<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 December 31, 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 Identification
incorporation of organization) 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 February 10, 1998:
5,150,500
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
----------------------------
1997 1997
NOTE $US $US
-------------------------------------
ASSETS (Audited) (Unaudited)
- ------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 118 7,469,048
Accounts receivable - related party 2,025,455 0
Accounts receivable - trade, net 3 615,560 1,090,361
Inventories 4 1,277,104 2,445,449
Prepaid expenses and other current assets 449,458 1,377,102
---------- ----------
Total current assets 4,367,695 12,381,960
---------- ----------
Non-current assets
Investment in affiliated companies 8 0 7,214,215
Plant and equipment, net 6 869,571 880,720
Intangibles, net 7 10,142,077 9,872,000
Deferred income taxes 549,393 668,995
Other non-current assets 3,748 3,283
Receivable - related party 24,366 0
---------- ----------
Total non-current assets 11,589,155 18,639,213
---------- ----------
Total assets 15,956,850 31,021,173
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft 31,795 125,881
Note payable - FAI Insurances group 8 0 1,631,750
Payables - trade 4,018,147 4,886,564
Accrued liabilities 1,105,612 946,083
Lease liability 19,068 20,892
Income tax payable 467,961 1,549,538
Deferred income 479,307 531,094
---------- ----------
Total current liabilities 6,121,890 9,691,802
========== =========
Non-current liabilities
Note payable - FAI Insurance group 8 0 5,384,775
Lease liability 44,877 27,062
Accrued liabilities 0 52,322
Deferred income 0 216,527
---------- ----------
Total non-current liabilities 44,877 5,680,686
---------- ----------
Total liabilities 6,166,767 15,372,488
========== ==========
Shareholders' equity
Preferred stock $.001 value; 1,000,000 shares authorized, none outstanding
Common stock $.001 value; 20,000,000 shares authorized; 1997: 4,500 5,150
5,150,500 September 30, 1997 (1996: 4,500,000) shares outstanding
Additional paid-in capital 10,238,691 16,111,311
Secured Note 5 0 (2,375,000)
Foreign currency translation reserve (406,534) (580,189)
Related earnings (accumulated losses) (46,574) 2,487,412
---------- ----------
Total shareholders' equity 9,790,083 15,648,684
---------- ----------
Total liabilities and shareholders' equity 15,956,850 31,021,172
========== ==========
</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 Six Months Ended
December 31, December 31,
--------------------------------------------------------
1996 1997 1996 1997
NOTE $US $US $US $US
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 2 7,493,355 10,769,464 15,169,911 21,818,161
Cost of goods sold
- related party (894,524) 0 (1,774,753) 0
- other (4,580,299) (6,659,864) (9,166,727) (12,985,600)
--------------------------------------------------------
Gross profit 2,018,532 4,109,600 4,228,432 8,832,561
Management fees received - related parties 443,075 0 429,157 0
General and administrative expenses (1,535,536) (2,628,558) (2,923,464) (5,127,206)
--------------------------------------------------------
Income from operations 926,071 1,481,042 1,734,124 3,705,355
Interest income - related party 169,602 0 282,083 0
- other 33,060 143,832 58,755 233,842
Interest expenses - other (2,265) (3,232) (6,043) (3,232)
--------------------------------------------------------
Income before taxes 1,126,468 1,621,642 2,068,919 3,935,965
Income tax expense (425,884) (523,097) (769,501) (1,401,979)
--------------------------------------------------------
Net income 700,584 1,098,545 1,299,418 2,533,986
========================================================
Net income per common share
Earnings per common share $0.16 $0.21 $0.29 $0.50
Earnings per common share - $0.16 $0.21 $0.29 $0.49
assuming dilution
Weighted average number of shares
outstanding
Primary 4,500,000 5,150,500 4,500,000 5,100,735
Fully diluted 4,500,000 5,179,784 4,500,000 5,130,019
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1996 1997
$US $US
-----------------------------
<S> <C> <C>
Cashflow from operating activities
Net income 1,299,418 2,533,986
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 3,611 101,474
Amortization of goodwill 185,816 277,918
Deferred taxes and income tax payable 449,811 946,210
Provision for losses on accounts receivable (13,655) 256,295
(Increase) decrease in operating assets:
Accounts receivable - trade 129,478 (807,503)
Inventories (152,437) (1,260,256)
Prepaid expenses and other assets (581,712) (888,752)
Increase (decrease) in operating liabilities:
Accounts payable 606,512 1,358,463
Accrued liabilities (37,894) 353,721
-----------------------------
Net cash provided by operating activities 1,888,948 2,871,556
-----------------------------
Cashflow from investing activities
Investment in affiliated companies 0 (197,690)
Short term loans (granted), repayments received 242,398 (56,065)
Additions to plant and equipment (1,653) (215,317)
Receipt/(payments) from/(to) related parties (2,631,008) 1,470,159
-----------------------------
Net cash provided by/(used in) investing activities (2,390,263) 1,001,087
-----------------------------
Cashflow from financing activities
Capital subscribed 0 3,934,678
Share issue costs 0 (436,408)
Increase in bank overdraft 208,789 98,033
-----------------------------
Net cash (provided by) financing activities 208,789 3,596,303
-----------------------------
Net increase/(decrease) in cash held (292,526) 7,468,946
-----------------------------
Cash at the beginning of the financial period 369,837 118
Effect of exchange rate change on cash held 12,945 (17)
-----------------------------
Cash at the end of the financial period 90,256 7,469,047
=============================
Supplemental disclosure of cash flow information:
Interest paid 6,043 3,232
Income taxes paid 255,200 288,140
</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>
Capital Stock Issued Foreign
--------------------------- 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 1 -
September 30 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
Foreign currency
translation adjustment (177,576) (177,576)
Net income October 1 -
December 31, 1997 1,098,545 1,098,545
---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 5,150,500 5,150 16,111,311 (2,375,000) (580,189) 2,487,412 15,648,684
</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 statements of income for the three and six month periods
ended 31 December 1996 include 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-
Note 2 - Earnings Per Share
For the periods ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 126, "Earnings Per Share". In
accordance with the requirements of SFAS No. 128, Earnings per common share for
1997 has been calculated by dividing net income by the weighted average number
of common shares outstanding in the quarter. Earnings per share assuming
dilution has been computed based on the assumption that all stock options have
been exercised.
Weighted average number of shares outstanding for the three months ended:
December 31, 1996 December 31, 1997
Primary 4,500,000 5,150,500
Fully diluted 4,500,000 5,179,784
Weighted average number of shares outstanding for the six months ended:
December 31, 1996 December 31, 1997
Primary 4,500,000 5,100,735
Fully diluted 4,500,000 5,130,019
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.
<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.
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
NOTE 2: NET SALES Three Months Ended December 31,
------------------------------------
1996 1997
$US $US
------------------------------------
<S> <C> <C>
Distributor sales 7,436,920 10,594,384
Other 94,484 254,891
---------- ----------
Gross sales 7,531,404 10,849,275
Less: returns and rebates (38,049) (79,809)
---------- ----------
Net sales 7,493,355 10,769,466
</TABLE>
<TABLE>
<CAPTION>
NOTE 2: NET SALES (Continued) Six Months Ended December 31,
------------------------------------
1996 1997
$US $US
------------------------------------
<S> <C> <C>
Distributor sales 15,054,671 21,473,034
Other 190,266 494,054
---------- ----------
Gross sales 15,244,937 21,967,088
Less: returns and rebates (75,026) (148,926)
---------- ----------
Net sales 15,169,911 21,818,162
</TABLE>
<TABLE>
<CAPTION>
NOTE 3: ACCOUNTS RECEIVABLE June 30, December 31,
------------------------------------
1997 1997
$US $US
------------------------------------
<S> <C> <C>
Accounts Receivable 745,280 1,460,273
Less: allowances for doubtful debt (129,720) (369,914)
---------- ----------
615,560 1,090,360
</TABLE>
<TABLE>
<CAPTION>
NOTE 4: INVENTORIES June 30, December 31,
------------------------------------
1997 1997
$US $US
------------------------------------
<S> <C> <C>
Wholesale stock 879,476 2,096,305
Sales aids 397,628 349,144
---------- ----------
1,277,104 2,445,449
</TABLE>
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.
<TABLE>
<CAPTION>
NOTE 6: PLANT AND EQUIPMENT June 30, December 31,
------------------------------------
1997 1997
$US $US
------------------------------------
<S> <C> <C>
Furniture and fixtures 168,457 166,943
Office equipment 157,051 200,673
Plant 47,607 3,640
Motor vehicles 164,884 181,276
Computer equipment 255,764 336,893
Leasehold improvements 114,140 114,045
Less: Accumulated depreciation (38,332) (122,751)
---------- ----------
869,571 880,719
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
HOME SECURITY INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
NOTE 7: INTANGIBLES June 30, December 31,
----------------------------
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) (931,072)
-------------------------
10,142,077 9,872,000
</TABLE>
NOTE 8: FAI FINANCE CORPORATION 50% ACQUISITION
On December 31, 1997 the Company acquired 50 percent of FAI Finance
Corporation (FFC) from FAI Insurances, Ltd. ("FAI") FFC is a consumer finance
company in both Australia and New Zealand and finances more than 80% of all
customer accounts financed by the Company's distributorship network in Australia
and New Zealand.
The purchase price of $7,016,525 will be financed by FAI over a period of
five years at a fixed interest rate of 7.75% per annum payable monthly in
arrears. The first installment of $1,631,750 was paid on January 2, 1998. The
Agreement also grants the Company an option (the "Option") at no additional
cost, exercisable over four years from the date of the Agreement, to purchase
the remaining 50% interest in FFC, from FAI, for the same consideration plus 50%
of FFC's retained earnings at the time the Option is exercised. The total
purchase price for the remaining shares in FFC will be financed by FAI over four
years from the date the Option is exercised.
Further, in the event the Company, or any of its subsidiaries, receives funds
from any private or public issue of any debt or equity instruments, up to 40% of
the proceeds from such issue must be used to pay down the then outstanding
balance of the FAI Note.
The Company has filed a Form-8K in relation to this acquisition. Audited
financial statements of FFC and Pro Forma financial statements are to be filed
by amendment as soon as practicable but not later than March 15, 1998.
Pro Forma net income as adjusted to include equity in income of affiliated
company (FFC) is shown below.
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------------
1997 1997
$US $US
---------------------------------
<S> <C> <C>
Net income Home Security International 1,435,442 2,533,986
Equity in income of affiliated company - FFC 105,780 193,818
---------- ----------
Pro Forma Net income 1,541,222 2,727,804
Pro Forma weighted average number of shares outstanding
Primary 5,050,423 5,100,735
Fully diluted 5,163,995 5,130,019
Pro Forma Earnings per common share
Primary earnings per share 0.31 0.53
Fully diluted earnings per share 0.30 0.53
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
REVENUE: Total revenue increased by $3.3 million or 44% from $7.5 million for
the three months ended December 31, 1996 to $10.8 million for the three months
ended December 31, 1997. The increase in revenues is due to two factors.
Sales Revenue in the Australia/New Zealand market have increased by 29% from
$7.5 million for the three months ended December 31, 1996 to $9.7 million for
the three months ended December 31, 1997. This increase in revenue was
attributable to an increase in unit sales of 44% from 8,724 units for the three
months ended December 31, 1996 to 12,582 units for the three months ended
December 31, 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 December 31, 1996.
COSTS OF GOODS SOLD: Cost of goods sold increased by $1.2 million from $5.5
million to $6.7 million. This represented a decrease in the percentage of total
revenue by approximately 11% from 73% to 62% for the three months ended December
31, 1996 and 1997, respectively. This decrease, however, was partly due to a
royalty fee formerly 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 December 31, 1996, was
$4.6 million. As a percentage of total revenue, this represents an increase of
1.0% from 61% to 62% as compared to the three months ended December 31, 1997.
The re-classification of the Chief Executive Officer's compensation package from
a commission basis (recorded in cost of goods sold) to a base salary plus 10% of
net profit after tax (recorded in general and administrative expenses), resulted
in a decrease of $0.3 million for the three months ended December 31, 1997 as
compared to the three months ended December 31, 1996.
MANAGEMENT FEES RECEIVED - RELATED PARTY: Management fees received - related
party for the three months ended December 31, 1996 comprises management fee
income totaling $0.4 million derived from the European and North American
operations, which for three months ended December 31, 1997, is no longer
applicable.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$2.6 million for the three months ended December 31, 1997, compared to $1.1
million for the three months ended December 31, 1996. General and administrative
expenses for the three months ended December 31, 1997, however, include $0.7
million of expenses relating to the European, North American and South African
operations, which were not part of the Company in the three months ended
December 31, 1996. As adjusted to exclude management fee income derived from the
European and North American operations of $0.4 million, total general and
administrative expenses, as a percentage of revenue, increased 4% to 24% in the
three months ended December 31, 1997 compared to 20% for the three months ended
December 31, 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 December 31, 1997, as compared to the three months ended December
31, 1996.
Effective October 1, 1997, the Company entered into a Consulting Engagement
Agreement with Bradley D. Cooper and Speakeasy Pty. Ltd. (a company benefically
owned by Mr. Cooper) under the same terms and conditions as Mr. Cooper's
previous employment agreement. The new agreement replaced Mr. Cooper with
Speakeasy as the Payee for Mr. Cooper's executive salary and will result in no
greater compensation expense to the Company as would have been incurred by the
Company under Mr. Cooper's previous employment agreement. Under the Speakeasy
agreement, Mr. Cooper will continue to act as the Chief Executive Officer of the
Company.
Head Office expenses increased $0.2 million for the three months ended
December 31, 1997 as compared to the three months ended December 31, 1996. This
increase was mainly attributable to:
10
<PAGE>
Increased costs relating to the expanding Distributor Network, the public
listing of the Company's common stock and the extended warranty program.
Goodwill charges increased from $84,000 for the three months ended December 31,
1996 to $135,000 for the three months ended December 31, 1997.
INCOME FROM OPERATIONS: Net income from operations increased from $0.9 million
for the three months ended December 31, 1996 to $1.5 million for the three
months ended December 31, 1997. As compared to the three months ended December
31, 1997, net income from operations for the three months ended December 31,
1996 (as adjusted to exclude both the related party royalty payments for the use
of the FAI brand name and management fee income derived from the European and
North American operations) increased $0.1 million from $1.4 million compared to
$1.5 million.
INTEREST INCOME: Interest income decreased from $203,000 for the three months
ended December 31, 1996 to $144,000 for the three months ended December 31,
1997. However, the three months ended December 31, 1996 included related party
interest income of $170,000. Excluding interest income received from related
parties for the three months ended December 31, 1996, interest income increased
from $33,000 to $144,000 for the three months ended December 31, 1996 and 1997
respectively.
INCOME TAX EXPENSE: The effective rate of tax decreased from 38% for the three
months ended December 31, 1996 to 32% for the three months ended December 31,
1997. This is attributable to the introduction of income earned in the United
Kingdom, South Africa and Canada which all have lower tax rates than Australia.
NET INCOME: Net income increased from $0.7 million for the three months ended
December 31, 1996 to $1.1 million for the three months ended December 31, 1997.
However, this includes a related party royalty charge of $0.9 million, interest
income of $0.2 million and management fee income of $0.4 million. As adjusted to
exclude these related party charges, net income for the three months ended
December 31, 1996 was $1.0 million. As compared to net income of $1.1 million
for the three months ended December 31, 1997, this represents an increase of
10%.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996.
REVENUE: Total revenue increased by $6.6 million or 43.5% from $15.2 million for
the six months ended December 31, 1996 to $21.8 million for the six months ended
December 31, 1997. The increase in revenues is due to two factors.
Sales Revenue in the Australia/New Zealand market have increased by 30% from
$15.2 million for the six months ended December 31, 1996 to $19.7 million for
the six months ended December 31, 1997. This increase in revenue was
attributable to an increase in unit sales of 28% from 17,990 units for the six
months ended December 31, 1996 to 24,419 units for the six months ended December
31, 1997. Additionally, there was an inclusion of $2.1 million in revenues from
the European, North American and South African markets, which were not part of
the Company in the six months ended December 31, 1996.
COST OF GOODS SOLD: Cost of goods sold increased by $2.1 million from $10.9
million to $13.0 million. This represented a decrease in the percentage of total
revenue by approximately 12% from
11
<PAGE>
72% to 60% for the six months ended December 31, 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 $1.8 million, cost of goods for the
six months ended December 31, 1996, was $9.2 million. As a percentage of total
revenue, this represents a decrease of 1.0% from 61% to 60% as compared to the
six months ended December 31, 1997. This 1.0% reduction was due primarily to a
change in the Chief Executive Officer's compensation package, from a commission
basis (recorded in cost of goods sold) for the six months ended December 31,
1996, to a base salary plus 10% of net profit after tax (recorded in general and
administrative expenses) for the six months ended December 31, 1997, resulted in
a decrease in commissions of 1.0%, as a percentage of revenue, for the six
months ended December 31, 1997.
MANAGEMENT FEES RECEIVED - RELATED PARTY: Management fees received - related
party for six months ended December 31, 1996 comprises management fee income
totaling $0.4 million derived from the European and North American operations,
which for the six months ended December 31, 1997, is no longer applicable.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$5.1 million for the six months ended December 31, 1997, compared to $2.5
million for the six months ended December 31, 1996. General and administrative
expenses for the six months ended December 31, 1997, however, include $1.1
million of expenses relating to the European, North American and South African
operations, which were not part of the Company in the six months ended December
31, 1996. , which is not eliminated as an intercompany transaction. As adjusted
to exclude management fee income derived from the European and North American
operations of $0.4 million, total general and administrative expenses, as a
percentage of revenue, increased 4% to 23% in the six months ended December 31,
1997 compared to 19% for the six months ended December 31, 1996. The re-
classification of the Chief Executive Officer's compensation package resulted in
an increase of $0.6 million for the six months ended December 31, 1997, as
compared to the six months ended December 31, 1996.
Head Office expenses increased $0.5 million for the six months ended December
31, 1997 as compared to the six months ended December 31, 1996. This increase
was mainly attributable to increased costs relating to the expanding Distributor
Network, the public listing of the Company's common stock and the extended
warranty program.
Goodwill charges increased from $181,000 for the six months ended December 31,
1996 to $270,000 for the six months ended December 31, 1997.
INCOME FROM OPERATIONS: Net income from operations increased from $1.7 million
for the six months ended December 31, 1996 to $3.7 million for the six months
ended December 31, 1997. As compared to the six months ended December 31, 1997,
net income from operations for the six months ended December 31, 1996 (as
adjusted to exclude both the related party royalty payments for the use of the
FAI brand name and management fee income derived from the European and North
American operations) increased $0.6 million from $3.1 million compared to $3.7
million.
INTEREST INCOME: Interest income decreased from $340,000 for the six months
ended December 31, 1996 to $230,000 for the three months ended December 31,
1997. However, the six months ended December 31, 1996 included related party
interest income of $282,000. Excluding interest income
12
<PAGE>
received from related parties for the six months ended December 31, 1996,
interest income increased from $59,000 to $230,000 for the six months ended
December 31, 1996 and 1997 respectively.
INCOME TAX EXPENSE: The effective rate of tax decreased from 37% for the six
months ended December 31, 1996 to 36% for the six months ended December 31,
1997. This is attributable to the introduction of income earned in the United
Kingdom, South Africa and Canada which all have lower tax rates than Australia.
NET INCOME: Net income increased from $1.3 million for the six months ended
December 31, 1996 to $2.5 million for the six months ended December 31, 1997.
However, this includes a related party royalty charge of $1.8 million, interest
income of $0.3 million and management fee income of $0.4 million. As adjusted
to exclude these related party charges, net income for the six months ended
December 31, 1996 was $2.0 million. As compared to net income of $2.5 million
for the six months ended December 31, 1997, this represents an increase of 25%.
LIQUIDITY AND CAPITAL RESOURCES:
The principal source of the Company's liquidity historically has been, and in
the future is expected to be, cashflow from operations.
Cashflow from operations increased from $1.9 million for the six months ended
December 31, 1996 to $2.9 million for the six months ended December 31, 1997.
The improvement in cash flow provided by operations reflects improved
profitability of the Company. The increase in inventories during the six months
ended December 31, 1997 reflects increased sales in the international operations
and the need to carry increased inventories to meet these sales. Furthermore,
preparation to move from air to sea freight required the accumulation of buffer
stock in New Zealand, Europe and South Africa. The current inventory levels are
expected to reduce during the next quarter as the time lag caused by the freight
cost minimization initiative expires.
Accounts receivables increased during the six months ended December 31, 1997 due
to start up inventory provided to a number of new operations opened throughout
the Distributor Network in the six months ended December 31, 1997.
Net cash provided (used in) investing activity increased from a deficit of $2.4
million during the six months ended December 31, 1996 to $1.0 million during the
quarter ended December 31, 1997. This was a result of the settlement of related
party balances.
Net cash generated from financing activities increased from $0.2 million during
the six months ended December 31, 1996 to $3.6 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 entered into an AUD2.5 million dollar collar hedge on October 1,
1997 with an expiration date of June 30, 1998. The contract was taken out to
secure a foreign currency translation rate within a band of 0.7200 and 0.7461
for AUD conversion to USD. Additionally, on December 4, 1997 the Company entered
into a forward contract selling AUD1.0 million for USD at 0.6800. These
contracts have been marked to market as at December 31, 1997.
Investment in affiliated companies represents the acquisition by the Company of
50 percent of FAI Finance Corporation (FFC) from FAI Insurances Ltd. ("FAI").
FFC is a consumer finance
13
<PAGE>
company in both Australia and New Zealand and finances more than 80% of all
customer accounts financed by the Company's distributorship network in Australia
and New Zealand. The purchase price of approximately $7.02 million (excluding
acquisition costs) will be financed by FAI over a period of five years at a
fixed interest rate of 7.75% per annum payable monthly in arrears. The Company
also has a four year option to purchase the remaining 50 percent of FCC for
approximately $7.02 million plus 50 percent of retained earnings, to be financed
by FAI over an additional four years from the date the option is exercised. See
"Item 1. Financial Statement--Note 8".
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
cashflows 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 distributor. It is expected excess
cashflows generated by the Company will be used to fund the expansion of FFC's
operations.
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 cashflow
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 banking 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.
PART II - OTHER INFORMATION
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 Consultancy Engagement Agreement effective October 1, 1997,
between the Company, Speakeasy Pty Ltd. And Bradley D. Cooper.
27. Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
(i) On January 15, 1998, the Registrant filed a report to disclose
the purchase of 50% of the shares of FAI Finance Corporation Pty.
Ltd. from FAI Insurances Limited. In accordance with Item 7(a)(4)
and 7(b) of Form 8-K, the financial statements called for by Item
8-K and Rule 3-05 of Regulation S-X, and the pro forma financial
statements called for by Item 7(b) of Form 8-K and Article XI of
Regulation S-X, are expected to be filed by March 15, 1998.
15
<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: February 13, 1998
16
<PAGE>
HOME SECURITY INTERNATIONAL INC.
SPEAKEASY PTY LIMITED
BRADLEY DAVID COOPER
CONSULTANCY ENGAGEMENT AGREEMENT
Kevin Munro & Associates
Solicitors
Level 6, Kelco House
364 Kent Street
SYDNEY NSW 2000
Telephone: 9290.3838
Facsimile: 9290.3737
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS
2. APPOINTMENT
3. CONSULTANT'S DUTIES
4. THE CONSULTANT'S FEE
5. OPTIONS
6. BONUS
7. EMPLOYEE'S LEAVE
8. PERFORMANCE OF CONSULTANT'S DUTIES
9. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
10. ASSIGNMENT OF INTELLECTUAL PROPERTY
11. TERMINATION
12. EARLY TERMINATION
13. WHAT HAPPENS AFTER TERMINATION OF CONSULTANT'S ENGAGEMENT
14. RESTRAINT ON THE CONSULTANT'S CONDUCT
15. INDEPENDENT CONTRACTOR
16. COMPLIANCE
17. SEVERABILITY
18. WAIVER
19. NOTICE
<PAGE>
20. GOVERNING LAW
21. ENTIRE AGREEMENT
22. ALTERATION
23. THIS AGREEMENT IS CONFIDENTIAL
24. HEADINGS
<PAGE>
CONSULTANT ENGAGEMENT AGREEMENT
AGREEMENT dated 1997
BETWEEN: HOME SECURITY INTERNATIONAL, INC., a company incorporated in Delaware,
United States of America, and having its registered office at
[ ] ("Company")
AND: SPEAKEASY PTY LIMITED ACN 063 680 599 as trustee for the SPEAKEASY
UNIT TRUST of c/- Bedford Titley, 45 Hume Street, Crows Nest, New
South Wales, Australia ("Consultant")
AND: BRADLEY DAVID COOPER of 28 Coronation Avenue, Mosman, New South Wales,
Australia ("Nominated Person")
RECITALS
A. The Company has offered to engage the Consultant on the terms of this
Agreement and the Consultant has accepted that offer.
B. The Nominated Person has agreed to guarantee the performance by the
Consultant of its obligations under this Agreement.
AGREEMENT
1. DEFINITIONS
1.1 In this Agreement:
"Confidential Information" means all confidential information including,
but not limited to trade secrets and confidential know-how of which the
Consultant becomes aware or generates (both before and after the day this
Agreement is signed) in the course of, or in connection with, employment
with the Company, its Subsidiaries and predecessors.
"External Businesses" means any businesses or other commercial activities
engaged in by the Consultant otherwise then in the course of his engagement
under this Agreement.
"HSI Dealer" means any dealer, distributor or agent appointed by the
Company (or any subsidiary of the company) from time to time to promote the
sales, installation and/or service of the SecurityGuard Product.
<PAGE>
2
"HSI Group" means the Company and its wholly owned subsidiaries.
"HSI Group Company" means a member of the HSI Group.
"Intellectual Property Rights" means all intellectual property rights
including without limitation:
(a) patents, copyright, registered design, trademarks and the right to
have confidential information kept confidential; and
(b) any application or right to apply for registration of any of those
rights.
"Sale" means the sale by an HSI Dealer of a SecurityGuard product to a
member of the public where the product has not been returned by the
consumer, nor has there been a refund of the price paid for the Security
Guard product.
"Securityguard Product" 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".
"Fee" means the benefits due under clause 4.1 from time to time.
1.2 In this Agreement, unless the contrary intention appears:
(a) the singular includes the plural and vice versa;
(b) a reference to a clause or schedule is a reference to a clause or
schedule to this Agreement and a reference to this Agreement includes
an schedules;
(c) a reference to a document or agreement, including this Agreement,
includes a reference to that document or agreement as novated, altered
or replaced from time to time;
(d) a reference to "$" is a reference to Australian currency; and
(e) a reference to writing includes typewriting, printing, photocopying
and any other method of representing words, figures or symbols in a
permanent visible form.
2. APPOINTMENT
2.1 The Company must engage the Consultant.
<PAGE>
3
2.2 The Consultant's engagement will commence immediately following the
successful completion of the float of HSI.
3. CONSULTANT'S DUTIES
3.1 The Consultant must:
(a) perform to the best of the Consultant's abilities and knowledge the
duties assigned to the Consultant by the Company from time to time,
whether during or outside the Company's normal business hours;
(b) use all reasonable efforts to promote the interest of the Company;
(c) act in the Company's best interests;
(d) comply with all policies of the Company in place from time to time;
(e) comply with all law applicable to the Consultant's engagement and the
duties assigned to the Consultant;
(f) report to the person or persons nominated by the Company from time to
time;
(g) perform services in connection with any subsidiaries of the Company as
directed anywhere throughout the world;
(h) if required by the Company, enter into a similar engagement with an
HSI Group Company, either exclusively or in conjunction with
engagement by the Company; and
(i) be wholly responsible for the payment of its own taxes and for PAYE
tax deductions from the salary (if any) paid by the Consultant to any
employee of the Consultant and for any superannuation, workers'
compensation, long service leave, holiday pay, sick leave or other
entitlement of any employee.
3.2 Without limiting the Consultant's duties to the Company, the Consultant
must not:
(a) act in conflict with the Company's best interests; or
(b) compete with the Company.
<PAGE>
4
3.3 The Consultant may spend a reasonable amount of time on a weekly basis
working on the External Businesses. If the Consultant is not performing
its obligations under clauses 3.1 and 3.2 to the satisfaction of the board
of the company because of its rights under this clause 3.3 then the board
of the Company may review the time spent by the consultant working on the
External Businesses.
4. THE CONSULTANT'S FEE
4.1 The Company must pay the Consultant a fee of US $700,000 per annum which is
to be paid monthly.
4.2 For the avoidance of doubt, the Company is not obliged to pay or reimburse
the Consultant for any out of pocket expenses incurred by the Consultant in
relation to the business of the Company or otherwise.
4.3 The Company must review the Fee not less than once each year and may vary
the Fee following that review.
4.4 The Consultant's Fee set out in clause 4.1 is inclusive of any payments
required to be made by the Company pursuant to any applicable legal,
statutory or regulatory requirement arising from services performed by the
Consultant in accordance with this Agreement in any jurisdiction in which
the Consultant is required to work.
4.5 The Company may, and if requested by the Consultant, the Company must set
off against the Fee any or all interest which has become due to the Company
by the Consultant on a loan made by the Company to the Consultant in
respect of the 95% of the allotment price for the 250,000 shares in the
Company allotted to the Consultant.
5. OPTIONS
The consultant may be issued with options in accordance with Schedule 1.
6. BONUS
The Company may pay a bonus to the Consultant in accordance with Schedule
2. The Company may pay a bonus to the Consultant in accordance with
Schedule 3.
7. EMPLOYEE'S LEAVE
The Company consents to the Consultant granting any employee leave in
accordance with applicable law.
8. PERFORMANCE OF CONSULTANT'S DUTIES
8.1 The Company consents to the Consultant granting any employee of the
Consultant up to 10 days' paid sick leave each year if such employee is
unable to perform the Consultant's duties due to illness or injury.
<PAGE>
5
8.2 If the Consultant is unable to perform the Consultant's duties:
(a) for a period of less than three months in any one period of 52
consecutive weeks, the Consultant's engagement under this Agreement
will continue but the Company is not obliged to remunerate the
Consultant in accordance with Clause 4.1; or
(b) for equal to or more than three months in any one period of 52
consecutive weeks, the Company may terminate this Agreement by giving
the Consultant in addition to the Fee received or earned until that
point in accordance with Clause 4.1 an amount equal to the Fee
received or earned by the Consultant during the three month period
immediately preceding termination.
8.3 The Consultant acknowledges that the Consultant is not entitled to any
payment from the Company if this Agreement is terminated under Clause 8.2
except for:
(a) any remuneration due under Clause 4 but unpaid at the date of the
termination;
(b) any amount required under Clause 11.1 to be paid;
(c) any amount required under applicable law to be paid, less any amount
required to be paid under Clause 11.1.
9. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY
9.1 The Consultant may use Confidential Information solely for the purpose of
performing the Consultant's duties with the Company.
9.2 The Consultant must keep confidential all Confidential Information but may
disclose Confidential Information:
(a) to persons who:
(i) are aware and agree that the Confidential Information must be
kept confidential; or
(ii) have signed any confidentiality agreement required by the Company
from time to time,
and either:
<PAGE>
6
(iii) have a need to know relative to the running to the Business
(and only to the extent that each has a need to know); or
(iv) have been approved by the person or persons nominated by the
Company from time to time;
(b) that the Consultant is required to disclose in the course of the
Consultant's duties with the Company;
(c) that was public knowledge when this Agreement was signed or became so
at a later date (other than as a result of a breach of confidentiality
by the Consultant); or
(d) that the Consultant is required by law to disclose.
9.3 The Consultant must provide assistance reasonably requested by the Company
in relation to any proceedings the Company may take against any person for
unauthorized use, copying or disclosure of Confidential Information.
10. ASSIGNMENT OF INTELLECTUAL PROPERTY
10.1 The Consultant:
(a) presently assigns to the Company all existing and future Intellectual
Property Rights in all inventions, models, designs, drawings, plans,
software, reports proposals and other materials created or generated
by the Consultant (whether alone or with the Company, its other
employees or contractors) for use by the Company; and
(b) acknowledges that by virtue of this clause all such existing rights
are vested in the Company and, on their creation, all such future
rights will vest in the Company.
10.2 The Consultant must do all things reasonably requested by the Company to
enable the Company to assure further the rights assigned under CLAUSE 10.1.
11. TERMINATION
11.1 Subject to CLAUSES 8.3 and 12, the Consultant's engagement may be
terminated after three years from the date of commencement of the
Consultant's engagement under this agreement:
<PAGE>
7
(a) by the Consultant giving to the Company three months' notice; or
(b) by the Company giving to the Consultant three months' notice.
11.2 The Consultant's engagement may be terminated by the Company at any time
without notice if the Consultant:
(a) disobeys a lawful direction of the Company;
(b) is guilty of other serious misconduct;
(c) breaches CLAUSE 9;
(d) other than CLAUSE 9, breaches any other material provision of this
Agreement including CLAUSES 3.1 or 3.2.
(e) is found guilty by a court of a criminal offence.
11.3 Termination under this clause does not affect any accrued rights or
remedies of either party.
12. EARLY TERMINATION
If the Consultant's engagement is terminated for any reason other than
those detailed in CLAUSES 11.1 AND 11.2 the Consultant agrees that:
(a) the Company may terminate this Agreement by giving to the Consultant
in addition to the Fee received or earned until that point in
accordance with CLAUSE 4.1, an amount equal to the Fee received or
earned by the Consultant during the 12 month period immediately
preceding termination.
(b) the Consultant is not entitled to any payment from the Company except
for:
(i) any remuneration due under CLAUSE 4 but unpaid at the date of the
termination; and
(ii) any amount required under applicable law to be paid, less any
amount paid under CLAUSE 12(A).
13. WHAT HAPPENS AFTER TERMINATION OF CONSULTANT'S ENGAGEMENT
<PAGE>
8
13.1 If the Consultant's engagement is terminated for any reason:
(a) the Company may set off any amounts the Consultant owes the Company
against any amounts the Company owes the Consultant at the date of
termination except for amounts the Company is not entitled by law to
set off.
(b) the Consultant must return all the Company's property (including
property leased by the Company) to the Company on termination
including all written or machine readable material, software,
computers, credit cards, keys and vehicles;
(c) the Consultant's obligations under CLAUSE 9 continue after termination
except in respect of information that is part of the Consultant's
general skill or knowledge; and
(d) the Consultant must not record any Confidential Information in any
form after termination.
14. RESTRAINT ON THE CONSULTANT'S CONDUCT
14.1 During the Restraint Period after termination of the Consultant's
engagement, the Consultant must not in any area in which the Company has
operated during the preceding 24 months or to the Consultant's knowledge
intends to operate in the ensuing 24 months:
(a) engage in or prepare to engage in any business or activity that is the
same or similar to that part or parts of the business carried on by
the Company in which the Consultant was engaged at any time during the
Consultant's last 24 months with the Company; or
(b) solicit, canvass, approach or accept any approach from any person who
was at any time during the Consultant's last 24 months with the
Company a client of the Company in that part or parts of the business
carried on by the Company in which the Consultant was engaged with a
view to obtaining the custom of that person in a business that is the
same or similar to the business conducted by the Company; or
(c) interfere with the relationship between the Company and its customers,
employees or suppliers; or
(d) induce or assist in the inducement of any employee of the Company to
leave their employment.
<PAGE>
9
14.2 In clause 14.1, the "Restraint Period" means:
(a) 12 months after termination of the Consultant's engagement;
(b) 9 months after termination of the Consultant's engagement;
(c) 6 months after termination of the Consultant's engagement;
14.3 Clause 14.1 has the effect of several separate and individual covenants and
restraints consisting of each separate covenant and restraint set out in
clause 14.1 combined with each separate period of time set out in clause
14.2.
14.4 If any of the several separate and independent covenants and restraints
referred to in clause 14.3 are or become invalid or unenforceable for any
reason, then that invalidity or unenforceability will not affect the
validity of enforceability of any of the other separate and independent
covenants and restraints.
14.5 In clause 14.1 "engage in" means to participate, assist or otherwise be
directly or indirectly involved as a member, shareholder, unitholder,
director, consultant, advisor, contractor, principal, agent, manager,
employee, beneficiary, partner, associate, trustee or financier.
14.6 The Company may require the Consultant to provide evidence confirming to
the satisfaction of the Company that the Consultant is not in breach of
this clause.
14.7 The Consultant acknowledges that each restriction specified in clause
14.1 is in the circumstances reasonable and necessary to protect the
Company's legitimate interests.
15. INDEPENDENT CONTRACTOR
The Consultant is an independent contractor and shall not in relation to or
on behalf of any other party or any of its products or services:
(a) be, or hold itself out to be, an agent, employee, partner, joint
venturer or otherwise associated;
(b) have, or hold itself out as having, the authority to pledge the credit
of any other party;
(c) accept orders, otherwise contractually bind or enter into any
agreement or arrangement; or
<PAGE>
10
(d) make any representation or statement, express or implied, whether oral
or in writing.
16. COMPLIANCE
The exercise of or compliance with any discretion, right or obligation
under this Agreement is subject to compliance with any discretion, right or
obligation under this Agreement is subject to compliance with all
applicable laws.
17. SEVERABILITY
Part or all of any clause of this Agreement that is illegal or
unenforceable will be severed from this Agreement and the remaining
provisions of this Agreement continue in force.
18. WAIVER
The failure of either party at any time to insist on performance of any
provision of this Agreement is not a waiver of its right at any later time
to insist on performance of that or any other provision of this Agreement.
19. NOTICE
19.1 A party giving notice under this Agreement must do so in writing.
19.2 A notice given in accordance with clause 19.1 is to be received if:
(a) hand delivered, on delivery;
(b) sent by prepaid post, 3 days after the date of posting;
(c) sent by telex, when the machine on which the telex is transmitted
receives at the end of transmission, the answerback code of the
recipient informs the sender that it has not received the entire
notice;
(d) sent by facsimile, when the sender's facsimile system generates a
message confirming successful transmission of the total number of
pages of the notice unless, within 8 Business Hours after that
transmission, the recipient informs the sender that it has not
received the entire notice.
20. GOVERNING LAW
<PAGE>
11
This Agreement is governed by the law applicable in the United States of
America and the parties irrevocably and unconditionally submit to the
exclusive jurisdiction of the courts of the United States of America.
21. ENTIRE AGREEMENT
This Agreement (including its schedules):
(a) constitutes the entire agreement between the parties as to its subject
matter; and
(b) in relation to that subject matter, supersedes any prior understanding
or agreement between the parties and any prior condition, warranty,
indemnity or representation imposed, given or made by a party.
<PAGE>
12
22. ALTERATION
This Agreement (including its schedules) may only be altered in writing
signed by each party.
23. THIS AGREEMENT IS CONFIDENTIAL
The terms of this Agreement and any subsequent amendments are confidential
and may not be disclosed by the Consultant or Nominated Person to any other
person, other than for the purpose of obtaining professional legal or
accounting advice, without the written approval of the Company.
24. HEADINGS
Headings are for ease of reference only and do not affect the meaning of
this Agreement.
<PAGE>
13
SCHEDULE 1 - Options (Clause 5)
As determined by resolution of the Board of Directors from time to time pursuant
to the terms and conditions of the Company's Executive Option Plan.
SCHEDULE 2 - Bonus (Clause 6)
10% of the audited net profit of the HSI Group after tax. The bonus is to be
paid monthly, calculated on the basis of net profits after tax, as disclosed in
the monthly management accounts of the HSI Group. If when the audited accounts
of the HSI Group are released and the amount actually paid in the preceding 12
months is more or less than 10% of the audited net profit of the HSI Group after
tax as per those annual accounts, then the parties must within 30 days of
release of those accounts make the necessary adjustment between them to reduce
or increase the amount actually paid to equal 10% of the audited net profit of
the HSI Group after tax.
SCHEDULE 3 - Bonus (Clause 6)
As determined by a resolution of the Board of Directors of the Company.
<PAGE>
14
EXECUTED as an Agreement.
<TABLE>
<S> <C> <C>
THE COMMON SEAL OF HOME )
SECURITY INTERNATIONAL INC. was )
duly affixed to this document by the )
authority of the Board of Directors in the )
presence of: )
)
__________________________________ ) _________________________________
Signature of Secretary ) Signature of Director
)
__________________________________ ) _________________________________
Name of Secretary - please print ) Name of Director - please print
THE COMMON SEAL of SPEAKEASY )
PTY LIMITED was duly affixed to this )
document by the authority of the Board of )
Directors in the presence of: )
)
___________________________________ ) _________________________________
Signature of Secretary ) Signature of Director
)
___________________________________ ) _________________________________
Name of Secretary - please print ) Name of Director - please print
SIGNED SEALED AND DELIVERED by )
BRADLEY DAVID COOPER in the )
presence of: )
)
____________________________________ ) _________________________________
Signature of Witness )
)
____________________________________ )
Name of Witness - please print )
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,469,048
<SECURITIES> 0
<RECEIVABLES> 1,460,275
<ALLOWANCES> 369,914
<INVENTORY> 2,445
<CURRENT-ASSETS> 12,381,959
<PP&E> 1,003,471
<DEPRECIATION> 122,751
<TOTAL-ASSETS> 31,021,173
<CURRENT-LIABILITIES> 9,691,802
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 31,021,172
<SALES> 10,769,464
<TOTAL-REVENUES> 0
<CGS> (12,985,600)
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (2,628,558)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,621,642
<INCOME-TAX> (523,097)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,098,545
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
