Increment of goodwill 8,716,208 8,716,208
Amortization of goodwill (660,995) (796,033)
----------------------------
10,142,077 10,007,039
</TABLE>
NOTE 8: STOCK OPTION PLANS
The Company has two stock option 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 advisers of the Company. The 1997 Plan provides for the grant of
stock options ("Options"), including incentive stock options within the meaning
of Section 422 of the United States Internal Revenue Code of 1986, as amended
(the "Code"), and non-statutory stock options that do not qualify as stock
options under Section 422 of the Code ("Non-Statutory Options"). On July 15,
1997, the Company issued 250,000 Options to Bradley D. Cooper, exercisable at a
rate of 20% per year commencing on the first anniversary date of the IPO, at an
exercise price of $10.00 per share. In addition, on July 15, 1997, the Company
issued an additional 250,000 Options to key employees of the Company, other than
Bradley D. Cooper, which are exercisable at a rate of 20% per year commencing on
the first anniversary date of the effective date of the Company's IPO, at an
exercise price of $10.00 per share.
8
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(Continued)
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. Upon the
closing of the Company's IPO, all non-employee directors received options to
purchase 5,000 shares of Common Stock at $10.00 per share under the Director
Plan. On the day after each annual meeting of the shareholders of the Company,
provided that he or she continues to serve as a member of the Board of
Directors, all non-employee directors will receive options to purchase an
additional 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. On July 15, 1997, 20,000 options were issued to
non-executive directors. The options granted under the Director Plan are
exercisable beginning six months from the date of grant.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUE: Total revenue increased by $3.4 million or 44% from $7.7 million for
the three months ended September 30, 1996 to $11.0 million for the three months
ended September 30, 1997. The increase in revenues is due to several factors.
Sales revenue in the Australia/New Zealand market increased by 30% from $7.7
million for the three months ended September 30, 1996 to $10.0 million for the
three months ended September 30, 1997. This increase in revenue was attributable
to an increase in unit sales of 28% from 9,266 units for the three months ended
September 30, 1996 to 11,837 units for the three months ended September 30,
1997. Additionally, there was an inclusion of $1.1 million in revenues from the
European, North American and South African markets, which were not part of the
Company in the three months ended September 30, 1996.
COST OF GOODS SOLD: Cost of goods sold increased by $0.8 million from $5.5
million to $6.3 million. This represented a decrease in the percentage of total
revenue by approximately 14% from 71% to 57% for the three months ended
September 30, 1996 and 1997, respectively. This decrease, however, was partly
due to a royalty fee charged for the FAI brand name by a related party, which is
no longer applicable. As adjusted to exclude this related party royalty charge
of $0.9 million, cost of goods for the three months ended September 30, 1996,
was $4.6 million. As a percentage of total revenue, this represents an decreased
of 3% from 60% to 57% as compared to the three months ended September 30, 1997.
This 3% reduction was due primarily to two factors. First, product costs
decreased from 50.32% of revenue for the three months ended September 30, 1996
compared to 48.75% for the three months ended September 30, 1997. Second, a
change in the Chief Executive Officer's compensation package, from a commission
basis (recorded in cost of goods sold) for the three months ended September 30,
1996, to a base salary plus 10% of net profit after tax (recorded in general and
administrative expenses) for the three months ended September 30, 1997, resulted
in a decrease in commissions of 1.1%, as a percentage of revenue, for the three
months ended September 30, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$2.5 million for the three months ended September 30, 1997, compared to $1.4
million for the three months ended September 30, 1996. General and
administrative expenses for the three months ended September 30, 1996, however,
include $0.3 million of expenses related to the European, North American and
South African operations, which were not part of the Company in the three months
ended September 30, 1996. As a percentage of revenue, total general and
administrative expenses increased 5% to 23% in the three months ended September
30, 1997 compared to 18% for the three months ended September 30, 1996.
The re-classification of the Chief Executive Officer's compensation package
resulted in an increase of $0.3 million for the three months ended September 30,
1997 as compared to the three months ended September 30, 1996.
Head office expenses increased $0.3 million in the three months ended September
30, 1997 as compared to the three months ended September 30, 1996. This increase
was mainly attributable to
10
<PAGE>
increased costs relating to the expanding Distributor Network, the public
listing if the Company's common stock and the extended warranty program.
Goodwill charges increased from $97,000 for the three months ended September 30,
1996 to $145,000 for the three months ended September 30, 1997.
INCOME FROM OPERATIONS: Net income from operations increased from $0.8 million
for the three months ended September 30, 1996 to $2.2 million for the three
months ended September 30, 1997. As compared to the three months ended September
30, 1997, net income from operations for the three months ended September 30,
1996 (as adjusted to exclude the related party royalty payments for the use of
the FAI brand name) increased $0.5 million from $.17 million compared to $2.2
million.
INTEREST INCOME: Interest income was approximately $90,000 for the three months
ended September 30, 1997 compared to $137,000 for the three months ended
September 30, 1996. However, the three months ended September 30, 1996 included
related party interest income of $112,000. Excluding interest income received
from related party for the three months ended September 30, 1996, interest
income increased from $25,000 to $90,000 for the three months ended September
30, 1996 and 1997 respectively.
INCOME TAX EXPENSE: The effective rate of tax increased from 36% for the three
months ended September 30, 1996 to 38% for the three months ended September 30,
1997. This was a result of increased goodwill charges not deductible for tax
purposes and an increase in net income before tax earned in Australia with
company tax rate of 36% compared to lower tax rates in New Zealand, United
Kingdom, South Africa and Canada.
NET INCOME: Net income increased from $0.6 million for the three months ended
September 30, 1996 to $1.4 million for the three months ended September 30,
1997. However, this includes a related party royalty charge of $0.8 million and
interest income of $0.1. As adjusted to exclude these related party charges, net
income for the three months ended September 30, 1996 was $1.1 million. As
compared to net income of $1.4 million for the three months ended September 30,
1997, this represents an increase of 28%.
LIQUIDITY AND CAPITAL RESOURCES: On July 15, 1997 the Company and FAI Insurances
Ltd., an affiliate of the Company sold a total of 2,750,500 shares (including
350,500 shares pursuant to an over-allotment option) in the Company's initial
public offering ("IPO"). Specifically, the Company sold a total of 400,500
shares of Common Stock (including 150,500 shares pursuant to an over-allotment
option) at an issue price of $10.00. In addition, prior to the IPO, 250,000
shares of Common Stock of the Company were sold to Bradley D. Cooper at the IPO
price for cash of $125,000 and a secured note of $2,375,000.
The principal source of the Company's liquidity historically has been, and in
the future is expected to be, cash flows from operations.
Cash flow from operations increased from $0.8 million for the quarter ended
September 30, 1996 to $1.4 million for the quarter ended September 30, 1997. The
improvement in cash flow provided by operations reflects improved profitability
of the Company.
The increase in inventories during the quarter ended September 30, 1997 reflects
increased sales in the international operations and the need to carry increased
inventories to meet these sales. Furthermore, inventories held in New Zealand
were increased to ensure buffer stock was held to meet fluctuations in
11
<PAGE>
sales. In addition, accounts receivables increased during the quarter ended
September 30, 1997 due to start up inventory provided to a number of new
operations opened throughout the Distributor Network in the quarter ended
September 30, 1997.
Net cash provided (used in) investing activity increased from a deficit of $0.7
million during the quarter ended September 30, 1996 to $1.3 million during the
quarter ended September 30, 1997. This was a result of the settlement of related
party balances.
Net cash generated from financing activities increased from $0 during the
quarter ended September 30, 1996 to $3.7 million. This increase was a result of
the completion of the initial public offering of July 15, 1997 less float
expenses incurred (excluding prepaid float expenses).
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 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
12
<PAGE>
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Sale of Common Stock to Bradley D. Cooper.
-----------------------------------------
Prior to the commencement of the Company's IPO, Mr. Cooper purchased
250,000 shares of the Company's Common Stock at the initial public offering
price of $10.00. Five percent (5%) of the purchase price for the shares was paid
by Mr. Cooper in cash and the remainder was 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. The
note has been filed as Exhibit 10.15 to the Company's annual report for the
period ended June 30, 1997, filed on Form 10-K, commission file number 001-
14502.
The sale of all the aforementioned securities were 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.
Use of IPO Proceeds.
- -------------------
On July 15, 1997, the Company's initial public offering of its Common Stock was
declared effective by the Commission. The Commission file number assigned to the
registration statement was 333-26399. From the effective date of the
registration statement through September 30, 1997, a reasonable estimate of the
offering expenses paid by the Company is as follows:
Underwriting Discounts and Commissions $320,400
Non-Accountable Expense Allowance 64,080
Other Share Issue Costs 265,204
--------
$649,684
========
Underwriting Discounts and Commissions and the Non-Accountable Expense Allowance
of $384,480 were paid to National Securities Corporation, a wholly-owned
subsidiary of Olympic Cascade Financial Corporation. Steven A. Rothstein, a
director of the Company, is Chairman of National Securities Corporation and
Olympic Cascade Financial Corporation. Based on a reasonable estimate of the
offering expenses, the net proceeds of the IPO, after expenses (including
prepaid offering expenses), amounted to $3,355,316.
From the effective date of the registration statement through September 30,
1997, a reasonable estimate of utilization of the net proceeds of the offering
is as follows:
. To retire a non-interest bearing note payable to
FAI Home Security Holdings Pty Ltd/1/ representing
the partial purchase price (fixed asset and
inventories) of the International Assets purchased
by the Company pursuant to the Reorganization
("FAI Note")* $ 911,892
. To retire a non-interest bearing note payable to
FAI Home Security Holdings, Pty Ltd representing
the fixed asset and inventories of the New Zealand
operations acquired by the Company pursuant to the
Reorganization ("NZ Note")* $ 208,894
. Unutilized Proceeds $2,234,530
----------
$3,355,316
==========
*See "Item 1. Business - The Reorganization" on the Company's annual report for
the period ended June 30, 1997, filed on Form 10-K, Commission file number
001-14502.
/1/ FAI Home Security Holdings, Pty Ltd, is a 41.7% shareholder of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 1997 Employee Stock Option Plan
10.2 1997 Non-Employee Directors' Stock Option Plan
27.1 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
Not applicable.
13
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME SECURITIES INTERNATIONAL, INC.
(Registrant)
By: /s/ Bradley D. Cooper
--------------------------------------------
Bradley D. Cooper
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark Whitaker
--------------------------------------------
Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: November 14, 1997
<PAGE>
Exhibit 10.1
HOME SECURITY INTERNATIONAL, INC.
1997 EMPLOYEES' STOCK OPTION PLAN
1. Purpose of the 1997 Employees' Stock Option Plan
------------------------------------------------
The purpose of the Plan is to enable the Company to attract, retain and
motivate its employees by providing for or increasing the proprietary interests
of such employees in the Company through increased stock ownership.
The Plan provides for Options which either (i) qualify as incentive stock
Options ("Incentive Options") within the meaning of that term in Section 422 of
the Internal Revenue Code of 1986, as amended, or (ii) do not so qualify under
Section 422 of the Code ("Nonstatutory Options") (collectively "Options"). Any
Option granted under this Plan will be clearly identified at the time of grant
as to whether it is intended to be either an Incentive Option or a Nonstatutory
Option.
2. Definitions.
-----------
The following terms, when appearing in the text of this Plan in capitalized
form, will have the meanings set out below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code: means the Internal Revenue Code of 1986, as heretofore or
hereafter amended.
(c) "Committee" means the committee appointed by the Board pursuant to
Section 3 below.
(d) "Company" means Home Security International, Inc. or any "parent" as
that term is defined by Section 424(e) of the Code or "subsidiary
corporation", as that term is defined by Section 424(f) of the Code,
thereof, unless the context requires it to be limited to Home Security
International, Inc.
(e) "Disabled Grantee" means a Grantee who is disabled within the meaning
of Section 422(c)(6) of the Code.
(f) "Employees" means the class of employees consisting of individuals
regularly employed by the Company on a full-time salaried basis who
are primarily management or highly compensated employees, or such
other employees as the Committee shall so determine.
<PAGE>
(g) "Executive Officer" means those individuals who, on the last day of
the taxable year at issue: (i) served as the Company's chief executive
officer or was acting in a similar capacity, regardless of
compensation level; and (ii) the four most highly compensated
executive officers (other than the chief executive officer) all as
determined pursuant to 26 C.F.R (S) 1.162-27(c)(2).
(h) "Fair Market Value" means, with respect to the common stock of the
Company, the price at which the stock would change hands between an
informed, able and willing buyer and seller, neither of which is under
a compulsion to enter into the transaction. Fair market Value will be
determined in good faith by the committee in accordance with a
valuation method which is consistent with the guidelines set forth in
Treasury Regulation 1.421-7(e)(2) or any applicable regulations issued
pursuant to Section 422(a) of the Code. Fair Market Value will be
determined without regard to any restriction other than a restriction
which, by its terms, will never lapse.
(i) "Grantee" means an eligible Employee under this Plan who has been
granted an Option.
(j) "Incentive Option" means an Option that qualifies for the benefit
described in Section 421 of the Code, by virtue of compliance with the
provisions of Section 422 of the Code.
(k) "Nonstatutory Option" means an Option that is not an Incentive Option.
(1) "Option" means either an Incentive Option or a Nonstatutory Option
granted under this Plan.
(m) "Option Agreement" means the agreement entered into between the
Company and an individual Grantee and specifying the terms and
conditions of the Option granted to the Grantee, which terms and
conditions will recite or incorporate by reference: (i) the provisions
of this Plan which are not subject to variation; and (ii) the variable
terms and conditions of each Option granted hereunder which will apply
to that Grantee.
(n) "Optionee" means a Grantee, and, under the appropriate circumstances,
his guardian, representative, heir, distributes, legatee or successor
in interest, including any transferee.
(o) "Plan" means this 1997 Employees' Stock Option Plan, as the same may
from time to time be amended.
(p) "Stock" means the Company's common stock.
2
<PAGE>
3. Administration of the Plan.
----------------------------
The Plan shall be administered by a Committee of the Board.
a. Committee Membership. The Plan shall be administered by a committee
appointed by the Board, to be known as the Compensation Committee (the
"Committee"). The Committee shall be not less than two members and
comprised solely of Non-employee Directors, as defined by Rule 16b-
3(b)(3)(i) of the Securities and Exchange Act of 1934 ("1934 Act"), or
any successor definition adopted by the Securities and Exchange
Commission, and who shall each also qualify as an outside Director for
purposes of Section 162(m) of the Code. Any vacancy occurring on the
Committee may be filled by appointment by the Board. The Board at its
discretion may from time to time appoint members to the Committee in
substitution of members previously appointed, may remove members of
the Committee and may fill vacancies, however caused, in the
Committee. If no Committee is constituted, all members of the Board
who would otherwise qualify as Committee members shall constitute the
Committee.
b. Committee Procedures. The Committee shall select one of its members as
chairman and shall hold meetings at such times and places as it may
determine. A quorum of the Committee shall consist of a majority of
its members, and the Committee may act by vote of a majority of its
members present at a meeting at which there is a quorum, or without a
meeting by written consent signed by all members of the Committee. If
any powers of the Committee hereunder are limited or denied by the
Board, the same powers may be exercised by the Board.
c. Committee Responsibilities. The Committee will interpret the Plan,
prescribe, amend and rescind any rules or regulations necessary or
appropriate for the administration of the Plan, and make such other
determinations and take such other actions it deems necessary or
advisable, except as otherwise expressly reserved for the Board.
Subject to the limitations imposed by the Board, and the terms of the Plan,
the Committee may periodically determine which Employees should receive Options
under the Plan, whether the Options shall be Incentive Options or Nonstatutory
Options, the number of shares covered by such Options, the per share purchase
price for such shares, and the terms thereof, including but not limited to
transferability of such Options, and shall have full power to grant such
Options. In making its determinations, the Committee shall consider, among other
relevant factors, the importance of the duties of the Grantee to the Company,
his or her experience with the Company, and his or her future value to the
Company.
3
<PAGE>
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Grantees, Optionees and all persons deriving their
rights from a Grantee or Optionee. No member of the Board or the Committee shall
be liable for any action or failed to be taken in good faith or determination
made pursuant to the Plan.
4. Stock Subject to Plan.
---------------------
This Plan authorizes the Committee to grant Options to Employees up to the
aggregate amount of 750,000 shares of Stock, subject to eligibility and any
limitations specified herein. Adjustment in the shares subject to the Plan shall
be made provided in Section 9. Any shares covered by an Option which, for any
reason expires, terminates or is canceled may be re-Optioned under the Plan.
5. Eligibility
-----------
a. General Rule. All employees defined in section 2(f) shall be eligible
to be granted Options.
b. Ten Percent Stockholders. An employee who owns more than ten percent
(10%) of the total combined voting power of all classes of outstanding
Stock of the Company, its parent or subsidiaries shall not be eligible
for designation as a Grantee of an Incentive Option unless (i) the
exercise price for each share of Stock subject to such Incentive
Option is at least one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the date of grant, and (ii) such
Incentive Option, by its terms, is not exercisable after the
expiration of five (5) years from the date of grant.
c. Attribution Rules. For purposes of Subsection (b) above, in
determining stock ownership, an Employee shall be deemed to own the
stock owned, directly or indirectly, by or for his brothers, sisters
(whether by the whole or half blood), spouse, ancestors and lineal
descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries.
d. Outstanding Stock. For purpose of Subsection (b) above, "outstanding
stock" shall include all stock actually issued and outstanding
immediately after the grant. "Outstanding stock" shall include shares
authorized for issuance under outstanding Options held by the Employee
or by any other person.
e. Term of Plan. The Committee may make such grants at any time and in
any amounts that it, in its discretion, may designate, subject to the
other relevant limitations set out in this Plan. No Options will be
granted under this Plan after the day prior to the tenth (10th)
anniversary of the date this Plan is adopted or the
4
<PAGE>
date this Plan is approved by the stockholders of the Company
whichever date occurs first.
f. Individual limits of Executive officers. Subject to the provisions of
Section 9 hereof the number of Option shares granted in a fiscal year
of the Company to each Executive officer, shall not exceed 250,000
shares for any fiscal year for which such person is classified as an
Executive Officer.
g. Incentive Option Limitation. The aggregate Fair Market Value of the
Stock for which Incentive Options granted to any one Employee under
this Plan and under all incentive stock Option plans of the Company,
its parents(s) and subsidiaries, may by their terms first become
exercisable during any calendar year shall not exceed $100,000,
determining Fair Market Value of the Stock subject to any Option as of
the time that Option is granted. If the date on which one or more
Incentive Options could be first exercised would be accelerated
pursuant to any other provision of the Plan or any Stock Option
Agreement referred to in Section 6(a), or an amendment thereto, and
the acceleration of such exercise date would result in a violation of
the restriction set forth in the preceding sentence, then
notwithstanding any such other provision; the exercise date of such
incentive Options shall be accelerated only to the extent, if any,
that is permitted under Section 422 of the Code and the exercise date
of the Incentive Options with the lowest Option prices shall be
accelerated first. Any exercise date which cannot be accelerated
without violating the $100,000 restriction of this section shall
nevertheless be accelerated, and the portion of the Option becoming
exercisable thereby shall be treated as a Nonstatutory Option.
6. Terms and Conditions of All Options Under the Plan.
--------------------------------------------------
Each Option granted shall be subject to all applicable terms and conditions
of the Plan and may be subject to any other terms and conditions which are not
inconsistent with the Plan and which the Committee deems appropriate for
inclusion in the Option grant. The Committee will designate from among the
Employees, those who will be granted Options.
a. Option Agreements. All Options granted under the Plan shall be
evidenced by a written Option Agreement.
b. Number of Shares. Each Option Agreement shall specify the number of
shares of the Stock each such Employee will be entitled to purchase
pursuant to the Option and shall provide for the adjustment of such
number in accordance with Section 9. Each Option Agreement shall state
the minimum number of shares which must be exercised at any time, if
any.
5
<PAGE>
c. Nature of Option. Each Option Agreement shall specify the intended
nature of the Option as an Incentive Stock Option, a Nonstatutory
Option or partly of each type.
d. Exercise Price. Each Option Agreement shall specify the exercise
price. The exercise price of either the Incentive Stock Option or the
Nonstatutory Option shall not be less than one hundred percent (100%)
of the Fair Market Value of a share of Stock on the date of grant.
Subject to the foregoing, the exercise price under any Option shall be
determined by the Committee in its sole discretion. The exercise price
shall be payable in the form described in section 7.
e. Term of Option. The Option Agreement shall specify the term of the
Option. The term of any Option granted under this Plan is subject to
expiration, termination, and cancellation as set forth within this
Plan.
f. Exercisability. Subject to the provisions of the Plan, the Committee
may grant Options which are vested, or which become vested upon the
happening of an event or events as specified by the Committee. Each
Option Agreement shall specify the date when all or any installment of
the Option is to become exercisable. Exercisable Options may be
exercised in whole or in part. Such Option shall not be exercisable
after the expiration of such term which shall be fixed by the
Committee ending not later than ten years from the date such Option is
granted.
g. Withholding Taxes: If, upon exercise of any Nonstatutory Option (or
any Incentive Option which is treated as a Nonstatutory Option because
it fails to meet the requirements set forth herein and in the Code for
Incentive Stock Options), the Optionee fails to tender full payment to
the Company for any federal income tax withholding required in
connection with such exercise, the Committee shall withhold from the
Optionee sufficient shares having a Fair market Value (determined
under Section 2(h)) equal to any amount which the Company is required
to withhold under the Code.
h. Requirement of Certificate. An Optionee shall not be deemed to be the
holder of, or to have any of the rights of a holder with respect to,
any shares subject to such Option unless and until he has received a
certificate or certificates therefor.
i. Termination and Acceleration of Option. For Incentive Options:
If the employment of a Grantee who is not a Disabled Grantee
is terminated without cause, or such Grantee voluntarily quits or
retires under any retirement plan of the Company, any then outstanding
and exercisable stock Option held by such Grantee shall be
exercisable, in
6
<PAGE>
accordance with the provisions of the Option Agreement, by such
Grantee at any time prior to the expiration date of such Option
or within three months after the date of termination of
employment or service, whichever is the shorter period;
ii. If the employment of a Grantee who is a Disabled Optionee is
terminated without cause, any then outstanding and exercisable
Option held by such an Optionee shall be exercisable, in
accordance with the provisions of the Option Agreement, by such a
Grantee at any time prior to the expiration date of such Option
or within one year after the date of such termination of
employment or service, whichever is the shorter period;
iii. Following the death of a Grantee during employment, any
outstanding and exercisable Options held by such an Grantee at
the time of death shall be exercisable, in accordance with the
provisions of the Option Agreement referred to in Section 6(a),
by the person or persons entitled to do so under the will of the
Grantee, or, if the Optionee shall fail to make testamentary
disposition of the stock Option or shall die intestate, by the
legal representative of the Grantee at any time prior to the
expiration date of such Option or within one year after the date
of death, whichever is the shorter period.
For all Options issued hereunder:
i. If the Company terminates the employment of a Grantee for cause,
all outstanding Options held by the Grantee at the time of such
termination shall automatically terminate unless the Committee
notifies the Grantee that his or her Options will not terminate.
A termination "for cause" shall be defined under each written
Option Agreement issued pursuant to Section 6(a). The Company
assumes no responsibility and is under no obligation to notify a
Transferee of early termination of an Option on account of a
Grantee's termination of employment
ii. Whether termination of employment or other service is a
termination "for cause" and whether a Grantee is a Disabled
Grantee shall be determined in each case, in its discretion, by
the Committee and any such determination by the Committee shall
be final and binding.
7. Payment for Shares
------------------
a. Cash. Payment in full for shares purchased under an Option may be made
in cash (including check, bank draft or money order) at the time that
the Option is exercised.
7
<PAGE>
b. Stock. In lieu of cash an Optionee may, with the consent of the
Committee, make payment for Stock purchased under an Option, with Stock,
in whole or in part, by either of the following methods:
i. By tendering to the Company in good form for transfer, shares of
Stock valued at Fair Market Value on the date the Option is
exercised. Such shares will have been owned by the Optionee or
the Optionee's representative for the time specified by the
Committee but in no case shall the Optionee, or his
representative have held a beneficial interest in such tendered
shares for a period of less than six months prior to the exercise
of the Option.
ii. By requesting the Company to withhold from the number of shares
of Stock otherwise issuable upon exercise of the Option that
number of shares having an aggregate Fair Market Value on the
date of exercise equal to the exercise price for all of the
shares of Stock subject to such exercise.
c. Promissory Notes. The Board has authority and reserves the right to
make an independent determination as to whether the Company shall
assist any Grantee to whom an Option is granted hereunder in the
payment of the purchase price payable on exercise of an Option. Upon
application by a Grantee and to the extent that the Board
independently determines that the Company shall provide assistance,
payment may be made all or in part with a full recourse promissory
note executed by the Grantee. The interest rate, security and other
terms and conditions of such note shall be determined by the Board. In
no event shall the stock certificate(s) representing such shares be
released to the Grantee until such note is paid in full.
8. Use of Proceeds from Stock.
--------------------------
Cash proceeds from the sale of Stock pursuant to Options granted under the
Plan shall constitute general funds of the Company.
9. Adjustments.
-----------
Changes or adjustments in the Option price, number of shares subject to an
Option or other specifics as the Committee should decide will be considered or
made pursuant to the following rules:
a. Upon Changes in Stock. If the outstanding Stock is increased or
decreased, or is changed into or exchanged for a different number or
kinds of shares or securities, as a result of one or more
reorganizations, recapitalization, stock splits, reverse
8
<PAGE>
stock splits, split-up, combination of shares, exchange of shares,
change in corporate structure, or otherwise, appropriate adjustments
will be made in the exercise price or the number and/or kind of shares
or securities for which Options may thereafter be granted under this
Plan and for which Options then outstanding under this Plan may
thereafter be exercised. The Committee will 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 Optionees. No
adjustment provided for in this Section 9 will require the Company to
issue or sell a fraction of a share or other security. Nothing in this
Section will be construed to require the Company to make any specific or
formula adjustment.
b. Prohibited Adjustment. If any such adjustment provided for in this
Section 9 requires the approval of stockholders in order to enable the
Company to grant or amend Options, then no such adjustment will be made
without the required stockholder approval. Notwithstanding the
foregoing, if the effect of any such adjustment would be to cause an
Incentive Option to fail to continue to qualify under Section 422 of the
Code or to cause a modification, extension or renewal of such Option
within the meaning described in Section 424 of the Code, the Committee
may elect that such adjustment not be made but rather shall use
reasonable efforts to effect such other adjustment of each then
outstanding Option as the Committee, in its sole discretion, shall deem
equitable and which will not result in any disqualification,
modification, extension or renewal (within the meaning of Section 424 of
the Code) of such Incentive Option.
c. Further Limitations. Nothing in this Section will entitle the Optionee
to adjustment of his Option in the following circumstances:
i. The issuance or sale of additional shares of the Stock, through
public offering or otherwise;
ii. The issuance or authorization of an additional class of capital
stock of the Company;
iii. The conversion of convertible preferred stock or debt of the
Company into Stock; and
iv. The payment of dividends except as provided in section 9 (a).
The grant of an Option shall not effect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations or changes
of its capital or business structure, to merge or consolidate or to dissolve,
liquidate, sell or transfer all or any part of its business or assets.
9
<PAGE>
10. Legal Requirements:
------------------
a. Compliance with all laws. The Company will 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 securities laws, including without limitation
the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, or state securities laws and regulations, the
regulations of any stock exchange or interdealer quotation system on
which the Company's securities may then be listed, or obtaining any
ruling or waiver from any government body which the Company will, in its
sole discretion, determine to be necessary or advisable, or which, in
the opinion of counsel to the Company, is otherwise required.
b. Compliance with Specific Code Provisions. It is the intent of the
Company that the Plan and its administration conform strictly to the
requirements of Section 422 of the Code with respect to Incentive
Options. Therefore, notwithstanding any other provisions of this Plan,
nothing herein will contravene any requirement set forth in Section 422
of the Code with respect to Incentive Options and if inconsistent
provisions are otherwise found herein, they will be deemed void and
unenforceable or automatically amended to conform, as the case may be.
c. Plan Subject to Delaware Law. All questions arising with respect to the
provisions of the Plan will be determined by application for the Code
and the laws of the state of Delaware except to the extent that Delaware
laws are preempted by any federal law.
11. Rights as a Shareholder.
-----------------------
An Optionee, or anyone claiming rights derived from an Optionee, 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 after receipt of the
consideration in full set forth in the Option Agreement. Except as provided in
Section 9 hereof or as may be required by Section 7(c) or 10(a), no adjustments
will be made for dividends, whether ordinary or extraordinary, whether in cash
securities, or other property, for distributions for which the record date is
prior to the date on which the Option is exercised.
12. Restrictions on Shares.
-----------------------
Prior to the issuance or delivery of any shares of the Stock under the
Plan, the person exercising the Option may be required to:
10
<PAGE>
a. represent and warrant that the shares of the Stock to be acquired upon
exercise of the 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, sell, transfer, assign, pledge (except for a pledge of
shares issued or delivered upon payment in whole or in part of the
Option price with a promissory note as contemplated by Section 7),
hypothecate or otherwise dispose of any such shares unless the sale,
transfer, assignment, pledge, hypothecation or other disposition of
the shares is pursuant to the provisions of this Plan and effective
registrations under the 1933 Act and any applicable state or foreign
securities laws or pursuant to appropriate exemptions from any such
registrations; and
c. execute such further documents as may be reasonably required by the
Committee upon exercise of the Option or any part thereof, including
but not limited to any stock restriction agreement that the Committee
may choose to require.
Nothing in this Plan shall assure any Optionee that shares issuable under
this Option are registered on a Form S-8 under the Securities Act of 1933 ("1933
Act") or on any other form. The certificate or certificates representing the
shares of the stock to be issued or delivered upon exercise of an Option may
bear a legend evidencing the foregoing and other legends required by any
applicable securities laws. Furthermore, nothing herein or any Option granted
hereunder will require the Company 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 1933 Act, as amended, applicable state securities
laws, or any other applicable rule or regulation then in effect. The Company
shall have no liability for failure to issue shares upon any exercise of Options
because of a delay pending the meeting of any such requirements.
13. Transferability.
---------------
The Committee shall retain the authority and discretion to permit a Non
statutory Option, but in no case an Incentive Option, to be transferable as long
as such transfers are made to one or more of the following: family members,
including children of Grantee, spouse of Grantee, or grandchildren of Grantee or
trusts for such family members ("Transferee"), provided that such transfer is a
bona fide gift (as defined in Rule 16 b-3) and accordingly, the Grantee receives
no consideration for the transfer, and that the Options transferred continue to
be subject to the same terms and conditions that were applicable to the Options
immediately prior to the transfer. Options are also subject to transfer by will
or the laws of descent and distribution. Options granted pursuant to this Plan
shall not be otherwise transferred, assigned, pledged, hypothecated or disposed
of in any way, whether by operation of law or otherwise. The designation of a
beneficiary shall not constitute a transfer.
11
<PAGE>
14. No Right to Continued Employment.
--------------------------------
This Plan, and any Option granted under this Plan, will not confer upon any
Optionee any right with respect to continued employment by the Company nor shall
they alter, modify, limit or interfere with any right or privilege of the
Company under any employment agreement heretofore or hereinafter executed with
any Optionee, including the right to terminate any Optionee's employment at any
time for or without cause to change his level of compensation or to change his
responsibilities or position.
15. 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 then 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 will terminate and all Options will lapse. The
result described above will not occur if provision is made in writing in
connection with such transaction for the continuance of the Plan and/or for the
assumption of Options earlier 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 will
continue in the manner and under the terms so provided. If the Plan and
unexercised Options shall terminate pursuant to the foregoing, 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 the termination as the Company shall designate, to exercise the
unexercised portions of their Options, including the portions thereof which
would but for this Section 15, not yet be exercisable.
16. Modification, Extension and Renewal.
-----------------------------------
a. Options. Subject to the conditions of, and within the limitations
prescribed in the Plan herein, the Committee may modify, extend, cancel
or renew outstanding Options. Notwithstanding the foregoing, no
modification will, without the prior written consent of the Optionee,
alter, impair or waive any rights or obligations associated with any
Option earlier granted under the Plan.
b. Plan. The Board at any time, and from time to time, may interpret, amend
or discontinue the Plan, subject to the limitation, however, that,
except as provided in Section 9 (relating to adjustments upon changes in
Stock), no amendment shall be made, except upon approval by vote of a
majority of the outstanding shares of the company, which will:
12
<PAGE>
1. Increase the number of shares reserved for Options under the
Plan; or
2. Reduce the minimum permissible exercise Price or
3. Change the requirements for eligibility for Participation under
the Plan;
4. Extend the ten year duration of this Plan.
17. Plan Date and Duration.
----------------------
The Plan shall take effect on the date it is adopted by the Board and shall
adopted by the stockholders of the Company by June 30, 1997. Options may
not be granted under this Plan more than ten years after the date of the
adoption of this Plan, or of shareholder approval thereof, whichever is earlier.
HOME SECURITY INTERNATIONAL, INC.,
A Delaware Corporation
Adopted by the Board of Directors of Home Security
International, Inc. on May 1, 1997.
Approved by the Stockholders of Home Security
International, Inc. on June 30, 1997.
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<PAGE>
Exhibit 10.2
HOME SECURITY INTERNATIONAL, INC.
1997 DIRECTORS' STOCK OPTION PLAN
1. Purpose of the 1997 Directors' Stock Option Plan:
------------------------------------------------
This Stock Option Plan ("the Plan") is designed to enable Home Security
International, Inc., a Delaware corporation (the "Company") and it subsidiaries
to attract, retain, and motivate the members of its Board of Directors who are
non-employee directors ("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.
2. Eligibility:
-----------
The persons who shall be eligible to receive Options shall be Directors of
the Company (the "Eligible Directors") who are not full-time employees of or
consultants to the Company.
3. Stock:
-----
Subject to the provisions of Section 9 (relating to the adjustment upon
changes in stock), there will be reserved for issuance upon the exercise of
Options to be granted from time to time under the Plan an aggregate of 50,000
shares of Common Stock, no par value, of the Company ("Stock"). In the event
that any outstanding Options under the Plan for any reason expires or is
canceled or terminated, the shares of stock allocable to the unexercised portion
of such Option may again be subject to an Option under the Plan.
4. Administration:
--------------
This Plan shall be administered by the Compensation Committee (the
"Committee"), comprised solely of Non-Employee Directors as defined by Rule 16b-
3(b)(3)(i) of the Securities Exchange Act of 1934 ("1934 Act"), or any successor
definition adopted by the Securities and Exchange Commission, and who shall each
also qualify as an Outside Director for purposes of Section 162(m) of the
Internal Revenue Code ("Code"). Any vacancy occurring on the Committee may be
filled by appointment by the Board. The Board at its discretion may from time to
time appoint members to the Committee in substitution of members previously
appointed, may remove members of the Committee and may fill vacancies, however
caused, in the Committee. If no Committee is constituted, all members of the
Board who would otherwise qualify as Committee members shall constitute the
Committee. The interpretation and construction by the Committee of any
provisions of the Plan or of any Option granted under it shall be final unless
otherwise determined by the Board of Directors. No member of the Board of
Directors or the Committee shall be liable for any action or determination made
in good faith with respect to the Plan or any Option granted under it.
<PAGE>
5. Terms and Conditions of Options:
-------------------------------
Stock Options granted pursuant to the Plan shall be evidenced by agreements
("Agreements") in such form as the Committee shall from time to time recommend
and the Board of Directors shall from time to time approve, which Agreements
shall comply with and be subject to the following terms and conditions:
a. Immediately upon the closing of the initial public offering, each
director shall receive Options for 5,000 shares of Stock at the
initial public offering price, and on the next business day following
the close of each of the regular annual shareholders meetings for each
of the fiscal years 1998, 1999 and 2000 (each such date is hereafter
the "Date of Grant"), each Eligible Director ("Grantee") shall receive
an Option for 2,500 shares of Stock, provided such Eligible Director
continues to serve in the capacity of director.
b. Each Option shall state the Option price which shall be 100% of the
fair market value of the shares of Stock of the Company on the
applicable Date of Grant. The fair market value is defined for the
purposes of this Plan as the last sales price on the day preceding the
Date of Grant.
c. Payment for Options may be made as follows:
i. Cash. Payment in full for shares purchased under an Option may
be made in cash (including check, bank draft or money order) at
the time that the Option is exercised.
ii. Stock. In lieu of cash an Optionee may, with the consent of the
Committee, make payment for Stock purchased under an Option, in
whole or in part, by:
(1) tendering to the Company in good form for transfer, shares
of Stock valued at fair market value on the date the Option
is exercised (any Stock so tendered must be held by the
Option holder for a period of at least six months prior to
the tender), or
(2) by requesting the Company to withhold from the number of
shares of Stock otherwise issuable upon exercise of the
Option that number of shares having an aggregate fair market
value on the date of exercise equal to the exercise price
for all of the shares of Stock subject to such exercise (for
purposes of this subsection, fair market value is defined as
the last sales price on the day preceding the exercise of
the Option).
2
<PAGE>
iii. Promissory Notes. The Board has authority and reserves the right
to make an independent determination as to whether the Company
shall assist any Grantee in the payment of the purchase price
payable on exercise of an Option. Upon application by a Grantee
and to the extent that the Board independently determines that
the Company shall provide assistance, payment may be made all or
in part with a full recourse promissory note executed by the
Grantee. The interest rate, security and other terms and
conditions of such note shall be determined by the Board. In no
event shall the stock certificates) representing such shares be
released to the Grantee until such note is paid in full.
d. No stock acquired under this Plan may be disposed of within six months
from the Date of Grant.
e. The term of any Option shall be ten (10) years from the date it was
granted.
f. In no event shall any Option be exercisable prior to the approval of
this Plan by the holders of a majority of the shares of the Company's
Stock present, or represented and entitled to vote, at the annual
shareholders' meeting following the granted Option, duly held in
accordance with the applicable laws of the State of Delaware.
g. Subject to the approval of the Board of Directors, the Committee shall
have and retain the authority and discretion to permit an Option to be
transferable as long as such transfers are made to one or more of the
following: family members, including children of the Grantee, the
spouse of the Grantee, or grandchildren of the Grantee or trusts for
such family members ("Transferees"), provided that such transfer is a
bona fide gift and accordingly, the Grantee receives no consideration
for the transfer, and that the Options transferred continue to be
subject to the same terms and conditions that were applicable to the
Options immediately prior to the transfer. Options are also subject
to transfer by will or the laws of descent and distribution. Options
shall not be otherwise transferred, assigned, pledged, hypothecated or
disposed of in any way, whether by operation of law or otherwise. A
Transferee may not subsequently transfer an Option. The designation
of a beneficiary shall not constitute a transfer.
h. An Option shall terminate and shall not be exercisable if the person
to whom it is granted ceases to be a Director of the Company, except
that, subject to the limitation hereafter stated in this paragraph
5(h):
i. if his directorship is terminated by any reason other than his
death or on account of any act of fraud, intentional
misrepresentation, embezzlement, misappropriation or conversion of
assets or opportunities of the Company
3
<PAGE>
or any direct or indirect majority-owned subsidiary of the
Company, he, or his successors or assigns, may at any time within
three months after termination of his directorship exercise his
Option, but only to the extent that it was exercisable by him on
the date of termination of his office, and
ii. if he dies while a Director of the Company, or within three
months after termination of his office, his Option may be
exercised by his successors or assigns at any time within 18
months following his death, but only to the extent that such
Option was exercisable by him on the date of termination of his
office.
An Option may not be exercised to any extent by anyone after the
expiration of its term. Anything in this paragraph 5(h) to the
contrary notwithstanding, an Option shall not terminate solely by
reason of the fact that the person to whom it is granted ceases to be
a Director of the Company if such person shall become or remain an
officer of the Company as provided in the By-laws simultaneously with
his ceasing to be a Director; and in such event the subsequent ceasing
of such person to be an officer of the Company at a time when such
person is not a Director of the Company shall have the same effect as
if such person were then to have ceased to be a Director of the
Company. The Company assumes no responsibility and is under no
obligation to notify a Transferee of early termination of an Option on
account of a Director's termination of office.
i. Neither a person to whom an Option is granted, nor his Transferee,
legal representative, heir, legatee, or distributee shall be deemed to
be the holder of, or to have any of the rights of a holder with
respect to, any shares subject to such Option unless and until he has
received a certificate or certificates therefor. Under no
circumstances shall any certificate be issued within six months of the
Date of Grant. Except as provided in Section 9 hereof, no adjustments
will be made for dividends, whether ordinary or extraordinary, whether
in cash, securities, or other property, for distributions for which
the record date is prior to the date on which the Option is exercised.
j. If, upon exercise of any Option, the Grantee fails to tender payment
to the Company for any federal or state income tax or withholding, the
Committee shall withhold from the Grantee sufficient shares or
fractional shares having a fair market value equal to any amount that
the Company is required to withhold under the Code or State law.
k. The minimum number of shares with respect to which an Option may be
exercised in part at any time is 100.
4
<PAGE>
6. Restrictions on Shares:
Prior to the issuance or delivery of any shares of Stock under the Plan,
the person exercising the Option may be required to:
a. represent and warrant that the shares of Stock to be acquired upon
exercise of the 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 (except for a pledge of shares issued or delivered upon payment
in whole or in part of the Option price with a promissory note as
contemplated by Section 5(c)(iii)), hypothecation or other disposition
of the shares is pursuant to the provisions of this Plan, effective
registrations under the 1933 Act and any applicable state or foreign
securities laws, or pursuant to appropriate exemptions from any such
registrations; and
c. execute such further documents as may be reasonably required by the
Committee upon exercise of the Option or any part thereof, including
but not limited any stock restriction agreement that the Committee may
choose to require.
The certificate or certificates representing the shares of Stock to be
issued or delivered upon exercise of an Option may bear a legend evidencing the
foregoing and other legends required by any applicable securities laws.
Furthermore, nothing herein or any Option granted hereunder will require the
Company 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 Delaware securities laws, or any other applicable
rule or regulation then in effect and the Company shall have no liability for
failure to issue shares upon any exercise of Options because of a delay pending
the meeting of any such requirements.
7. Use of Proceeds from Stock:
Cash proceeds from the sale of stock pursuant to Options granted under the
Plan shall constitute general funds of the Company.
8. No Implied Covenants:
Neither this Plan nor any action taken hereunder shall be construed as
giving any Director any right to be retained in office.
5
<PAGE>
9. Adjustment Upon Changes in Stock:
--------------------------------
If any change is made in the Stock subject to the Plan, or subject to any
Option granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination of shares, exchange of
shares, change in corporate structure, or otherwise) appropriate adjustments
shall be made by the Board of Directors as to the kind and maximum number of
shares subject to the Plan, and the kind and number of shares and price per
share of Stock subject to outstanding Options.
10. Modification, Extension and Renewal:
-----------------------------------
Subject to the conditions of, and within the limitations prescribed in,
Section 15, hereof, the Committee may cancel, modify, extend or renew
outstanding Options. Notwithstanding the foregoing, no modification will,
without the prior written consent of the Grantee, alter, impair or waive any
rights or obligations associated with any Option earlier granted under the Plan.
Further, but subject to Section 9, the Committee may not change the number of
shares of the Company's Stock issuable under the Plan or the class of persons
who are eligible to participate in the Plan.
11. 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
its 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.
12. 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 then 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 will terminate and all Options will lapse. The
result described above will not occur if provision is made in writing
6
<PAGE>
in connection with such transaction for the continuance of the Plan and/or for
the assumption of Options earlier granted, or the substitution for such Options
of Options covering the stock of a successor 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 will
continue in the manner and under the terms so provided.
13. Financial Assistance:
--------------------
Upon an independent determination of the Board consistent with Section
5(c)(iii) herein, the Company may assist a Grantee in purchasing an Option
granted hereunder by lending the amount of such purchase price to such Grantee
on such terms and at such rates of interest and upon such security (or
unsecured) as is authorized by the Board.
14. Governing Law:
-------------
All questions arising with respect to the provisions of the Plan will be
determined by application of the Code and the laws of the state of Delaware
except to the extent that Delaware laws are preempted by any federal law.
15. Amendment of the Plan:
---------------------
The Board of Directors at any time, and from time to time, may amend the
Plan, subject to the limitation, however, that, except as provided in Section 9
(relating to adjustments upon changes in Stock), no amendment shall be made,
except upon approval by vote of a majority of the outstanding shares of the
Company, which will:
a. Increase the number of shares reserved for Options under the Plan; or
b. Reduce the Option price below 100% of fair market value at the time an
Option is granted;
c. Change the requirements for eligibility for participation under the
Plan; or
d. Extend the ten year duration of this Plan.
16. Termination or Suspension of the Plan:
-------------------------------------
The Board of Directors at any time may suspend or terminate the Plan.
Unless previously terminated by the Board, this Plan shall terminate on and no
further Options will be granted after the tenth (10th) anniversary of the
Effective Date of the Plan, as described in Section 17 hereof.
7
<PAGE>
Rights and obligations under any Option granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except by consent of the person to whom the Option was granted.
17. Effective Date:
--------------
This Plan shall become effective on the date it is adopted by the Company's
Board of Directors, provided that the shareholders approve the Plan within
twelve months thereafter.
The Plan shall take effect on the date it is adopted by the Board subject
to approval by the stockholders of the Company by June 30, 1997. Options may not
be granted under this Plan more than ten years after the date of the adoption of
this Plan, or of shareholder approval thereof, whichever is earlier.
HOME SECURITY INTERNATIONAL, INC., A Delaware
Corporation
Adopted by the Board of Directors of Home Security
International, Inc. on May 1, 1997.
Approved by the Stockholders of Home Security
International, Inc. on June 30, 1997.
8
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