<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO.
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOME SECURITY INTERNATIONAL, INC.
(NAME OF REGISTRANT IN ITS CHARTER)
DELAWARE 1731 98-0169495
(STATE OR JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR INDUSTRIAL IDENTIFICATION NO.)
ORGANIZATION)
CLASSIFICATION CODE
NUMBER)
LEVEL 7, 77 PACIFIC HIGHWAY
NORTH SYDNEY, NSW 2060
(011) (61-2) 9936-2424
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS OR INTENDED PRINCIPAL PLACE OF BUSINESS)
---------------
RALPH STEPHENSON
50 CENTRAL PARK SOUTH
NEW YORK, NEW YORK
(212) 486-2713
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
ARTHUR DON, ESQ. ALAN I. ANNEX, ESQ.
FERNANDO R. CARRANZA, ESQ. DAVID M. ENGLANDER, ESQ.
D'ANCONA & PFLAUM CAMHY KARLINSKY & STEIN LLP
30 NORTH LASALLE STREET 1740 BROADWAY
SUITE 2900 SIXTEENTH FLOOR
CHICAGO, ILLINOIS 60602 NEW YORK, NEW YORK 10019-4315
(312) 580-2000 (212) 977-6600
FAX (312) 580-0923 FAX (212) 977-8389
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock(2)............. 1,495,000 $10.25 $15,323,750 $4,522
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933
(the "Securities Act"), based upon the average of the high and low prices
of Common Stock as reported on the American Stock Exchange on July 16,
1998.
(2) Includes shares of Common Stock issuable upon exercise of the
Underwriters' Over-Allotment Option.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JULY 20, 1998
PROSPECTUS
1,300,000 SHARES
LOGO
HOME SECURITY INTERNATIONAL, INC.
COMMON STOCK
All 1,300,000 shares (the "Shares") of Common Stock, $.001 par value (the
"Common Stock"), offered hereby (this "Offering") are being sold by Home
Security International, Inc., a Delaware corporation (the "Company"). The
Company's Common Stock is traded on the American Stock Exchange under the
symbol "HSI". On July 16, 1998, the last reported sale price for the Common
Stock on the American Stock Exchange was $10.25 per share. See "Price Range of
Common Stock".
-----------
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
THE PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................ $ $ $
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Total(3)......................... $ $ $
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</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting".
(2) Before deducting estimated expenses of the offering, estimated at $508,000,
payable by the Company.
(3) The Company has granted L.H. Friend, Weinress, Frankson & Presson, Inc.
("L.H. Friend"), the representative (the "Representative") of the several
underwriters (the "Underwriters"), a 45-day option to purchase up to an
aggregate of 195,000 additional shares of Common Stock to cover over-
allotments, if any (the "Underwriters' Over-Allotment Option"). If the
Underwriters exercise such option in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ respectively. See "Underwriting".
-----------
The Shares offered by this Prospectus are offered by the several Underwriters
subject to prior sale, when and if delivered to and accepted by the
Underwriters, and subject to the right to reject any order in whole or in part
and to certain other conditions. It is expected that delivery of the Shares
will be made at the offices of L.H. Friend on or about , 1998.
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
The date of this Prospectus is , 1998
<PAGE>
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OF THE COMPANY INCLUDING ENTERING STABILIZING
BIDS OR IMPOSING PENALTY BIDS. SEE "UNDERWRITING".
----------------
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this prospectus ("Prospectus"). As used throughout this
Prospectus, unless the context otherwise requires, the terms "Company" or "Home
Security International, Inc." refer to Home Security International, Inc., its
wholly owned subsidiaries and its predecessor entities. Each prospective
investor is urged to read this Prospectus in its entirety. Except as otherwise
indicated, the information in this Prospectus assumes the Underwriters' Over-
Allotment Option is not exercised. All figures are in U.S. dollars unless
otherwise noted. Investors should read the risk factors related to the purchase
of Common Stock of the Company. See "Risk Factors".
THE COMPANY
The Company is a direct sales company which, through an extensive distributor
network (the "Distributor Network"), sells, installs and services a residential
security alarm system marketed under the trade name SecurityGuard, principally
in Australia and New Zealand, with expanding international operations in
Europe, South Africa and North America. The Company's security system (the
"SecurityGuard System"), which includes a SecurityGuard alarm, a smoke
alarm/detector, a fire extinguisher, and a fire blanket, provides home
protection to a customer's premises through interior heat sensitive motion
detectors, flashing lights, a siren, window decals and a centralized processing
unit ("CPU") with the ability to communicate signals to a central monitoring
station. In order to capitalize on its base of customers with installed
SecurityGuard Systems (which the Company believes to be approximately 165,000),
the Company is continually seeking additional methods of generating recurring
revenue, including the sale of extended warranties to its customers and the
introduction of on-line alarm monitoring services in Australia and New Zealand
in the next twelve months.
The Company's business success is dependent upon the continued successful
implementation of its "Direct Sales Marketing Program" by its Distributor
Network. The Direct Sales Marketing Program is a systematic approach to selling
the Company's products through low cost lead generation, telemarketing and in
home sales appointments. The program's focus is on middle income families and
retirees, a market which the Company believes has been historically underserved
by the security alarm industry. Sales leads are generated using various
methods, including referrals from in home sales appointments, shopping center
"drop box" promotions and the collection of crime awareness and fire safety
surveys conducted in shopping centers and in targeted neighborhoods. These
leads are then utilized by telemarketers to set up in home sales appointments,
during which the sales representatives make a crime awareness and fire safety
presentation and then demonstrate the functionality of the SecurityGuard
System. In order to increase the effectiveness of its Direct Sales Marketing
Program, the Company requires participants in its Distributor Network to
regularly participate in comprehensive training seminars developed by the
Company relating to all aspects of its Direct Sales Marketing Program.
The Distributor Network is a structured sales hierarchy of "Independent
Agents", "Area Distributors" and "Distributors" who are compensated solely on
the basis of sales of the Company's SecurityGuard Systems. The Company believes
that it possesses an advantage over other direct sales companies since
advancement through the Distributor Network is based exclusively on the
participant's success in sales of the Company's products, rather than
recruitment of other sales representatives. The Independent Agents, who are the
entry level participants in the Distributor Network, are motivated by an
attractive sales commission structure, as well as the opportunity to become
Area Distributors who own and operate their own distribution business.
Independent Agents are promoted based on a proven ability to sell the Company's
products over a defined period of time. Each Area Distributor purchases
products from the Company for resale to end users through Independent Agents
who operate out of their offices. Successful Area Distributors, in turn, can
become Distributors who earn an override on sales by the Company made to their
attributed Area Distributors, as well as continuing to earn profits on the
sales made by its distribution business. The Company believes that the
Distributor Network, in addition to offering a potential for substantial
individual compensation and profit, is an effective motivational tool which
<PAGE>
emphasizes peer ranking and recognition in order to improve sales performance.
The Company also believes the Distributor Network gives it a significant
strategic advantage over its competitors by limiting the capital investment
needed to grow the Company, since its Area Distributors and Distributors are
responsible for most costs associated with running their distribution
businesses (including all recruitment, telemarketing and SecurityGuard System
installation costs). See "Business--Distributor Network".
The Company's net sales increased by 38% from $23.2 million for the nine
months ended March 31, 1997 to $32.1 million for the nine months ended March
31, 1998, and its net income increased by 100% from $1.8 million for the nine
months ended March 31, 1997 to $3.6 million for the nine months ended March 31,
1998. The Company's net sales growth is primarily attributable to its
significant increase in unit sales of its alarm system, which in Australia and
New Zealand have increased by 34% from 26,812 units for the nine months ended
March 31, 1997 to 35,891 units for the nine months ended March 31, 1998 and in
its international markets have increased by 210% from 1,618 units for the nine
months ended March 31, 1997 to 5,028 units for the nine months ended March 31,
1998.
The Company's strategy is to expand its operations by increasing the size of
the Distributor Network in those countries in which it now operates and
initiating the Distributor Network in new international markets. The Company
also expects to increase sales by generating sources of recurring revenue from
its existing base of customers with installed alarms through the sale of
extended warranties and the introduction of on-line monitoring services. In
addition, in order to enhance sales, create operating efficiencies and improve
margins, the Company has recently acquired a 50% interest in FAI Finance
Corporation Pty Ltd ("FFC"), a consumer finance company primarily in the
business of financing purchases of the SecurityGuard System in Australia and
New Zealand (the "FFC Transaction") and, upon completion of this Offering, will
acquire a 75% interest in Ness Security Products Pty Ltd ("Ness"), which
manufactures the SecurityGuard alarm (the "Ness Transaction"). The acquisitions
are principally intended to ensure that each of FFC and Ness continues to focus
its primary business efforts on the Company's interests, as well as to produce
certain operating efficiencies by more thoroughly integrating their businesses
with that of the Company. See "Business--Strategic Acquisitions".
The principal executive office of the Company is located at Level 7,
77 Pacific Highway, North Sydney, NSW 2060 Australia and its telephone number
is (011) (61-2) 9936-2424.
RECENT DEVELOPMENTS
FFC Transaction
On December 31, 1997, the Company purchased 50% of the shares (the "FFC
Shares") of FFC from FAI Insurances Limited ("FAI Insurances"), a significant
shareholder of the Company. FFC, a consumer finance company with operations in
Australia and New Zealand, financed approximately 74% of the Company's financed
sales, and 56% of all sales by the Company of the SecurityGuard System to end
users in Australia and New Zealand for the nine months ended March 31, 1998.
The purchase price for the FFC Shares of $7,016,525 was paid through the
delivery of a five year promissory note (the "FFC Note"), which bears interest
at a rate of 7.75% per annum payable monthly in arrears and is secured by the
FFC Shares. Pursuant to the terms of the FFC Note, as amended, the Company is
required to utilize any funds raised in any equity offering subsequent to the
FFC Transaction to pay down the FFC Note (the "FFC Note Payment"), if available
after paying the cash portion of the purchase price in the Ness Transaction
(see "Business--Strategic Acquisitions"). As part of the FFC Transaction, the
Company received an option (the "FFC Option"), at no additional cost,
exercisable within four years of the date of the FFC Transaction, to purchase
the remaining 50% interest in FFC from FAI Insurances, for the same
consideration plus 50% of the net change in FFC's retained earnings from the
date of the FFC Transaction until the date the FFC Option is exercised. If the
FFC Option is exercised the purchase price will be financed by FAI Insurances
over a four year period from the date the FFC Option is exercised on terms
comparable to the FFC Note. See "Business--Strategic Acquisitions" and "Certain
Transactions--Transactions with FAI Insurances".
2
<PAGE>
Ness Transaction
On July 17, 1998, the Company entered into a stock purchase agreement ("Stock
Purchase Agreement"), whereby the Company agreed to purchase all of the issued
and outstanding common stock of International Integrated Home Security Limited
("IIHSL"), a British Virgin islands holding company. IIHSL is the holder of
75.04% of the issued and outstanding common stock of Ness. Ness is a leading
manufacturer of security alarm products in Australia and the Company's sole
supplier of the SecurityGuard alarm. For the nine months ended March 31, 1998,
approximately 78% of Ness' revenues were derived from sales of the
SecurityGuard alarm to the Company. The purchase price for all of the issued
and outstanding common stock of IIHSL will consist of the following: (i)
400,000 shares of Common Stock, (ii) warrants convertible into 360,000 shares
of Common Stock at an exercise price of $13.00, which will be exercisable
through the year 2003 (the "Ness Warrants") and (iii) $11,157,000 in cash (the
"Cash Portion"). A portion of the proceeds of this Offering will be used to pay
the Cash Portion. The closing of the Ness Transaction, which will occur
immediately following the closing of this Offering, is conditioned on the
occurrence of certain events, including the Company's successful closing of
this Offering. See "Business--Strategic Acquisitions."
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by
The Company............................... 1,300,000 shares of Common Stock.
Common Stock Outstanding After the
Offering (1) (2).......................... 6,850,500 shares of Common Stock.
Use of Proceeds............................ To finance the Cash Portion of
the Ness Transaction and to pay
down the FFC Note.
American Stock Exchange Symbol............. HSI
</TABLE>
- --------
(1) Includes 400,000 shares of Common Stock to be issued in connection with the
Ness Transaction.
(2) Excludes (i) an aggregate of 750,000 shares of Common Stock subject to
options issued under the Company's 1997 Stock Option Plan and 20,000 shares
of Common Stock subject to options issued under the Company's 1997 Non-
Employee Director Stock Option Plan, all at an exercise price of $10.00 per
share; (ii) 240,000 shares of Common Stock reserved for issuance upon the
exercise of warrants granted by the Company to the managing underwriters
(collectively, the "IPO Representatives") of the Company's initial public
offering conducted in July 1997 ("IPO"), at an exercise price of $16.50 per
share (the "IPO Warrants"); and (iii) 360,000 shares of Common Stock
reserved for issuance upon the exercise of the Ness Warrants. See
"Description of Securities--Warrants".
3
<PAGE>
SUMMARY SELECTED FINANCIAL INFORMATION
SUMMARY STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED PRO FORMA NINE
YEARS ENDED JUNE 30, MARCH 31, MONTHS ENDED
----------------------------------------- ----------------- MARCH 31, 1998
1993 1994 1995 1996 1997 1997 1998 AS ADJUSTED(1)
------- ------- ------- ------- -------- -------- -------- --------------
(in thousands, except per share and unit sales data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $11,093 $10,629 $21,437 $26,701 $ 33,465 $ 23,232 $ 32,158 $ 36,369
Gross profit........... 5,162 3,901 7,218 9,116 9,191 6,453 13,293 20,501
Income (Loss) from
operations............ 852 (54) 2,127 2,510 3,138 2,407 5,210 8,544
Interest income, net... 2 5 65 203 784 555 215 223
Net income (loss)...... 492 (74) 1,470 1,659 2,292 1,838 3,573 4,837
Diluted net income per
share of Common
Stock(2).............. $ 0.51 $ 0.41 $ 0.69 $ 0.70
Diluted weighted
average shares of
Common Stock
outstanding(2)........ 4,500 4,500 5,157 6,906
UNIT SALES DATA:(3)
Unit sales............. 11,744 12,235 25,280 31,669 38,071 26,812 40,919 40,919
Cumulative unit sales.. 16,947 29,182 54,462 86,131 124,202 112,943 165,121 165,121
</TABLE>
SUMMARY BALANCE SHEET DATA:
<TABLE>
<CAPTION>
PRO FORMA
AS OF
AS OF AS OF MARCH 31, 1998
JUNE 30, 1997 MARCH 31, 1998 AS ADJUSTED(4)
------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents......... $ -- $ 5,803 $ 2,939
Working capital (deficit)......... (1,754) 2,900 3,808
Total assets...................... 15,957 30,326 48,605
Total debt, including current
portion.......................... -- 5,726 1,353
Shareholders' equity.............. 9,790 16,798 35,463
</TABLE>
- --------
(1) Gives effect to the following transactions as if they had occurred at the
beginning of the period: (i) the FFC Transaction; (ii) the Ness
Transaction; (iii) the IPO; and (iv) this Offering. See "Pro Forma
Financial Statements".
(2) Pro forma diluted net income per share of Common Stock and pro forma
weighted average shares of Common Stock outstanding are computed after
giving effect to the transactions listed in Note 1 above.
(3) Unit sales represents sales of the SecurityGuard System during the
applicable period and cumulative unit sales represents the aggregate sales
of the SecurityGuard System since the Company began operations in 1988.
(4) Gives effect to the issuance of 400,000 shares pursuant to the Ness
Transaction, the issuance of 1,300,000 shares pursuant to this Offering,
and the application of the estimated net proceeds therefrom (and a portion
of existing cash reserves) to repay certain indebtedness. See "Use of
Proceeds".
4
<PAGE>
RISK FACTORS
An investment in the Shares involves a high degree of risk and is not
recommended for any investor who cannot afford to lose his or her entire
investment. In evaluating an investment in the Shares, investors should
carefully consider the following factors, in addition to the other information
in the Prospectus. See "Certain Forward Looking Statements" for further
information concerning certain of these risks.
Risk of International Expansion. Although the Company's sales historically
have been generated in the Australian and New Zealand markets, the Company has
initiated expansion programs in Europe, South Africa and North America. There
can be no assurance that the Company will be able to market, sell and deliver
its products and services successfully in these new markets. A key component
of the Company's strategy is deployment of its Direct Sales Marketing Program
in markets outside of Australia and New Zealand through its Distributor
Network. Although the Company believes that the implementation of the
Distributor Network in those markets limits the Company's costs related to
expansion, the Company is still required to bear certain start-up costs when
entering new markets, including costs related to obtaining regulatory approval
of the SecurityGuard System and other pre-operational start-up costs. The
expenses associated with establishing the Distributor Network in new markets
during any period may substantially affect the Company's operating results
during that period. In addition, for the Company to expand successfully into a
new market, the Company must obtain a sufficient number and density of
customers in that market to support the additional investment made by the
Company, and establish a relationship with a local financing company that will
finance the purchase of products by customers. There can be no assurance that
the required customer numbers and density in any new market will be achieved
or that a relationship with a local financing company in that market will be
established. If the revenues generated by the Company in new and existing
markets are not sufficient to offset the expense of establishing and
maintaining the infrastructure to facilitate expansion of the operations, the
Company's business, operating results and financial condition could be
materially adversely affected. The Company is also subject to certain risks
inherent in operating globally, including international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies
and foreign manufacturing regulations. Furthermore, varying climatic
conditions in countries in which the Company operates or intends to commence
operations may affect the performance of the alarm system, thereby requiring
modification of its design.
Dependence on Consumer Financing. For the nine months ended March 31, 1998,
approximately 75% of the sales of SecurityGuard Systems by participants of the
Distributor Network to consumers were financed on an installment basis. The
Company's distributors in Australia and New Zealand have the option of
offering potential consumers financing from FFC (see "Business--Strategic
Acquisitions") or other financing organizations. In each of the other markets
in which the Distributor Network operates, the Company has arranged for a
local financing company to make financing available to purchasers in the
market. The availability of consumer financing in new international markets
and the continued availability of consumer finance in existing markets will be
a significant factor in determining whether the Company will succeed in these
markets. Any changes in interest rates or credit quality requirements of
financing organizations may adversely affect sales of the Company's products
and therefore have a material adverse effect on the Company. There can be no
assurance that financing will be available on terms which are attractive to
consumers and suitable for the Company's operations.
Currency Fluctuations and Duty Rates. Although the Company's principal
operations are concentrated in Australia and New Zealand, it conducts
operations throughout the world. (See "Risk Factors--Geographic
Concentration".) Accordingly, the Company's financial performance could be
adversely affected by fluctuations in currency exchange rates as well as
changes in duty rates. Furthermore, as the Company reports its financial
results in U.S. dollars, a significant movement in the value of the U.S.
dollar against certain international currencies, particularly the Australian
dollar ("AUD"), could have a material adverse effect on the Company's reported
financial position and results of operations. The AUD has declined in value
relative to the U.S. dollar from .7452 on July 1, 1997 to .6608 on March 31,
1998 and as of July 16, 1998 was valued at .6290 as compared to the U.S.
dollar. The change in valuation has resulted in lower reported revenues than
budgeted when translated into U.S. dollars for the nine months ended March 31,
1998. The Company has experienced gains and losses in recent periods due to
transactions in foreign currencies. The Company hedged a portion of its
foreign exchange risk against the U.S. dollar through an AUD $2.5 million
dollar collar hedge and an AUD $1.0 million
5
<PAGE>
dollar forward contract, both of which expired on June 30, 1998. Although the
Company is not in the business of currency hedging, it may from time to time
engage in hedge arrangements. Nevertheless, there can be no assurance that the
Company will be successful in limiting risks related to currency fluctuations
and that changes in exchange rates will not have a material adverse effect on
the Company or its results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
Risk Associated With Acquisitions. The Company's success will depend, in
part, on its ability to integrate its recent acquisition of FFC and the
proposed acquisition of Ness, which will occur upon the closing of this
Offering, into the Company's core sales business. There can be no assurance
that the Company will be able to successfully integrate such businesses into
its operations without substantial costs, delays or other problems, that
either FFC or Ness will have a positive effect on the Company's profitability
in an amount sufficient to justify the investment therein or that the Company
will be able to realize expected operating and economic efficiencies in the
operation of either Ness or FFC following such acquisitions. In addition,
integration of such acquisitions may require a substantial amount of time from
key management personnel. If the Company does not manage these acquisitions
effectively, its business, financial condition and results of operations could
be materially adversely affected. See "Business--Strategic Acquisitions".
Management of Growth. An important element of the Company's business
strategy has been and continues to be expansion of its Distributor Network
beyond its present base of operations. This expansion has placed and will
continue to place substantial demands on the Company's management, operational
resources and system of financial controls. The Company's future operating
results will depend in part on the Company's ability to continue to implement
and maintain operating and financial systems and to expand, train and manage
its employees and members of its Distributor Network. Additionally, management
of growth may limit the time available to the Company's management to devote
to other operational, financial and strategic issues. There can be no
assurance that the Company will successfully implement and maintain the
necessary operational and financial systems or successfully obtain, integrate
and utilize the personnel, management, operational and financial resources
required to manage a developing and expanding business in new markets. Failure
to implement such systems successfully and use such resources effectively
could have a material adverse effect on the Company's results of operations
and financial condition.
Government Regulation. The Company must receive approval from the various
regulatory and licensing authorities for each country, state and local area in
which it operates. The Company may be required to obtain formal approval to
operate the Direct Sales Marketing Program and for the construction, design,
functionality, acceptability or merchantable quality of the SecurityGuard
System. The time that it takes to secure these approvals in any market will
affect the Company's growth and ability to establish a presence in such
markets. In certain jurisdictions, the Company has been required to obtain
licenses or permits prior to the commencement of operations. The loss of such
licenses or permits, or the establishment of conditions to the granting or
retention of such licenses or permits, could have a material adverse effect on
the Company. In certain jurisdictions the Company may also be required to
comply with standards governing employee selection and training, and to meet
certain standards in the conduct of its business. Although the Company
believes that it is presently in substantial compliance with all licensing and
regulatory requirements in each jurisdiction in which it operates, there can
be no assurance the Company will be able to secure the necessary regulatory
approvals in all of the countries or smaller geographic areas in which it
seeks to operate or that it will continue receiving regulatory approvals for
its existing activities. Recently, a trend has emerged on the part of local
governmental authorities to adopt various laws and regulations aimed at
reducing the number of false alarms. Enactment of such measures could have a
material affect on the Company's future business and results of operations.
See "Business--Government Regulation".
Dependence On Key Management Executives. The success of the Company's
business is largely dependent upon the active participation of Bradley D.
Cooper and other executive officers. The loss or interruption of the continued
services for any reason of one or more of the Company's key officers or the
inability of the Company to hire or retain qualified executives may have a
material adverse effect on the Company's business. Although Mr. Cooper's
principal occupation is as the Company's Chief Executive Officer and Chairman,
he has significant interests in other operating companies, and periodically
gives speeches and writes articles on sales motivation
6
<PAGE>
techniques. The Company has "key-man" life insurance policies on Mr. Cooper,
Terrence J. Youngman (President), David Appleby (Vice President of
International Business Development) and Geoffrey D. Knowles (Vice President of
Marketing) for $5 million, $1 million, $2 million and $2 million respectively.
See "Management".
Recruitment of Independent Agents. The Company is dependent on the continued
recruitment of new Independent Agents to serve as sales agents for the
Distributor Network. The Distributor Network faces competition in the
recruitment of sales agents from other organizations, some of which are not in
the security alarm industry. The Company's ability to maintain or increase its
sales growth in the future will depend in part upon the number and quality of
Independent Agents that the Distributor Network can recruit and the Company
can train. There can be no assurance that a sufficient number of Independent
Agents will be recruited or retained by the Distributor Network.
Competition. The security alarm industry in each country where the Company
operates is highly competitive and there can be no assurance that the Company
will be able to compete successfully in the future. Although the Company has
achieved rapid growth in the sale of the SecurityGuard System in Australia and
New Zealand, there is no assurance that the Company will have continued
success in these countries. Although the Company believes that the Distributor
Network provides it with a competitive advantage over other security alarm
companies in Australia and New Zealand, the loss of any such competitive
position could have a material adverse effect on the Company. In marketing the
SecurityGuard System outside Australia and New Zealand, the Company competes
with larger national and international companies who may be better capitalized
and who conduct media advertising, which the Company does not currently
utilize. In the United States, the Company faces competition from alarm
installation and monitoring companies which are better capitalized than the
Company and which offer low-priced installations of security systems.
Competitive pressure may require the Company to reduce its prices to achieve
in other countries the growth rate it has experienced in Australia and New
Zealand. Furthermore, new competitors are continuing to enter the industry and
the Company may encounter additional competition from such future industry
entrants. See "Business--Competition".
Quarterly Variations In Operating Results. The Company has historically
experienced fluctuations in its quarterly operating results and expects to
experience fluctuations of its quarterly operating results in the future.
These fluctuations have been caused by many factors, including, among others,
the opening and closing of distributor offices, the volume and timing of
customer generation, competitive pricing pressures, local and national crime
rates in the markets in which the Distributor Network operates, general
economic conditions, foreign currency fluctuations and seasonality. The
Company's sales can be hampered by unfavorable weather conditions, holidays
and reduced hours of daylight. The Company's budgeted expenses are based, to
some extent, on its expectations of future sales and customer growth. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall due to levels of new sales that are lower
than anticipated. Given the possibility of quarterly fluctuations, the Company
believes that comparisons of the results of its operation for preceding
quarters are not necessarily meaningful and that the results for any one
quarter should not be relied upon as an indication of future performance. In
the event that the Company's revenues or operating results for any quarter are
lower than expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of the Company's Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
Geographic Concentration. Sales in Australia and New Zealand for the fiscal
years ended June 30, 1995, June 30, 1996 and June 30, 1997 and for the nine
months ended March 31, 1998 accounted for approximately 95%, 94%, 94% and 89%,
respectively, of the Company's total net sales. The Company expects that sales
in Australia and New Zealand will continue to account for a significant
portion of the Company's net sales in the future. The performance of the
Company may be adversely affected by any change in regional economic
conditions or other factors affecting these markets. See "Business--Geographic
Operations".
Product Concentration. To date, sales of the SecurityGuard System and
related services accounted for substantially all of the Company's sales, and
will continue to account for substantially all sales in the foreseeable
future. Decline in the demand for this product, whether as a result of
competition, technological change or
7
<PAGE>
otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--SecurityGuard
System" and "Business--Services".
Risks of Liability. Most of the alarm installation agreements and other
agreements pursuant to which the Company and the Distributor Network sell the
SecurityGuard System and related services contain provisions and disclaimers
limiting liability to customers. These provisions and disclaimers are intended
to reduce the risk of liability to the Company for the acts or omissions of
employees or Distributor Network representatives and for system failures.
However, in the event of litigation with respect to such matters, there can be
no assurance that these liability limiting provisions and disclaimers will be
enforceable. While the Company currently carries insurance of various types,
including general liability and errors and omissions insurance, the loss
experience of the Company and other security service companies may affect the
availability and cost of such insurance in the future. Certain of the
Company's insurance policies and the laws of some jurisdictions may limit or
prohibit insurance coverage for punitive or certain other types of damages, or
liability arising from gross negligence or wanton behavior. The cost and
effect of litigation could have a material adverse effect on the Company.
Benefits to Affiliates. The Company will use a portion of the proceeds of
this Offering to pay the Cash Portion of the Ness Transaction to International
Home Security Investments Limited, of which Paul Brown is the sole beneficial
owner, and which will beneficially own 10.5% of the Company's Common Stock
upon the closing of the Ness Transaction. The Company is required to use the
remainder of the proceeds of this Offering to pay down the FFC Note, which is
held by FAI Insurances. See "Business--Strategic Acquisitions" and
"Management--Directors and Executive Officers".
Adverse Publicity. Direct sales companies are occasionally the subject of
print articles and broadcast programs which present a negative view of such
companies and that emphasize their use of high pressure sales practices.
Although the Company maintains an active training and compliance program to
deter abusive sales practices by the participants in the Distributor Network,
the Company and the Distributor Network occasionally have received adverse
publicity. The Company has been the subject of isolated news articles accusing
its sales agents of high pressure sales practices including focusing on
customers' fears by using photographs of burglarized homes to encourage
purchases of the SecurityGuard System, and for charging above market financing
rates to consumers who cannot afford the product. Publicity of this nature
could have a material adverse affect on the Company's sales and earnings.
Limitations on Enforceability of Judgments. A substantial portion of the
assets of the Company are, and for the foreseeable future will be, located
outside the United States. In addition, all or a substantial portion of the
assets of directors, executive officers and experts residing outside the
United States are or may be located outside of the United States, primarily in
Australia. As a result, it may not be possible to effect service of process in
the United States on such directors and executive officers, such experts or on
the Company's subsidiaries or to enforce, collect or realize upon, judgments
against such persons obtained in United States courts which are predicated
upon civil liability under United States securities laws. The Company has been
advised by its special Australian counsel, Dibbs, Crowther & Osborne, that
there are doubts as to the enforceability of civil liabilities imposed by
United States courts and as to the ability of stockholders to pursue in
Australian courts claims based on the contents of this Prospectus or otherwise
predicated on United States federal securities laws against the Company or its
directors, executive officers and experts.
Foreign Taxation. Because the Company is a United States corporation which
generates substantially all of its income from non-U.S. operations, its income
will generally be subject to taxation in different jurisdictions. Certain
operations of the Company conducted outside the United States or by foreign
subsidiaries, in addition to being subject to taxation in foreign
jurisdictions, are also subject to various provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), which impose special taxes in certain
circumstances on foreign subsidiaries of United States corporations. While the
Company will generally receive foreign tax credits for taxes paid in foreign
jurisdictions which can be offset against United States tax liabilities, there
can be no assurance that the Company will generate sufficient United States
income to fully utilize such foreign tax credits.
Anti-takeover Considerations. Certain provisions of the Company's By-Laws
and Delaware law could discourage potential acquisition proposals, delay or
prevent a change in control of the Company, and limit the
8
<PAGE>
price that certain investors might be willing to pay in the future for shares
of the Company's Common Stock. For example, these provisions allow a staggered
board of directors and the issuance, without stockholder approval, of
preferred stock with rights and privileges senior to the Common Stock. The
issuance of preferred stock could result in the dilution of the voting power
of the shares of Common Stock purchased in this Offering and could have a
dilutive effect on earnings per share. The Company is also subject to Section
203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business ventures with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. See "Description of Securities--Certain Provisions of the
Company's Charter and Delaware Law".
Limited Experience of the Representative. Although the Representative has
co-managed over fifty public offerings, it has served as the sole managing
underwriter of only one public offering. However, the senior officers of the
Representative overseeing the Offering have served, with various firms, as the
lead investment bankers for more than one hundred registered public offerings
over the last fifteen years. There can be no assurances that the
Representative's lack of public offering experience will not have a material
adverse effect on the Offering or the trading market for the Company's Common
Stock following the Offering. See "Underwriting".
Potential Adverse Effect of Warrants and Company Options. The Company issued
warrants to purchase an aggregate of 240,000 shares of Common Stock to the IPO
Representatives which are exercisable at a price of $16.50 per share (the "IPO
Warrants") and will issue warrants to purchase an aggregate of 360,000 shares
pursuant to the Ness Transaction which are exercisable at a price of $13.00
per share (the "Ness Warrants"). See "Description of Securities--Warrants".
Additionally, the Company has reserved 50,000 shares of Common Stock for
issuance under its 1997 Non-Employee Director Stock Option Plan and 750,000
shares of Common Stock for issuance under its employee 1997 Stock Option Plan
of which 20,000 and 750,000 options, respectively, have been issued, all at an
exercise price of $10.00 per share. See "Management--Stock Compensation
Plans". The holders thereof will have, at nominal cost, the opportunity to
profit from a rise in the market price of the Common Stock without assuming
the risk of ownership, with a resulting dilution in the interest of the other
security holders. As long as the IPO Warrants, Ness Warrants and other Company
options remain unexercised, the Company's ability to obtain additional capital
might be adversely affected. Moreover, the holders of the IPO Warrants, the
Ness Warrants and other Company options may exercise such warrants or options
at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of its securities on terms more favorable
than those under which the existing warrants or options are exercisable. See
"Description of Securities" and "Certain Transactions".
Risk Associated With the Potential Acquisition of the Remaining Interest of
FFC and/or Ness. The Company may choose to proceed with the acquisition of the
remaining 50% interest in FFC that it does not currently own by exercising the
FFC Option, and is currently negotiating with the management of Ness to
acquire the 24.96% interest it will not acquire pursuant to the Ness
Transaction. If the consideration for either such transaction consists of
cash, a substantial portion of the Company's available cash may have to be
used to consummate the transaction. If the consideration for either
transaction consists of Common Stock or other securities, stockholders of the
Company could suffer dilution of their interests in the Company. In addition,
the consummation of either transaction could involve acquisition related
charges. See "Business--Strategic Acquisitions".
Shares Eligible For Future Sale. Sales of shares of Common Stock by existing
shareholders or by existing holders of outstanding options and warrants, under
Rule 144 of the Act, pursuant to the exercise of registration rights or
otherwise, could have an adverse effect on the price of the Common Stock. The
holders of the IPO Warrants will be able to sell publicly the Common Stock
issuable upon exercise thereof, either through the exercise of certain
registration rights, or for shares issued pursuant to the "cashless exercise"
provisions thereof, pursuant to Rule 144. See "Description of Securities" and
"Underwriting".
No Dividends. The Company does not anticipate paying dividends on its Common
Stock for the foreseeable future. Dividends will only be paid at such time as
the cash flow of the Company is sufficient to justify such payments, provided
that there are no restrictions on payment of dividends under credit or other
agreements. See "Dividend Policy".
9
<PAGE>
Possible Illiquidity of Trading Market. The Common Stock is listed on the
American Stock Exchange. To continue to be listed on the American Stock
Exchange, the Company must continue to satisfy certain maintenance standards.
If the Company is unable to maintain the standards for continued quotation on
the American Stock Exchange, the Common Stock could be subject to delisting by
the American Stock Exchange. In such event, an investor would find it more
difficult to dispose of the Shares, or to obtain accurate quotations as to
their price.
Potential Volatility of Stock Price. The stock market has, from time to
time, experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock.
In addition, the market price of the Common Stock may prove to be highly
volatile. Announcements of innovations or new commercial products by the
Company or its competitors, developments or disputes concerning proprietary
rights, regulatory developments in countries in which the Company operates, as
well as period to period fluctuations in financial results, among other
factors, may have a significant impact on the market price of the Common
Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock being offered hereby are estimated to be approximately
$13,995,000, at an assumed Offering price of $12.00 per share and after
deducting the underwriting discounts and commissions and Offering expenses
payable by the Company. The Company intends to use (i) $11,157,000 to pay the
Cash Portion of the Ness Transaction and (ii) $2,838,000 of the net proceeds
to paydown the FFC Note. The remainder of the FFC Note will be paid off
utilizing the existing cash reserves of the Company. Based on the amount
outstanding in principal and interest under the FFC Note at March 31, 1998 of
$5,726,000, approximately $2,888,000 of the Company's existing cash reserves
would be required to pay off the FFC Note. However, since the FFC Note is
denominated in AUD, the actual amount of existing cash reserves required to
pay off the FFC Note will vary from the amount set forth above unless the AUD
value relative to U.S. dollars on the date of payment of the FFC Note is
identical to the relative value on March 31, 1998.
DIVIDEND POLICY
Except for a final dividend distribution to FAI Insurances made prior to the
initial public offering ("IPO") of approximately $5.8 million (including a
partial return of capital of $0.6 million), the Company has paid no dividends
on the Common Stock and does not anticipate doing so for the foreseeable
future. Dividends will only be paid at such time as the cash flow of the
Company is sufficient to justify such payments. The Company anticipates that
all earnings, if any, for the foreseeable future will be retained to finance
the growth and development of the business, including the operations of FFC.
See "Certain Transactions--Transactions with FAI Insurances", and "Pro Forma
Financial Statements".
PRICE RANGE OF COMMON STOCK
On July 15, 1997, the Company commenced the initial public offering of its
Common Stock, which has been traded on the American Stock Exchange since that
date.
The following table sets forth the high and low closing sale prices of the
Common Stock as reported by the American Stock Exchange for the periods
indicated.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
----------- ------- -------
<S> <C> <C>
First Quarter (July 15-September 30)..................... $14.875 $10.000
Second Quarter (October 1-December 31)................... 13.250 9.000
Third Quarter (January 1-March 31)....................... 11.375 9.062
Fourth Quarter (April 1-June 30)......................... 13.875 10.000
<CAPTION>
FISCAL 1999
-----------
<S> <C> <C>
First Quarter (July 1-July 16 ).......................... 13.000 10.250
</TABLE>
On July 16, 1998, the last reported sale price of the Common Stock as
reported by the American Stock Exchange was $10.25. Based on information
obtained from the Company's transfer agent, there are seven holders of record
of the Common Stock and the Company believes that the number of beneficial
owners of its Common Stock is in excess of 250.
10
<PAGE>
CAPITALIZATION
The following table sets the capitalization of the Company as of March 31,
1998 as adjusted to reflect (i) the issuance and sale by the Company of
1,300,000 shares of Common Stock in this Offering (at an assumed Offering
price of $12.00 per share) and application of the net proceeds therefrom after
deducting estimated underwriting discounts and commissions and Offering
expenses payable by the Company and (ii) the issuance of 400,000 shares of
Common Stock and the Ness Warrants pursuant to the Ness Transaction. The
capitalization information set forth in the table below is unaudited and
qualified by, and should be read in conjunction with the pro forma financial
statements, the financial statements and the notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
----------------------
ADJUSTED FOR
THIS OFFERING
AND THE NESS
ACTUAL ACQUISITION
------- -------------
(in thousands)
<S> <C> <C>
Total Debt (1)...................................... $ 5,726 $ 1,353
Shareholders' Equity
Preferred Stock, $.001 value; 1,000,000 shares
authorized; none outstanding..................... -- --
Common Stock $.001 value; 20,000,000 shares
authorized; 5,150,500 shares outstanding,
6,850,500 as adjusted for the sale of 1,300,000
shares of Common Stock pursuant to this Offering,
and 400,000 shares of Common Stock issued
pursuant to the Ness Transaction (2)............. 5 7
Additional Paid in Capital(3)....................... 16,111 34,774
Secured Note........................................ (2,375) (2,375)
Foreign Currency Translation Reserve................ (470) (470)
Retained Earnings................................... 3,527 3,527
------- -------
Total Shareholders' Equity...................... 16,798 35,463
------- -------
Total Capitalization............................ $22,524 $36,816
======= =======
</TABLE>
- --------
(1) Represents the current and long-term debt of the Company. Pursuant to the
terms of the FFC Note, the Company is required to utilize the net proceeds
of this Offering in excess of the Cash Portion of the Ness Transaction to
pay down the FFC Note. The Company will utilize a portion of its cash
reserves to extinguish the remainder of the FFC Note.
(2) Excludes (i) an aggregate 750,000 shares of Common Stock subject to
options issued under the Company's 1997 Stock Option Plan and 20,000
shares of Common Stock subject to options issued under Company's 1997 Non-
Employee Director Stock Option Plan, all at an exercise price of $10.00
per share, (ii) 240,000 shares of Common Stock reserved for issuance upon
exercise of the IPO Warrants and (iii) 360,000 shares of Common Stock
reserved for issuance upon the exercise of the Ness Warrants. See
"Management--Stock Compensation Plans" and "Description of Securities--
Warrants".
(3) The "Adjusted" Additional Paid in Capital figure includes the value
attributed to the Ness Warrants in the Stock Purchase Agreement relating
to the Ness Transaction.
11
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information set forth below has been derived from the
financial data of the Company, its subsidiaries and its predecessor entities,
including FAI Home Security Pty Limited, FAI Home Security (ENZED) Limited,
FAI Home Security (NZ) Trust and FAI Home Security (NZ) Limited. The selected
statement of operations and balance sheet data of the Company as of and for
the years ended June 30, 1993, 1994, 1995, 1996 and 1997 have been derived
from the audited consolidated financial statements of the Company. See
"Consolidated Financial Statements of Home Security International--Note 1".
The selected statement of operations and balance sheet data as of and for the
nine month periods ended March 31, 1997 and 1998, are unaudited, but in the
opinion of management include all adjustments necessary for a fair
presentation of such data. The selected financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in the Prospectus. The pro forma
financial data as of and for the nine months ended March 31, 1998 is
unaudited, and has been derived from the financial data of the Company after
giving effect to the FFC Transaction, the Ness Transaction, the IPO and this
Offering as though such transactions had occurred at the beginning of such
period. See "Pro Forma Financial Statements".
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED NINE MONTHS
YEARS ENDED JUNE 30, MARCH 31, ENDED
---------------------------------------------- ------------------ MARCH 31, 1998
1993 1994 1995 1996 1997 1997 1998 AS ADJUSTED(1)
------- ------- -------- -------- -------- -------- -------- --------------
(in thousands, except per share and unit sales data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $11,093 $10,629 $ 21,437 $ 26,701 $ 33,465 $ 23,232 $ 32,158 $ 36,369
Cost of goods sold..... (5,931) (6,728) (14,219) (17,585) (24,274) (16,779) (18,865) (15,868)
------- ------- -------- -------- -------- -------- -------- --------
Gross profit........... 5,162 3,901 7,218 9,116 9,191 6,453 13,293 20,501
General and
administrative
expenses.............. (4,310) (3,955) (5,091) (6,606) (6,053) (4,046) (8,083) (11,348)
Research and
development........... -- -- -- -- -- -- -- (609)
------- ------- -------- -------- -------- -------- -------- --------
Income (Loss) from
operations............ 852 (54) 2,127 2,510 3,138 2,407 5,210 8,544
Interest income, net... 2 5 65 203 784 555 215 223
------- ------- -------- -------- -------- -------- -------- --------
Income before taxes,
equity in income of
affiliated companies
and minority interest. 854 (49) 2,192 2,713 3,922 2,962 5,425 8,767
Income tax expense..... (362) (25) (722) (1,054) (1,630) (1,124) (1,949) (3,338)
------- ------- -------- -------- -------- -------- -------- --------
Income (Loss) before
equity in income of
affiliated companies
and minority interest. 492 (74) 1,470 1,659 2,292 1,838 3,476 5,429
Equity in income of
affiliated companies.. -- -- -- -- -- -- 97 61
Minority interest...... -- -- -- -- -- -- -- (653)
------- ------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 492 $ (74) $ 1,470 $ 1,659 $ 2,292 $ 1,838 $ 3,573 $ 4,837
======= ======= ======== ======== ======== ======== ======== ========
Diluted net income per
share of Common
Stock(2).............. $ 0.51 $ 0.41 $ 0.69 $ 0.70
======== ======== ======== ========
Diluted weighted
average shares of
Common Stock
outstanding(2)........ 4,500 4,500 5,157 6,906
UNIT SALES DATA:(3)
Unit sales............. 11,744 12,235 25,280 31,669 38,071 26,812 40,919 40,919
Cumulative unit sales.. 16,947 29,182 54,462 86,131 124,202 112,943 165,121 165,121
</TABLE>
- --------
(1) Gives effect to the following transactions as if they had occurred at the
beginning of the period: (i) the FFC Transaction; (ii) the Ness
Transaction; (iii) the IPO; and (iv) this Offering. See "Pro Forma
Financial Statements".
(2) Pro forma diluted net income per share of Common Stock and pro forma
weighted average shares of Common Stock outstanding are computed after
giving effect to the transactions listed in Note 1 above.
(3) Unit sales represents the sales of the SecurityGuard System during the
applicable period and cumulative unit sales represents the aggregate sales
of the SecurityGuard System since the Company began operations in 1988.
12
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
PRO FORMA
AS OF JUNE 30, AS OF MARCH 31, AS OF
-------------------------------------- --------------- MARCH 31, 1998
1993 1994 1995 1996 1997 1997 1998 AS ADJUSTED(1)
------ ------ ------ ------- ------- ------- ------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents........... $ (42) $ 247 $1,230 $ 370 $ -- $ 236 $ 5,803 $ 2,939
Working capital
(deficit)............. (279) (1) 1,684 3,451 (1,754) 4,896 2,900 3,808
Total assets........... 1,748 2,281 7,671 13,384 15,957 20,985 30,326 48,605
Total debt, including
current portion....... 191 557 -- -- -- 1,750 5,726 1,353
Shareholders' equity... 408 369 3,912 9,894 9,790 14,044 16,798 35,463
</TABLE>
- --------
(1) Gives effect to the issuance of 400,000 shares pursuant to the Ness
Transaction, the issuance of 1,300,000 shares pursuant to this Offering,
and the application of the estimated net proceeds therefrom (and a portion
of existing cash reserves) to repay certain indebtedness. See "Use of
Proceeds".
13
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION
The accompanying unaudited pro forma statement of operations for the year
ended June 30, 1997 has been prepared after giving effect to the pro forma
adjustments described in the notes thereto as if the acquisition of the
International Assets, the FFC Transaction, the Ness Transaction, the IPO and
this Offering had occurred on July 1, 1996. The pro forma statement of
operations for the nine month period ended March 31, 1998 has been prepared as
if this Offering, the FFC Transaction and the Ness Transaction had taken place
on July 1, 1997. The unaudited pro forma balance sheet as of March 31, 1998
has been prepared as if this Offering and the Ness Transaction took place on
March 31, 1998.
The sale of the shares, pursuant to this Offering, has been reflected in the
pro forma financial statements assuming a $12.00 per share offering price, net
of underwriting commission and issue costs. The funds raised from this
Offering are being used to pay the cash portion of the consideration for the
Ness Transaction, with the remainder used to retire a portion of the FFC Note.
Pro forma earnings per share amounts have been included in the pro forma
statements of operations assuming the shares issued pursuant to the events
included in the respective statements of operations were outstanding during
the periods described therein.
The unaudited pro forma financial statements do not purport to represent
what the results of operations or financial condition of the Company would
actually have been for the corresponding period if the respective events or
transactions described above had in fact been in effect throughout such period
or to project the results of operations or financial condition of the Company
for any future date or period.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of the Company, the Cooper
International Group and FFC, including the notes thereto, and other financial
information included elsewhere in the Prospectus.
14
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS FOR NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HSI
CONSOLIDATED IIHSL PRO FORMA
MARCH 31, CONSOLIDATED(1) PRO FORMA MARCH 31,
1998 MARCH 31, 1998 ADJUSTMENTS NOTE 1998
------------ --------------- ----------- ---- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 32,158 $ 18,855 $(14,644) (2) $ 36,369
Cost of goods sold--
other (18,865) (11,279) 14,644 (2) (15,500)
- --inventory revaluation. -- -- (368) (3) (368)
-------- -------- --------
Gross profit............ 13,293 7,576 20,501
General and
administrative
expenses............... (8,083) (2,748) (517) (4) (11,348)
Research and
development............ -- (609) (609)
-------- -------- --------
Income from operations.. 5,210 4,219 8,544
Interest income
(expense), net......... 215 (103) 111 (5) 223
-------- -------- --------
Income before income
taxes, equity in income
of affiliated companies
and minority interest.. 5,425 4,116 8,767
Income tax expense...... (1,949) (1,498) 109 (6) (3,338)
-------- -------- --------
Income before equity in
income of affiliated
companies and minority
interest............... 3,476 2,618 5,429
Equity in income of
affiliated companies... 97 -- (36) (7) 61
Minority interest....... -- (758) 105 (8) (653)
-------- -------- --------
Net income (loss)....... $ 3,573 $ 1,860 $ 4,837
======== ======== ========
Diluted weighted average
shares of Common Stock
outstanding............ 5,157 1,749 (9) 6,906
Diluted net income per
share of Common Stock.. $ 0.69 $ 0.70
</TABLE>
- --------
(1) The consolidated information reported for IIHSL reflects 100% of the
statement of operations data of Ness, adjusted by the "Minority Interest"
line entry to reflect IIHSL's historical ownership of 71.04% of Ness,
which increased to 75.04% in June 1998. See Note 8 below.
(2) Represents elimination of all sales and purchases between Ness and the
Company for the nine months ended March 31, 1998.
(3) Represents elimination of profit recognized by Ness on the net change in
inventory carried by the Company for the nine months ended March 31, 1998.
(4) Represents the sum of (i) an amortization charge for the period of
$470,000 resulting from the amortization of intangible assets of
$12,532,000 arising from the Ness Transaction using an amortization period
of 20 years; and (ii) the depreciation expense for the period of $47,000
resulting from the depreciation expense on the fair value revaluation of
plant and equipment arising from the Ness Transaction of $316,000.
(5) Represents the reduction in interest expense resulting from the repayment
of the FFC Note utilizing $2,838,000 of the proceeds of this Offering and
$2,888,000 of the Company's cash reserves.
(6) Represents the tax effect of the adjustments referred to in Notes 2, 3, 4
and 5 listed above. The amortization of intangible assets has no tax
effect. Taxation expense has been calculated at the Australian effective
tax rate of 36%.
15
<PAGE>
(7) Represents the Company's 50% equity in income (loss) of affiliated
companies for the six months ended December 31, 1997 as computed below.
(Pro Forma Reconciliation of Equity in Income (Loss)
of Affiliated Companies for the six months ended December 31, 1997)
<TABLE>
<CAPTION>
FFC PRO FORMA
CONSOLIDATED ADJUSTMENTS PRO FORMA
------------ ----------- ---------
<S> <C> <C> <C>
Income before taxes.................. $ 938,000 $(539,000) $ 399,000
Income tax expense................... (336,000) 194,000 (141,000)
--------- ---------
Net income........................... $ 602,000 $ 258,000
========= =========
50 percent equity in income of FFC... $ 129,000
Amortization of goodwill............. (165,000)
---------
Equity in loss of affiliated
companies........................... $ (36,000)
=========
</TABLE>
The equity in loss of affiliated companies has been calculated on a pro
forma basis after adjusting for the inclusion of an interest expense on the
loan balances due from FFC to FAI Insurances and FAI General Insurances
Limited, a subsidiary of FAI Insurances. Prior to January 1, 1998 these
loans were non interest bearing. Pro forma interest has been charged
monthly in arrears at the historic Westpac Banking Corporation ("Westpac")
indicator rate.
Equity in loss of affiliated companies is calculated after amortization of
goodwill of $6,586,000 arising from the FFC Transaction. Goodwill has been
amortized as if the FFC Transaction had taken place on July 1, 1997, over a
period of 20 years, which would result in an amortization charge for the
six month period ended December 31, 1997 of $165,000.
(8) Represents the adjustment needed to reflect IIHSL's acquisition of an
additional 4% interest in Ness in June 1998.
(9) Represents issuance of 400,000 shares of Common Stock in connection with
the Ness Transaction and the issuance of 1,300,000 of Common Stock in
connection with this Offering and the dilutive effect, if any, of all
outstanding options and warrants.
16
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS FOR YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO PRO FORMA
HSI INTERNATIONAL PRO FORMA FORMA ADJUSTMENTS PRO
CONSOLIDATED 9 MONTHS TO ADJUSTMENTS FOR FOR 1997 IIHSL JUNE 30, FOR 1998 FORMA
JUNE 30, MARCH 30, 1997 TRANS- 1997 TRANS- JUNE 30,
1997 1997 (1) TRANSACTIONS (2) NOTE ACTIONS CONSOLIDATED (8) ACTIONS (9) NOTE 1997
------------ ------------- ---------------- ---- -------- ---------------- ----------- ---- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........ $ 33,465 $ 1,398 $ -- $ 34,863 $16,193 $(14,701) (10) $ 36,355
Cost of sales
--related party. (3,647) -- 3,647 (3) -- -- --
--inventory
revaluation.... -- -- -- -- (269) (11) (269)
--other......... (20,627) (770) (21,397) (9,451) 14,701 (10) (16,147)
-------- ------- -------- ------- --------
Gross profit..... 9,191 628 13,466 6,742 19,939
General and
administrative
expenses--
related party... 560 (560) -- -- --
General and
administrative
expenses--other. (6,613) (1,140) (148) (4) (7,901) (3,554) (690) (12) (12,145)
Research and
development..... -- -- -- (595) (595)
-------- ------- -------- ------- --------
Income from
operations...... 3,138 (1,072) 5,565 2,593 7,199
Interest income
(expense), net.. 784 (284) (405) (5) 95 (193) (98)
-------- ------- -------- ------- --------
Income before
income taxes,
equity in loss
of affiliated
companies and
minority
interest........ 3,922 (1,356) 5,660 2,400 7,101
Income tax
expense......... (1,630) -- (1,063) (6) (2,693) (720) 119 (13) (3,294)
-------- ------- -------- ------- --------
Income before
equity in loss
of affiliated
companies and
minority
interest........ 2,292 (1,356) 2,967 1,680 3,807
Equity in loss of
affiliated
companies....... -- -- -- -- (22) (14) (22)
Minority
interest........ -- -- -- (444) 67 (15) (377)
-------- ------- -------- ------- --------
Net income
(loss).......... $ 2,292 $(1,356) $ 2,967 $ 1,236 $ 3,408
======== ======= ======== ======= ========
Diluted weighted
average shares
of Common Stock
outstanding..... 4,500 651 (7) 5,151 1,700 (16) 6,851
Diluted net
income per share
of Common Stock. $ 0.51 $ 0.58 $ 0.50
</TABLE>
- -------
(1) The consolidated financial statements of the Company include the results
of operations of the International Assets from April 1, 1997 to June 30,
1997. The remaining nine months results (July 1, 1996 to March 30, 1997)
of the year presented above reflect the results of the International
Assets prior to their sale to the Company, and are included in this Pro
Forma Statement of Operations as if the International Assets had been
acquired by the Company on July 1, 1996.
Footnotes related to Pro Forma Adjustments for the 1997 Transactions:
(2) The 1997 Transactions include the acquisition of the International Assets
and the IPO.
(3) Represents reversal of royalty expenses charged by FAI Insurances of
$3,647,000 for use of the FAI name, since the Company was granted the
right to use the FAI name for no ongoing charge in connection with the
Reorganization.
(4) Represents additional amortization of intangible assets of $148,000 to
arrive at a full year amortization of $540,000, which consists of
amortization of the goodwill of $10,803,000 arising from the purchase of
the Australian operations prior to 1997 and the purchase of the
International Assets, using an amortization period of 20 years. This
amortization period is consistent with the period used for similar assets
acquired.
(5) Represents reversal of (i) interest charges on a loan made by FAI
Insurances to the previous owner of the International Assets for $291,000,
as the loan was not assumed by the Company when it acquired the
International Assets; (ii) a $60,000 interest charge incurred by the
Company on a loan from FFC; and (iii) interest income of $756,000,
received on the Company's loan to an affiliate of FAI Insurances.
17
<PAGE>
(6) Represents the tax effect of the adjustments referred to in Notes 3, 4 and
5 listed above. The interest charge reversal and amortization of
intangible assets has no tax effect. Taxation expense has been calculated
at the Australian effective tax rate of 36%.
(7) Represents the issuance of 250,000 shares of Common Stock to Bradley D.
Cooper and the issuance of 400,500 shares of Common Stock in connection
with the IPO.
Footnotes related to IIHSL and the Pro Forma Adjustments for the 1998
Transactions:
(8) The consolidated information reported for IIHSL reflects 100% of the
statement of operations date of Ness, adjusted by the "Minority Interest"
line entry to reflect IIHSL's historical ownership of Ness, which
increased from 51.84% to 71.04% in January 1997, and subsequently
increased to 75.04% in June 1998. See Note 15 below.
(9) The 1998 Transactions include the FFC Transaction, the Ness Transaction
and this Offering.
(10) Represents elimination of all sales and purchases between Ness and the
Company for the year ended June 30, 1997.
(11) Represents elimination of profit recognized by Ness on the net change in
inventory carried by the Company for the twelve months ended June 30,
1997.
(12) Represents the sum of (i) an amortization charge for the period of
$627,000 resulting from the amortization of intangible assets of
$12,532,000 arising from the Ness Transaction using an amortization
period of 20 years; and (ii) the depreciation expense for the period of
$63,000 resulting from the depreciation expense on the fair value
revaluation of plant and equipment arising from the Ness Transaction of
$316,000.
(13) Represents the tax effect of the adjustments referred to in Notes 10, 11
and 12 listed above. The amortization of intangible assets has no tax
effect. Taxation expense has been calculated at the Australian effective
tax rate of 36%.
(14) Represents the Company's 50% equity in income of FFC for the year ended
June 30, 1997 as computed below.
(Pro Forma Reconciliation of Equity in Income (loss) of Affiliated Companies
for the year ended June 30, 1997)
<TABLE>
<CAPTION>
FFC PRO FORMA
CONSOLIDATED ADJUSTMENTS PRO FORMA
------------ ----------- ---------
<S> <C> <C> <C>
Income before taxes.................. $1,684,000 $(765,000) $ 920,000
Income tax expense................... (580,000) 275,000 (305,000)
---------- ---------
Net income........................... $1,104,000 $ 615,000
========== =========
50 percent equity in income of FFC... $ 307,000
Amortization of goodwill............. (329,000)
---------
Equity in loss of affiliated
companies........................... $ (22,000)
=========
</TABLE>
The equity in loss of affiliated companies has been calculated on a pro
forma basis after adjusting for the inclusion of an interest expense on
the loan balances due from FFC to FAI Insurances and FAI General
Insurances Limited. Prior to January 1, 1998 these loans were non-interest
bearing. Pro forma interest has been charged monthly in arrears at the
historic Westpac indicator rate.
Equity in loss of affiliated companies is calculated after amortization of
goodwill of $6,586,000 arising from the FFC Transaction. Goodwill has been
amortized as if the FFC Transaction had taken place on July 1, 1996, over
a period of 20 years, which would result in an amortization charge for the
twelve month period ended June 30, 1997 of $329,000.
(15) Represents the adjustments needed to reflect IIHSL's acquisition of an
additional 4% interest in Ness in June 1998.
(16) Represents issuance of 400,000 shares of Common Stock in connection with
the Ness Transaction and the issuance of 1,300,000 shares of Common Stock
in connection with this Offering.
18
<PAGE>
PRO FORMA BALANCE SHEET AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
HSI IIHSL
CONSOLIDATED CONSOLIDATED PRO FORMA
MARCH 31, MARCH 31, PRO FORMA MARCH 31,
1998 1998 ADJUSTMENTS NOTE 1998
------------ ------------ ----------- ---- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents............ $ 5,803 $ 24 $(2,888) (1) $ 2,939
Accounts receivable,
net.................... 1,246 4,565 (3,326) (2) 2,485
Inventories............. 2,791 4,351 7,142
Prepaid expenses and
other current assets... 1,226 97 (150) (3) 1,173
------- ------- ------- -------
Total current assets.. 11,066 9,037 (6,364) 13,739
------- ------- ------- -------
Non-current assets
Investment in affiliated
companies.............. 7,775 -- 7,775
Plant and equipment,
net.................... 1,060 1,579 316 (4) 2,955
Intangibles, net........ 9,737 865 12,532 (5) 23,134
Deferred income taxes... 685 385 (114) (5) 955
Other non-current asset. 3 44 47
------- ------- ------- -------
Total non-current
assets............... 19,260 2,873 12,734 34,866
------- ------- ------- -------
Total assets.......... $30,326 $11,910 $ 6,370 $48,605
======= ======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft.......... $ -- $ 503 $ $ 503
Note payable--FAI
Insurances Group....... 694 -- (694) (1) --
Accounts payable--trade. 4,424 2,422 (3,326) (2) 3,520
Accrued liabilities..... 944 564 1,508
Lease liability......... 6 234 240
Income taxes payable.... 1,450 1,402 2,852
Deferred income......... 647 -- 647
Current portion of long
term borrowings........ -- 661 661
------- ------- ------- -------
Total current
liabilities.......... 8,165 5,786 (4,020) 9,931
------- ------- ------- -------
Non-current liabilities
Long term lease
liability.............. 10 575 585
Accrued liabilities..... 115 77 191
Deferred income......... 206 -- 206
Long term borrowings.... -- 165 165
Payables--related party. -- 527 527
Note payable--FAI
Insurances Group....... 5,032 -- (5,032) (1) --
------- ------- ------- -------
Total non-current
liabilities.......... 5,363 1,344 (5,032) 1,674
------- ------- ------- -------
Total liabilities..... 13,528 7,130 (9,052) 11,605
------- ------- ------- -------
Minority interest......... 1,537 1,537
Shareholders' equity
Common stock............ 5 1 1 (6) 7
Additional paid-in
capital................ 16,111 -- 18,663 (6) 34,774
Secured note issue...... (2,375) -- -- (2,375)
Foreign currency
translation adjustment. (470) (340) 340 (7) (470)
Retained earnings....... 3,527 3,582 (3,582) (7) 3,527
------- ------- ------- -------
Total shareholders'
equity............... 16,798 3,243 15,422 35,463
------- ------- ------- -------
Total liabilities and
shareholders' equity. $30,326 $11,910 $ 6,370 $48,605
======= ======= ======= =======
</TABLE>
19
<PAGE>
- --------
(1) Represents the cash effect of the Ness Transaction and this Offering
summarized as follows:
<TABLE>
<S> <C>
Net proceeds from the Offering (increased by prepaid
offering expenses at March 31, 1998)..................... $ 13,995,000
Cash Portion.............................................. (11,157,000)
Repayment of the FFC Note--current........................ (694,000)
--long term............................................... (5,032,000)
------------
Cash reserves utilized................................ $ (2,888,000)
============
</TABLE>
(2) Represents the elimination of accounts receivable and accounts payable
between the Company and Ness of $3,326,000.
(3) Represents prepaid offering expenses as of March 31, 1998.
(4) Represents the fair value revaluation of plant and equipment of $316,000
arising from the Ness Transaction.
(5) Represents the goodwill generated from the Ness Transaction computed as
follows:
<TABLE>
<S> <C>
Ness Transaction price (AUD $25,400,000)................... $ 15,977,000
Net identifiable assets of IIHSL........................... (3,243,000)
Plant and equipment revaluation............................ (316,000)
Tax effect of plant and equipment revaluation.............. 114,000
------------
Purchase price in excess of tangible and other
intangible net assets................................. $ 12,532,000
============
(6) Represents the Common Stock and Additional Paid-in-Capital resulting from
this Offering and the Ness Transaction computed as follows:
Issuance of 400,000 shares of Common Stock at $10.25 per
share..................................................... $ 4,100,000
Issuance of 360,000 warrants (valued at $2 per share)...... 720,000
Offering of 1,300,000 shares (assuming $12 per share)...... 15,600,000
Underwriting commission and issue costs.................... (1,756,000)
------------
Total.................................................. $ 18,664,000
============
</TABLE>
(7) Elimination of Ness foreign currency translation adjustment and retained
earnings.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a direct sales company which, through the Distributor
Network, sells, installs and services a residential security alarm system
marketed under the trade name SecurityGuard, principally in Australia and New
Zealand, with expanding international operations in Europe, South Africa and
North America.
The Company's revenues from SecurityGuard System sales are recorded upon
shipment by the Company to Area Distributors and Distributors and are net of
any discounts. Revenues related to extended warranties are recognized over the
life of the warranty agreement with the customer, although payment is received
in full at the beginning of the agreement. In the face of increased
competition in the industry, there can be no assurance that the Company will
not face increased pricing pressure, which in turn could lead to changes in
the selling price of the SecurityGuard System or services furnished by the
Company. The impact of any such price changes on the Company's revenue or
operating results cannot be accurately determined.
On June 30, 1997, the Company acquired from FAI Insurances Limited and
certain of its subsidiaries ("FAI Insurances") (i) the Australian and New
Zealand security alarm operations ("Australia and New Zealand Operations") of
FAI Insurances and (ii) the assets of FAI Insurances' security alarm
operations outside Australia and New Zealand (which were previously purchased
by FAI Insurances from Bradley D. Cooper on March 31, 1997) ("International
Assets") (collectively, the "Reorganization"). Pursuant to the Reorganization,
the Company's previous existing royalty agreement with FAI Insurances, which
provided for the payment of commissions for each SecurityGuard System sold in
exchange for the use of the "FAI" name and logo was replaced by a no cost
license agreement (the "License Agreement") with FAI Insurances for the
continued use of the "FAI" name and logo. As a result of the Reorganization,
the Company's financial statements have been prepared using the U.S. GAAP
"common control" concept. Under this concept, the financial statements of the
Company include the results of operations of the Company's predecessor
entities operated by FAI Insurances (i.e., FAI Home Security Pty Limited, FAI
Home Security (ENZED) Limited, FAI Home Security (NZ) Trust and FAI Home
Security (NZ) Limited) as if the Company had owned such entities before the
Reorganization. Additionally, the Company has included in its financial
statements for the year ended June 30, 1997 the results for three months of
operations (April 1, 1997-- June 30, 1997) of the International Assets
purchased by FAI Insurances on March 31, 1997 from Bradley D. Cooper and
subsequently transferred to the Company as part of the Reorganization. The
inclusion of the operating results of that business for the three month period
had no material impact on the Company's results for the year ended June 30,
1997. See "Certain Transactions--Transactions Involving Bradley D. Cooper".
On December 31, 1997, the Company acquired a 50% equity interest in FFC. The
purchase price of $7,016,525 for the FFC Shares was paid by the Company
through delivery of the FFC Note which provides for periodic principal
payments over a five year period, and bears interest at a per annum rate of
7.75% payable monthly in arrears. FFC is a consumer and business finance
company operating in Australia and New Zealand. FFC specializes in the
provision of consumer credit, primarily to purchasers of the SecurityGuard
System through sales finance arrangements with the Company and participants in
the Distributor Network, and also through personal loan and insurance products
which are not currently part of the Company's business. For the nine months
ended March 31, 1998 approximately 80% of the principal amount of loans made
by FFC were derived from consumer loans to finance purchases of the
SecurityGuard System by end users in Australia and New Zealand. FFC is also
experiencing growth in its business from sources other than the Company,
particularly in the personal loan market. See "Business--Strategic
Acquisitions".
The consolidated financial statements are translated into U.S. dollars to
reflect the Company's reporting currency. The assets and liabilities are
translated at the balance sheet date exchange rate. The statements of
operations data for each period have been translated at the average exchange
rate throughout such period. The resulting translation effects are reflected
in shareholders' equity.
21
<PAGE>
On October 1, 1997, the Company entered into an AUD $2.5 million collar
hedge which expired on 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 U.S. dollars. Additionally, on December 4, 1997 the Company
entered into a forward contract selling AUD $1.0 million for U.S. dollars at
0.6800 which also expired on June 30, 1998. These contracts have been marked
to market with a gain of U.S. $122,207 being recorded for the nine months
ended March 31, 1998.
The Company is currently in the process of evaluating its information
technology infrastructure ("ITI") for Year 2000 compliance. The Company will
utilize both internal and external resources to test its ITI for Year 2000
compliance and if necessary, to reprogram or replace any non-compliant ITI.
The Company does not expect that the cost to modify its ITI, if necessary, to
be Year 2000 compliant will be material to its financial condition or results
of operations. The Company is also communicating with suppliers, financial
institutions and others to coordinate Year 2000 compliance.
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE ENDED
30, MARCH 31,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 66.3% 65.9% 72.5% 72.2% 58.7%
----- ----- ----- ----- -----
Gross profit............................. 33.7% 34.1% 27.5% 27.8% 41.3%
Management fees received--related party.. 1.4% -- 1.7% 2.2% --
General and administrative expenses...... 25.2% 24.7% 19.8% 19.6% 25.1%
----- ----- ----- ----- -----
Income from operations................... 9.9% 9.4% 9.4% 10.4% 16.2%
Interest income net...................... 0.3% 0.8% 2.3% 2.4% 0.7%
----- ----- ----- ----- -----
Income before income taxes, equity in
income of affiliated companies.......... 10.2% 10.2% 11.7% 12.8% 16.9%
Income tax expense....................... 3.3% 4.0% 4.9% 4.9% 6.1%
----- ----- ----- ----- -----
Income before equity in income of
affiliated companies.................... 6.9% 6.2% 6.8% 7.9% 10.8%
Equity in income of affiliated companies. -- -- -- -- 0.3%
----- ----- ----- ----- -----
Net income............................... 6.9% 6.2% 6.8% 7.9% 11.1%
</TABLE>
Comparison of Nine Months ended March 31, 1998 and March 31, 1997.
Net Sales: Net sales increased by $8.9 million or 38% from $23.2 million for
the nine months ended March 31, 1997 to $32.1 million for the nine months
ended March 31, 1998. The increase in net sales was primarily due to the
following factors: (i) a 24% increase in net sales in the Australia and New
Zealand markets, from $23.2 million for the nine months ended March 31, 1997
to $28.7 million for the nine months ended March 31, 1998, which was
attributable to a 34% increase in unit sales in Australia and New Zealand from
26,812 units for the nine months ended March 31, 1997 to 35,891 units for the
nine months ended March 31, 1998; and (ii) the inclusion in the nine months
ended March 31, 1998 of $3.5 million from the European, South African and
North American markets, which was not part of the Company's results for the
nine months ended March 31, 1997. Unit sales in these markets for the nine
months ended March 31, 1998 were 5,028 compared to 1,618 for the nine months
ended March 31, 1997, an increase of 210%. Sales during the 1997 period were
made by entities related to Bradley D. Cooper which owned the International
Assets during that period. See "Certain Transactions--Transactions Involving
Bradley D. Cooper".
22
<PAGE>
Cost of Goods Sold: Cost of goods sold increased by $2.1 million from $16.8
million to $18.9 million. This represented a decrease, as a percentage of net
sales, from 72% to 58% for the nine months ended March 31, 1997 and 1998,
respectively. This decrease, however, was partly due to the elimination of the
royalty fee charged for the use of the FAI name by FAI Insurances during the
nine month period ended March 31, 1997. As adjusted to exclude this related
party royalty charge of $2.7 million, cost of goods for the nine months ended
March 31, 1997 would have been $14.1 million, which was 61% of revenues. This
reduction from 61% to 58% 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 nine months ended March 31, 1997, to a base salary plus
10% of net profit after tax (recorded in general and administrative expenses)
for the nine months ended March 31, 1998.
Management Fees Received--Related Party: Management fees received from a
related party for the nine months ended March 31, 1997 comprises management
fee income totaling $0.5 million, which for the nine months ended March 31,
1998, is eliminated as an intercompany transaction.
General and Administrative Expenses: General and administrative expenses
were $8.1 million for the nine months ended March 31, 1998, compared to $4.5
million for the nine months ended March 31, 1997. General and administrative
expenses for the nine months ended March 31, 1998, however, included $2.0
million of expenses relating to the European, North American and South African
operations, which were not part of the Company's operations in the nine months
ended March 31, 1997. Included in the $2.0 million is a provision of $0.2
million due to delays in the product approval process in Belgium and a $0.15
million charge was expensed in relation to the establishment of the U.S.
market. Total general and administrative expenses, as a percentage of net
sales (as adjusted to exclude the management fee income of $0.5 million
received from a related party in the 1997 period) increased to 25.1% for the
nine months ended March 31, 1998 compared to 19.6% for the nine months ended
March 31, 1997. The re-classification of the Chief Executive Officer's
compensation package resulted in an increase of $0.9 million or 3% as a
percentage of net sales for the nine months ended March 31, 1998 as compared
to the nine months ended March 31, 1997.
Income From Operations: Net income from operations increased from $2.4
million for the nine months ended March 31, 1997 to $5.2 million for the nine
months ended March 31, 1998. As adjusted to exclude the related party royalty
payments (which were eliminated pursuant to the License Agreement) and the
management fee income received from a related party, income from operations
increased $0.6 million from $4.6 million for the nine months ended March 31,
1997 compared to $5.2 million for the nine months ended March 31, 1998.
Interest Income: Interest income decreased from $555,000 for the nine months
ended March 31, 1997 to $334,000 for the nine months ended March 31, 1998.
However, the nine months ended March 31, 1997 included related party interest
income of $491,000. Excluding interest income received from related parties
for the nine months ended March 31, 1997, interest income increased from
$64,000 to $307,000 for the nine months ended March 31, 1997 and 1998
respectively. The increase during the 1998 period was attributable to higher
cash balances.
Interest Expense: Interest expense for the nine months ended March 31, 1998
is $118,000. This includes interest payments of $111,000 to FAI Insurances
pursuant to the FFC Note. For the nine months ended March 31, 1997 there was
no interest expense for the Company.
Income Tax Expense: The effective rate of tax decreased from 38% for the
nine months ended March 31, 1997 to 36% for the nine months ended March 31,
1998. This is attributable to the introduction during the 1998 period of
income earned in the United Kingdom, South Africa and Canada all of which have
lower tax rates than Australia.
Equity in Income of Affiliated Companies: Equity in income of affiliates for
the nine months ended March 31, 1998 was $0.1 million. This was calculated by
taking the Company's 50% share of FFC's net income of $0.18 million for the
three months ended March 31, 1998 and deducting amortization of goodwill for
the same period of $0.08 million. There was no equity in income of affiliates
for the nine months ended March 31, 1997 as the FFC Transaction took place on
December 31, 1997.
23
<PAGE>
Net Income: Net income increased from $1.8 million for the nine months ended
March 31, 1997 to $3.6 million for the nine months ended March 31, 1998.
However, as described above, the period ended March 31, 1997 included related
party charges of $2.7 million in royalty payments, interest income of $0.5
million and management fee income of $0.5 million. As adjusted to exclude
these related party charges and interest income, net income increased 24% from
$2.9 million for the nine months ended March 31, 1997 to $3.6 million for the
nine months ended March 31, 1998.
Comparison of fiscal years ended June 30, 1997 and June 30, 1996
Net Sales. Net sales increased by $6.8 million or 25% from $26.7 million for
the fiscal year ended June 30, 1996 to $33.5 million for the fiscal year ended
June 30, 1997. This increase was primarily due to continued growth of unit
sales in the New Zealand market. Net sales in the Australian market increased
by approximately $0.6 million (2.5%) from $21.9 million for the fiscal year
ended June 30, 1996 to $22.5 million for the fiscal year ended June 30, 1997.
Cost of Goods Sold. Cost of goods sold increased by $6.7 million from fiscal
year 1996 to fiscal year 1997. As a percentage of net sales, cost of goods
sold increased from 66% for the fiscal year ended June 30, 1996 to 73% for the
fiscal year ended June 30, 1997. This increase was due, in part, to the
increased cost of goods from the manufacturer for an updated version of the
SecurityGuard alarm with enhanced features, increases in commission and bonus
payments to senior executives related to sales volumes and increases in
royalty fees paid to related parties for use of the FAI brand name. This
royalty, which was eliminated for all periods after June 30, 1997, increased
as a percentage of revenues from 10% for the fiscal year ended June 30, 1996
to 11% for the fiscal year ended June 30, 1997. Excluding related party
expenses such as royalty charges for both periods, cost of goods sold, as a
percentage of revenues, increased from 56% of total revenue for the fiscal
year ended June 30, 1996 to 62% for the fiscal year ended June 30, 1997. See
"Management--Executive Employment Agreements," and "Certain Transactions--
Transactions with FAI Insurances".
General and Administrative Expenses. General and administrative expenses
were $6.6 million for both the fiscal years ended June 30, 1996 and 1997. As a
percentage of net sales, total general and administrative expenses decreased
to 20% in the fiscal year ended June 30, 1997 from 25% for the fiscal year
ended June 30, 1996. The decrease as a percentage of net sales for the fiscal
year ended June 30, 1997 compared to the fiscal year ended June 30, 1996,
reflects the economies of scale of operating the Distributor Network, since
increases in net sales did not entail a proportionate increase in overhead.
Furthermore, the decrease in general and administrative expenses reflects
changes to the Chief Executive Officer's employment agreement made during
fiscal 1997, which made him responsible for all costs of support staff,
travel, accommodation and other expenses related to the performance of his
duties as Chief Executive Officer of the Company. For fiscal 1997, these
expenses were encompassed by the commission structure used to compensate the
Chief Executive Officer and for such period were therefore included in cost of
goods sold rather than general and administrative expense. Additionally, the
Company received a management fee of $0.5 million (net of management fees paid
to FFC) from FAI Insurances in connection with the management of the
international operations. See "Certain Transactions--Transactions Involving
Bradley D. Cooper". General and administrative expenses also include a charge
of $0.4 million for the amortization of goodwill which was expensed in the
fiscal year ended June 30, 1997 compared to $0.2 million for the fiscal year
ended June 30, 1996.
Income from Operations. Income from operations increased from $2.5 million
for the fiscal year ended June 30, 1996 to $3.1 million for the fiscal year
ended June 30, 1997. If royalty payments to FAI Insurances for the use of the
FAI name and other related party charges and income were excluded for both
periods, net income from operations would have increased from $5.3 million for
the fiscal year ended June 30, 1996 to $6.8 million for the fiscal year ended
June 30, 1997. See "Certain Transactions--Transactions with FAI Insurances".
Interest Income. Interest income was approximately $0.8 million for the
fiscal year ended June 30, 1997 compared to $0.2 million for the fiscal year
ended June 30, 1996. This was due to the higher loan balances with a related
party, FFC, during the year ended June 30, 1996. See "Certain Transactions--
Transactions with FAI Insurances".
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Income Tax Expense. The effective rate of tax increased from 39% for the
fiscal year ended June 30, 1996 to 42% for the fiscal year ended June 30,
1997. This was due to the non-deductibility of goodwill amortization of $0.4
million during fiscal year ended June 30, 1997.
Net Income. Net income increased from $1.7 million for the fiscal year ended
June 30, 1996 to $2.3 million for the fiscal year ended June 30, 1997.
Comparison of fiscal year ended June 30, 1996 and June 30, 1995
Net Sales. Net sales increased by 25% from $21.4 million for the fiscal year
ended June 30, 1995 to $26.7 million for the fiscal year ended June 30, 1996.
Net sales in the fiscal year ended June 30, 1995 included $6.2 million in
direct retail sales and in-house finance sales (i.e., not through the
Distributor Network), as compared to $1.9 million in fiscal year ended June
30, 1996. This increase in net sales was primarily the result of the increase
in the amount of units sold into the Australian market during the fiscal year
ended June 30, 1996 compared to the fiscal year ended June 30, 1995.
Cost of Goods Sold. Cost of goods sold remained stable at 66% of net sales
although increasing in absolute terms from $14.2 million to $17.6 million for
the fiscal years ended June 30, 1995 and 1996, respectively. Product costs
from the manufacturer remained stable throughout the fiscal year ended June
30, 1996.
General and Administrative Expenses. General and administrative expenses
were $6.6 million (net of management fees) in the fiscal year ended June 30,
1996 and $5.1 million for the fiscal year ended June 30, 1995. As a percentage
of net sales, general and administrative expenses decreased from 26% to 25%
during the fiscal year ended June 30, 1996 compared to the fiscal year ended
June 30, 1995. This decrease reflects the completion of the shift to the
Distributor Network for fiscal year ended June 30, 1996 from direct retail
sales utilized during the year ended June 30, 1995, and the benefits of
certain economies of scale.
Income from Operations. Income from operations remained relatively constant
as a percentage of net sales at 10%, but showed an increase in absolute
figures from $2.1 million for fiscal year ended June 30, 1995 to $2.5 million
for fiscal year ended June 30, 1996. If royalty payments to FAI Insurances for
the use of the FAI name are excluded, net income from operations increased 29%
to $5.3 million for fiscal year ended June 30, 1996 from $4.1 million for the
fiscal year ended June 30, 1995. See "Certain Transactions--Transactions with
FAI Insurances".
Interest Income. Interest income was approximately $251,000 for the fiscal
year ended June 30, 1996, compared to $65,000 for the fiscal year ended June
30, 1995. This increase was due to an increase in funds on deposit during the
year and a significant increase in interest received from loans to a related
party, FFC. See "Certain Transactions--Transactions with FAI Insurances".
Income Tax Expense. The effective rate of tax increased to 39% for the
fiscal year ended June 30, 1996 from 33% for the fiscal year ended June 30,
1995. This was due to an increase in Australia's basic corporate tax rate.
Net Income. Net income increased by $190,000, or by 13%, from $1.5 million
for the fiscal year ended June 30, 1995 to $1.7 million for the fiscal year
ended June 30, 1996.
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. 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.
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In July 1997 the Company sold a total of 450,500 shares of Common Stock
pursuant to the IPO (including 150,500 shares pursuant to an over-allotment
option) at an issue price of $10.00, and obtained net proceeds of $3,497,670.
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. See "Certain Transactions--Transactions Involving
Bradley D. Cooper".
On October 1, 1997, the Company entered into an AUD $2.5 million collar
hedge which expired on 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 U.S. dollars. Additionally, on December 4, 1997 the Company
entered into a forward contract selling AUD $1.0 million for U.S. dollars at
0.6800 which also expired on June 30, 1998. These contracts have been marked
to market with a gain of U.S. $122,207 being recorded for the nine months
ended March 31, 1998.
On December 31, 1997 the Company entered into the FFC Transaction. The
purchase price of $7,016,525 was paid by delivery of the FFC Note, which is
payable over a period of five years, with interest at a rate of 7.75% per
annum payable monthly in arrears. The first installment of $1,631,750 was paid
on January 2, 1998 and the next principal installment of $694,117 is due on
December 31, 1998. For the three months ended March 31, 1998 interest in the
amount of $111,000 was paid under the FFC Note. The Company was also granted
the FFC Option to purchase the remaining 50% equity interest in FFC from FAI
Insurances, for the same consideration paid by the Company for the FFC Shares
plus 50% of the net change in FFC's retained earnings from the date of the FFC
Transaction until the date the FFC Option is exercised.
Cashflow from operations decreased from $3.3 million for the nine months
ended March 31, 1997 to $3.0 million for the nine months ended March 31, 1998.
The reduction in cash flow provided by operations reflects the use of cash to
support the current expansion of the Company's international operations. The
increase in inventories during the nine months ended March 31, 1998 reflects
increased sales in the international operations, the transition from air to
sea freight and the need to ensure sufficient levels of stock were available
for the commencement of operations in Germany.
Accounts receivable increased during the nine months ended March 31, 1998 as
a result of the continued expansion of the Distributor Network in the nine
months ended March 31, 1998.
Net cash used in investing activities decreased from a deficit of $3.5
million during the nine months ended March 31, 1997 to a deficit of $0.7
million during the nine months ended March 31, 1998. This was a result of the
settlement of related party balances.
Net cash generated from financing activities increased from a deficit of
$0.1 million during the nine months ended March 31, 1997 to a surplus of $3.5
million. This increase primarily resulted from the sale of shares in the IPO
in July 1997.
The Company believes that internally generated cashflows plus the proceeds
of this Offering (which will be used to complete the Ness Transaction and
satisfy, along with cash on hand, the balance of the FFC Note) 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
Distributor 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 in part to fund the expansion of FFC's
operations and will be used to acquire the 24.96% interest of Ness it will not
own following the closing of the Ness Transaction. Additionally, the Company
may from time to time, use excess cash flows to make strategic acquisitions or
other investments. Notwithstanding that the Company's costs in expanding its
Distributor Network are expected to be limited, the Company may be required to
obtain additional capital to fund growth from other financing sources 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 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.
26
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BUSINESS
OVERVIEW
The Company is a direct sales company which, through an extensive
distributor network (the "Distributor Network"), sells, installs and services
a residential security alarm system marketed under the tradename
SecurityGuard, principally in Australia and New Zealand, with expanding
international operations in Europe, South Africa and North America. The
Company's security system (the "SecurityGuard System"), which includes a
SecurityGuard alarm, a smoke alarm/detector, a rechargeable fire extinguisher,
and a fire blanket, provides home protection to a customer's premises through
an interior heat sensitive motion detector, flashing lights, a siren, window
decals and a centralized processing unit ("CPU") with the ability to
communicate signals to a central monitoring station. In order to capitalize on
its base of customers with installed SecurityGuard Systems (which the Company
believes to be approximately 165,000), the Company is continually seeking
additional methods of generating recurring revenue, including the sale of
extended warranties to its customers and the introduction of on-line alarm
monitoring services in Australia and New Zealand in the next twelve months.
The Company was founded by Bradley D. Cooper and commenced business in
Sydney, Australia in 1988. At its inception, the Company sold alarms through
part-time dealers who purchased franchises from the Company. In May 1991, the
Company adopted a more traditional sales structure by shifting to commission-
based compensation for its employees/agents, who were given extensive in-house
sales training. Although this approach allowed the Company to expand and
establish an office in Melbourne, Australia and to grow to five offices in
Australia within a year and a half, the growth and the income generation of
its sales force plateaued. In response to this development, in early 1993, the
Company implemented the Distributor Network strategy, which converted the
existing Company owned and operated branch offices to independently owned and
operated distribution offices, and converted the Company employed salespersons
to independent distributors responsible for their own costs. The Company
believes that this shift to the Distributor Network strategy is responsible
for the rapid growth in unit sales since that time. Since the first
independent distribution office launched its operations in September 1993, the
Company has grown to a total of sixty-seven distribution offices in Australia
and New Zealand, with an additional eighteen offices in Europe, South Africa
and North America.
In 1990 50% of the Company was sold to FAI Insurances and the remaining 50%
was sold to FAI Insurances in a series of transactions during 1994 and 1995.
In November 1995, FAI Insurances sold the home security operations of the
Company outside Australia and New Zealand to Bradley Cooper. On March 31,
1997, FAI Insurances reacquired the business and substantially all of the
assets of the international operations from Mr. Cooper. See "Certain
Transactions--Transactions Involving Bradley D. Cooper". Thereafter, on June
30, 1997, the Company completed the Reorganization, and thereby began
operations as a Delaware corporation. Following the Reorganization, in July
1997 the Company completed the IPO. See "Certain Transactions--Transactions
with FAI Insurances."
SECURITY ALARM INDUSTRY
According to the IBIS Information Service Report on the Security and
Investigative Services L7864, printed April 14, 1997 (the "IBIS Report") the
security alarm industry in Australia derives 90% of its revenue from
businesses and 10% from households, and is concentrated among four companies,
including the Company, Brambles Industries Ltd., Chubb Security Holdings
Australia Ltd. and Tempo Services Ltd., who account for approximately 68% of
the market. The IBIS Report indicated that gross sales for the entire industry
for 1995-1996 were AUD $866 million and that the real rate of growth during
that year was estimated at 3.5%. The Company's management believes that growth
in the residential security alarm industry is attributable to a number of
factors. First, it appears that media coverage of crime, along with political
discussions concerning its causes and remedies, have increased public
consciousness of crime. Second, a number of insurance companies offer premium
discounts to customers with security and fire detection systems or require
their customers to maintain such systems as a condition of coverage. Third,
the worldwide residential market for security alarms remains relatively
unpenetrated. Fourth, there is an industry trend toward reducing installation
costs to increase affordability.
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The Company believes that the security alarm services industry is
characterized by the following attributes:
High Degree of Fragmentation. Although residential security alarm
services in Australia, New Zealand and worldwide are consolidating, the
industry remains highly fragmented, consisting of major international
companies and a large number of local and regional companies within each
geographic market. The fragmented nature of the industry can be attributed
to the low capital requirements associated with performing basic
installation and maintenance of security alarm systems. However, the
business of a full service, integrated security services company providing
central station monitoring services is capital intensive, and the Company
believes that the high fixed costs of establishing both central monitoring
stations and full service operations contribute to the small number of
national competitors in each international market.
Continued Product Diversification and Integration of Services. The
products and services marketed in the residential security alarm industry
range from alarm systems that provide basic intrusion and fire detection to
sophisticated systems incorporating features such as closed circuit
television and access control. A recent trend in the residential security
alarm industry has been increased integration of different types of
products into single systems provided by single vendors. The Company
believes that this trend is a result of the need for enhanced security
services on a more cost-effective basis. Whereas basic alarm systems were
once adequate for many businesses and homes, it appears that many consumers
now demand remote control access and monitoring integrated into a single
system to provide for their overall security needs. A security alarm system
which provides burglar and fire alarm monitoring and remote control, all
integrated into one central system, not only provides enhanced security
services, but also is more cost-effective than separate systems installed
by separate vendors. Accordingly, the Company is aggressively positioning
itself to take advantage of this trend by expanding the services offered to
its customers to include 24-hour monitoring services. In this environment,
the Company believes that it can gain a competitive advantage over smaller
companies in the industry that do not have the infrastructure or the
expertise to support the larger and more sophisticated integrated systems.
Advances in Digital Communications Technology. Alarm systems use either
hardwired or wireless technology for systems installed on subscribers'
premises and may include digital, multiplex and wireless (radio)
technologies for the transmission of alarm signals to a central monitoring
center. Prior to the development of digital communications technology,
alarm monitoring required a dedicated telephone line, which made long-
distance monitoring uneconomic. Consequently, alarm monitoring companies
were required to maintain a large number of geographically dispersed
monitoring stations in order to achieve a national or regional presence.
The development of digital communications technology eliminated the need
for dedicated telephone lines, reducing the cost of monitoring services to
the subscriber and permitting the monitoring of subscriber accounts over a
wide geographic area from a central monitoring station. The elimination of
local monitoring stations has not only decreased the cost of providing
alarm monitoring services, it has also substantially increased the
economies of scale for larger alarm service companies. In addition, the
concurrent development of microprocessor-based control panels has
substantially reduced the cost of the subscriber equipment available to
consumers in the residential and commercial markets and has substantially
reduced service costs because many diagnostic and maintenance functions can
be performed from a vendor's office without sending a technician to the
customer's premises.
STRATEGY
The Company expects to increase sales by continuing to focus its sales
efforts on markets underserved by the security alarm industry and through
generating sources of recurring revenue by offering its existing base of
customers with installed alarms security related services, such as extended
warranties and on-line monitoring services. In addition, the Company expects
to expand its operations by initiating the Distributor Network in new
international markets and by increasing the size of the Distributor Network in
those countries in which it now operates. The Company is also seeking to
become more efficient and cost-effective by taking advantage of the increased
economies of scale afforded by its growth and through the integration of its
strategic acquisitions, which should allow the Company to realize increased
profits. Each of the key elements of the Company's growth strategy is
discussed below.
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Focus on Underserved Markets. The Company's sales and marketing efforts are
focused on demographic groups which have traditionally been underserved by the
security alarm industry. The Company aggressively markets its products to
middle income families and retired persons in contrast to a majority of its
competitors, which tend to focus their attention on the upper middle class
market. The Company believes that by focusing its marketing on the underserved
markets it currently serves, the Company will continue to reach a customer
base which has been historically ignored by the security alarm industry.
Additional Services and Recurring Revenue. The Company continually seeks to
generate additional and recurring revenue from its existing base of customers
with previously installed SecurityGuard Systems (which the Company believes to
be approximately 165,000). To this end, the Company currently sells extended
warranties to its customers (to supplement the one year limited warranty which
accompanies the sale of the SecurityGuard System) and intends to offer online
security alarm monitoring services to its customers in Australia and New
Zealand within the next twelve months. The Company currently offers, as part
of the SecurityGuard System, twenty-four hour emergency response services,
which is provided by local security patrol persons upon telephonic
notification that an alarm has sounded. In May 1998 the Company began offering
on-line monitoring services on a limited basis to its customers in South
Africa and intends to offer on-line monitoring in other markets when the
Company's base of customers with installed SecurityGuard Systems in any such
region is sufficient to support such an operation.
International Expansion. The Company believes that in actively expanding its
international operations and placing greater emphasis on those operations it
can create a significant source of future growth. The Company intends to
expand its international operations via the controlled growth model it
employed to successfully grow its Australian and New Zealand operations. The
Company's strategy is to develop a limited number of distribution offices in
each new market it enters while learning the intricacies and nuances of
selling to such market before aggressively expanding its distributor base in
that market. This plan will be implemented by the Company's existing senior
management team who will spend extended periods of time in markets targeted
for expansion in order to more effectively direct the growth of the
international operations. After targeting a region for expansion, the Company
generally appoints a limited number of Distributors for that region. These
Distributors are responsible for establishing operations in the designated
region and report directly to the Company's head office in Australia. The
Distributors bear all costs of commencing operations in their respective
market, other than initial recruitment and product approval expenses. Prior to
appointment in a new market, each Distributor must successfully complete an
intensive twelve week training program.
Increased Penetration of Existing Geographic Markets. The Company believes
that its success is directly related to its increased penetration of existing
geographic markets. By actively expanding the Distributor Network in existing
geographic markets via increasing the number of independent sales agents and
distributors, the Company believes that it will be able to increase account
density in those regions and thereby enhance the efficiency of its operations
and its distributors. By increasing sales in a given area, the Company
believes that it will increase operating efficiencies associated with
providing its 24 hour emergency response services and warranty maintenance.
Also by increasing the number of SecurityGuard System installations in each
distributor area in which it has already secured customers, it will be able to
provide monitoring to its customers at a lower marginal cost. Additionally, as
the Company penetrates a new market it develops a reputation for providing
quality products and superior customer service and community awareness of the
Company is heightened, which leads to the generation of additional sales
leads.
Vertical Integration. In order to enhance sales and improve operating
efficiencies and margins, the Company has recently closed one strategic
acquisition and will close a second strategic acquisition upon the closing of
this Offering. Pursuant to the FFC Transaction, the Company recently acquired
a 50% equity interest in FFC, a consumer business finance company operating in
Australia and New Zealand, along with the FCC Option to purchase the remaining
50% equity interest in FFC at any time prior to December 31, 2001. FFC was
originally founded primarily to provide financing for the Company's security
alarm sales, particularly for those consumers not normally serviced by
traditional financing companies, such as retired persons and single parents.
Although for the nine months ended March 31, 1998, approximately 80% of the
principal amount of all consumer loans
29
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made by FFC were made to finance SecurityGuard System purchases in Australia
and New Zealand, in recent years FFC has begun diversifying its products and
services to become less dependent on the Company as a source of business. The
acquisition of FFC by the Company helps ensure that the operations of FFC will
continue to primarily serve the Company's interests. In addition, the Company
believes the FFC Transaction is critical to the future growth of the Company
because it reduces an operational risk by ensuring the availability of credit
to purchasers of the SecurityGuard System in Australia and New Zealand, of
whom, during the nine months ended March 31, 1998, approximately 75% financed
their purchase. It is also anticipated that FFC will market additional
products and services to the Company's customers as a way for FFC to generate
additional revenue.
The Company, upon completion of this Offering, is also acquiring a 75%
interest in Ness, the manufacturer of the SecurityGuard alarm. Ness is a
leading designer and manufacturer of security and safety related products
within Australia. Sales of the SecurityGuard alarm to the Company represented
approximately 78% of Ness' sales during the nine months ended March 31, 1998,
which has resulted in attempts by Ness to diversify its product line and
thereby increase sales to other companies. Consummating the Ness Transaction
ensures that the business operations of Ness will be primarily focused on
serving the interests of the Company. The acquisition of Ness will also reduce
certain operational risks by affording the Company better control over
production times and schedules, which have become more important in light of
the greater lead times required to ensure timely delivery of the Company's
products in international markets. The Company also believes it will be able
to reduce the manufacturing cost of the SecurityGuard alarm by more
effectively negotiating with Ness' suppliers. Furthermore, the Company will
effectively achieve a higher profit margin on the sale of the SecurityGuard
System by recovering in income 75% of the price mark-up currently charged by
Ness to the Company. Ness also has an award winning research and development
staff which will facilitate the development of enhancements to the
SecurityGuard System, including a dialer to assist the Company in providing
future monitoring services to its existing base of customers.
GEOGRAPHIC OPERATIONS
The Company has been actively selling SecurityGuard Systems for
approximately eight years in Australia and New Zealand and believes it is one
of the fastest growing residential security alarm businesses in the market.
Currently there are fifty-five distributor offices in Australia and twelve
distributor offices in New Zealand. The Company has experienced significant
increases in unit sales of alarm systems in Australia and New Zealand over the
past five fiscal years. Unit sales in Australia and New Zealand have increased
from 11,744 units in fiscal year 1993 to 36,892 units in fiscal year 1997, and
increased from 26,812 units for the nine months ended March 31, 1997 to 35,891
units for the nine months ended March 31, 1998.
The Company is actively expanding its international operations and is
placing increasing importance on those operations as a significant source of
future growth. The Company believes that the characteristics and growth of the
Australian and New Zealand markets are representative of the conditions that
exist in the other countries in which the Company operates or plans to
commence operations. The Company currently maintains a total of eighteen
international distributor offices located in Belgium (one), Canada (three),
Germany (one), the Netherlands (three), South Africa (one), the United Kingdom
(seven) and the United States (two). Of the eighteen international offices,
nine were opened during the nine months ended March 31, 1998; two in the
United States, five in the United Kingdom, and two in the Netherlands. Unit
sales for the international markets have increased from 1,157 units in fiscal
year 1995 to 2,649 units in fiscal year 1997 and have increased from 1,618
units for the nine months ended March 31, 1997 to 5,028 units for the nine
months ended March 31, 1998.
Over the next two years the Company intends to continue its international
expansion by adding distribution offices in established markets and entering
new markets. The planned international expansion efforts outside Australia and
New Zealand may cause an increase in expenses from time to time, without
necessarily generating a corresponding increase in revenue. Additionally, the
lack of availability of financing in new regions could significantly impact
the successful expansion of the Company's operations. See "Risk Factors--Risk
of International Expansion"; "Risk Factors--Dependence on Consumer Financing."
There can be no assurance that the success of the Distributor Network and
corresponding operating results in Australia and New Zealand can be replicated
throughout the world.
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THE SECURITYGUARD SYSTEM
The SecurityGuard alarm is a two time winner of the prestigious Australian
Design Award (1992 and 1996) and a winner of the Australian Design Mark
(1996). The Australian Design Mark and the Australian Design Award are awarded
by Standards Australia, an independent not-for-profit organization which
utilizes industry and design experts to evaluate products for excellence. To
attain the Australian Design Mark, a product must achieve excellence in four
key areas: (i) the design process; (ii) the product; (iii) the manufacture of
the product; and (iv) the product lifecycle. Generally, a product must first
achieve the Australian Design Mark to be eligible to receive the Australian
Design Award. In special circumstances products that are innovative and
original in design can achieve the Australian Design Award without first
receiving the Australian Design Mark. Due to its innovative design, in 1992
the SecurityGuard alarm received the Australian Design Award prior to
receiving the Australian Design Mark. In 1996, the SecurityGuard alarm was
only one of 37 products to achieve the Australian Design Mark, and thereafter
was only one of eight products to achieve Australian Design Award status in
that year.
The basic SecurityGuard alarm provides protection for two openings to the
premises through interior heat sensitive motion detectors, a siren, flashing
lights, window decals and a CPU with the ability to communicate signals to the
Company's proposed central monitoring station. In addition to the
SecurityGuard alarm, as part of the SecurityGuard System, the Company provides
the customer with a smoke alarm/detector, a fire extinguisher and a fire
blanket. The Company's smoke alarm/detector features dual ionization chambers
to limit false alarms, incorporates low battery warning beeps and when
triggered, emits a loud persistent siren noise in the high frequency range of
the audible sound spectrum. Smoke alarm/detectors are recommended by all fire
and emergency services, and are now compulsory in new homes in certain areas.
Customers have the option of adding sirens and motion detectors and increasing
fire protection by means of additional smoke and heat detectors and alarms.
The SecurityGuard System also features the ability to arm and disarm the alarm
via a wireless remote control device which also acts as a "panic button". The
remote control feature of the SecurityGuard System helps differentiate the
Company's alarm from those of its competitors whose alarm systems generally
require the input of a security code to arm and disarm the alarm. The
Company's average fee for a SecurityGuard System, including options, was
approximately AUD $2090 per account customer during 1997, including all
installation service charges. Also included within the cost of each
SecurityGuard System is a one year limited warranty on system parts and a one
year limited warranty on labor.
The SecurityGuard alarm is molded in an extruded polycarbonate casing and
features double soldered circuitry, a sealed independent power source, battery
back up and automatic testing of battery power supply. It is radio controlled
with access through a radio transmitted, sixteen digit, binary code bit
stream. It has a security key override switch, and a 120 decibel (at 1 meter)
horn speaker installed within the alarm plus an external siren and blue
flashing strobe light. The alarm features infra-red detection cells that
respond effectively to body temperature, remote controls and a tuner set to
optimum range, signal and strength. The alarm's volume is deliberately set at
a level that causes extreme discomfort to human beings and should result in
the invader leaving the premises. In addition, the volume of the alarm is
sufficient to alert not just the home's residents, but also their neighbors,
increasing the likelihood that the invader will be seen and apprehended. The
alarm reacts instantaneously on detecting an intruder, reducing the intruder's
ability to search for or remove valuables. Unlike silent alarms, which are
linked to police stations or other patrols, the SecurityGuard System's
immediate shrill alarm does not furnish the home invader with a pre-
established or known response time. The design of the SecurityGuard alarm is
not intended to assist in catching intruders, but to prevent protected homes
from being burglarized or invaded and to minimize losses if they are invaded.
The SecurityGuard System complies with the relevant Australian/NZ Standards
AS2201.1/5. The system carries guarantees of quality and service on terms and
conditions comparable to others in the industry.
The SecurityGuard System installed by the Company is a wireless alarm
system, which uses radio signals from transmitters incorporated into the
protective devices to communicate activation signals from such devices to the
customer's CPU. By comparison, hard-wire devices, which are characterized by
substantially higher initial costs to the customer, use actual wires to
connect each of the protective devices to the customer's
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CPU. Wireless devices can generally be installed more simply and quickly than
those that require alarm wiring, thus reducing labor costs. In addition,
wireless devices are also easy to remove and reinstall when a customer
relocates to a new residence.
SERVICES
Extended Warranty. In September 1996, the Company commenced offering an
extended warranty program to its customers in Australia and New Zealand, which
offers the opportunity to extend the original manufacturers product warranty
of twelve months by an additional twelve or twenty-four months. The cost of
the extended warranty to the customer is AUD $99 for twelve months and AUD
$169 for twenty-four months. The extended warranty contract covers all costs
of repairs during the contract period. From the time the Company commenced its
extended warranty program through March 31, 1998 it has entered into 14,140
extended warranty contracts. The percentage of contracts divided between
twelve and twenty-four-month contracts were 37% and 63% respectively. The
income derived from the sale of extended warranty contracts is recognized
proportionately over the period of each contract.
Installation And Field Services. Each distribution office is required by the
Company to maintain its own installation and field service personnel.
Distributors subcontract services and installation to third parties who are
trained by the Company to install and maintain the SecurityGuard System.
Installations of new systems are performed promptly, without charge, after the
completion of the sale. After completing an installation, the technician
instructs the customer on the use of the system and furnishes a written manual
and, in many instances, an instructional video. In order to demonstrate its
commitment to customer service the Company also requires each technician to
clean up all debris caused by the installation of the system before completing
the installation as well as offering to perform any other minor maintenance
work for the customer. Additional follow-up instruction is provided by
Independent Agents as needed. As the density of the Company's customer base
increases, the Company will be able to more efficiently schedule and route
field service technicians. The increased efficiency in scheduling and routing
also allows the Company to provide faster field service response and support,
which leads to a higher level of customer satisfaction.
24 Hour Emergency Response Services; On-line Monitoring. The Company
currently offers twenty-four hour emergency response service to its customers
as part of its SecurityGuard System for five years from the date of
installation. As part of this service the Company contracts with local
security patrol services to send personnel to a residence upon telephonic
notification that an alarm has sounded. In addition, the Company intends to
market twenty-four hour on-line monitoring services to all of its Australian
and New Zealand customers within the next twelve months and began providing
(on a limited basis) twenty-four hour on-line monitoring to its South African
customers in May 1998. Initially, the Company intends to outsource the
monitoring in Australia and New Zealand to a central station in Sydney,
Australia that utilizes advanced communications and computer systems to route
incoming alarm signals and telephone calls to operators. The Company intends
to begin construction of its own central monitoring station in Sydney,
Australia in March 1999. Monitoring stations in each of the Company's
international markets will be established as its installed base in such market
is sufficient to support such an operation. Depending on the type of service
chosen by the customer, central monitoring personnel will respond to alarms by
relaying information to local security patrols or police departments,
notifying the customer or taking other appropriate action. Non-emergency
administrative signals will include power failures, low battery signals,
deactivation and reactivation of the alarm monitoring system, and test
signals, and will be processed automatically by central monitoring station
computers.
DISTRIBUTOR NETWORK
The Distributor Network is a structured sales hierarchy of Independent
Agents, Area Distributors and Distributors who are compensated solely on the
basis of sales of the Company's SecurityGuard Systems. The Company believes
that it possesses an advantage over other direct sales companies since
advancement through the Distributor Network is based exclusively on the
participant's success in sales of the Company's products, rather than
recruitment of other sales representatives. The Independent Agents, who are
the entry level participants in the Distributor Network, are motivated by an
attractive sales commission structure, as well as the
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opportunity to become Area Distributors who own and operate their own
distribution business. Independent Agents are promoted based on a proven
ability to sell the Company's products over a defined period of time. Each
Area Distributor purchases products from the Company for resale to end users
through Independent Agents who operate out of their offices. Successful Area
Distributors, in turn, can become Distributors who earn an override on sales
by the Company made to their attributed Area Distributors as well as
continuing to earn profits on the sales made by its distribution business. The
Company believes that the Distributor Network, in addition to offering a
potential for substantial individual compensation and profit, is an effective
motivational tool which emphasizes peer ranking and recognition in order to
improve sales performance. The Company also believes the Distributor Network
gives it a significant strategic advantage over its competitors by limiting
the capital investment needed to grow the Company, since its Area Distributors
and Distributors are responsible for most costs associated with running their
distribution businesses (including all recruitment, telemarketing and Security
Guard System installation costs). The following is a description of each tier
of the Distributor Network.
Level 1--Independent Agent. The majority of the sales personnel within the
Distribution Network are Independent Agents who contract directly with
Distributors and Area Distributors. Independent Agents are compensated solely
by commissions paid by the Area Distributors or Distributors based solely on
sales made by the Independent Agent. The Independent Agents primary
responsibilities include the generation of leads and the delivery of scripted
in home sales presentations to potential customers. Every prospective
Independent Agent starts as an agent in training and goes through the
Company's training program, which includes accompanying existing Independent
Agents on in home sales presentations prior to becoming an Independent Agent.
For an Independent Agent to be promoted to an Area Distributor he/she is
required to achieve a predetermined level of sales over a specified period and
must successfully complete a course in area distributorship operation. As of
March 31, 1998, the Company had 769 Independent Agents (including 131 agents
in training and 136 agents in markets outside of Australia and New Zealand).
Level 2--Area Distributors. Area Distributors sell the SecurityGuard System
to the public utilizing the Independent Agents as their sales representatives.
Area Distributors own and operate their own offices and are responsible for
most costs associated with the implementation of the Direct Sales Marketing
Program within their assigned area, including telemarketing, lead generation
and recruitment. Independent Agents operate from the Area Distributor's
premises and are paid commissions by the Area Distributor based on their sales
of SecurityGuard Systems. The Area Distributors purchase the SecurityGuard
Systems directly from the Company, and their compensation is the profit earned
from the sales of the SecurityGuard Systems less the payment of (i) commission
to Independent Agents, (ii) cost of goods sold and (iii) operating expenses
(including recruiting, telemarketing and installation costs). There is no
limit to the number of Independent Agents that can operate out of an Area
Distributor's office. For Area Distributors to be promoted to Distributors,
they are required to achieve a predetermined level of sales within a specified
period and must successfully complete a course in advanced distributorship
operation. As of March 31, 1998, the Company had forty-six Area Distributors,
including nine in markets outside of Australia and New Zealand.
Level 3--Distributors. Distributors, with support from the Company, are
responsible for ensuring that Independent Agents are motivated and proficient
in all aspects of direct sales by, among other items: (i) ensuring all new
Independent Agents go through a specified training program which includes
proficiency tests, video taping and "on the job" observation and critical
analysis; (ii) organizing major conferences annually, as well as running
weekly internal training seminars; (iii) professionally videotaping major
training conferences and seminars; (iv) professionally recording
teleconferences of meetings where Distributors discuss topics on business
enhancement, such as lead generation; (v) running reward programs for the
introduction or recruitment of new staff members; and (vi) recognizing and
rewarding other staff for securing new customers. Distributors are compensated
in a manner similar to the Area Distributors although they may purchase
Security Guard Systems from the Company at a slightly lower price per unit
than the Area Distributors. In addition to earning profits on sales made by
their own distribution business, Distributors receive a commission override
for all purchases by Area Distributors that are attributed to them by the
Distributor Network. Independent Agents working under a Distributor are paid
the same commission structure as those working under an Area Distributor. As
of March 31, 1998, the Company had 32 Distributors, including nine in markets
outside of Australia and New Zealand.
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Historically, the Company has also utilized "Dealers" to sell the
SecurityGuard System to the public. Dealers operate out of a Distributor's or
an Area Distributor's office, under the supervision of the Distributor or Area
Distributor, as the case may be. Dealers, like Independent Agents, are
compensated solely by commissions on products sold, but earn a greater
proportion of the sales price as commission than that earned by an Independent
Agent. As of March 31, 1998 there were eight persons who had been designated
as Dealers by the Company.
SALES AND MARKETING
The Company's business success is dependent upon the continued successful
implementation of its Direct Sales Marketing Program by its Distributor
Network. The Direct Sales Marketing Program is a systematic approach to
selling the Company's products through low cost lead generation, telemarketing
and in home sales appointments. The program focus is on middle income families
and retirees, a market which the Company believes has been historically
underserved by the security alarm industry. Sales leads are generated using
various methods, including referrals from in home sales appointments, shopping
center "drop box" promotions and the collection of crime awareness and fire
safety surveys conducted in shopping centers and in targeted neighborhoods.
These leads are then utilized by telemarketers to set up in home sales
appointments, during which the sales representatives make a crime awareness
and fire safety presentation and then demonstrate the functionality of the
SecurityGuard System. In order to increase the effectiveness of its Direct
Sales Marketing Program, the Company requires participants in its Distributor
Network to regularly participate in comprehensive training seminars developed
by the Company relating to all aspects of its Direct Sales Marketing Program.
The Company believes that its Direct Sales Marketing Program represents a
competitive advantage over other security alarm companies.
The Distributor Network is responsible for all marketing of the
SecurityGuard System. The Company does not generally use media advertising to
promote its products, instead it relies on the Independent Agents to generate
leads. The Independent Agents solicit sales leads from every in home
appointment, as well as through shopping center "drop box" promotions and the
collection of crime awareness and fire safety surveys. In exchange for
completing a survey or participating in a promotion, individuals are given a
chance to win a free SecurityGuard System. Telemarketers contact individuals
who respond to these efforts and make appointments for home visits by
Independent Agents. Each individual who hosts an in home sales appointment,
regardless of whether they make a purchase, receives a valuables register, a
book containing crime, fire and general home safety tips and a personal attack
alarm. During the in home presentation, the Independent Agents present a
mounted display of the alarm and related equipment and describe their
features. Furthermore, the Independent Agents use the in home presentation to
educate the consumer with regard to the crime level of the area and the
utility of the SecurityGuard System in dealing with crime and in reducing
danger and losses to the property. The Company believes that these methods
generate low cost, high quality sales leads, and since each home which an
Independent Agent visits is selected based on a positive response to other
aspects of the systematic sales approach, its sales rate resulting from home
visits is much higher than for companies who rely on random door to door
sales. The Company believes that by making sales to multiple homes in a
neighborhood and increasing crime awareness in the neighborhood, crime
prevention synergies and additional sales opportunities are achieved as
neighbors begin to work together to minimize crime. While the Company's sales
approach relies on an emotional response from the potential customer, the
Company maintains an active training and compliance program to deter abusive
sales practices and to ensure that the Independent Agents do not use a high-
pressure approach to increase unit sales. The Company believes that its sales
techniques have been very successful at both closing sales and generating
additional leads from satisfied customers.
The Company's sales and marketing approach stresses three aspects of the
SecurityGuard System: deterrence, detection and ejection. The Company believes
that the mere existence of a security alarm system in a home deters burglars
and home invaders from attempting entry. The features of the SecurityGuard
System are aimed at detecting any unauthorized access. Once activated, the
alarm is designed to provoke a quick flight response by the intruder,
preventing a burglary or, at a minimum, minimizing the loss.
Customer Service. In 1995, the Company implemented its "We Care" customer
satisfaction program by recruiting, as its Director of Customer Care and
Compliance, an individual who had previously been a Senior
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Investigation Officer of an Australian state government consumer affairs
organization. The We Care program consists of a number of measures intended to
maximize customer satisfaction, including an annual survey of customers,
periodic awards to participants in the Distributor Network who maintain
superior customer satisfaction, and the installation of a toll-free number
which customers can call with any questions or complaints. The We Care program
also includes a total quality management program through which the Company
analyzes and documents all processes critical to customer satisfaction,
including sales, installations, monitoring, billing and customer service. The
Company then implements improvements and continually updates the analysis
process.
STRATEGIC ACQUISITIONS
FFC Transaction. On December 31, 1997, the Company purchased the FFC Shares
from FAI Insurances in the FFC Transaction. FFC, a consumer finance company
with operations in Australia and New Zealand, financed approximately 74% of
the Company's financed sales, and 56% of all sales by the Company of the
SecurityGuard System to end users in Australia and New Zealand for the nine
months ended March 31, 1998. The purchase price for the FFC Shares of
$7,016,525 was paid through the delivery of the FFC Note, a five year
promissory note which bears interest at a rate of 7.75% per annum payable
monthly in arrears and is secured by the FFC Shares. The first installment of
$1,631,750 was paid on January 2, 1998. The next principal installment of
$694,117 is due on December 31, 1998. Pursuant to the terms of the FFC Note,
as amended, the Company is required to utilize any funds raised in any equity
offering subsequent to the FFC Transaction to pay down the FFC Note if
available after paying the Cash Portion of the Ness Transaction. The Company
also received the FFC Option, at no additional cost, exercisable within four
years of the date of the FFC Transaction, to purchase the remaining 50%
interest in FFC from FAI Insurances, for the same consideration plus 50% of
the net change in FFC's retained earnings from the date of the FFC Transaction
until the date the FFC Option is exercised. If the FFC Option is exercised the
purchase price will be financed by FAI Insurances over a four-year period from
the date on which the FFC Option is exercised on terms comparable to the FFC
Note. See "Certain Transactions--Transactions with FAI Insurances".
FFC is a consumer and business finance company which specializes in the
provision of consumer credit, primarily to purchasers of the SecurityGuard
System through sales finance arrangements with the Company and participants in
the Distributor Network, and also through personal loan and insurance products
which are not currently part of the Company's business. The FFC Transaction
ensures that the operations of FFC will be focused primarily on servicing the
Company's customers. The Company believes the FFC Transaction is critical to
the future growth of the Company because it will help ensure the availability
of credit to purchasers of the SecurityGuard System in Australia and New
Zealand. For the nine month period ended March 31, 1998, approximately 74% of
sales by the Distributor Network to end-users were financed on an installment
basis. The FFC Transaction also benefits the Company by enabling the Company
to utilize the management of FFC to assist the Company in establishing
financing arrangements in new international markets. FFC may also be able to
capitalize on the Company's existing and future base of customers with
installed alarms by marketing additional products and services to them, such
as personal loans, as a way of generating additional revenue for FFC.
FFC was founded in 1991 by FAI Insurances, primarily to provide financing
for purchases of the SecurityGuard System in the Australia and New Zealand
markets, particularly for certain groups of individuals not normally serviced
by traditional financing companies, such as retired persons and renters. For
the nine months ended March 31, 1998 approximately 80% of all consumer loans
made by FFC were made to finance purchases of the SecurityGuard System in
Australia and New Zealand.
FFC was initially funded by an interest free loan from FAI Insurances of AUD
$30 million, secured by a lien on all of its assets. Since the FFC
Transaction, FFC has paid interest, at the rate of 7.75% per annum, on its
outstanding loan balance from FAI Insurances (which was $21,204,336 as of
March 31, 1998). In addition, FAI Insurances has agreed with the Company that
for every dollar the Company loans to FFC, FAI Insurances is obligated to
match the amount of the loan. The Company believes FFC will be an attractive
use of funds for its excess cash flows from operations.
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Currently, FFC's principal source of funds is a Receivables Purchase
Agreement with Westpac Banking Corporation ("Westpac"), pursuant to which FFC
sells eligible receivables to Westpac and undertakes to continue to service
the receivables in exchange for a management fee. The maximum currently
available to FFC under the Receivables Purchase Agreement is AUD $30 million.
The Receivables Puchase Agreement provides FFC the necessary capital to
support its financing activities and future growth. The Company believes it
will be able to actively grow the receivables balance of FFC. In addition to
the funds which may be loaned to FFC by FAI Insurances and the Company, FFC is
actively seeking to expand its receivables facility with Westpac and is
evaluating additional options as a way of growing its receivable balance. See
"Business--Strategy".
Ness Transaction. On July 17, 1998, the Company entered into the Stock
Purchase Agreement, whereby the Company agreed to purchase all of the issued
and outstanding common stock of IIHSL. IIHSL is the holder of 75.04% of the
issued and outstanding common stock of Ness. Ness is a designer and
manufacturer of security alarm products in Australia and the Company's sole
supplier of the SecurityGuard alarm. For the nine months ended March 31, 1998,
the Company's purchases of the SecurityGuard alarm from Ness represented
approximately 78% of Ness' total sales. The purchase price for all of the
issued and outstanding common stock of IIHSL will consist of the following:
(i) 400,000 shares of Common Stock, (ii) warrants convertible into 360,000
shares of Common Stock at an exercise price of $13.00 per share, which will be
exercisable through the year 2003 and (iii) $11,157,000 in cash representing
the Cash Portion. The closing of the Ness Transaction, which will occur
immediately following the closing of this Offering, is conditioned on certain
events including the Company's successful closing of this Offering.
Ness was founded in 1972 and has been the Company's sole supplier of its
SecurityGuard alarm since 1989. The Company anticipates that one of the
principal benefits of the Ness Transaction for the Company is that it will
ensure that Ness' business operations will be focused primarily on producing
products for the Company. The Ness Transaction will also enable the Company to
better control production times and schedules. Furthermore, the Company will
be able to achieve a higher profit margin on the sale of its SecurityGuard
Systems by recovering in income 75% of the price mark-up charged by Ness to
the Company and by more cost effectively purchasing the major component parts
of Ness' primary products.
Ness manufactures other products in addition to its SecurityGuard alarm,
including its (i) Medi Alarm, a personal alarm that notifies an attendant when
the user requires assistance, specifically designed for aged and immobile
residents of retirement communities and nursing homes; (ii) D 8 Dialer
Security Alarm Panel, a traditional electricity-based security alarm system
designed for commercial and residential markets that utilizes a dialer to call
a central monitoring station and features eight fully programmable zones,
programmable siren, radio interface and secure DTMF remote arming/disarming
capabilities; (iii) 10 +, a leading security alarm sensor which is temperature
sensitive and utilizes the latest S.M.D. technology and has a special anti-
creep zone lens that detects human movement directly below the lens where most
detectors are "blind"; and (iv) other sensor detector products, including
"Nessensor", an advanced high frequency vibration sensor for traditional
residential and commercial security system installations.
Ness has an accomplished research and development staff and a computer board
manufacturing facility that utilizes state-of-the-art surface mount
technology. The Company believes that Ness' research and development expertise
will be extremely important in supporting the Company's ability to
successfully provide on-line monitoring services, by assisting the Company in
the incorporation of a dialer into the existing SecurityGuard alarm to permit
communication with the proposed central monitoring station. The Company also
believes that Ness currently has excess manufacturing capacity that may allow
Ness to provide contract manufacturing services for third parties until such
time as the Company's needs require all of Ness' manufacturing capacity. See
"Business--Strategy".
Ness' main office is located in Sydney, Australia, and Ness has distribution
offices in each of Melbourne, Perth and Brisbane. Ness also maintains an
office in Hong Kong. As of March 31, 1998, Ness had 137 employees in Australia
and five employees in Hong Kong.
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Since the inception of Ness' relationship with the Company in 1989, senior
management of the two companies have met regularly. The Company is currently a
party to a manufacturing/supply agreement with Ness under which Ness
manufactures the SecurityGuard alarm for the Company. The agreement precludes
termination prior to the year 2007 under normal circumstances, also grants the
Company the exclusive right to sell the SecurityGuard alarm throughout the
world (except the United States) and a non-exclusive right to sell to the
United States market. The agreement also provides that Ness may market and
sell the SecurityGuard alarm within the Company's exclusive territory, but
only upon the Company's prior written consent, which shall not be unreasonably
withheld. The manufacturing agreement further provides that Ness will be
permitted to market and sell the SecurityGuard alarm in places where the
Company does not intend to carry on business. Ness' right to sell the
SecurityGuard alarm in any country terminates if it supplies or sells any
product to companies that sell products in that country using a marketing
method or strategy which is similar in nature to that used by the Company.
Upon consummation of the Ness Transaction the Company plans to renegotiate the
manufacturing agreement in order to improve the terms on which it buys the
SecurityGuard alarm and to gain the exclusive right to sell the SecurityGuard
alarm in the United States.
OTHER INVESTMENTS
On June 30, 1998, the Company purchased, for approximately $300,000, a 49%
interest in a partnership that has entered into an agreement with Prime Life
Corporation Limited to acquire a retirement village in Melbourne, Australia.
The Company believes this passive investment will provide the Company with
greater returns than interest earned on excess cash. The Company has given the
operators of the partnership significant incentives and has limited the
operators ability to take commercial risks, in order to maximize the Company's
return on its investment.
COMPETITION
The security alarm industry in Australia, New Zealand and the international
markets in which the Company operates is highly competitive and fragmented.
The Company competes with numerous other companies for new customers. The
Company's three major competitors for first-time purchasers of alarm systems
in Australia and New Zealand are Brambles Industries Ltd, Chubb Security
Holdings Australia Ltd, and Tempo Services Ltd. Competition for new accounts
is based primarily on purchase price, monthly monitoring fee, the range of
services offered, and reputation for quality. The Company believes it has a
superior marketing strategy because of its focus on underserved markets and
the implementation of the Direct Sales Marketing Program to the end user
through the Distributor Network. Although the Company believes that it is a
leading seller of residential alarm systems in Australia and New Zealand,
there is no assurance that the Company will continue to have a competitive
advantage in those countries. The loss of any competitive position by the
Company in either Australia or New Zealand could have a material adverse
effect on the Company.
In marketing the SecurityGuard System outside of Australia and New Zealand,
the Company faces competition from large national and international alarm
installation and monitoring companies. Many of those companies are better
capitalized than the Company and which often offer low-priced installations of
security systems. However, the Company believes that it will be able to
successfully penetrate and compete in such markets using the same marketing
and sales strategy that it uses in Australia and New Zealand.
TRADEMARKS AND INTELLECTUAL PROPERTY
The Company operates under the registered Company name "FAI Home Security"
in Australia, New Zealand, North America, Europe and South Africa. The
Company's License Agreement with FAI Insurances permits it to use the "FAI"
name and logos on a royalty free, non-exclusive, non transferable basis. The
License Agreement has a perpetual term and will terminate only upon breach by
the Company. See "Certain Transactions--Transactions with FAI Insurances". The
Company also holds copyrights to significant marketing, training, promotional
and organizational material.
GOVERNMENT REGULATION
The Company's domestic operations in Australia and New Zealand, as well as
its other worldwide operations, are subject to a variety of laws, regulations
and licensing requirements of federal, state and local authorities. In certain
jurisdictions, the Company is required to obtain licenses or permits prior to
the
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commencement of operations, and the Company may also be required to comply
with standards governing employee selection and training, and to meet certain
standards in the conduct of its business. Many jurisdictions also require
certain of the Company's employees to obtain licenses or permits.
The alarm industry is also subject to requirements imposed by various
insurance, approval, licensing and standards organizations. Depending upon the
type of customer served, the type of security service provided and the
requirements of the applicable local governmental jurisdiction, adherence to
the requirements and standards of such organizations is mandatory in some
instances and voluntary in others. The Company has experienced delays in
achieving product approval from local authorities in Belgium, which has
resulted in larger than anticipated start-up expenses and delays in the
commencement of sales in that country.
In most countries, the Company's advertising and sales practices are
regulated by various consumer protection laws. Such laws and regulations
include restrictions on the manner in which the Company promotes the sale of
its security alarm systems and require the Company to provide purchasers of
its alarm systems with certain rescission rights.
Recently, a trend has emerged on the part of local governmental authorities
to adopt various measures aimed at reducing the number of false alarms. Such
measures include (i) subjecting alarm monitoring companies to fines or
penalties for transmitting false alarms, (ii) licensing individual alarm
systems and the revocation of such licenses following a specified number of
false alarms, (iii) imposing fines on alarm customers for false alarms, (iv)
imposing limitations on the number of times the police will respond to alarms
at a particular location and (v) requiring further verification of an alarm
signal before the police will respond. See "Risk Factors--Government
Regulation".
EMPLOYEES
At March 31, 1998, the Company employed eighty-two individuals, including
sixty-eight on a full-time basis, one on a part-time basis and thirteen
employees on an hourly basis. Currently, none of the Company's employees are
represented by a labor union or covered by a collective bargaining agreement.
The Company believes it has an excellent relationship with its employees.
PROPERTY
The Company's executive office, administrative, customer care and extended
warranty divisions are located at Levels Ground, 3, 7 and 8, 77 Pacific
Highway, North Sydney, Australia. The offices, which are leased from a
subsidiary of FAI Insurances, constitute approximately 824 square meters and
are leased at a rental rate of AUD $380 per square meter, per annum. The
Company has entered into a five-year lease expiring in 2002, with an option to
extend the lease arrangement for an additional five years with respect to
Level 7. The Company is seeking to enter into a further long-term lease when
floor space contiguous to Level 7 becomes available. See "Certain
Transactions--Transactions with FAI Insurances". The Company has also taken a
three year lease for its twenty-four hour on-line monitoring division at level
2, 80 Chandos Street, Leonards, Australia. The division will occupy 280 square
meters at a cost of AUD $220 per square meter per annum and has acquired an
option on 140 square meters at the same location. The Company intends to
construct a central monitoring station at this address beginning in March,
1999. The Company believes that its existing office space is adequate to meet
its future needs.
The Company has an office in England at 2nd Floor Lodge House, Kay Street,
Burnley, Lancashire. The lease expires on April 12, 2000 and has an annual
rent of STG (pounds) 6640. The Company also leases a warehouse facility in
Manchester, England. The Company believes that its existing office and
warehouse space in Europe is adequate to meet its future needs.
LEGAL PROCEEDINGS
The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any currently pending or
threatened litigation will have a material adverse effect on the financial
condition and results of operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company and their ages as of
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Bradley D. Cooper 39 Chairman of the Board of Directors, Chief Executive
Officer
Terrence J. Youngman 45 President
Robert D. Appleby 47 Executive Vice President of International Business
Development
Mark Whitaker 31 Chief Financial Officer, Treasurer, Executive Vice
President of Finance
Geoffrey D. Knowles 33 Executive Vice President of Marketing
Felicity A. Hilbert 28 Executive Vice President of Operations
Timothy M. Mainprize(1) 48 Director
Steven A. Rothstein 47 Director
Steven Rabinovici(1)(2) 46 Director
Dennis J. Puleo(1)(2) 52 Director
Paul Brown(3) 38 Prospective Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Will become a director of the Company upon the closing of the Ness
Transaction, or as soon as practicable thereafter, subject to the approval
of the board of directors of the Company, which shall not be unreasonably
withheld.
Mr. Bradley D. Cooper is the founder of the Company and has been its Chief
Executive Officer since its inception in 1988. Mr. Cooper became Chairman of
the Board of the Company on May 1, 1997. Mr. Cooper is also a director and
major shareholder of the Phoenix Leisure Group Pty Ltd, which holds the
Australian license for Rossignol Skis. He is the founding director and major
shareholder of Theme Products Pty Ltd, which holds exclusive licenses to
manufacture, market and distribute children's furniture in Australia for such
childhood favorites as Warner Bros. (Looney Tunes), Sesame Street, and Thomas
the Tank Engine. and is Chairman of Vision Publishing Pty Ltd, a business
publishing and conference company. Mr. Cooper is also a director of the
Elizabethan Theatre Trust.
Mr. Terrence J. Youngman is the President of the Company and is responsible
for management of all senior departmental managers and overall Company
operations, a position he has held since 1996. Mr. Youngman has been employed
by the Company since 1992, serving as General Manager from 1995 to 1996 and
Finance Administration Manager from 1992 to 1995. In 1991 and 1992 Mr.
Youngman served as a Finance Accountant for Furniture Australia (BTS
Subsidiaries).
Mr. Robert D. Appleby is the Executive Vice President of International
Business Development for the Company and has served in this position since
1993. His responsibilities include the recruitment, training, development and
motivation of the Company's distributors in Australia and overseas. Prior to
his present position, Mr. Appleby served as the Company's International Sales
Director.
Mr. Mark Whitaker is the Company's Chief Financial Officer, Treasurer and
Executive Vice President of Finance and has served in this capacity since
December 1996. Mr. Whitaker has been employed by the Company since 1992,
serving as Assistant General Manager in 1995 and 1996, as Group Accountant
from 1993 to 1995 and as a Financial Accountant from 1992 to 1993. Prior to
his employment with the Company, Mr. Whitaker was employed by Hewlett Packard
(in England) as a financial accountant from 1991 to 1992.
Mr. Geoffrey D. Knowles has served as Executive Vice President of Marketing
for the Company since 1994. Mr. Knowles is responsible for the development and
implementation of all sales and marketing material, training programs and
internal competitions for all sales personnel. Mr. Knowles has been employed
by the Company
39
<PAGE>
since 1993, serving as Assistant General Manager of the Company from 1993 to
1994 and National Sales Manager during 1993. From 1986 to 1992 Mr. Knowles was
the Managing Director of Knowles Enterprises Pty Ltd., a company which sold
electrical appliances.
Ms. Felicity A. Hilbert has served as the Company's Executive Vice President
of Operations, responsible for the operational management of the Company, the
Customer Service department and the Extended Services department in Australia
and overseas, since 1996. Ms. Hilbert has been employed by the Company since
1992, serving as the International Operations Manager from 1994 to 1996, as
Distributor Relations Manager and National Administration Manager from 1993 to
1994 and as an Administrative Assistant for the Company's Melbourne branch
from 1992 to 1993. Ms. Hilbert was employed by Tilt Lift Equipment Pty Ltd., a
company which specializes in providing commercial construction products and
services, from 1988 to 1992.
Mr. Timothy M. Mainprize was elected a director of the Company in April
1997. Mr. Mainprize is Chief Financial Officer of FAI Insurances, where he is
also responsible for its Information Technology and is a member of the
Investment Committee. Mr. Mainprize had been with FAI Insurances since 1988
and was appointed a director of FAI Insurances in 1993.
Mr. Steven Rothstein was elected a director of the Company in April 1997. He
became a member of the Board of Directors of National Securities Corporation
("National Securities") in May 1995 and was appointed Chairman on August 1,
1995. He is also the Chairman, Chief Executive Officer, President and a
director of Olympic Cascade Financial Corporation, the parent company of
National Securities and L.H. Friend. From 1979 through 1989, Mr. Rothstein was
a registered representative and limited partner at Bear Stearns and Company,
Inc. in Chicago, Illinois and Los Angeles, California. From 1989 to 1992, Mr.
Rothstein was a Senior Vice President in the Chicago office of Oppenheimer and
Company, Inc. In December 1992 he joined Rodman and Renshaw, Inc., a Chicago-
based broker/dealer, serving as Managing Director, and joined H.J. Meyers,
Inc., a New York Stock Exchange member firm in March 1994. Mr. Rothstein is a
1972 graduate of Brown University, Providence, Rhode Island. Presently, Mr.
Rothstein is a board member of SigmaTron International, Inc. and Vita Food
Products, Inc. National Securities was one of the IPO Representatives and Mr.
Rothstein has been designated by National Securities as its director nominee
pursuant to rights granted to it in the Underwriting Agreement relating to the
IPO.
Mr. Steven Rabinovici was elected a director of the Company in April 1997.
He has been Chairman of the Board and Chief Executive Officer of Complete
Management, Inc. ("CMI") since December 28, 1995. From December 31, 1992
through December 27, 1995 he was the President, Chief Executive Officer and a
director of CMI. From July 1990 through December 31, 1992, he was an
independent health care and business consultant. Earlier in his career, Mr.
Rabinovici had more than 10 years experience in hospital administration,
including approximately two years as associate administrator of Brookdale
Hospital Medical Center, a 1,000 bed teaching hospital, and two years as the
administrator of the Division of Psychiatry, Cornell University New York
Hospital. Mr. Rabinovici has a Bachelors degree from City University of New
York, Brooklyn College, a Masters degree in Public Health from Columbia
University School of Public Health and a Juris Doctorate degree from New York
Law School.
Mr. Dennis Puleo was elected a director of the Company in April 1997. He has
worked as a real estate agent for Century 21 since 1991 and holds real estate
licenses in Florida and Massachusetts. During this time, Mr. Puleo has also
worked as an independent consultant in the areas of sales, marketing and
franchising.
Pursuant to the Ness Transaction, International Home Security Investments
Limited, the sole shareholder of IIHSL, will have the right to designate one
nominee, subject to the reasonable approval of the Board of Directors, for
election to the Board of Directors for the lesser of a period of five years,
or until it is the beneficial owner of less than 5% of the Common Stock of the
Company. Paul Brown, a private investor and the sole beneficial owner of
International Home Security Investments Limited, has been designated.
STAGGERED BOARD OF DIRECTORS
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is divided into three classes of directors serving staggered three-
year terms.
40
<PAGE>
Class I Directors. The following persons serve as Class I directors with
their term expiring in 1998: Steven A. Rothstein and Steven Rabinovici.
Class II Directors. The following persons serve as Class II directors with
their term expiring in 1999: Timothy M. Mainprize and Dennis J. Puleo.
Class III Directors. The following person serves as a Class III director
with his term expiring in 2000: Bradley D. Cooper. It is also anticipated that
Paul Brown will be designated a Class III director.
All directors of each class hold their positions until the annual meeting of
shareholders held during the year in which the terms of the directors in such
class expire, or until their respective successors are elected and qualified.
COMPENSATION OF DIRECTORS
Non-employee directors receive annual compensation of $10,000 and are
reimbursed for out-of-pocket expenses incurred in attending each committee or
board meeting. Upon the closing of the Company's IPO, each non-employee
director received, pursuant to the 1997 Non-Employee Director Stock Option
Plan, options to purchase 5,000 shares of the Company's Common Stock at an
exercise price of $10.00 per share. Thereafter, pursuant to the 1997 Non-
Employee Director Stock Option Plan at each Annual Meeting of Stockholders
held following the IPO (the first of which is expected to be conducted in
December 1998), each non-employee director will be granted options to purchase
2,500 shares of Common Stock at an exercise price equal to the closing market
price on the date of such meeting. All options will be exercisable six months
after the effective date of grant of said options and expire on the fifth
anniversary of such date. See "Stock Compensation Plans" below.
DIRECTORS COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee, each consisting exclusively of non-employee directors. The Audit
Committee is responsible for recommending to the Board of Directors the
engagement of the independent auditors of the Company and reviewing with the
independent auditors the scope and results of the audits, the internal
accounting controls of the Company, audit practices and the professional
services furnished by the independent auditors. The Compensation Committee is
responsible for reviewing and approving all compensation arrangements for
officers of the Company, and is also responsible for administering the 1997
Stock Option Plan.
LIMITATION OF DIRECTOR'S LIABILITY AND INDEMNIFICATION
Article Nine of the Company's Certificate of Incorporation provides that the
liability of the Company's directors to the Company for monetary damages is
eliminated to the fullest extent permissible under Delaware law. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief, rescission or damages. The Company's By-laws
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by Delaware law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. At the present time, there is no pending litigation involving a
director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding that may result in a claim for such
indemnification.
41
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
Certain executive employment agreements, which became effective upon the
completion of the IPO and continue through June 30, 2000, have been executed
with the Company by the following key executives: Messrs. Bradley Cooper,
Terrence J. Youngman, David Appleby, Mark Whitaker and Geoffrey Knowles and
Ms. Felicity Hiblert.
The executive employment agreement (which has been superseded by a
consulting agreement with a company beneficially owned by Mr. Cooper described
below) with Mr. Cooper provides that he shall receive a base salary of
$700,000 per year plus a bonus equivalent to 10% of Net Profit After Tax
("NPAT"), as calculated prior to his bonus entitlement. In addition, Mr.
Cooper may receive an additional bonus, as may be determined by the Company's
Board of Directors and its Compensation Committee. Mr. Cooper bears all
expenses associated with his employment including rent, administrative support
and travel costs, and the Company is not obligated to pay or reimburse Mr.
Cooper for any out of pocket expenses incurred while he is on Company
business. Mr. Cooper is eligible to receive stock options in accordance with
the Company's 1997 Stock Option Plan or any other executive stock option plan
as may be established from time to time by the Company's Board of Directors.
The total remuneration received by Mr. Cooper is reviewed by the Company's
Compensation Committee on an annual basis, and is subject to adjustment based
on such review. In the event of termination during the first three years of
the agreement, the Company must pay to Mr. Cooper an amount equal to Mr.
Cooper's total remuneration (exclusive of bonuses) received or earned during
the 12 month period preceding such termination. On October 1, 1997, the
executive employment agreement with Mr. Cooper was replaced by a consulting
agreement with Speakeasy Pty Ltd, a company beneficially owned by Mr. Cooper.
The terms of the consulting agreement are substantially the same as the terms
of the executive employment agreement that it replaced, except that the
Company agreed to reimburse Speakeasy Pty Ltd for certain out of pocket costs
which may be incurred by Mr. Cooper in connection with services rendered by
him solely related to the Company's expansion into new markets outside of
Australia and New Zealand.
The executive employment agreement with Mr. Appleby provides that he
receives no base salary. Instead, Mr. Appleby receives, on a monthly basis, a
commission of approximately AUD $16 for each sale of a SecurityGuard System
within Australia and New Zealand to a member of the public (provided the
product has not been returned by the consumer and no refund of the purchase
price has been made) and a bonus for reaching specified unit sale targets. For
the twelve months ended June 30, 1997, Mr. Appleby received remuneration,
based on the number of units sold, of $474,564 and a bonus of $78,170. The
executive employment agreement with Mr. Knowles is substantially the same as
that of Mr. Appleby except for his commission, which is approximately AUD $10
for each SecurityGuard System sold under the same conditions as Mr. Appleby.
For the twelve months ended June 30, 1997, Mr. Knowles received remuneration,
based on the number of units sold, of $271,213 and no bonus.
Mr. Youngman's agreement provides for a base salary of $120,222 and does not
entitle him to any bonus.
The executive employment agreement for each of Mr. Whitaker and Ms. Hilbert
provides for a base salary of $66,000.
The total remuneration, including any bonus, received by Messrs. Appleby,
Knowles, Youngman and Whitaker and Ms. Hilbert under their respective
agreements is reviewed by the Company's Compensation Committee on an annual
basis, and is subject to adjustment based on such review.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for the
years ended June 30, 1997 and 1996 to the Chief Executive Officer and to the
other executive officers of the Company whose total annual salary and bonus
for the year ended June 30, 1997 exceeded $100,000 (together, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------- ---------------
STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS BONUS
- --------------------------- ---- -------- ------- -------
<S> <C> <C> <C> <C>
Bradley D. Cooper(1)............................ 1997 $692,192 0 0
Chairman of the Board and Chief Executive
Officer 1996 $ 59,708
Terry J. Youngman............................... 1997 $120,227 0 0
President 1996 $120,227
Robert D. Appleby............................... 1997 $474,564 0 $78,170
Executive Vice-President of International
Business 1996 $113,826 $78,860
Development
Geoffrey D. Knowles............................. 1997 $271,213 0 0
Vice President of Marketing 1996 $110,693
</TABLE>
- --------
(1) The salary paid to Mr. Cooper in fiscal year 1997 consisted solely of
commissions for each SecurityGuard System sold by the Company. Mr.
Cooper's employment agreement that became effective with the IPO, and the
consulting agreement with Speakeasy Pty Ltd which has replaced the
employment agreement, eliminated this commission arrangement. See
"Management--Executive Employment Agreements".
STOCK COMPENSATION PLANS
1997 Stock Option Plan. The Company has adopted the 1997 Stock Option Plan,
under which the Compensation Committee may grant options to purchase up to an
aggregate of 750,000 shares of Common Stock to management, employees and
advisors of the Company. The 1997 Stock Option Plan provides for the grant of
stock options ("Options"), including incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-statutory stock options that do not qualify as stock options
under Section 422 of the Code ("Non-Statutory Options"). The Company has
issued a total of 750,000 options under the 1997 Stock Option Plan, all at an
exercise price of $10.00 per share, including 250,000 to Mr. Cooper, 90,000 to
Mr. Youngman and 80,000 to each of Mr. Whitaker and Ms. Hilbert, granted on
July 15, 1997, and 165,000 to Mr. Appleby and 85,000 to Mr. Knowles, granted
on April 8, 1998. Each of these Options vests in annual 20% increments over a
five year period, with the first 20% vested and exercisable on the first
anniversary of the grant date, except that 85,000 Options granted to Mr.
Appleby and 55,000 Options granted to Mr. Knowles will vest in increments upon
the Company achieving certain unit sales numbers outside of Australia and New
Zealand prior to June 30, 1999 or on October 31, 2003, if the Company fails to
achieve the targeted unit sales numbers.
1997 Non-Employee Director Stock Option Plan. The Company has adopted the
1997 Non-Employee Director Stock Option Plan, under which 50,000 shares of
Common Stock have been authorized for issuance. Upon the closing of the
Company's IPO, all four non-employee directors received options to purchase
5,000 shares of Common Stock at an exercise price of $10.00 per share under
the 1997 Non-Employee Director Stock Option Plan. Commencing with the first
annual meeting of shareholders following the IPO (expected to be conducted in
December 1998), all non-employee directors continuing to serve as such will
receive, on the day following each annual meeting, 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. The options granted under the 1997 Non-Employee
Director Stock Option Plan are exercisable beginning six months from the date
of grant.
43
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING BRADLEY D. COOPER
In 1990, FAI Insurances acquired 50% of the stock of the Company from
Bradley D. Cooper. On September 5, 1994 and June 1, 1995 FAI Insurances
acquired from Mr. Cooper an additional 4.18% and 5.98% of FAI, respectively,
for approximately $2,552,000. On June 1, 1995, FAI Insurances acquired from
Mr. Cooper the remaining 39.84% of the Company which it did not already own
for a purchase price of approximately $6,280,800 payable over 49 months
(subject to downward adjustment in the event certain Earnings Before Interest
and Taxes ("EBIT") targets were not achieved). By May 1997, the purchase price
was paid in full by FAI Insurances. As a result of these transactions, the
Company became a wholly owned subsidiary of FAI Insurances.
On November 11, 1995, Mr. Cooper acquired from FAI Insurances the
International Assets for $220 and assumed approximately $2.0 million of
intercompany debt associated with the International Assets owed to FAI
Insurances. This intercompany debt was subsequently converted to a fixed term
loan bearing interest at 10% per annum. On March 31, 1997, FAI Insurances
reacquired the International Assets from Mr. Cooper for the purchase price of
approximately $2.8 million. The International Assets included a license from
FAI Insurances to distribute the SecurityGuard System in all countries outside
Australia and New Zealand. FAI Insurances' purchase of the International
Assets did not include the amount due under the fixed term loan and the right
to repayment was not transferred by FAI Insurances to the Company in
connection with the Reorganization or otherwise. As of March 31, 1998 Mr.
Cooper was obligated to FAI Insurances under the term loan in an aggregate
amount of $2,449,528.
On July 1, 1996, the Company entered into a management agreement with
Speakeasy Pty Ltd. (as the trustee for the Speakeasy Investment Trust, of
which Bradley D. Cooper is the primary beneficiary), whereby the services of
Mr. Cooper were made available to the Company. In exchange for services
provided, Speakeasy Pty Limited was paid a commission of approximately $19.25
on each alarm unit sold by the Company. For the fiscal year ended June 30,
1997, the Company paid to Speakeasy Pty Limited approximately $692,192. This
management agreement terminated on the closing of the Company's IPO and was
replaced by an employment agreement between the Company and Mr. Cooper, which
was subsequently replaced on October 1, 1997 by a consulting agreement with
Speakeasy Pty Ltd., which provides Mr. Cooper's services to the Company on
substantially the same terms as the employment agreement which became
effective upon the IPO. See "Management--Executive Employment Agreements".
On July 15, 1997 Mr. Cooper purchased 250,000 shares of the Company's Common
Stock at $10.00 per share. 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, and secured by the shares purchased. The note is repayable on
the fifth anniversary of its issuance. The interest payable on the note is due
on a full recourse basis.
During the years ended June 30, 1996 and 1997, the Company made certain
personal loan advances to Mr. Cooper. These loan advances were on a non-
interest bearing basis and repayable on demand. The balance of these personal
loans on June 30, 1996 and on June 30, 1997 were $105,432 and $14,076,
respectively. These personal loan balances have been paid in full as of March
31, 1998.
TRANSACTIONS WITH FAI INSURANCES
On June 30, 1997, pursuant to the Reorganization, the Company acquired from
FAI Insurances, the Australian and New Zealand security alarm operations of
FAI Insurances (the "Australia and New Zealand Operations") and the
International Assets. The Reorganization was effected by a share purchase
agreement through which the Company, in exchange for the International Assets
and 100% of the issued capital stock of
44
<PAGE>
the wholly owned subsidiaries of FAI Insurances which owned the Australia and
New Zealand Operations, executed a $911,892 non-interest bearing note payable
to FAI Insurances within thirty days of the effective date of the Company's
IPO (the "FAI Note"), assumed a $208,894 non-interest bearing note payable to
FAI Insurances within thirty days of the effective date of the Company's IPO
(the "NZ Note") and issued 4,499,999 shares of Common Stock of the Company to
FAI Home Security Pty Limited, a wholly owned subsidiary of FAI Insurances. In
connection with the Reorganization, the Company entered into the License
Agreement through which the license previously granted by FAI Insurances to
use the "FAI" name and logo was modified to eliminate the royalty fee in
connection therewith. Prior to the Reorganization, the Company paid a royalty
fee to FAI Insurances for the fiscal years ended June 30, 1995, June 30, 1996
and June 30, 1997 of $1,989,371, $2,750,468 and $3,697,376, respectively.
Immediately prior to the Reorganization, the Company, through its predecessor
entities, made a final dividend distribution to FAI Insurances totaling
approximately $5,876,224 (including a partial return of capital of $581,928)
representing primarily the retained earnings of the Australia and New Zealand
Operations on the date of the Reorganization. Following the Reorganization,
the Company completed the IPO. The FAI Note and the NZ Note were paid in full
by the Company from proceeds of the IPO.
The Company leases from FAI General Insurances Limited, a subsidiary of FAI
Insurances, approximately 824 square meters of office space for its principal
executive and operational offices located at Levels Ground, 3, 7 and 8, 77
Pacific Highway, North Sydney NSW 2060. Under the terms of the agreement, the
Company pays an annual rent of AUD $380 per square meter per annum. See
"Business--Property".
From time to time predecessor entities of the Company entered into loan
transactions with other companies affiliated with FAI Insurances. These loan
transactions were treated as intercompany loans since at the time the loans
were made the Company was an affiliate of FAI Insurances. The balance of these
loans as of June 30, 1995, 1996 and 1997 amounted to $2,675,655, $4,380,060,
and $2,025,427, respectively. All of these loans were satisfied in full
subsequent to June 30, 1997.
Pursuant to the FFC Transaction, on December 31, 1997 the Company purchased
the FFC Shares from FAI Insurances for $7,016,525 and acquired the FFC Option,
at no cost, to acquire the remaining 50% equity interest of FFC for the same
consideration as was paid for the FFC Shares plus 50% of the net change in
FFC's retained earnings from the date of the FFC Transaction until the date
the FFC Option is exercised. The Company delivered the FFC Note in payment of
the purchase price. As of March 31, 1998 the aggregate principal amount of the
FFC Note, plus accrued interest, totaled approximately $5,726,000. The payment
of the principal balance of this note is secured by the FFC Shares purchased
by the Company in the FFC Transaction.
TRANSACTIONS WITH STEVEN A. ROTHSTEIN
National Securities, of which Steven A. Rothstein is Chairman of the Board,
served as one of the IPO Representatives. In connection with the IPO, National
Securities received, in addition to applicable underwriting discounts,
commissions and a nonaccountable expense allowance, 130,000 of the IPO
Warrants, and the right to delegate one nominee for election as a director of
the Company during the five year period ending on July 18, 2002. Mr. Rothstein
is also Chairman of the Board and Chief Executive Officer of Olympic Cascade
Financial Corporation, which is the parent corporation of L.H. Friend, the
Representative in this Offering.
TRANSACTIONS WITH INTERNATIONAL HOME SECURITY INVESTMENTS LIMITED AND PAUL
BROWN
On July 17, 1998 the Company entered into the Stock Purchase Agreement with
International Home Security Investments Limited, whereby it has agreed to
purchase all of the issued and outstanding common of IIHSL for a purchase
price of (i) 400,000 shares of Common Stock; (ii) the Ness Warrants; and (iii)
$11,157,000 to be paid out of the proceeds of this Offering. Upon the closing
of the Ness Transaction which will occur immediately following the closing of
this Offering, International Home Security Investments Limited and its sole
beneficial owner, Paul Brown, will beneficially own 10.5% of the Common Stock.
Following the Ness Transaction International Home Security Investments Limited
will have the right to designate one nominee for election to the board of
directors of the Company. See "Business--Strategic Acquisitions".
45
<PAGE>
TRANSACTION POLICY
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and affiliates will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of June 30, 1998 and as
adjusted to reflect the sale of the shares offered pursuant to this Offering
and the shares issued pursuant to the Ness Transaction by (i) each executive
officer of the Company, (ii) each director of the Company or nominee for
director, (iii) all executive officers and directors as a group, and (iv) each
person known by the Company to be the beneficial owner of more than five
percent of the Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR OWNERSHIP AFTER
TO OFFERING(1) OFFERING(2)
----------------- -----------------
NUMBER OF NUMBER OF
SHARES PERCENT SHARES PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS(3)
Bradley D. Cooper(4).................. 300,000 5.8% 300,000 4.3%
Terrence J. Youngman(5)............... 18,000 * 18,000 *
Robert D. Appleby..................... -- -- -- --
Mark Whitaker(6)...................... 16,000 * 16,000 *
Geoffrey D. Knowles................... -- -- -- --
Felicity A. Hilbert(6)................ 16,000 * 16,000 *
Steven Rabinovici(7).................. 5,000 * 5,000 *
Timothy M. Mainprize(7)(8)............ 5,000 * 5,000 *
Dennis J. Puleo(7).................... 5,000 * 5,000 *
Steven A. Rothstein(7)(9)............. 5,000 * 5,000 *
Paul Brown(10)........................ -- -- 760,000 10.5
All executive officers and directors
as a group(11) persons).............. 370,000 7.0 1,130,000 15.4
FIVE PERCENT SHAREHOLDERS
FAI Home Security Holdings Pty
Ltd.(11)............................. 2,150,000 41.7 2,150,000 31.4
Level 7, 77 Pacific Highway
North Sydney, NSW 2060 Australia
Robertson, Stephens & Company
Investment Management L.P.(12)....... 828,900 16.1 828,900 12.1
555 California St., Suite 2600
San Francisco, CA 94104
Heartland Advisors, Inc.(13).......... 1,203,100 23.3 1,203,100 17.6
790 North Milwaukee Street
Milwaukee, WI 53202
</TABLE>
- --------
*Less than one percent.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting power and sole investment power with respect to
all the shares reflected in this table.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Unless otherwise noted, the address for each of the Executive Officers
and Directors is c/o Home Security International, Inc., Level 7, 77
Pacific Highway, North Sydney, NSW 2060, Australia.
(4) Includes 250,000 shares owned by Mr. Cooper and 50,000 shares issuable
upon the exercise of options exercisable within sixty days after June 30,
1998.
(5) Represents 18,000 shares issuable upon the exercise of options
exercisable within sixty days after June 30, 1998.
(6) Represents 16,000 shares issuable upon the exercise of options
exercisable within sixty days after June 30, 1998.
(7) Represents 5,000 shares issuable upon the exercise of options, all of
which are currently exercisable.
47
<PAGE>
(8) Does not include 2,150,000 shares beneficially owned by FAI Insurances,
of which Mr. Mainprize is a director and the Chief Financial Officer.
(9) Does not include 130,000 shares issuable upon the exercise of the IPO
Warrants held by National Securities, of which Mr. Rothstein is a
director and Chairman. Mr. Rothstein is also Chairman, Chief Executive
Officer, President and a director of Olympic Cascade Financial
Corporation, the parent company of National Securities.
(10) Includes 400,000 shares to be issued to International Home Security
Investments Limited pursuant to the Ness Transaction, the sole
shareholder of IIHSL, of which Paul Brown is the sole beneficial owner
and 360,000 shares issuable upon the exercise of the Ness Warrants also
to be issued to International Home Security Investments Limited pursuant
to the Ness Transaction.
(11) A wholly owned subsidiary of FAI Insurances. Based on information
reported on Schedule 13G, filed on February 19, 1998.
(12) Includes 626,100 shares held of record by The Robertson Stephens Orphan
Fund ("Orphan") of which Robertson, Stephens & Co. Investment
Management, L.P. ("Robertson") is a General Partner, 132,800 shares held
of record by The Robertson Stephens Orphan Offshore Fund ("Offshore") of
which Robertson is the General Partner, and 70,000 shares held of record
by the Robertson Stephens Global Low-Priced Stock Fund ("Low-Priced") of
which Robertson is investment adviser. Based on information reported on
Schedule 13D, Amendment No. 1, filed on October 14, 1997. Robertson, its
general partner Bayview Holdings, Inc. ("Bayview"), Bayview's 100%
parent, Robertson Stephens Investment Management Co. ("Parent"), and
Parent's 100% parent, BankAmerica Corporation, each beneficially own the
828,900 shares held by Orphan, Offshore and Low-Priced. Additionally
Bayview Investors Ltd., also a general partner of Orphan, and its
managing member, Private Equity Group L.L.C., also jointly beneficially
own the 626,100 shares held by Orphan. Based on information reported on
Schedule 13D, Amendment No. 1, filed on October 14, 1997.
(13) Based on information reported on Schedule 13G, Amendment No. 2, filed on
May 11, 1998.
48
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company is 20,000,000 shares of Common
Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par
value. Immediately prior to the commencement of this Offering, 5,150,500
shares of Common Stock of the Company will be issued and outstanding. There
are no shares of Preferred Stock outstanding. The holders of outstanding
shares of Common Stock are entitled to receive dividends out of assets
available therefor at such time and in such amounts as the Board may, from
time to time, determine. Each stockholder is entitled to one vote for each
share of Common Stock held of record on all matters submitted to a vote of
stockholders. As is permitted by Delaware law, there is no cumulative voting
in connection with the election of directors. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities under the Company's charter documents. There are no sinking fund
provisions applicable to the Common Stock. Upon liquidation, dissolution or
winding up of the Company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
outstanding at that time. All outstanding shares of Common Stock are, and the
Common Stock to be outstanding upon completion of this Offering and the Ness
Transaction will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number
of shares constituting any series and the designation of such series, without
any further vote or action by the stockholders. The Board of Directors,
without stockholder approval, may issue Preferred Stock with voting and
conversion rights which could materially adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock could also
decrease the amount of earnings and assets available for distribution to
holders of Common Stock. In addition, the issuance of Preferred Stock may have
the effect of delaying, deferring or preventing a change in control of the
Company. At present, the Company has no plans to issue any shares of Preferred
Stock. See "Risk Factors--Anti-Takeover Considerations".
WARRANTS
In connection with the Ness Transaction, the Company will issue to
International Home Security Investments Limited warrants to purchase an
aggregate of 360,000 shares of Common Stock, which warrants will be
exercisable at the price of $13.00 per share ("Ness Warrants"). The Ness
Warrants will be exercisable at any time during the five year period
commencing on the closing of the Ness Transaction. The Company is not required
to issue fractional shares upon the exercise of the Ness Warrants. The holders
of the Ness Warrants do not possess any rights as a shareholder of the Company
until such holders exercise such warrants.
In connection with the IPO, the Company issued to the IPO Representatives
warrants to purchase an aggregate of 240,000 shares of Common Stock which
warrants are exercisable at the price of $16.50 per share ("IPO Warrants").
The IPO Warrants are exercisable at any time beginning on July 15, 1998
through July 15, 2002. The IPO Warrants contain provisions that protect the
holders against dilution by adjustment of the exercise price. Such adjustments
will occur in the event, among others, that the Company makes certain
distributions to holders of its Common Stock. The Company is not required to
issue fractional shares upon the exercise of the IPO Warrants. The holders of
the IPO Warrants do not possess any rights as a shareholder of the Company
until such holders exercise such warrants.
The IPO Warrants provide certain rights with respect to the registration
under the Securities Act of shares of Common Stock issuable upon exercise of
the IPO Warrants. The Company has agreed that, until July 15, 2002, it will
register the issuance of such shares (and, if necessary, their resale) so as
to permit their public resale
49
<PAGE>
without restriction. The holders of the IPO Warrants have, until July 15,
2002, the right to demand two registrations by the Company of their shares and
an unlimited number of incidental, or "piggyback," registration rights. These
registration rights could result in substantial future expense to the Company
and could adversely affect the Company's ability to complete future equity or
debt financing. Furthermore, the registration and sale of Common Stock of the
Company held by or issuable to the holders of registration rights, or even the
potential of such sales, could have an adverse effect on the market price of
the securities offered hereby.
For the life of each of the IPO Warrants and the Ness Warrants, as well as
options issued by the Company, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming
the risk of ownership of the shares of Common Stock issuable upon the exercise
of the warrants or options. The holders may be expected to exercise their
warrants or options at a time when the Company would, in all likelihood, be
able to obtain any needed capital by an offering of Common Stock on terms more
favorable than those provided for by the warrants or options. Further, the
terms on which the Company could obtain additional capital during the life of
the warrants or options may be adversely affected.
CERTAIN PROVISIONS OF THE COMPANY'S CHARTER AND DELAWARE LAW
Classified Board of Directors. The Company's By-laws provides for the Board
of Directors to be divided into three classes of directors, as nearly equal in
number as is reasonably possible, serving staggered terms so that directors'
initial terms will expire at the 1998, 1999 or 2000 annual meeting of the
stockholders. Starting with the 1998 annual meeting of the stockholders, one
class of directors will be individually elected each year for a three-year
term. See "Management--Directors and Executive Officers." The Company believes
that a classified Board of Directors will help to assure the continuity and
stability of the Board of Directors and the Company's business strategies and
policies as determined by the Board of Directors, since a majority of the
directors at any given time will have had prior experience as directors of the
Company. The Company believes that this, in turn, will permit the Board of
Directors to more effectively represent the interests of stockholders. See
"Management--Limitation of Director's Liability and Indemnification".
Delaware Anti-Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or after such
date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or
associate of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is the Bank of New York, 101
Barclay Street, New York, New York 10286.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the Ness Transaction, the Company will
have outstanding 6,850,500 shares of Common Stock. All of the 1,300,000 shares
sold in this Offering, as well as the 2,750,500 shares sold in the Company's
IPO, will be freely tradeable without restriction or further registration
under the Securities Act unless held by "affiliates" of the Company as that
term is defined in Rule 144 under the Securities Act. The remaining 2,800,000
shares will be subject to certain restrictions, as defined under Rule 144 (the
"Restricted Shares"). Specifically, under Rule 144 (i) 2,150,000 shares held
by a subsidiary of FAI Insurances may be resold under Rule 144, subject to
volume and other resale limitations; (ii) 250,000 shares sold to Bradley D.
Cooper may not be resold publicly pursuant to Rule 144 for a period of one
year following the date on which full payment for such shares is made; and
(iii) the 400,000 shares issued pursuant to the Ness Transaction may not be
resold publicly pursuant to Rule 144 until at least one year after the close
of the Ness Transaction. The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions under the
Securities Act. Restricted Shares generally may be sold in the public market
only if registered under the Securities Act or sold in compliance with Rule
144 or other applicable regulation.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated for purposes of Rule 144) who beneficially owns
restricted shares with respect to which at least one year has elapsed since
the later of the date the shares were acquired from the Company or from an
affiliate of the Company, is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock of the Company (approximately 68,505 shares
immediately after this Offering), or (ii) the average weekly trading volume in
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner-of-sale provisions and notice
requirements and to the availability of current public information about the
Company. A person who is not an affiliate, has not been an affiliate within
three months prior to sale and who beneficially owns restricted securities
with respect to which at least two years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company, is entitled to sell such shares under Rule 144(k) without regard to
any of the volume limitations or other requirements described above.
Restricted Shares that have been issued in reliance on Rule 701 (such as
shares of Common Stock issued under the Company's stock option plans) may be
resold by persons other than affiliates of the Company, subject only to the
manner of sale provisions of Rule 144, and may be resold by affiliates of the
Company under Rule 144 without compliance with its one-year holding period
requirement. In addition, the holders of the IPO Warrants will, subject to the
satisfaction of certain conditions, be able to sell the Common Stock issuable
upon exercise thereof publicly through the exercise of certain registration
rights or (for shares issued, pursuant to the "cashless exercise" provisions
thereof) pursuant to Rule 144.
Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares issued prior
to the IPO of all or a portion of their shares to certain "qualified
institutional buyers," as defined in Rule 144A.
The Company cannot predict the effect, if any, that sales of shares of
Common Stock, or the availability of such shares for sale, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices and could enjoin the Company's ability to raise capital through a sale
of its securities.
51
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom L. H. Friend is
acting as the Representative, have severally agreed, subject to the terms and
conditions of the Underwriting Agreement between the Company and the
Representative (the "Underwriting Agreement"), to purchase from the Company,
and the Company has agreed to sell to the Underwriters, the shares of Common
Stock set forth in the table below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
L. H. Friend, Weinress, Frankson & Presson, Inc.................
---------
Total....................................................... 1,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Common Stock are subject to certain conditions. The
Underwriters are committed to purchase all the Common Stock offered by this
Prospectus, if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus, and to selected dealers at such price less
a concession not in excess of $ per share of Common Stock, and that the
Underwriters and such dealers may reallow a concession to other dealers,
including the Underwriters, not in excess of $ per share of Common
Stock. After the commencement of this Offering, the public offering price, the
concessions to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted the Underwriters the Underwriters' Over-Allotment
Option, expiring at the close of business forty-five days after the closing of
this Offering, to purchase up to an aggregate of 195,000 additional shares of
Common Stock from the Company at the public offering price set forth on the
cover page of this Prospectus less underwriting discounts and commissions. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional Common Stock as the percentage it was obligated to purchase
pursuant to the Underwriting Agreement. The Underwriters may exercise the
option only to cover over-allotments, if any, incurred in the sales of the
Common Stock.
The Representative has informed the Company that it does not expect the
Underwriters to confirm sales of shares of Common Stock offered by this
Prospectus to any accounts over which they exercise discretionary authority.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons on the one hand, and the Underwriters
and their respective controlling persons on the other hand, against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments the Underwriters may be required to make in respect thereof.
In connection with the IPO, the Company has agreed that, until July 18, 2002
National Securities (which is an affiliate of the Representative) shall have
the right to designate for election one member of the Company's Board of
Directors. However, if National Securities so chooses, National Securities may
instead designate an
52
<PAGE>
observer, who shall receive all notices of meeting by the Company's Board of
Directors and all other correspondence and communications sent by the Company
to its Board of Directors and be entitled to attend all meetings of the
Company's Board of Directors. The Company has agreed to reimburse the National
Securities designee for out-of-pocket expenses incurred in connection with
attending meetings of the Company's Board of Directors. Steven A. Rothstein
has been designated by National Securities as its director.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Company's
Common Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which, such
persons may bid for or purchase Common Stock of the Company for the purpose of
stabilizing its market price. The Underwriters also may create a short
position for the account of the Underwriters by selling more of the Common
Stock in connection with this Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock of the Company in
the open market following completion of this Offering to cover all or a
portion of such short position. The Underwriters may also cover all or a
portion of such short position by exercising the Underwriters' Over-Allotment
Option. In addition, the Representative on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in this
Offering) for the account of other Underwriters, the selling concession with
respect to the shares of Common Stock that are distributed in this Offering
but subsequently purchased for the account of the Underwriters in the open
market. Any of the transactions described in this paragraph may stabilize or
maintain the price of the Common Stock of the Company at a level above that
which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
Although the Representative has co-managed over fifty public offerings, it
has served as the sole managing underwriter of only one public offering.
However, the senior officers of the Representative overseeing the Offering
have served, with various firms, as the lead investment bankers for more than
one hundred registered public offerings over the last fifteen years.
The foregoing is a summary of the principal terms of the Underwriting
Agreement referred to above and does not purport to be complete. Reference is
made to such agreement, which is filed as an exhibit to the registration
statement filed in connection with this Offering.
LEGAL MATTERS
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Company by D'Ancona & Pflaum. Certain legal matters will
be passed upon for the Underwriters by Camhy Karlinsky & Stein LLP, New York,
New York. Arthur Don, a member of D'Ancona & Pflaum, acts as the Secretary for
the Company, a non-executive position as defined in the Company's By-laws.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Arthur Andersen, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in auditing and accounting in giving
such reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act, with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement and the exhibits and
schedules thereto. Statements contained herein concerning the provisions of
any documents are not necessarily complete, and in
53
<PAGE>
each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. In addition, the Company is subject to the
informational requirements of Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information, as well as the Registration Statement, including exhibits
and schedules filed therewith, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained from the public reference section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of the prescribed fees. Such materials may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov. The Company's Common Stock is listed on the American
Stock Exchange and the above materials may also be inspected at the office of
the American Stock Exchange at 86 Trinity Place, New York, New York 10006-
1881.
CERTAIN FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
within the meaning of Section 27A of the Securities Act and 21E of the
Exchange Act that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in this Prospectus, words such as
"anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and
similar expressions as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the Company's operations and results
of operations, competitive factors and pricing pressures, shifts in market
demand, the performance and needs of the residential security alarm industry,
the costs of product development and other risks and uncertainties including,
in addition to any uncertainties specifically identified in the text
surrounding such statements, uncertainties with respect to changes or
developments in social, economic, business, industry, market, legal and
regulatory circumstances and conditions and actions taken or omitted to be
taken by third parties, including the Company's shareholders, customers,
suppliers, business partners, competitors, and legislative, regulatory,
judicial and other governmental authorities and officials. Should one or more
of these risks or uncertainties materialize, or should the underlying
estimates or assumptions prove incorrect, actual results or outcomes may vary
significantly from those anticipated, believed, estimated, expected, intended
or planned. See also "Risk Factors".
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Home Security International, Inc.:
Report of Independent Public Accountants................................ F-3
Consolidated Statements of Income for the Years Ended June 30, 1995,
1996 and 1997 and the Unaudited Nine Months Ended March 31, 1997 and
1998................................................................... F-4
Consolidated Balance Sheets as at June 30, 1996 and 1997 and the
Unaudited Nine Months Ended March 31, 1998............................. F-5
Consolidated Statements of Cashflows for the Years Ended June 30, 1995,
1996 and 1997 and the Unaudited Nine Months Ended March 31, 1997 and
1998................................................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1995, 1996 and 1997 and the Unaudited Nine Months Ended
March 31, 1998......................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Cooper International Group:
Report of Independent Public Accountants................................ F-21
Combined Statements of Loss for the Period Ended June 30, 1995, Year
Ended June 30, 1996 and the Nine Months Ended March 30, 1997........... F-22
Combined Statements of Cashflows for the Period Ended June 30, 1995,
Year Ended June 30, 1996 and the Nine Months Ended March 30, 1997...... F-23
Combined Statements of Changes in Shareholders' Equity for the Period
Ended June 30, 1995, Year Ended June 30, 1996 and the Nine Months Ended
March 30, 1997......................................................... F-24
Notes to Combined Financial Statements.................................. F-25
FAI Finance Corporation Pty Limited:
Report of Independent Public Accountants................................ F-31
Consolidated Statements of Income for the Years Ended June 30, 1995,
1996 and 1997 and the Unaudited Nine Months Ended March 31, 1997 and
1998................................................................... F-32
Consolidated Balance Sheets as of June 30, 1996 and 1997 and Unaudited
Nine Months Ended March 31, 1998....................................... F-33
Consolidated Statements of Cashflows for the Year Ended June 30, 1995,
1996 and 1997 and the Unaudited Nine Months Ended March 31, 1998....... F-34
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1995, 1996 and 1997 and the Unaudited Nine Months Ended
March 31, 1998......................................................... F-35
Notes to Consolidated Financial Statements.............................. F-36
</TABLE>
F-1
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Home Security International, Inc.:
We have audited the accompanying consolidated balance sheets of the Home
Security International, Inc. as of June 30, 1997 and 1996, and related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home
Security International, Inc. as of June 30, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1997 in conformity with generally accepted accounting
principles in the United States of America.
The consolidated financial statements of Home Security International, Inc.
as of March 31, 1998 and for the nine months ended March 31, 1998 and 1997,
which are presented solely for comparative purposes, were not audited by
Independent Public Accountants.
/s/ Arthur Andersen
Sydney
September 22, 1997
F-3
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
NOTE $US $US $US $US $US
---- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 2 21,437,325 26,700,922 33,464,595 23,232,294 32,157,807
Cost of goods sold--
related party.......... 14 (1,989,371) (2,750,468) (3,647,376) (2,668,985) --
--other.......... (12,229,324) (14,834,094) (20,626,411) (14,109,950) (18,864,996)
----------- ----------- ----------- ----------- -----------
Gross profit............ 7,218,630 9,116,360 9,190,808 6,453,359 13,292,811
Management fees
received--related
parties................ 14 321,355 -- 559,002 508,813 --
General and
administrative
expenses............... (5,412,853) (6,606,377) (6,612,318) (4,554,748) (8,083,449)
----------- ----------- ----------- ----------- -----------
Income from operations.. 2,127,132 2,509,983 3,137,492 2,407,424 5,209,362
Non operating income--
other.................. -- -- 6,740 -- --
Interest income--related
party.................. 14 -- 75,087 755,613 491,051 26,679
--other........... 65,211 175,719 81,790 63,951 307,160
Interest expenses--
related party.......... 14 -- (47,625) (60,046) -- (111,425)
--other.......... -- -- -- -- (6,950)
----------- ----------- ----------- ----------- -----------
Income before taxes and
equity in income of
affiliated companies... 2,192,343 2,713,164 3,921,589 2,962,426 5,424,826
Income tax expense...... 13 (722,523) (1,054,170) (1,629,973) (1,124,066) (1,948,779)
----------- ----------- ----------- ----------- -----------
Income before equity in
income of affiliated
companies.............. 1,469,820 1,658,994 2,291,616 1,838,360 3,476,047
Equity in income of
affiliated companies... 9 -- -- -- -- 97,274
----------- ----------- ----------- ----------- -----------
Net income.......... 1,469,820 1,658,994 2,291,616 1,838,360 3,573,321
=========== =========== =========== =========== ===========
Net income per common
share
Basic earnings per
share................ $ 0.33 $ 0.37 $ 0.51 $ 0.41 $ 0.70
Diluted earnings per
share................ $ 0.33 $ 0.37 $ 0.51 $ 0.41 $ 0.69
Weighted average number
of shares outstanding
Basic................. 4,500,000 4,500,000 4,500,000 4,500,000 5,106,000
Diluted............... 4,500,000 4,500,000 4,500,000 4,500,000 5,157,417
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------- -----------
1996 1997 1998
ASSETS NOTE $US $US $US
- ------ ---- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents............ 369,837 118 5,803,023
Accounts receivable--related party .. 14 4,380,060 2,025,455 --
Accounts receivable--trade, net...... 3 1,099,733 615,560 1,246,001
Inventories.......................... 4 339,602 1,277,104 2,791,109
Prepaid expenses and other current
assets.............................. 5 751,426 449,458 1,225,606
---------- ---------- ----------
Total current assets............... 6,940,658 4,367,695 11,065,739
---------- ---------- ----------
Non-current assets
Investment in affiliated companies... 9 -- -- 7,774,860
Plant and equipment, net............. 7 12,706 869,571 1,060,114
Intangibles, net..................... 8 5,948,255 10,142,077 9,736,962
Deferred income taxes................ 13 475,505 549,393 685,324
Receivables--related party........... 14 -- 24,366 --
Other non-current assets............. 6,531 3,748 3,492
---------- ---------- ----------
Total non-current assets........... 6,442,997 11,589,155 19,260,752
---------- ---------- ----------
Total assets....................... 13,383,655 15,956,850 30,326,491
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
Current liabilities
Bank overdraft....................... -- 31,795 --
Note payable--FAI Insurances Group... 9,14 -- -- 694,117
Payables--trade...................... 2,414,042 4,018,147 4,424,199
Accrued--Warranty.................... 1 332,336 411,778 309,563
Accrued--Security Call-out expense... 1 354,423 486,864 494,380
Other accrued liabilities............ 269,548 206,970 140,099
Lease liability...................... -- 19,068 6,413
Income tax payable................... -- 467,961 1,449,553
Deferred income...................... 1 119,479 479,307 647,359
---------- ---------- ----------
Total current liabilities.......... 3,489,828 6,121,890 8,165,683
---------- ---------- ----------
Non-current liabilities
Note payable--FAI Insurances group... 9,14 -- -- 5,032,346
Lease liability...................... -- 44,877 10,165
Accrued liabilities.................. -- -- 114,885
Deferred income...................... 1 -- -- 205,646
---------- ---------- ----------
Total non-current liabilities...... -- 44,877 5,363,042
---------- ---------- ----------
Total liabilities.................. 3,489,828 6,166,767 13,528,725
---------- ---------- ----------
Shareholders' equity
Preferred stock $.001 value;
1,000,000 shares authorized, none
outstanding......................... -- -- --
Common stock $.001 value; 20,000,000
shares authorized and 5,150,500,
4,500,000 and 5,150,500 shares
issued and outstanding as of June
30, 1997, June 30, 1996 and March
31, 1998, respectively.............. 2 4,500 5,150
Additional paid-in capital........... 6,016,944 10,238,691 16,111,311
Secured Note......................... 6 -- -- (2,375,000)
Foreign currency translation reserve. 386,693 (406,534) (470,442)
Retained earnings (accumulated
losses)............................. 3,490,188 (46,574) 3,526,747
---------- ---------- ----------
Total shareholders' equity......... 9,893,827 9,790,083 16,797,766
---------- ---------- ----------
Total liabilities and shareholders'
equity............................ 13,383,655 15,956,850 30,326,491
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1995 $US 1996 $US 1997 $US 1997 $US 1998 $US
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cashflow from operating
activities
Net income............. 1,469,820 1,658,994 2,291,616 1,838,359 3,573,321
Adjustments to
reconcile net income
to net cash from
operating activities:
Depreciation......... 12,350 11,192 42,100 33,422 143,407
Amortization of
goodwill............ 47,884 226,498 391,924 273,685 494,844
Deferred taxes and
income tax payable.. 478,995 (1,143,650) 427,573 322,492 840,079
Provision for losses
on accounts
receivable.......... 9,552 58,213 100,715 23,895 305,036
(Increase) decrease
in operating assets:
Accounts
receivable--trade. (245,402) (21,925) (203,120) (14,959) (977,673)
Inventories........ 60,656 (239,731) (965,610) (259,667) (1,590,001)
Prepaid expenses
and other assets.. (262,407) (305,224) (33,054) (201,814) (848,757)
Increase (decrease)
in operating
liabilities:
Accounts payable... 1,740,323 (489,880) 2,159,629 933,636 681,494
Accrued
liabilities....... 195,823 734,742 627,011 396,959 407,995
---------- ---------- ---------- ---------- ----------
Net cash provided
by operating
activities....... 3,507,594 489,229 4,838,784 3,346,008 3,029,745
---------- ---------- ---------- ---------- ----------
Cashflow from investing
activities
Proceeds from sale of
plant and equipment... -- 112,062 -- -- --
Investment in
affiliated companies.. -- -- -- -- (2,130,285)
Short term loans
(granted)/repayments
received.............. (927) (3,129) 295,353 2,559 23,107
Additions to plant and
equipment............. (43,632) (70,701) (871,894) (762,408) (391,245)
Receipt from/(payments
to) related parties... (2,509,175) (1,429,568) 2,137,679 (2,722,800) 1,802,920
Purchase of goodwill... -- -- (271,826) -- --
Proceeds from sale of
investment............ -- -- 1,914 -- --
Cash in predecessor
entities not acquired. -- -- (410,302) -- --
---------- ---------- ---------- ---------- ----------
Net cash provided
by/(used in)
investing
activities....... (2,553,734) (1,391,336) 880,924 (3,482,649) (695,503)
---------- ---------- ---------- ---------- ----------
Cashflow from financing
activities.............
Dividend and trust
distribution paid..... -- -- (5,294,296) -- --
Return of capital...... -- -- (581,928) -- --
Capital subscribed..... -- -- -- -- 3,934,678
Share issue costs...... -- -- -- -- (436,409)
Increase in bank
overdraft............. -- -- 31,795 -- (29,615)
---------- ---------- ---------- ---------- ----------
Net cash (provided
by) financing
activities....... -- -- (5,844,429) -- 3,468,654
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash held........... 953,860 (902,107) (124,721) (136,641) 5,802,896
---------- ---------- ---------- ---------- ----------
Cash at the beginning of
the financial period... 247,000 1,229,501 369,837 369,837 118
Effect of exchange rate
change on cash held.... 28,641 42,443 (244,998) 3,289 9
---------- ---------- ---------- ---------- ----------
Cash at the end of the
financial period....... 1,229,501 369,837 118 236,485 5,803,023
========== ========== ========== ========== ==========
Supplemental disclosure
of cash flow
information:
Interest paid.......... 874 59,945 515,763 314,915 118,376
Income taxes paid...... 212,736 1,279,393 946,230 595,981 796,153
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL STOCK FOREIGN
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, 1994.. 2 $ 2 $ -- $ -- $ -- $ 361,374 $ 361,376
Foreign currency
translation
adjustment............. (4,240) (4,240)
Additional paid-in
capital................ 2,085,090 2,085,090
Net Income 1995......... 1,469,820 1,469,820
--------- ------ ----------- ----------- --------- ----------- -----------
BALANCE, JUNE 30, 1995.. 2 2 2,085,090 -- (4,240) 1,831,194 3,912,046
Foreign currency
translation adjustment. 390,933 390,933
Additional paid-in
capital................ 3,931,854 3,931,854
Net Income 1996......... 1,658,994 1,658,994
--------- ------ ----------- ----------- --------- ----------- -----------
BALANCE, JUNE 30, 1996.. 2 2 6,016,944 -- 386,693 3,490,188 9,893,827
Foreign currency
translation Adjustment. (553,335) (553,335)
Additional paid-in
capital................ 1 1 4,803,675 4,803,676
Net Income 1997......... 2,291,616 2,291,616
Dividends and Trust
Distributions, and
return of capital...... (581,928) (5,294,296) (5,876,224)
Reorganization
Adjustments............ 4,499,997 4,497 (239,892) (534,082) (769,477)
--------- ------ ----------- ----------- --------- ----------- -----------
BALANCE, JUNE 30, 1997.. 4,500,000 4,500 10,238,691 -- (406,534) (46,574) 9,790,083
(Unaudited)
Foreign currency
translation Adjustment. (63,908) (63,908)
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-March
31, 1998............... 3,573,321 3,573,321
--------- ------ ----------- ----------- --------- ----------- -----------
BALANCE, MARCH 31, 1998. 5,150,500 $5,150 $16,111,311 $(2,375,000) $(470,442) $ 3,526,747 $16,797,766
========= ====== =========== =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business--
Home Security International, Inc. ("HSI") was incorporated in Delaware,
United States of America on April 11, 1997. On June 30, 1997 HSI acquired FAI
Home Security Pty Limited (incorporated in New South Wales, Australia on
August 13, 1990) and FAI Home Security (ENZED) Limited (incorporated in
Auckland, New Zealand on April 24, 1997) as well as certain tangible and
intangible assets of the United Kingdom (including certain European
countries), South Africa, Canada and the United States of America Home
Security operations ("International Operations") (all collectively called "the
Company"). The background to the reorganization and acquisition is as follows:
FAI Home Security (ENZED) Limited acquired all of the intangible assets,
fixed assets and inventory, net of warranty provision from FAI Home Security
(NZ) Trust on April 30, 1997. The consideration for the acquisition was the
issue of fully paid ordinary shares for the value of the intangibles, and a
note payable ("NZ Note") of $208,894 for the net intangible assets acquired.
FAI Home Security (NZ) Trust then sold these shares and the NZ Note to FAI
Home Security Holdings Pty Ltd on June 30, 1997.
The International Operations were acquired by FAI Home Security Holdings Pty
Limited on March 31, 1997 from FAI Home Security (UK) Trust, FAI Home Security
(Canada) Unit Trust and their subsidiaries FAI Home Security USA, Inc and FAI
Home Security (AFRICA)(PROPRIETARY) Ltd (the "Cooper International Group").
As part of the reorganization on June 30, 1997, HSI acquired from FAI Home
Security Holdings Pty Ltd all of the shares of FAI Home Security Pty Limited
and FAI Home Security (ENZED) Limited, plus the NZ Note and the inventory,
fixed assets and intangible assets of the International Operations (the
"International Assets") in exchange for the issue of 4,499,999 shares, the
issue of a $911,892 note payable to FAI Home Security Holdings Pty Limited
("FAI Note") equivalent to the book value of assets acquired, being $641,138,
plus $270,754, and a further note payable in the amount of $208,894 for the NZ
Note.
The main business activity of the Company, is the sale, service and
monitoring of security alarm systems, which are sold via a distributor network
to residential and small business premises in the countries of operations.
The security alarm system, "SecurityGuard", and other major components are
supplied exclusively by Ness Security Products Pty Limited, a company based in
Sydney, Australia.
On December 31, 1997 the Company acquired 50 percent of the equity interest
in FAI Finance Corporation Pty Limited (together with its subsidiary FAI
Finance Corporation (NZ) Limited (FFC)) from FAI Insurances Ltd. 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.
(b) Principles of Consolidation and Basis of Preparation--
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
of America ("US GAAP"). The investment in FFC is recorded on the equity
method.
The acquisition of FAI Home Security Pty Limited, FAI Home Security (ENZED)
Limited was accounted for as a reorganization of entities under common control
on an historic cost basis in a manner similar to a pooling of interests. The
acquisition of the International Operations by the Company's predecessor and
the acquisition of the interest in FFC were accounted for as purchases.
F-8
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The consolidated financial statements as of and for the nine months ended
March 31, 1998 and 1997 have been prepared by the Company, without audit. 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 the period have been made.
The consolidated statement of income for the year ended June 30, 1997, 1996
and 1995 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 during those years. Results of the International Operation for
the three months ended June 30, 1997 have been included in the 1997 financial
statements since those operations were acquired by the Company's predecessor
on March 31, 1997.
All intercompany accounts and transactions have been eliminated upon
consolidation.
(c) Cash and Cash Equivalents--
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost, which approximates market.
(d) Foreign Currencies--
The consolidated financial statements are translated into US dollars to
reflect the Company's reporting currency. The assets and liabilities are
translated at the balance sheet date exchange rate. The profit and loss items
have been translated at the average exchange rates throughout each period. The
resulting translation effects are reflected in shareholders' equity.
The functional currency for FAI Home Security (ENZED) Limited is New Zealand
dollars, for FAI Home Security Pty Limited is Australian dollars, for Home
Security International (UK) Limited is British Pound Sterling, for Home
Security International (Canada), Inc is Canadian dollars, and for Home
Security International (South Africa)(Proprietary) Limited is the South
African Rand.
(e) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
(f) Income Taxes--
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109 ("Accounting for Income Taxes") which
requires an asset and liability method of accounting for income taxes. Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
F-9
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Revenue Recognition--
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates. The Company also sells extended product warranties for
periods of one to two years and the income derived is recognized on a
straight-line basis over the life of the warranties. All unearned portions of
the warranties are deferred in the balance sheet as "Deferred Income".
(h) Allowance for Doubtful Accounts--
Management reviews the collectability of accounts receivable on a regular
basis. Amounts, if any, which are determined to be uncollectable are provided
for in the financial statements in the period such determination is made.
(i) Inventories--
Inventories consist of wholesale stock and sales aids and are stated at the
lower of cost (first-in, first-out method), or market.
(j) Plant and Equipment--
Plant and equipment are recorded at cost. Maintenance and repairs are
expensed in the period to which they relate. Depreciation on plant and
equipment is calculated using the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures............................................. 8.0
Office equipment................................................... 8.0
Plant.............................................................. 5.0
Motor vehicles..................................................... 6.5
Computer equipment................................................. 3.5
Leasehold improvements............................................. 3.0
</TABLE>
(k) Research and Development--
The Company has no significant research and development activities.
(l) Pension and Other Benefit Plans--
The Company contributes to a pension plan on behalf of its employees. The
pension plan is an accumulation fund and the Company has no liability to
members under the plan. The Company has no other pension or other employment
benefit plans.
(m) Intangible Assets--
Intangible assets represent the excess of cost over fair value of assets
acquired and are amortized using the straight-line method over twenty years.
The carrying value of intangible assets is periodically reviewed by the Group
based on the expected future undiscounted operating cash flows of the related
business unit. Based upon its most recent analysis, the Group believes that no
material impairment of intangible assets exists at March 31, 1998.
F-10
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The excess of cost over fair value of the assets of FFC acquired will be
amortized using the straight-line method over 20 years and will be recognized
as part of the Company's equity in net income of FFC.
(n) Warranty--
The Company warrants its products against defects in design, materials and
workmanship for one year from the date of installation. A provision for
estimated warranty costs is recorded at the time of sale and periodically
adjusted to reflect actual expense.
(o) Security Call-out expense--
The Company provides a security call-out service for emergency response for
five years from the date of installation. A provision for security call-outs
is recorded at the time of the sale and is periodically adjusted to reflect
actual expense.
(p) Derivative Financial Instruments--
The Company periodically enters into forward currency exchange contracts and
options to manage the risk of foreign currency fluctuations, since a
significant portion of its sale are in foreign currencies. The change in fair
value of the contracts is recognized immediately and included in the
determination of net income. The Company is not a trader in derivative
securities, and it has not used speculative derivative products for the
purpose of generating earnings from changes in market conditions.
(q) Earnings per Share--
Earnings per share have been computed according to the provisions of SFAS
No. 128, "Earnings Per Share" using the weighted average number of shares
outstanding and assuming the 1997 reorganization occurred as of January 1,
1995. Earnings per share assuming dilution have been computed based on the
assumption that all stock options have been exercised.
(r) 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 exceeds 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 but requires pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1995
and thereafter as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has determined that the net income and net income
per common share would not be materially affected by the provision of SFAS No.
123.
(s) New accounting pronouncements--
SFAS No. 130, "Reporting Comprehensive Income" was issued in July 1997 and
will be adopted by the Company effective July 1, 1998. This new pronouncement
establishes standards for reporting and display of comprehensive income and
its components. Adoption of this standard will not impact the Company's
financial position or results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" introduces a new model for segment reporting, called the
"management approach". The management approach is based on the way that the
chief operating decision maker organizes segments within the company for
making operating decisions and assessing performance. Management of the
Company is evaluating this new pronouncement to determine its impact upon
current reporting. Adoption of this new standard is scheduled for June 1999.
SFAS No. 132, "Employers' Disclosure about Pensions and Other Post
Retirement Benefits" was issued February 1998 and will be adopted by the
Company in June 1999. This new pronouncement standardizes employers'
disclosures about pension and other post retirement benefit plans. It does not
change the measurement or recognition of these plans. Adoption of this
standard will not have a material impact on the Company's financial position
or results of operations.
F-11
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: NET SALES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1995 $US 1996 $US 1997 $US 1997 $US 1998 $US
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Direct retail sales..... 5,773,208 1,366,926 -- -- --
Distributor sales....... 15,452,646 25,053,110 33,183,267 23,019,224 31,563,680
Other................... 426,901 497,637 516,601 340,363 838,161
---------- ---------- ---------- ---------- ----------
Gross sales............. 21,652,755 26,917,673 33,699,868 23,359,587 32,401,841
Less: returns and
rebates................ (215,430) (216,751) (235,273) (127,293) (244,034)
---------- ---------- ---------- ---------- ----------
Net sales............... 21,437,325 26,700,922 33,464,595 23,232,294 32,157,807
========== ========== ========== ========== ==========
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE--TRADE
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------- -----------
1996 $US 1997 $US 1998 $US
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable........................ 1,245,808 745,280 1,679,571
Less: allowances for doubtful debts........ (146,075) (129,720) (433,570)
--------- --------- ---------
1,099,733 615,560 1,246,001
========= ========= =========
NOTE 4: INVENTORIES
<CAPTION>
JUNE 30, MARCH 31,
-------------------- -----------
1996 $US 1997 $US 1998 $US
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Wholesale stock............................ 117,115 879,476 2,449,347
Sales aids................................. 222,487 397,628 341,762
--------- --------- ---------
339,602 1,277,104 2,791,109
========= ========= =========
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<CAPTION>
JUNE 30, MARCH 31,
-------------------- -----------
1996 $US 1997 $US 1998 $US
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepayments................................ 50,620 210,556 630,920
Director's loan............................ 105,432 14,076 (180,175)
Sundry debtors............................. 595,374 224,826 774,861
--------- --------- ---------
751,426 449,458 1,225,606
========= ========= =========
</TABLE>
NOTE 6: 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.
F-12
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------- -----------
1996 $US 1997 $US 1998 $US
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures................... 3,098 168,457 225,074
Office equipment......................... 11,966 157,051 224,478
Plant.................................... 0 47,607 3,871
Motor vehicles........................... 0 164,884 273,266
Computer equipment....................... 4,329 255,764 390,312
Leasehold improvements................... 0 114,140 161,744
Less: Accumulated depreciation........... (6,687) (38,332) (218,631)
--------- ---------- ----------
12,706 869,571 1,060,114
========= ========== ==========
NOTE 8: INTANGIBLES
<CAPTION>
JUNE 30, MARCH 31,
--------------------- -----------
1996 $US 1997 $US 1998 $US
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Initial goodwill on investment........... 2,086,864 2,086,864 2,086,864
Increment of goodwill.................... 4,135,773 8,716,208 8,716,208
Less: Accumulated amortization........... (274,382) (660,995) (1,066,110)
--------- ---------- ----------
5,948,255 10,142,077 9,736,962
========= ========== ==========
</TABLE>
Goodwill represents the excess of the purchase price paid by the ultimate
parent entity, FAI Insurances Limited, intermediate parent entities, such as
FAI Home Security Holdings Pty Limited and FAI Home Security (Aust) Unit
Trust, and Home Security International, Inc., over the fair value of assets
acquired when FAI Insurances Limited acquired its additional shareholding in
FAI Home Security Holdings Pty Limited from Mr. Bradley Cooper in 1995, and
the goodwill associated with the acquisition of the International Assets in
March 1997. The goodwill includes additional consideration paid in 1996 and
1997, relating to the acquisition under the purchase agreement. The goodwill
associated with the above transaction is being amortized over 20 years.
NOTE 9: INVESTMENT IN AFFILIATED COMPANIES (UNAUDITED)
On December 31, 1997 the Company acquired a 50 percent equity interest in
FAI Finance Corporation Pty Limited and its subsidiary FAI Finance Corporation
(NZ) Limited (FFC) from FAI Insurances Ltd. FFC is a consumer finance company
in both Australia and New Zealand and finances more than 80% of all customer
accounts serviced by the Company's distributorship network in Australia and
New Zealand.
The purchase price of $7,016,525 has been financed by the seller over a
period of five years at a fixed interest rate of 7.75% per annum payable
monthly in arrears and is secured by the FFC Shares. The first installment of
$1,631,750 was paid on January 2, 1998. The remaining long term debt,
$5,032,346, is payable on December 31, of each year beginning in 1999 in the
following amounts: $1,388,233 in 1999, 2000 and 2001, and $867,616 in 2002.
The Agreement also grants the Company 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 $7,016,525 plus 50% of the
increase in FFC's retained earnings from January 1, 1998 to 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.
F-13
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Insurances Group Note.
The Company has capitalized costs of $219,312 relating to this acquisition.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash
equivalents, accounts receivable and payable approximate their respective fair
values due to short maturities of those instruments. The foreign exchange
contracts are carried at their market value. The carrying value of the long-
term payable to FAI Insurances Limited approximates its fair value as the loan
was granted on December 31, 1997 at market rates.
NOTE 11: LEASE COMMITMENTS
Operating lease commitments of the Company consist of property rentals and
computer equipment leases.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, MARCH 31,
---------------------- -----------
1995 1996 1997 1998
$US $US $US $US
------- ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Payable not later than one year.......... 175,650 47,243 181,166 152,378
Payable later than one year but not later
than two years.......................... 49,651 18,194 181,166 151,051
Payable later than two years but not
later than three years.................. 38,197 5,325 179,243 151,051
Payable later than three years but not
later than four years................... 38,197 -- 173,717 151,051
Payable later than four years but not
later than five years................... 22,282 -- 126,143 37,761
------- ------ ------- -------
323,977 70,762 841,435 643,292
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
----------------------- ---------------
1995 1996 1997 1997 1998
$US $US $US $US $US
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rental expense........................ 150,649 218,610 214,229 160,385 167,471
</TABLE>
F-14
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: SEGMENT INFORMATION
The Company operates principally in one industry segment which includes the
sale, service and monitoring of security alarm systems. The Company's area of
current operations is principally in Australia and New Zealand with start-up
operations in the United Kingdom, Canada, USA and South Africa. No single
customer accounts for more than 10% of the Company's revenues. Information
about the Company's operations split by geographic location is shown below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1995 $US 1996 $US 1997 $US 1997 $US 1998 $US
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales:
Australia............. 17,358,783 21,937,533 22,488,078 15,847,086 22,694,334
New Zealand........... 4,078,542 4,763,389 10,327,184 7,385,208 6,006,513
United Kingdom........ -- -- 547,083 -- 2,325,392
South Africa.......... -- -- -- -- 609,180
Canada................ -- -- 102,250 -- 522,388
United States......... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
21,437,325 26,700,922 33,464,595 23,232,294 32,157,807
========== ========== ========== ========== ==========
Income (loss) from
operations before
related party royalty
payment:
Australia............. 3,012,295 3,707,419 3,956,520 3,257,754 4,461,418
New Zealand........... 1,104,208 1,553,032 2,839,174 1,818,655 974,525
United Kingdom........ -- -- 90,175 -- 285,333
South Africa.......... -- -- (8,481) -- 143,201
Canada................ -- -- (40,400) -- (370,166)
United States......... -- -- (52,120) -- (284,949)
---------- ---------- ---------- ---------- ----------
4,116,503 5,260,451 6,784,868 5,076,409 5,209,362
Less related party
royalty................ (1,989,371) (2,750,468) (3,647,376) (2,668,985) --
---------- ---------- ---------- ---------- ----------
2,127,132 2,509,983 3,137,492 2,407,424 5,209,362
========== ========== ========== ========== ==========
Income (Loss) from
Operations:
Australia............. 1,393,175 1,448,608 1,457,489 1,436,009 4,461,418
New Zealand........... 733,957 1,061,375 1,690,829 971,415 974,525
United Kingdom........ -- -- 90,175 -- 285,333
South Africa.......... -- -- (8,481) -- 143,201
Canada................ -- -- (40,400) -- (370,166)
United States......... -- -- (52,120) -- (284,949)
---------- ---------- ---------- ---------- ----------
2,127,132 2,509,983 3,137,492 2,407,424 5,209,362
========== ========== ========== ========== ==========
Depreciation:
Australia............. 12,350 11,192 36,453 28,397 149,557
New Zealand........... -- -- 3,757 5,025 2,817
United Kingdom........ -- -- -- -- --
South Africa.......... -- -- -- -- --
Canada................ -- -- 2,225 -- 4,344
United States......... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
12,350 11,192 42,435 33,422 156,718
========== ========== ========== ========== ==========
Amortization:........... 47,884 226,498 391,925 273,685 412,032
========== ========== ========== ========== ==========
Capital Expenditure:
Australia............. 43,632 70,701 856,205 761,407 348,536
New Zealand........... -- -- 9,696 1,001 16,321
United Kingdom........ -- -- -- -- 45,934
South Africa.......... -- -- -- -- --
Canada................ -- -- 43,648 -- --
United States......... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
43,632 70,701 909,549 762,408 410,791
========== ========== ========== ========== ==========
</TABLE>
F-15
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, MARCH 31,
--------------------- -----------
1996 $US 1997 $US 1998 $US
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Identifiable Assets
Australia................................ 6,528,704 14,892,968 18,710,442
New Zealand.............................. 6,485,114 430,468 1,140,197
United Kingdom........................... -- 418,863 1,873,056
South Africa............................. -- 24,368 204,112
Canada................................... -- 183,631 614,008
United States............................ -- 6,434 1,981,653
---------- ---------- ----------
13,013,818 15,956,732 24,523,468
Corporate Assets......................... 369,837 118 5,803,023
---------- ---------- ----------
13,383,655 15,956,850 30,326,491
========== ========== ==========
</TABLE>
Identifiable assets are those assets that are identified with the operation
in each geographic area. Corporate assets are principally cash and short-term
deposits.
NOTE 13: INCOME TAXES
The actual income tax expense attributable to net income differed from the
amounts computed by applying local federal tax rates to income before taxes as
a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------ --------------------
1995 $US 1996 $US 1997 $US 1997 $US 1998 $US
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected income tax
expense at statutory
rates.................. 723,473 940,639 1,351,883 1,030,975 1,877,475
Tax effect of permanent
and other differences:
Over provision for
income tax in prior
years................ (21,192) (862) (8,538) (8,606) --
Non-deductible
expenses and other
items................ 12,820 32,854 145,535 15,507 (70,485)
Amortization of
goodwill............. 17,238 81,539 141,093 86,190 141,789
Change in tax rates in
deferred tax
benefits............. (9,816) -- -- -- --
------- --------- --------- --------- ---------
722,523 1,054,170 1,629,973 1,124,066 1,948,779
The tax expense is split
between:
Current............... 643,893 699,653 1,711,286 1,081,419 2,073,309
Deferred.............. 78,630 354,517 (81,313) 42,647 (124,530)
------- --------- --------- --------- ---------
722,523 1,054,170 1,629,973 1,124,066 1,948,779
======= ========= ========= ========= =========
</TABLE>
F-16
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Tax losses were purchased by FAI Home Security Pty Limited at June 30, 1996
from FAI Home Security Holdings Pty Limited and FAI Insurances Limited for
$110,202 and $766,344 respectively. These tax losses were utilized during the
financial year by offsetting them against taxable income.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------ -----------
1996 $US 1997 $US 1998 $US
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets are comprised of
timing differences on:
Provisions not currently deductible for
tax purposes for:
Doubtful debts........................ 35,803 46,982 59,104
Warranty.............................. 124,203 118,293 85,720
Security call-out..................... 143,860 126,563 176,100
Extended warranty..................... 14,946 172,550 302,721
Other................................. 72,122 60,851 50,226
Sundry accruals......................... 23,546 29,638 52,252
Quarantined overseas expenses........... 70,345 -- --
Tax losses carried forward.............. 8,903 -- --
Prepayments............................. (18,223) (5,484) (40,799)
------- ------- -------
Net deferred tax assets................... 475,505 549,393 685,324
======= ======= =======
</TABLE>
NOTE 14: RELATED PARTY TRANSACTIONS
FAI Finance Corporation (NZ) Limited, FAI Home Security (NZ) Trust, FAI Home
Security (NZ) Limited and FAI Home Security (ENZED) Limited are related by the
majority holding of the ultimate parent entity, FAI Insurances Limited as of
June 30, 1997.
FAI Home Security (UK) Trust and FAI Home Security (Canada) Unit Trust were
formerly related to FAI Home Security Pty limited by the ultimate holdings of
the ultimate parent entity, FAI Insurances Limited. In November 1995, the
trusts were acquired by Bradley D. Cooper. On March 31, 1997 FAI Home Security
Holdings Pty Ltd. acquired all of the intangible assets, inventories and fixed
assets of these trusts and their subsidiaries FAI Home Security USA, Inc. and
FAI Home Security (AFRICA) (Proprietary) Limited.
Interest has been charged on all amounts due to or payable from all related
parties with the exception of the amount payable to FAI Home Security Pty
Limited by its previous parent, FAI Home Security Holdings Pty Limited, which
was non-interest bearing. Interest has been charged in arrears at an
annualized commercial rate on a monthly basis.
Management fees charged to or received from related parties are an
apportionment of overhead costs incurred by the relevant related entity. FAI
Home Security Pty Limited incurs staff and administration costs whereas a
related entity FAI Finance Corporation (NZ) Limited incurred costs to
administer the New Zealand customer loan book.
During the years ended June 30, 1995, 1996 and 1997 royalties were paid to
the ultimate parent entity, FAI Insurances Limited, for naming rights in
relation to all business conducted by the Company. The basis of royalty
payments was 6% of the final retail value of sales made by the Company
entities and its distributors. No further royalties were charged for the use
of the FAI trade name after July 1, 1997.
F-17
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAI General Insurances Ltd., a subsidiary of FAI Insurances Ltd., leases
office space to FAI Home Security Pty Limited at a commercial rate.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
------------------- -----------
1996 $US 1997 $US 1998 $US
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Amounts due from related parties:
Current Assets:
FAI Home Security Holdings Pty Limited... 1,465,364 2,025,465 --
FAI Finance Corporation (NZ) Ltd......... 2,877,353 -- --
FAI Secure Home Finance Pty Limited...... 37,343 -- --
--------- --------- ----
4,380,060 2,025,465 --
Non Current Assets:
FAI Secure Home Finance Pty Limited...... -- 24,366 --
</TABLE>
The above loans are unsecured, bear interest at the Westpac Bank indicator
rate and are repayable on demand, with the exception of FAI Home Security
Holdings Pty Limited. Loans to FAI Home Security Holdings Pty Limited were
non-interest bearing until June 30, 1997, but bear interest since that date.
The loan to FAI Home Security Holdings Pty Limited at June 30, 1997 is net of
a note payable to that company in respect of the acquisition of tangible and
intangible assets of the Cooper International Group (the FAI note). The loan
to FAI Home Security Holdings Pty Limited was repaid in full on July 31, 1997.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
----------------- -----------
1996 $US 1997 $US 1998 $US
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Amounts due to related party:
Current Liabilities:
FAI Insurances Limited..................... -- -- 694,117
Non Current Liabilities:
FAI Insurances Limited..................... -- -- 5,032,346
</TABLE>
The above loans of $5,726,463 relate to the acquisition of FFC. The purchase
price of $7,016,525 was financed by the seller and the loans are payable in
annual installments 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. Refer to Note 9 for details on the
terms of and conditions of the loans.
F-18
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------- ------------------
1995 $US 1996 $US 1997 $US 1997 $US 1998 $US
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income is stated
after the following
items:
Interest on direct
advances to:
FAI Insurances
Limited............. -- 47,625 60,046 -- --
Royalty fees paid to:
FAI Insurances
Limited............. 1,989,371 2,750,468 3,647,376 2,668,985 --
Interest on loans paid
to:
FAI Insurances
Limited............. -- -- -- -- 111,425
Interest on loans
received from:
FAI Home Security
Holdings Pty
Limited............. -- -- -- -- 26,679
FAI Finance
Corporation (NZ)
Ltd................. -- 75,087 755,613 491,051 --
Management fees paid
to:
FAI Finance
Corporation (NZ)
Ltd................. -- 43,628 58,394 29,831 --
Management fees
received from:
FAI Home Security
Holdings Pty
Limited............. -- -- 559,002 508,813 --
FAI Home Security
(UK) Trust.......... 74,198 -- -- -- --
FAI Home Security
(Canada) Unit Trust. 140,977 -- -- -- --
FAI Secure Home
Finance Pty Limited. 106,180 -- -- -- --
Office rentals paid to:
FAI Insurances
Limited............. 150,652 218,613 213,240 106,451 159,948
Computer rentals paid
to:
FAI Home Security
Holdings Pty
Limited............. 76,923 96,925 92,937 163 --
</TABLE>
NOTE 15: 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 Chose 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
Company's initial public offering ("IPO"), at an exercise price of $10.00 per
share. In addition, on July 15, 1997, the Company issued an additional 250,000
Options for issuance 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 IPO, at an exercise price
of $10.00 per share.
F-19
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
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 share of Common Stock have been authorized from issuance. Upon
the closing of the IPO in July 1997, all of the Company's 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.
NOTE 16: DERIVATIVES (UNAUDITED)
On December 4, 1997 the Company had entered into a forward currency exchange
contract which matures on June 30, 1998. Under the contract the Company has
agreed to sell Australian Dollars ("AUD") $1,000,000 and to receive $680,000
on maturity.
The Company has also entered two foreign currency options which mature on
June 30, 1998. The Company has purchased an Australian dollar put / United
States dollar call for AUD $2,500,000 with an exercise price of
AUD $1 = $0.72 and has sold an Australian dollar call / United States dollar
put for AUD $2,500,000 with an exercise price of AUD $1 = $0.7461.
For the nine months ended March 31, 1998 the Company has recorded a gain of
$122,207 on its derivatives.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees of
FAI Home Security (Canada) Unit Trust and FAI Home Security (UK) Trust
("Cooper International Group"):
We have audited the accompanying combined statements of loss, changes in
shareholders' equity and cash flows of Cooper International Group for the nine
months ended March 30, 1997, for the year ended June 30, 1996 and for the
period from date of declaration to June 30, 1995. These financial statements
are the responsibility of the Group's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of Cooper International
Group and its cash flows for the nine months ended March 30, 1997, the year
ended June 30, 1996 and for the period from date of declaration to June 30,
1995, in conformity with generally accepted accounting principles in the
United States of America.
/s/ Arthur Andersen
Sydney, NSW
September 22, 1997
F-21
<PAGE>
COOPER INTERNATIONAL GROUP
COMBINED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED MARCH
YEAR ENDED JUNE 30, 30,
---------------------- -----------
NOTE 1995 $US 1996 $US 1997 $US
---- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... 2 876,693 1,750,028 1,397,997
Cost of goods sold................. (446,246) (1,028,583) (770,155)
---------- ---------- ----------
Gross profit....................... 430,447 721,445 627,842
General and administrative expenses
--other.......................... (2,378,947) (3,199,590) (1,140,054)
--related party.................. 6(a) (206,344) -- --
--FAI Group...................... 6(b) -- -- (560,172)
---------- ---------- ----------
Loss from operations............... (2,154,844) (2,478,145) (1,072,384)
Interest income.................... -- 7,927 6,514
Interest expense--FAI Group........ 6(b) -- -- (290,997)
---------- ---------- ----------
Loss before taxes.................. (2,154,844) (2,470,218) (1,356,867)
Income tax expense................. 5 -- -- --
---------- ---------- ----------
Net loss........................... (2,154,844) (2,470,218) (1,356,867)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-22
<PAGE>
COOPER INTERNATIONAL GROUP
COMBINED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, MARCH 30,
------------ ---------- -----------
1995 $US 1996 $US 1997 $US
------------ ---------- -----------
<S> <C> <C> <C>
Cashflow from operating activities
Net Loss................................ (2,154,844) (2,470,218) (1,356,867)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation.......................... 11,307 45,847 21,119
Provision for losses on accounts
receivable........................... 15,810 129,602 123,773
(Increase) decrease in operating
assets:
Accounts receivable--trade.......... (184,230) (38,558) (366,219)
Inventories......................... (347,800) (115,504) 15,026
Prepaid expenses and other assets... (11,645) (114,911) (21,051)
Increase (decrease) in operating
liabilities:
Accounts payable.................... 281,256 143,349 206,385
Accrued liabilities................. 56,501 2,928 82,066
---------- ---------- ----------
Net cash used in operating
activities....................... (2,333,645) (2,417,465) (1,295,768)
---------- ---------- ----------
Cashflow from investing activities
Proceeds from sale of plant and
equipment.............................. -- -- 8,472
Additions to plant and equipment........ (152,878) (15,475) (19,569)
---------- ---------- ----------
Net cash used in investing
activities....................... (152,878) (15,475) (11,097)
---------- ---------- ----------
Cashflow from financing activities
Increase in bank overdraft.............. -- 20,943 --
Provided by FAI Group debt.............. -- 1,655,291 805,179
Receipts from related parties........... 355,971 425,908 481,752
Capital subscribed...................... 2,207,436 344,598 --
---------- ---------- ----------
Net cash provided by financing
activities....................... 2,563,407 2,446,740 1,286,931
---------- ---------- ----------
Net increase (decrease) in cash held...... 76,884 13,800 (19,934)
---------- ---------- ----------
Cash at the beginning of the financial
year..................................... -- 69,982 82,214
Effect of exchange rate change on cash
held..................................... (6,902) (1,568) (2,074)
---------- ---------- ----------
Cash at the end of the period............. 69,982 82,214 60,206
---------- ---------- ----------
Supplemental disclosure of cash flow
information:
Interest paid........................... -- -- 290,997
</TABLE>
The accompanying notes are an integral part of these combined financial
statements
F-23
<PAGE>
COOPER INTERNATIONAL GROUP
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN TOTAL
TRUST TRUST UNITS CURRENCY ACCUMULATED SHAREHOLDERS'
SETTLEMENT ISSUED TRANSLATION LOSSES EQUITY
$US $US RESERVE $US $US $US
---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
October 14, 1994........ 15 690,446 -- -- 690,461
March 28, 1995.......... 1,516,975 1,516,975
Foreign currency
translation adjustment. (5,871) (5,871)
Net loss 1995........... (2,154,844) (2,154,844)
--------- ------- ------- ---------- ----------
Balance June 30, 1995... 1,516,990 690,446 (5,871) (2,154,844) 46,721
Foreign currency
translation adjustment. (24,080) (24,080)
Forgiveness of debt..... 344,598 344,598
Net loss 1996........... (2,470,218) (2,470,218)
--------- ------- ------- ---------- ----------
Balance June 30, 1996... 1,861,588 690,446 (29,951) (4,625,062) (2,102,979)
Foreign currency
translation adjustment. (64,301) (64,301)
Net loss for nine months
to March 31, 1997...... (1,356,867) (1,356,867)
--------- ------- ------- ---------- ----------
Balance March 30, 1997.. 1,861,588 690,446 (94,252) (5,981,929) (3,524,147)
========= ======= ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements
F-24
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business--
FAI Home Security (UK) Trust was declared in Manchester, England on March
28, 1995 and FAI Home Security (Canada) Unit Trust was declared in Toronto,
Canada on October 14, 1994.
The main business activity of FAI Home Security (UK) Trust and FAI Home
Security (Canada) Unit Trust, collectively ("the Group"), is the sale, service
and monitoring of security alarm systems, which are sold via a distributor
network to residential and small business premises in North America, Europe
and South Africa.
The security alarm system, "SecurityGuard", and other major components are
supplied exclusively by Ness Security Products Pty Ltd, an unrelated company
based in Sydney, Australia.
(b) Principles of Consolidation and Combined Statements--
The two entities are subsidiaries of the current ultimate beneficiary,
Cooper Investment Trust. Accordingly, the accompanying financial statements
have been presented on a combined basis, and include the consolidated accounts
of FAI Home Security (UK) Trust, and its wholly-owned subsidiary, FAI Home
Security (Africa) Pty Ltd, and the consolidated accounts of FAI Home Security
(Canada) Unit Trust, and its wholly-owned subsidiary, FAI Home Security (USA)
Inc.
All intercompany accounts and transactions have been eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America.
(c) Cash and Cash Equivalents--
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost which approximates market.
(d) Net Income/(Loss) per Common Share--
There has been no calculation of net income/(loss) per common share because
of the combined group structure.
(e) Foreign Currencies--
The combined financial statements of the Group are translated into US
dollars to reflect the local currency of the proposed ultimate parent entity,
Home Security International Inc. The profit and loss items of the Group have
been translated at the average exchange rates throughout each period. The
resulting translation effects are reflected in shareholders' equity.
The local currency of FAI Home Security (UK) Trust is British Pound
Sterling, the local currency of FAI Home Security (Canada) Unit Trust is
Canadian dollars, and the local currency of FAI Home Security (Africa) Pty Ltd
is South African Rand. FAI Home Security (USA) Inc. reports its financial
statements in United States dollars.
(f) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
(g) Income Taxes--
The group accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109 ("Accounting for Income Taxes") which requires an
asset and liability method of accounting for income
F-25
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the year in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(h) Revenue Recognition--
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates.
(i) Allowance for Doubtful Accounts--
Management reviews the collectibility of accounts receivable on a regular
basis. Amounts, if any, which are determined to be uncollectable are provided
for in the financial statements in the period such determination is made.
(j) Plant and Equipment--
Plant and equipment are recorded at cost. Maintenance and repairs are
expensed in the period to which they relate. Depreciation on plant and
equipment is calculated using the straight-line method with the exception of
Canada which uses the declining balance method for all assets except leasehold
improvements, over the following estimated useful lives:
<TABLE>
<CAPTION>
UNITED
KINGDOM CANADA
YEARS YEARS
------- ------
<S> <C> <C>
Furniture and fixtures.................................... 4.0 5.0
Office equipment.......................................... 4.0 5.0
Plant..................................................... 4.0 --
Computer equipment........................................ -- 3.3
Motor vehicles............................................ 4.0 --
Leasehold improvements.................................... -- 5.0
</TABLE>
(k) Research and Development--
The Group has no significant research and development activities.
(l) Pension and Other Benefit Plans--
The Group has no pension or other post-employment benefit plans.
NOTE 2: NET SALES
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, MARCH 30,
------------ ---------- -----------
1995 1996 1997
$US $US $US
------------ ---------- -----------
<S> <C> <C> <C>
Direct retail sales........................ 377,983 539,845 88,626
Distributor sales.......................... 513,368 1,251,325 1,330,031
Other...................................... -- 12,996 1,834
------- --------- ---------
Gross sales................................ 891,351 1,804,166 1,420,491
Less: returns and rebates.................. (14,658) (54,138) (22,494)
------- --------- ---------
Net sales.................................. 876,693 1,750,028 1,397,997
======= ========= =========
</TABLE>
F-26
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: ACCOUNTS RECEIVABLE--TRADE
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
----------------- ---------
1995 1996 1997
$US $US $US
------- -------- ---------
<S> <C> <C> <C>
Accounts receivable............................... 185,443 238,589 578,706
Less: allowances for doubtful accounts............ (15,810) (145,412) (269,326)
------- -------- --------
169,633 93,177 309,380
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
--------------- ---------
1995 1996 1997
$US $US $US
------- ------- ---------
<S> <C> <C> <C>
Service stock......................................... -- 30,023 10,600
Sales aids............................................ 47,274 37,372 111,705
Goods for resale...................................... 302,013 367,883 337,563
------- ------- -------
349,287 435,278 459,868
</TABLE>
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
-------------- ---------
1995 1996 1997
$US $US $US
------ ------- ---------
<S> <C> <C> <C>
Prepayments............................................ 5,193 19,934 47,307
Pre-paid VAT........................................... -- 106,622 65,536
Sundry debtors......................................... 6,452 -- 3,112
------ ------- -------
11,645 126,556 115,955
</TABLE>
NOTE 6: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
---------------- ---------
1995 1996 1997
$US $US $US
------- ------- ---------
<S> <C> <C> <C>
Furniture and fixtures.............................. 42,739 65,718 82,395
Plant and equipment................................. 98,775 98,117 97,117
Motor vehicles...................................... 11,895 -- --
less: Accumulated depreciation...................... (11,350) (54,208) (76,883)
------- ------- -------
142,059 109,627 102,629
</TABLE>
NOTE 7: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the combined balance sheets for cash and
cash equivalents, and accounts receivable and payable approximate their
respective fair values due to the short maturities of these instruments.
F-27
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: LEASE COMMITMENTS
Operating leases exist for the premises and motor vehicles in Canada and the
United Kingdom.
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
------------- ---------
1995 1996 1997
$US $US $US
------ ------ ---------
<S> <C> <C> <C>
The future minimum payments on operating leases are
as follows:
Payable no later than one year................... 21,004 45,163 53,620
Payable later than one year but not later than
two years....................................... 14,988 35,836 39,124
Payable later than two years but not later than
three years..................................... 5,749 7,688 13,081
Payable later than three years but not later than
four years...................................... -- -- --
Payable later than four years but not later than
five years ..................................... -- -- --
------ ------ -------
41,741 88,687 105,825
====== ====== =======
</TABLE>
NOTE 9: SEGMENT INFORMATION
The Group operates principally in one industry segment which includes the
sale, service and monitoring of security alarm systems. The Group's area of
operations includes Canada, South Africa, United Kingdom and United States and
no single customer accounts for more than 10% of the Group's revenues.
Information about the Group's operations split by geographic location is shown
below.
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD ENDED YEAR ENDED ENDED
JUNE 30, JUNE 30, MARCH 30,
------------ ---------- -----------
1995 1996 1997
$US $US $US
------------ ---------- -----------
<S> <C> <C> <C>
Net Sales:
--United Kingdom........................ 386,639 698,508 960,847
--South Africa.......................... -- -- 23,975
--Canada................................ 490,054 999,268 437,647
--United States......................... -- 52,252 34,148
---------- ---------- ----------
876,693 1,750,028 1,456,617
less: Eliminations........................ -- -- (58,620)
---------- ---------- ----------
Total Net Sales....................... 876,693 1,750,028 1,397,997
========== ========== ==========
Operating Loss
--United Kingdom........................ (1,606,332) (1,995,479) (597,883)
--South Africa.......................... -- -- (3,917)
--Canada................................ (548,512) (429,911) (391,521)
--United States......................... -- (52,755) (79,063)
---------- ---------- ----------
(2,154,844) (2,478,145) (1,072,384)
less: Eliminations........................ -- -- --
---------- ---------- ----------
Total Operating Loss.................. (2,154,844) (2,478,145) (1,072,384)
========== ========== ==========
Capital Expenditure
--United Kingdom........................ 91,042 10,350 --
--South Africa.......................... -- -- 661
--Canada................................ -- -- 18,908
--United States......................... -- -- --
---------- ---------- ----------
91,042 10,350 19,569
========== ========== ==========
Depreciation
--United Kingdom........................ 5,371 28,280 8,800
--South Africa.......................... -- -- --
--Canada................................ 5,936 17,567 12,319
--United States......................... -- -- --
---------- ---------- ----------
11,307 45,847 21,119
========== ========== ==========
</TABLE>
F-28
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: INCOME TAXES
The Group has estimated, unconfirmed income tax loss carry forwards
available to offset future taxable income, the tax benefit of which has not
been recorded in these combined financial statements. These losses expire as
follows (using the balance sheet date exchange rate):
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
------------------- ---------
1995 1996 1997
$US $US $US
--------- --------- ---------
<S> <C> <C> <C>
2002........................................... 2,154,997 2,154,997 2,154,997
2003........................................... -- 2,470,150 2,470,150
2004........................................... -- -- 1,356,867
--------- --------- ---------
2,154,997 4,625,147 5,982,014
========= ========= =========
</TABLE>
These income tax losses are not available to the Home Security
International, Inc.
NOTE 11: RELATED PARTY TRANSACTIONS
(a) Related party transactions
FAI Home Security (UK) Trust and FAI Home Security (Canada) Unit Trust were
related to FAI Home Security Holdings Pty Limited by the ultimate holdings of
the ultimate parent company FAI Insurances Ltd. until November 11, 1995 at
which time the trusts were sold to entities related to Mr. Cooper.
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
--------------- ---------
1995 1996 1997
$US $US $US
------- ------- ---------
<S> <C> <C> <C>
Portion of debt forgiven by FAI Home Security
Holdings Pty Limited to:
FAI Home Security Trust....................... -- 344,598 --
The debt forgiven by FAI Home Security Holdings Pty Limited was part of the
total consideration for the sale of international operations that occurred on
November 15, 1995.
Management fees paid to FAI Home Security Pty
Limited by:
FAI Home Security (UK) Trust.................. 71,283 -- --
FAI Home Security (Canada) Trust.............. 135,061 -- --
</TABLE>
The management fees relate to an apportionment of costs incurred by FAI Home
Security Pty Limited on behalf of FAI Home Security (UK) Trust and FAI Home
Security (Canada) Unit Trust.
(b) Transactions with FAI Group
On November 15, 1995 the FAI Group sold its interest in the International
Group to Mr. Cooper at which time the international group ceased to be related
to the FAI Group. FAI Home Security Holdings Pty Limited contracted to provide
management services to the International Group at market rates. The loans
outstanding from the International Group to FAI Home Security Holdings Pty
Limited became interest bearing after the sale carrying an interest rate of
10% per annum.
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
-------------- ---------
1995 1996 1997
$US $US $US
---- --------- ---------
<S> <C> <C> <C>
Current Liabilities:
FAI Home Security Holdings Pty Limited............ -- 2,012,472 2,845,560
</TABLE>
F-29
<PAGE>
COOPER INTERNATIONAL GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
The amount due to FAI Home Security Holdings Pty Limited has been
subordinated to June 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, MARCH 30,
--------- ---------
1995 1996 1997
$US $US $US
---- ---- ---------
<S> <C> <C> <C>
Management fees received by FAI Home Security Holdings
Pty Limited from--
FAI Home Security (UK) Trust........................ -- -- 448,138
FAI Home Security (Canada) Trust.................... -- -- 112,034
The management fees relate to an apportionment of costs incurred by FAI Home
Security Holdings Pty Limited on behalf of FAI Home Security (UK) Trust and FAI
Home Security (Canada) Unit Trust.
<CAPTION>
JUNE 30, MARCH 30,
--------- ---------
1995 1996 1997
$US $US $US
---- ---- ---------
<S> <C> <C> <C>
Interest paid to FAI Home Security Holdings Pty
Limited by:
FAI Home Security (UK) Trust........................ -- -- 238,246
FAI Home Security (Canada) Trust.................... -- -- 52,751
</TABLE>
The interest was charged on the balance of the loans outstanding from FAI
Home Security Holdings Pty Limited from June 30, 1996.
NOTE 12: POST BALANCE SHEET EVENTS
The Group has entered into the International asset purchase agreement with
FAI Home Security Holdings Pty Limited. Under the agreement FAI Home Security
Holdings Pty Limited has agreed to purchase from the Group all of its
intangible and tangible assets, (including but not limited to inventories,
fixed assets, licenses, goodwill but excluding accounts receivable) in
exchange for a cash payment of approximately $2,784,431 as at March 30, 1997.
NOTE 13: CONTINGENT LIABILITIES
In the United Kingdom an estimated 400 alarm units have been sold with an
extended warranty period of 10 years by a distributor of FAI Home Security
(UK) Trust. FAI Home Security (UK) Trust has undertaken with the Office of
Fair Trading to honor this warranty in full.
The Company's historical experience with these warranties has been that less
than 10% of units sold will require a service call outside the normal 12 month
warranty period. Based upon these assumptions 400 units at the maximum service
cost of US$70 per visit over the 10 year period would give rise to a potential
liability of $28,000.
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of FAI Finance Corporation Pty
Limited:
We have audited the accompanying consolidated balance sheet of FAI Finance
Corporation Pty Limited as of June 30, 1997, 1996 and 1995 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Australia, which are substantially similar to generally accepted
auditing standards in the United States of America. Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FAI
Finance Corporation Pty Limited as of June 30, 1997, 1996 and 1995 and the
results of its operations and its cash flows for each of the three years in
the period ended 30 June 1997 in conformity with generally accepted accounting
principles in the United States of America.
The consolidated financial statements of FAI Finance Corporation Pty Limited
as of and for the nine months ended March 31, 1998, and 1997, which are
presented solely for comparative purposes, were not audited by Independent
Public Accountants.
/s/ Arthur Andersen
Sydney
September 12, 1997
F-31
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------- ----------------------
1995 1996 1997 1997 1998
NOTE $US $US $US $US $US
---- -------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest income--related
party.................. -- -- -- -- --
- --other................. 263,177 2,814,877 6,399,516 4,484,631 6,047,812
Interest expenses--
related party.......... 11 -- (75,087) (755,741) (491,052) (887,181)
- --other................. -- (145,479) (1,170,662) (875,823) (862,621)
-------- --------- ---------- ---------- ----------
Net interest income..... 263,177 2,594,311 4,473,113 3,117,756 4,298,010
Management fee income--
related party.......... 11 -- 43,628 61,675 44,650 31,958
-------- --------- ---------- ---------- ----------
Operating revenues...... 263,177 2,637,939 4,534,788 3,162,406 4,329,968
General and
Administrative
expenses--other........ 4 (344,158) (888,377) (2,042,788) (1,409,792) (2,190,055)
General and
Administrative
expenses--related
party.................. 11 (106,180) -- -- -- --
Bad debts and allowance
for losses............. 2 (20,652) (402,017) (807,800) (519,962) (705,299)
-------- --------- ---------- ---------- ----------
Income (loss) before
taxes.................. (207,813) 1,347,545 1,684,200 1,232,652 1,434,614
Income tax expense...... 10 71,551 (491,898) (580,205) (433,711) (501,650)
-------- --------- ---------- ---------- ----------
Net income (loss)....... (136,262) 855,647 1,103,995 798,941 932,964
======== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-32
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------- -----------
1996 1997 1998
NOTE $US $US $US
----- ---------- ---------- -----------
ASSETS
- ------ (UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. 5 17,576 211,096 624,868
Receivables........................... 2
Consumer loans...................... 21,281,787 34,488,681 38,188,452
Business finance loans.............. -- 1,020,528 623,980
---------- ---------- ----------
Total receivables................. 21,281,787 35,509,209 38,812,432
Less: Allowance for losses of
receivables........................ 2 271,781 550,974 708,456
---------- ---------- ----------
Net receivables................... 21,010,006 34,958,235 38,103,976
Prepaid expenses and other current
assets............................... 6 244,463 684,198 662,596
Restricted deposits................... 7, 14 788,600 893,588 938,139
Plant and equipment, net.............. 8 140,143 343,050 435,110
Deferred income taxes................. 10 89,260 208,814 340,455
Intangibles........................... 9 331,461 296,440 251,706
---------- ---------- ----------
Total assets...................... 22,621,509 37,595,421 41,356,850
========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C> <C>
Bank overdraft........................ 11,819 1,541,954 --
Borrowing--Westpac Banking
Corporation.......................... 14 12,062,036 16,348,950 16,741,589
Payables--trade....................... 220,874 84,793 166,856
Accrued liabilities................... 30,834 43,141 50,872
Income tax payable.................... 42,523 1,063 634,822
Payables--related party............... 11 9,126,269 17,445,050 21,204,336
---------- ---------- ----------
Total liabilities................. 21,494,355 35,464,951 38,798,475
---------- ---------- ----------
Shareholders' equity
Common stock ($A1.00 value; 100,000
shares authorized; 50,002 shares
outstanding)....................... 36,976 36,976 36,976
Additional paid in capital.......... 335,592 335,592 335,592
Foreign currency translation
reserve............................ 36,578 (64,101) (569,160)
Retained earnings................... 718,008 1,822,003 2,754,967
---------- ---------- ----------
Total shareholders' equity........ 1,127,154 2,130,470 2,558,375
---------- ---------- ----------
Total liabilities and
shareholders' equity............. 22,621,509 37,595,421 41,356,850
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-33
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
YEAR ENDED JUNE 30, 31,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
$US $US $US $US $US
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cashflow from operating
activities
Net income (loss)..... (136,262) 855,647 1,103,995 798,941 932,964
Adjustments to
reconcile net income
(loss) to net cash
from Operating
activities:
Depreciation.......... 4,193 24,860 55,318 24,477 87,279
Amortization of
goodwill............. 5,363 17,185 35,020 14,730 44,734
Deferred taxes and
income tax payable... (78,944) 43,308 (613,974) 433,045 502,118
Provision for losses
on term loans
receivable........... 7,584 257,633 279,192 174,300 157,482
(Increase) decrease in
operating assets:
Prepaid expenses and
other assets......... 2,528 (244,198) (450,320) 12,911 21,601
Increase (decrease) in
operating
liabilities:
Accounts payable...... 16,864 201,529 7,443 (114,655) 82,062
Accrued liabilities... 46,514 (15,679) 12,306 9,969 7,731
---------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities. (132,160) 1,140,285 428,980 1,353,718 1,835,971
---------- ----------- ----------- ----------- -----------
Cashflow from investing
activities
Additions to plant and
equipment............ (61,919) (107,277) (258,225) (128,491) (179,339)
Term loans funded..... (5,629,730) (26,548,547) (38,119,265) (31,907,395) (29,303,786)
Collection of
principal............ 1,575,196 9,950,145 23,706,843 20,755,866 26,000,564
---------- ----------- ----------- ----------- -----------
Net cash used in
investing activities. (4,116,453) (16,705,679) (14,670,647) (11,280,020) (3,482,561)
---------- ----------- ----------- ----------- -----------
Cashflow from financing
activities
Net proceeds from
borrowings........... -- 12,062,036 4,286,914 2,788,264 392,639
Decrease in restricted
deposits............. -- (788,600) (104,988) (92,537) (44,551)
Receipts from related
parties.............. 4,613,623 3,890,195 8,679,306 6,304,199 3,254,229
Increase (decrease) in
bank overdraft....... -- 11,819 1,530,134 909,575 (1,541,953)
---------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities. 4,613,623 15,175,450 14,391,366 9,909,501 2,060,364
---------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash held........... 365,010 (389,944) 149,699 (16,801) 413,774
---------- ----------- ----------- ----------- -----------
Cash at the beginning of
the financial period... 10,170 379,406 17,576 17,576 211,096
Effect of exchange rate
change on cash held.... 4,226 28,114 43,821 -- (2)
---------- ----------- ----------- ----------- -----------
Cash at the end of the
financial period....... 379,406 17,576 211,096 775 624,868
========== =========== =========== =========== ===========
Supplemental disclosure
of cashflow information
Interest paid......... -- 220,566 755,742 1,366,875 1,749,802
Income taxes paid..... -- 497,783 1,200,788 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-34
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL STOCK ISSUED
--------------------- ADDITIONAL FOREIGN RETAINED TOTAL
($1 AUSTRALIAN DOLLAR PAID-IN CURRENCY EARNINGS SHAREHOLDERS'
PAR VALUE) AMOUNT CAPITAL TRANSLATION UNAPPROPRIATED EQUITY
SHARES $US $US RESERVE $US $US $US
--------------------- ------ ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994.. 50,002 36,976 -- -- (1,377) 35,599
Foreign currency
translation adjustment. (14,151) (14,151)
Additional paid-in
capital................ 335,592 335,592
Net income 1995......... (136,262) (136,262)
------ ------ ------- -------- --------- ---------
BALANCE, JUNE 30, 1995.. 50,002 36,976 335,592 (14,151) (137,639) 220,778
Foreign currency
translation adjustment. 50,729 50,729
Net income 1996......... 855,647 855,647
------ ------ ------- -------- --------- ---------
BALANCE, JUNE 30, 1996.. 50,002 36,976 335,592 36,578 718,008 1,127,154
Foreign currency
translation adjustment. (100,679) (100,679)
Net income 1997......... 1,103,995 1,103,995
------ ------ ------- -------- --------- ---------
BALANCE, JUNE 30, 1997.. 50,002 36,976 335,592 (64,101) 1,822,003 2,130,470
(Unaudited)
Foreign currency
translation Adjustment. (505,059) (505,059)
Net income July 1--
March 31, 1998......... 932,964 932,964
------ ------ ------- -------- --------- ---------
BALANCE,
MARCH 31, 1998......... 50,002 36,976 335,592 (569,160) 2,754,967 2,558,375
====== ====== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-35
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business--
FAI Finance Corporation Pty Ltd was incorporated in New South Wales,
Australia on October 15, 1991 and FAI Finance Corporation (NZ) Ltd was
incorporated in Auckland, New Zealand on May 23, 1996.
FAI Finance Corporation Pty Ltd and FAI Finance Corporation (NZ) Ltd,
collectively ("FFC") or ("FAI Finance Corporation") is a consumer and business
finance company operating in Australia and New Zealand. The main business
activity of FFC is the sale and management of consumer, commercial and
business finance products. Currently more than 80 percent of all consumer
loans rise from Home Security International, Inc's (the "Company") distributor
network in Australia and New Zealand.
(b) Principles of Consolidation and Basis of Preparation--
The consolidated financial statements comprise the accounts of FAI Finance
Corporation Pty Limited and its controlled entity FAI Finance Corporation (NZ)
Ltd and have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP").
All intercompany accounts and transactions have been eliminated.
(c) Cash and Cash Equivalents--
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost, which approximates market.
(d) Foreign Currencies--
The consolidated financial statements of FFC are translated into US dollars
to reflect the reporting currency of the Company. The assets and liabilities
of FFC are translated at the balance sheet date exchange rate. The profit and
loss items of FFC have been translated at the average exchange rates
throughout each period. The resulting translation effects are reflected in
shareholders' equity.
The functional currency of FAI Finance Corporation Pty Limited is Australian
dollars and the functional currency of FAI Finance Corporation (NZ) Ltd is New
Zealand dollars.
(e) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
(f) Income Taxes--
FFC accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109 ("Accounting for Income Taxes") which requires an
asset and liability method of accounting for income taxes. Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-36
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(g) Receivables--
Receivables are presented net of unearned interest. Unearned interest is
amortized to interest income using the effective interest method over the life
of the related loan or commitment period.
(h) Allowance for Losses--
The allowance for losses of receivables is established through direct
charges to income. The allowance for losses is determined by management after
analysis of the current trend in the loan portfolio including charge offs,
loan arrears and recoveries. FFC has adopted the policy of charging off
receivables for which no loan installment has been received in the last six
months.
(i) Plant and Equipment--
Plant and equipment are recorded at cost. Maintenance and repairs are
expensed in the period to which they relate. Depreciation on plant and
equipment is calculated using the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Office equipment.................................................... 7.7
Plant............................................................... 6.0
Motor vehicles...................................................... 6.5
Computer equipment.................................................. 4.0
Leasehold improvements.............................................. 6.0
</TABLE>
(j) Research and Development--
FFC has no significant research and development activities.
(k) Pension and Other Benefit Plans--
FFC contributes to a pension plan on behalf of its employees. The pension
plan is an accumulation fund and FFC has no liability to members under the
plan. FFC has no other pension or other employment benefit plans.
(l) Derivative Financial Instruments
FFC uses derivatives as part of its asset/liability management to reduce its
overall level of financial risk arising from normal business operations. FFC
currently uses interest rate options to cap its interest expense on part of
its external borrowings. FFC is not a trader in derivatives, and it has not
used speculative derivative products for the purpose of generating earnings
from changes in market conditions.
NOTE 2: LENDING ASSETS
Lending assets include receivables.
(a) Diversification of Credit Risk--
FFC predominantly lends to consumers. There are no individual loans which
exceed 5% of the lending assets at June 30, 1996, June 30, 1997 and March 31,
1998.
F-37
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Contractual Maturity of Loan Receivable (unaudited)--
The contractual maturities of FFC's receivables at March 31, 1998, are due
as follows:
<TABLE>
<CAPTION>
AFTER
1998 1999 2000 TOTAL
$US $US $US $US
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Consumer loans.................... 19,020,974 15,333,983 3,833,495 38,188,452
Business finance loans............ 436,786 187,194 -- 623,980
---------- ---------- --------- ----------
Total......................... 19,457,760 15,521,177 3,833,495 38,812,432
========== ========== ========= ==========
</TABLE>
The average yield on the Company's receivables at March 31, 1998 was 22.97%
per annum.
(c) Allowance for Losses--
The change in the allowance for losses of receivables were as follows:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------- -----------
1996 1997 1998
$US $US $US
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balance at the beginning of the year............. 14,148 271,781 550,974
Provision for losses............................. 257,633 279,193 157,482
------- ------- -------
Balance at the end of the year................... 271,781 550,974 708,456
======= ======= =======
</TABLE>
FFC maintains an allowance for losses of receivables based upon management's
best estimate of future possible losses in the portfolio of receivables.
Management's estimate is based upon current economic conditions, previous loss
history, and knowledge of clients' financial position. Changes in these
estimates could result in an increase or decrease in the reserves maintained.
(d) Bad Debts and Allowance for Losses--
Bad debts and allowance for losses comprises:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
---------------------- ---------------
1995 1996 1997 1997 1998
$US $US $US $US $US
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase in allowance for losses..... 7,923 257,633 279,193 174,329 157,482
Bad debts charged off................ 12,729 144,384 528,607 345,633 547,817
------ ------- ------- ------- -------
Total............................ 20,652 402,017 807,800 519,962 705,299
====== ======= ======= ======= =======
</TABLE>
NOTE 3: LEGAL PROCEEDINGS
FFC is party to a number of legal proceedings as plaintiff and defendant,
all arising in the ordinary course of its business. Although the ultimate
amount for which FFC may be held liable, if any, is not ascertainable, a FFC
believes that the amounts, if any, which may ultimately be funded or paid with
respect to these matters will not have a material adverse effect on the
financial condition or results of operations of FFC.
F-38
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: GENERAL AND ADMINISTRATIVE EXPENSES
The following table sets forth a summary of the major components of general
and administrative expenses:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------- -------------------
1995 1996 1997 1997 1998
$US $US $US $US $US
------- ------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Employee salaries.............. 184,075 370,786 836,372 544,509 901,070
Communications................. 6,336 68,925 315,020 46,784 139,113
Space costs.................... 6,978 39,138 104,812 100,386 249,325
Legal fees..................... 18,029 16,642 81,337 50,338 72,410
Research information........... 13,446 43,699 99,591 67,853 98,196
Office expenses................ 57,261 130,280 175,695 218,758 292,543
Bank charges................... 27,775 108,151 72,081 80,196 86,284
Other.......................... 30,258 110,756 357,880 300,968 351,114
------- ------- --------- --------- ---------
Total...................... 344,158 888,377 2,042,788 1,409,792 2,190,055
======= ======= ========= ========= =========
</TABLE>
NOTE 5: CASH
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------- -----------
1996 1997 1998
$US $US $US
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash on hand......................................... 394 373 636
Cash at bank......................................... 17,182 210,723 624,232
------ ------- -------
17,576 211,096 624,868
====== ======= =======
</TABLE>
NOTE 6: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------- -----------
1996 1997 1998
$US $US $US
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Prepayments......................................... 59,143 46,628 18,786
Sundry Debtors...................................... 185,320 637,570 643,810
------- ------- -------
244,463 684,198 662,596
======= ======= =======
</TABLE>
NOTE 7: RESTRICTED DEPOSITS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------- -----------
1996 1997 1998
$US $US $US
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deposits--Westpac Banking Corporation............... 788,600 893,588 938,139
------- ------- -------
788,600 893,588 938,139
======= ======= =======
</TABLE>
Access to the funds in this account is restricted in accordance with the
Receivable Purchase Agreement entered into with Westpac Banking Corporation.
Refer to Note 14.
F-39
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------- -----------
1996 1997 1998
$US $US $US
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment.................................. 37,470 104,574 176,109
Plant............................................. 28,032 29,318 25,997
Motor vehicles.................................... 28,961 47,210 78,328
Computer equipment................................ 57,092 177,738 243,749
Leasehold improvements............................ 17,641 68,582 82,577
Less: Accumulated depreciation.................... (29,053) (84,372) (171,650)
------- ------- --------
140,143 343,050 435,110
======= ======= ========
</TABLE>
NOTE 9: INTANGIBLES
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------- -----------
1996 1997 1998
$US $US $US
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Initial goodwill on investment.................... 335,137 335,592 297,583
Less accumulated amortization..................... (23,676) (39,152) (45,877)
------- ------- -------
331,461 296,440 251,706
======= ======= =======
</TABLE>
Goodwill represents the excess of the purchase price paid by the ultimate
parent entity, FAI Insurances Limited, over the fair value of assets acquired
when FAI General Insurance Companies Limited acquired the shares in Secure
Home Finance Pty Limited (later FAI Finance Corporation Pty Limited) from FAI
Home Security Holdings Pty Limited on March 1, 1995. The goodwill associated
with this acquisition has been pushed down to FFC and is being amortized over
20 years.
NOTE 10: INCOME TAX
The actual income tax expense attributable to net income differed from the
amounts computed by applying local federal tax rate to net income before taxes
as a result of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
$US $US $US $US $US
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected income tax expense
(recovery) at statutory rates. (72,314) 474,017 591,684 420,412 489,540
Tax effect of permanent and
other differences:
Over provision for income tax
in prior years.............. 2,986 696 (42,152) 2 415
Non-deductible expenses and
other items................. -- -- 24,336 -- --
Amortization of goodwill..... 5,569 17,185 6,337 13,297 11,695
Change in tax rates in deferred
tax benefits.................. (7,792) -- -- -- --
------- ------- -------- ------- -------
(71,551) 491,898 580,205 433,711 501,650
The tax expense is split
between:
Current...................... 21,957 482,101 710,273 486,255 501,235
Deferred..................... (93,508) 9,797 (130,068) (52,544) 415
</TABLE>
F-40
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Tax losses have been purchased by FFC at June 30, 1996 for $497,783 and June
30, 1997 for $671,751 from the FAI Insurances Group. These were utilized in
the year of acquisition.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------- ------------
1996 1997 1998
$US $US $US
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred tax assets are comprised of
timing differences on:
Provisions not currently deductible
for tax purposes for:
Doubtful debts................... 97,841 198,351 253,386
Leave............................ 11,100 15,530 17,125
Other............................ -- 4,389 3,892
Sundry accruals.................... 1,272 -- 72,582
Deferred costs..................... (21,292) -- --
Prepayments........................ 339 (9,456) (6,530)
------- ------- -------
Net deferred tax asset............... 89,260 208,814 340,455
======= ======= =======
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
FAI Home Security (NZ) Trust, FAI Home Security Holdings (New Zealand)
Limited and FAI General Insurance Company Limited are related by the 50%
holding of their ultimate parent entity, FAI Insurances Limited, in FAI
Finance Corporation Pty Limited as at March 31, 1998.
Management fees charged to related parties are an allocation of overhead
costs incurred by the relevant related entity. FAI Finance Corporation (NZ)
Limited incurred costs to administer the FAI Home Security Holdings (New
Zealand) Limited's New Zealand customer loans book.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-------------------- ----------
1996 1997 1998
$US $US $US
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amounts due to related party:
Non Current Liabilities
FAI Insurances Limited......... 1,971,500 -- 10,445,136
FAI General Insurance Company
Limited....................... 4,240,074 7,511,515 10,449,554
FAI Home Security Pty Limited.. 37,343 -- --
FAI Home Security (NZ) Trust... 2,636,866 9,546,227 --
FAI Home Security (NZ) Ltd..... 240,486 387,308 309,646
--------- ---------- ----------
9,126,269 17,445,050 21,204,336
========= ========== ==========
</TABLE>
The above loans are unsecured, bear interest at the Westpac Bank indicator
rate and are repayable on demand, with the exception of the FAI Insurances
Limited and FAI General Insurance Company Limited loans which are non-interest
bearing and repayable on demand as at December 31, 1997. As from January 1,
1998 these two loans bear interest at the Westpac Bank indicator rate.
F-41
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------------- ---------------
1995 1996 1997 1997 1998
$US $US $US $US $US
------- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income is stated after the
following items:
Interest on loans paid by FAI
Finance Corporation (NZ) Limited
to:
FAI Home Security (NZ) Trust.... -- 67,174 754,176 464,790 325,681
FAI Home Security Holdings (New
Zealand) Limited............... -- 7,913 1,565 26,262 24,599
Interest on loans paid by FAI
Finance Corporation Pty Limited
to:
FAI General Insurance Company
Ltd............................ -- -- -- -- 245,238
FAI Insurances Ltd.............. -- -- -- -- 291,663
Management fees received by FAI
Finance Corporation (NZ) Limited
From:
FAI Home Security Holdings (New
Zealand) Limited............... -- 43,628 61,675 44,650 31,958
Management fees paid by FAI
Finance Corporation to:
FAI Home Security Pty Limited... 106,180 -- -- -- --
Office rentals paid by FAI Finance
Corporation Pty Limited to:
FAI General Insurance Company
Limited........................ 6,036 65,611 51,535 24,158 73,223
</TABLE>
NOTE 12: FAIR VALUE DISCLOSURES
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information for certain financial
instruments, for which it is practicable to estimate that value. Since there
is no well established market for many of FFC's assets, fair values are
estimated using present value and other valuation techniques. These techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. These assumptions are inherently
judgmental and changes in such assumptions could significantly affect fair
value calculations. The derived fair value estimates may not be substantiated
by comparison to independent markets and may not be realized in immediate
liquidation of the instrument.
For variable rate borrowings that reprice frequently, fair values were
assumed to equal carrying values. The loans from FAI General Insurance Company
Limited and FAI General Insurances Limited were renegotiated as part of the
Company's acquisition of a 50% interest in FFC. These loans bear interest from
January 1, 1998, and as a consequence their carrying values approximate fair
values.
For fixed rate consumer and business loans, the fair values were assumed to
equal carrying values as the market interest rates charged on the loans have
not changed significantly since the loans were granted.
Carrying values approximate fair values for all other financial instruments.
F-42
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: SEGMENT INFORMATION
The following table shows certain financial information by geographical
region.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------- -------------------
1995 1996 1997 1997 1998
$US $US $US $US $US
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net interest income:
--Australia............ 263,177 2,480,922 3,496,927 2,482,859 3,034,907
--New Zealand.......... -- 113,389 976,186 634,897 1,263,103
-------- --------- --------- --------- ---------
263,177 2,594,311 4,473,113 3,117,756 4,298,010
======== ========= ========= ========= =========
Operating revenues:
--Australia............ 263,177 2,481,860 3,496,927 2,482,859 3,034,907
--New Zealand.......... -- 156,079 1,037,861 679,547 1,295,061
-------- --------- --------- --------- ---------
263,177 2,637,939 4,534,788 3,162,406 4,329,968
======== ========= ========= ========= =========
Bad debts and allowance
for losses:
--Australia............ 20,652 401,610 754,141 479,967 589,477
--New Zealand.......... -- 407 53,659 39,995 115,822
-------- --------- --------- --------- ---------
20,652 402,017 807,800 519,962 705,299
======== ========= ========= ========= =========
Net income (loss):
--Australia............ (136,262) 781,853 750,864 467,684 498,888
--New Zealand.......... -- 73,794 353,131 331,257 434,076
-------- --------- --------- --------- ---------
(136,262) 855,647 1,103,995 798,941 932,964
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
--------------------- -----------
1996 1997 1998
$US $US $US
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Identifiable Assets
--Australia.............................. 19,478,616 27,251,057 29,685,459
--New Zealand............................ 3,142,893 10,344,364 11,671,391
---------- ---------- ----------
22,621,509 37,595,421 41,356,850
========== ========== ==========
</TABLE>
NOTE 14: FINANCE FACILITIES
On June 28, 1996, FFC entered into the Receivables Purchase Agreement with
Westpac Banking Corporation ("Westpac"). Under this agreement, FFC has the
right to sell eligible receivables to Westpac and undertakes to continue to
service the receivables in exchange for a management fee.
FFC also has the option to re-purchase the receivables at an amount
determined by Westpac which is to take into account the outstanding principal
on purchased loans and any outstanding obligations to Westpac under the
agreement, including unpaid interest and facility fees.
Under the Receivables Purchase Agreement, FAI General Insurance Company
Limited must maintain a subordinated loan with Westpac equal to the greater of
$2,643,200 and 25% of the outstanding sold receivable
F-43
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in the first year or not less than 20% in subsequent years. The right of FAI
General Insurance Company Limited to receive interest and principal repayments
in respect of the loan are subject to Westpac's prior ranking as agreed
between the parties. FAI General Insurance Company Limited has agreed to
provide a subordinated loan to Westpac to a maximum of $13,216,000.
FFC is required to maintain a cash reserve account (restricted deposit) with
Westpac, the balance of which is not less than the greater of $660,800 and 5%
of the outstanding principal on sold receivables. Interest on the cash reserve
account is only paid after the interest obligations under the Westpac loan and
subordinated loan have been met. The balance of the account is only available
to FFC after all outstanding obligations to Westpac and the subordinated loans
have been met.
FFC has not recognized the sales of receivables under the agreement as a
sale for financial reporting purposes. The sales proceeds received from
Westpac have been recognized as secured borrowing, and interest, program and
line fees under the Westpac facility have been recognized as interest expense.
Under the agreement FFC pays interest to Westpac at the Australian Bank Bill
rate plus 2.0% per annum. In addition, FFC pays program and line fees as
agreed between the parties.
The current limit of the facility provided by Westpac is $19,824,000
(utilized at March 31, 1998--$16,741,589). The scheduled commitment
termination date for the Receivables Purchase Agreement is the third
anniversary of the date the agreement was entered into. This date may be
extended at the sole discretion of Westpac on the second or any subsequent
anniversary of the Agreement for a further period of one year. If FFC wants an
extension of the scheduled commitment termination date it must give a written
request to Westpac at least 60 days before the relevant anniversary. If
Westpac agrees, it must give written notice to FFC not later than the day of
the relevant anniversary.
FAI Insurances Limited and FAI General Insurance Company Limited have agreed
to each provide a loan of up to $10,000,000 to FFC to enable it to fund its
financing activities. This facility is secured by FFC's assets.
NOTE 15: DERIVATIVES
FFC has entered into an interest rate collar with Westpac. Under the collar
FFC has capped its interest payable on a notional borrowing of $19,801,000 at
13.5% per annum, until 14 August 2001. FFC has also set a floor on the same
notional principal and maturity, at 6.03% per annum.
F-44
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICI-
TATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 10
Dividend Policy........................................................... 10
Price Range of Common Stock............................................... 10
Capitalization............................................................ 11
Selected Financial Information............................................ 12
Pro Forma Financial Information........................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 27
Management................................................................ 39
Certain Transactions...................................................... 44
Principal Shareholders.................................................... 47
Description of Securities................................................. 49
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Additional Information.................................................... 53
Certain Forward-Looking Statements........................................ 54
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,300,000 SHARES
HOME SECURITY INTERNATIONAL, INC.
LOGO
COMMON STOCK
-----------------
PROSPECTUS
-----------------
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the Representatives' nonaccountable
expense allowance, payable in connection with the sale of the Shares being
registered hereby. All amounts are estimates, except the registration fee and
the NASD filing fee: the total estimated fees set forth below shall be paid by
the Company.
<TABLE>
<S> <C>
SEC Registration Fees (includes State)........................ $ 4,602
NASD Filing Fee............................................... $ 2,060
Accountants' Fees and Expenses................................ $ 96,000
American Stock Exchange Listing Fee........................... $ 17,500
Legal Fees and Expenses....................................... $137,506
Printing and Engraving........................................ $100,000
Transfer Agent and Registration Fees.......................... $ 3,000
Miscellaneous................................................. $147,156
---------
Total..................................................... $ 507,824
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 102(b) of the Delaware General Corporations Law (the "DGCL") permits
a provision in the certificate of incorporation of each corporation organized
thereunder eliminating or limiting, with certain exceptions, the personal
liability of a director to the corporation or its stockholders for monetary
damages for certain breaches of fiduciary duty as a director. The Certificate
of Incorporation of the Registrant eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection
with the defense or settlement of such action or suit, provided such person
meets the standard of conduct described in the preceding paragraph, except
that no indemnification is permitted in respect of any claim where such person
has been found liable to the corporation, unless the Court of Chancery or the
court in which such action or suit as brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Reference is made to Section 7 of Article VII of the Registrant's By-laws
and Article Seventh of the Certificate of Incorporation of the Registrant for
the provisions which the Registrant has adopted relating to indemnification of
officers, directors, employees and agents, which provides for the
indemnification of such persons to the full extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
II-1
<PAGE>
Reference is also made to Section 7 of the Underwriting Agreement filed as
Exhibit 1 to this Registration Statement which provides for the
indemnification of the Company, its controlling persons, directors and certain
of its officers by the Underwriters against certain liabilities, including
liabilities under the securities laws.
Reference is also made to Section 7 of the underwriting agreement between
the Company, National and Nolan Securities Corporation, which also provides
for the indemnification of the Company, its controlling persons, directors and
National and Nolan against certain liabilities under the securities laws.
The Registrant has purchased directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
<TABLE>
<CAPTION>
AGGREGATE
DATE OF NUMBER OF PURCHASE FORM OF
PURCHASERS SALE SECURITIES SHARES PRICE CONSIDERATION
---------- ------- ---------- --------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
FAI Home Security
Holdings Pty Ltd....... 4/11/97 Common Stock 1 $ .001 Cash
FAI Home Security
Holdings Pty Ltd....... 6/30/97 Common Stock 4,499,999 $10,538,213 Common Stock of FAI
Home Security Pty Ltd.
and FAI Home Security
(ENZED) Ltd.
Bradley D. Cooper....... 7/15/97 Common Stock 250,000 $ 2,500,000 $125,000 Cash and
$2,375,000 Note
Payable
</TABLE>
The sales of all of 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, as a
transaction by an issuer not involving a public offering. To the best of the
Registrant's knowledge, the purchasers of securities described above acquired
them for their own account.
ITEM 16. EXHIBITS
(a) EXHIBITS
<TABLE>
<CAPTION>
<C> <S>
*1 Form of Underwriting Agreement
2.1 Share Purchase Agreement relating to the purchase of shares in
FAI Home Security Pty Limited and FAI Home Security (ENZED) Lim-
ited (4)
2.2 NZ Asset Purchase Agreement between FAI Home Security Holdings
New Zealand Limited and FAI Home Security (ENZED) Limited (4)
2.3 NZ Share Sale Agreement between FAI Home Security Holdings New
Zealand Limited and FAI Home Security Holdings Pty Limited (4)
2.4 Trade Mark License Agreement between FAI Insurances and FAI Home
Security Pty Limited (4)
3.1 Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4.1 National Securities Corporation Warrant Agreement (1)
4.2 Form of the Company Common Stock Certificate (3)
*5.1 Opinion and Consent of D'Ancona & Pflaum
10.1 1997 Employee Stock Option Plan (5)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.2 1997 Non-Employee Directors' Stock Option Plan (5)
10.3 International Asset Purchase Agreement between FAI Insurances
and Cooper International Group (2)
10.4 Manufacturing Agreement among Ness Security Products Pty Limit-
ed, FAI Home Security Pty Limited and FAI Home Security Holdings
Pty Limited (4)
10.5 Executive Service Agreement with Bradley D. Cooper (4)
10.6 Amendment to Executive Service Agreement with Bradley D. Cooper
(4)
10.7 Executive Service Agreement dated July 15, 1997 between the Com-
pany and Terrance J. Youngman (4)
10.8 Executive Service Agreement dated July 15, 1997 between the Com-
pany and Robert
D. Appleby (4)
10.9 Executive Service Agreement dated July 15, 1997 between the Com-
pany and
Mark Whitaker (4)
10.10 Executive Service Agreement dated July 15, 1997 between the Com-
pany and
Geoffrey D. Knowles (4)
10.11 Executive Service Agreement dated July 15, 1997 between the Com-
pany and
Felicity A. Hilbert (4)
10.12 Option Agreement dated September 5, 1994 between Bradley D. Coo-
per and FAI Insurances Limited (2)
10.13 Sale Agreement dated November 11, 1995, among Bradley D. Cooper,
FAI Insurances Ltd, FAI Home Security Holding Pty Ltd. and
Kamarasi Pty Ltd. (2)
10.14 Management Services Agreement with Speakeasy Ltd. (2)
10.15 Promissory Note Payable to Bradley D. Cooper (4)
10.16 Promissory Note Payable to FAI Home Security Holdings Pty Lim-
ited (4)
10.17 Promissory Note Payable to FAI Home Security (ENZED) Limited (4)
10.18 Share Sale Agreement dated December 31, 1997 by and between FAI
Insurances Limited and FAI Home Security Pty. Limited (6)
10.19 Shareholders Agreement dated December 31, 1997 by and between
FAI Insurances
Limited and FAI Home Security Pty. Limited (6)
10.20 Consultancy Engagement Agreement effective October 1, 1997,
among the Company, Speakeasy Pty. Ltd. and Bradley D. Cooper (7)
10.21 Stock Purchase Agreement dated July 17, 1998 between the Company
and International Home Security Investments Limited.
21.1 List of Subsidiaries
*23.1 Consent of D'Ancona & Pflaum (to be included in Exhibit 5.1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
23.2 Consent of Arthur Andersen
23.3 Consent of Paul Brown
24.1 Power of Attorney (included on Page II-6)
</TABLE>
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-26399), as amended, filed with the Securities
Exchange Commission on May 2, 1997
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-26399), as amended, filed with the Securities
Exchange Commission on June 10, 1997
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-26399), as amended, filed with the Securities
Exchange Commission on June 25, 1997
(4) Incorporated by reference to the Company's Registration Statement on Form
10-K (Registration No. 333-26399), filed with the Securities Exchange
Commission on September 29, 1997
(5) Incorporated by reference to the Company's Registration Statement on Form
10-Q (Registration No. 333-26399), filed with the Securities Exchange
Commission on November 14, 1997
(6) Incorporated by reference to the Company's Registration Statement on Form
8-K (Registration No. 333-26399), filed with the Securities Exchange
Commission on January 15, 1998
(7) Incorporated by reference to the Company's Registration Statement on Form
10-Q (Registration No. 333-26399), filed with the Securities Exchange
Commission on February 17, 1998
* To be filed by Amendment
ITEM 17. UNDERTAKINGS
(a) The Company will file, during any period in which it offers or sells
securities, all post-effective amendments to this Registration Statement as
to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) Reflect in this Prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(b) For determining liability under the Securities Act, the Company will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(c) The Company will file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
Offering.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities is asserted (other
than the expenses of a successful defense), the Company will, unless in the
opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and the Company will be governed by the final adjudication of such issues.
II-4
<PAGE>
(e) The Company will treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Company under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
For determining any liability under the Securities Act, treat each post-
effective amendment that contains a form of prospectus as a new registration
statement for the securities offered in the registration statement, and that
offering of the securities at that time as the initial bona fide offering of
those securities.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IS HAS REASONABLE GROUNDS TO BELIEVE THE REGISTRANT
MEETS ALL OF THE REQUIREMENTS OF FILING ON FORM S-1 AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED IN THE
CITY OF SYDNEY, AUSTRALIA ON JULY 17, 1998.
Home Security International, Inc.
/s/ Bradley D. Cooper
By:__________________________________
Bradley D. Cooper
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and
officers of Home Security International, Inc., a Delaware corporation, which
is filing a Registration Statement on Form S-1 with the Securities and
Exchange Commission, under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Bradley D. Cooper, Terrence J. Youngman
and Mark Whitaker, and each of them, each of their true and lawful attorneys-
in-fact and agents; with full power of substitution and resubstitution, for
him or her in his or her name, place and stead, in any and all capacities, to
sign such Registration Statement and any or all pre-effective and post-
effective amendments to the Registration Statements, including a Prospectus or
an amended Prospectus therein and any subsequent registration statement for
the same offering that may be filed under Rule 462(b) under the Securities Act
of 1933, as amended, and all other documents in connection therewith to be
filed with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all interests and purposes as each of them
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Bradley D. Cooper Chairman and Chief Executive July 17, 1998
____________________________________ Officer (Principal
Bradley D. Cooper Executive Officer)
/s/ Mark Whitaker Chief Financial Officer, July 17, 1998
____________________________________ Executive Vice President of
Mark Whitaker Finance and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Timothy M. Mainprize Director July 17, 1998
____________________________________
Timothy M. Mainprize
/s/ Steven A. Rothstein Director July 17, 1998
____________________________________
Steven A. Rothstein
/s/ Steve Rabinovici Director July 17, 1998
____________________________________
Steve Rabinovici
/s/ Dennis J. Puleo Director July 17, 1998
____________________________________
Dennis J. Puleo
</TABLE>
II-6
<PAGE>
Exhibit 10.21
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of July 17, 1998, between International Home
Security Investments Limited, a British Virgin Islands corporation ("Seller ")
the sole stockholder of Integrated International Home Security Limited, a
British Virgin Islands corporation (the "Company"), and Home Security
International, Inc., a Delaware corporation ("Purchaser").
R E C I T A L S
A. Seller owns all of the outstanding shares of capital stock ("Shares")
of the Company. The Company is the holder of 781,666 shares of capital stock
(each a "Ness Share") of Ness Security Products Pty Ltd., an entity incorporated
under the laws of Australia ("Ness").
B. Purchaser desires to purchase all the outstanding Shares from Seller
and Seller desires to sell such Shares to Purchaser, on the terms and subject to
the conditions contained herein.
A G R E E M E N T S
Therefore, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
Purchase and Sale of Shares; Closing and Manner of Payment
1.1 Agreement to Purchase and Sell Shares. On the terms and subject to the
conditions contained in this Agreement, Purchaser shall purchase from Seller,
and Seller shall sell to Purchaser, all of the outstanding Shares, free and
clear of all options, proxies, voting trusts, voting agreements, judgments,
pledges, charges, escrows, rights of first refusal or first offer, mortgages,
indentures, claims, transfer restrictions, liens, equities, encumbrances,
security interests and other encumbrances of every kind and nature whatsoever,
whether arising by agreement, operation of law or otherwise (collectively,
"Claims").
1.2 Purchase Price. The aggregate purchase price of the Shares shall be
equal to twenty five million four hundred thousand Australian Dollars (Aus.
$25,400,000) (the "Purchase Price"). The Purchase Price shall be equal to the
sum of (i) eleven million one hundred eighty two thousand dollars (U.S.
$11,182,000) payable at the Closing (the "Cash Portion"); (ii) 400,000 shares of
common stock ("HSI Common Stock"), U.S. $.001 par value per share of the
Purchaser, to be issued to Seller at the Closing, including any legends
restricting the transfer of such shares under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended (the "Share
Portion"); and (iii) a warrant to purchase 360,000 shares of HSI Common Stock
(the "Warrant") substantially in the form attached hereto as Exhibit A, with
such changes thereto as may be agreed to by Seller and Purchaser. The shares to
be issued to Seller to satisfy the Share Portion, and the shares underlying the
Warrant have not been registered under
<PAGE>
the Securities Act of 1933, as amended (the "Securities Act"), and, therefore,
can not be resold unless they are registered under the Securities Act or unless
an exemption from registration is available.
1.3 Manner of Payment of Purchase Price. The Purchase Price shall be paid
or satisfied at the Closing (as herein defined) as follows: (i) the Cash Portion
shall be paid by Purchaser's delivery of (A) one hundred twenty six thousand
dollars (U.S. $126,000) ("Deposit") which shall be delivered by Purchaser to
Seller contemporaneous with the signing of this Agreement and shall be credited
against the Purchase Price; and (B) eleven million fifty six thousand dollars
(U.S. $11,056,000) by wire transfer of immediately available funds per the wire
transfer instructions attached hereto as Exhibit B; (ii) the Share Portion shall
be paid by Purchaser's delivery of a certificate representing 400,000 shares of
HSI Common Stock to the escrow agent (the "Escrow Agent"), as identified in the
escrow agreement (the "Escrow Agreement") substantially in the form attached
hereto as Exhibit C, with such changes thereto as may be agreed to by the
parties hereto, to be held and distributed by the Escrow Agent in accordance
with the terms of the Escrow Agreement; and (iii) Purchaser's delivery of the
Warrant. In the event that the transactions contemplated by this Agreement are
not consummated and there is no Closing, the Seller shall be entitled to keep
the Deposit.
1.4 Appointment to Board of Directors. Subject to the approval of the Board
of Directors of Purchaser, which shall not be unreasonably withheld or delayed,
Purchaser will cause Paul Brown or his nominee to be elected to the Board of
Directors of Purchaser, on the Closing Date, or as soon as practicable
thereafter. Purchaser agrees to use commercially reasonable efforts to cause
Paul Brown or his nominee to be re-elected to the Board of Directors of
Purchaser until the earlier to occur of (i) the fifth anniversary of the Closing
Date or (ii) the date on which Paul Brown ceases to beneficially own (determined
in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act")) a number of shares (including shares underlying
the Warrant) equal to at least five percent (5.0%) of the outstanding HSI Common
Stock.
1.5 Closing Deliveries. At the Closing, Seller shall deliver to Purchaser
(i) certificates evidencing the Shares (together with all rights then or
thereafter attaching thereto) duly endorsed in blank, or accompanied by valid
stock powers duly executed in blank, in proper form for transfer; and (ii)
certificates evidencing the Ness Shares. The parties shall also deliver such
other documents (including incumbency certificates, good standing certificates,
lien searches, corporate resolutions and resignations) as are reasonably
required under Australian, British Virgin Islands, U.S. laws, or the laws of any
other relevant jurisdiction, in order to effectuate the consummation of the
transaction contemplated hereby. Additionally, each party shall deliver all
documents referenced on the closing checklist (the "Closing Checklist"),
substantially in the form attached hereto as Exhibit D, with such changes
thereto as may be reasonably agreed to by the parties hereto, to the other
party; and Purchaser shall deliver to Seller the Purchase Price in the manner
described in Section 1.3 above. All documents to be delivered by a party shall
be in form and substance reasonably satisfactory to the other party.
<PAGE>
1.6 Time and Place of Closing. The transaction contemplated by this
Agreement shall be consummated (the "Closing") at the offices of D'Ancona &
Pflaum, 30 N. LaSalle, Suite 2900, Chicago, Illinois, 60602, as soon as
practicable after the conditions set forth in Section 4.2 (f) are satisfied
(assuming all other conditions set forth in Article IV are met), or on such
later date that the conditions of Closing set forth in Article IV hereof are
satisfied or waived (subject to Section 7.1 (b)), or on such other date, or at
such other place, as shall be agreed upon by Seller and Purchaser. The date on
which the Closing shall occur in accordance with the preceding sentence is
referred to in this Agreement as the "Closing Date". The Closing shall be deemed
to be effective as of 12:01 a.m., prevailing time at the place of Closing on the
Closing Date.
ARTICLE II
Representations and Warranties
2.1 Representations and Warranties of Purchaser. Purchaser represents and
warrants to Seller as follows:
(a) Purchaser is a corporation duly organized, existing and in good
standing, under the laws of the state of Delaware.
(b) Purchaser has full corporate power and authority to enter into and
perform this Agreement. The execution and delivery by Purchaser of this
Agreement and the performance by Purchaser of its obligations hereunder have
been duly authorized and approved by all requisite corporate action. The
approval of its shareholders is not required in order to execute this Agreement,
or consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by a duly authorized officer of Purchaser.
(c) No consent, authorization, order or approval of, or filing or
registration with, any governmental commission, board or other regulatory body
of the United States or any state or political subdivision thereof is required
for or in connection with the consummation by Purchaser of the transaction
contemplated hereby.
(d) Neither the execution and delivery of this Agreement by Purchaser, nor
the consummation by Purchaser of the transaction contemplated hereby, will
conflict with or result in a breach of any of the terms, conditions or
provisions of its Certificate of Incorporation or by-laws, or of any statute or
administrative regulation, or of any order, writ, injunction, judgment or decree
of any court or governmental authority or of any arbitration award.
(e) Purchaser is not a party to any unexpired, undischarged or unsatisfied
written or oral contract, agreement, indenture, mortgage, debenture, note or
other instrument under the terms of which performance by Purchaser according to
the terms of this Agreement will be a
3
<PAGE>
default or an event of acceleration, or grounds for termination, or whereby
timely performance by Purchaser according to the terms of this Agreement may be
prohibited, prevented or delayed.
(f) The authorized capital stock of Purchaser consists of (i) 20,000,000
shares of HSI Common Stock, of which 5,150,500 are issued and outstanding, as of
the date hereof; and (ii) 1,000,000 shares of preferred stock, $.001 par value
per share, of which none are issued and outstanding, as of the date hereof.
There are no shares of capital stock of Purchaser of any other class authorized,
issued or outstanding. All of the issued and outstanding shares of HSI Common
Stock have been validly issued, are fully paid and nonassessable.
(g) The issuance and delivery of the Share Portion and the Warrant have
been duly and validly authorized by all necessary corporate action. The Share
Portion and the shares to be issued in connection with the exercise of the
Warrant, when issued in accordance with the terms of this Agreement or the
Warrant, as the case may be, will be validly issued, fully paid and non-
assessable. Purchaser has reserved and will continue to reserve until the
Warrant is exercised or expires in accordance with its terms, the number of
shares of HSI Common Stock issuable upon exercise of the Warrant.
(h) Purchaser has provided Seller with the opportunity to review each
registration statement, report, proxy statement or information statement (as
defined in Regulation 14C under the Exchange Act) filed by Purchaser with the
Securities and Exchange Commission (the "SEC") since its initial public offering
in July 1997, which reports constitute all of the documents required to be filed
by Purchaser with the SEC since such date, each in the form (including exhibits
and any amendments thereto) filed with the SEC (collectively, the "HSI
Reports"). As of their respective dates, the HSI Reports (a) complied as to form
in all material respects with the applicable requirements of the Securities Act,
the Exchange Act, and the rules and regulations thereunder; and (b) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(i) Purchaser has provided Seller with the opportunity to review the
registration statement on Form S-1 (the "Registration Statement") prepared by
Purchaser in connection with this transaction. Such Registration Statement (a)
complies as to form in all material respects with the applicable requirements of
the Securities Act and the rules and regulations thereunder; and (b) as of the
date on which it is filed with the SEC and as of the date it is declared
effective by the SEC will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein not misleading.
(j) The audited consolidated financial statements of Purchaser included in
its annual report on Form 10-K and the unaudited statements of Purchaser
included in its quarterly reports on Form 10-Q referred to in Section 2.2(h),
present fairly, in conformity with United
4
<PAGE>
States generally accepted accounting principles ("GAAP") applied on a consistent
basis (except as may be indicated in the notes thereto), the consolidated
financial position of Purchaser as of the dates thereof and its consolidated
results of operations and cash flows for the periods then ended (subject to
normal year end adjustments in the case of any interim financial statements).
2.2 Representations and Warranties of Seller. Seller represents and
warrants to Purchaser that, except as set forth in the schedule to be delivered
by Seller to Purchaser pursuant to Section 4.2 hereof and identified as the
"Disclosure Schedule":
(a) (i) (A) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the British Virgin Islands; and (B) Ness
and each of its subsidiaries are corporations duly organized, validly existing
and in good standing under the laws of their respective jurisdiction of
organization. (ii) Each of the Company and Ness has full corporate power and
authority to carry on its business as such business is now being conducted.
(iii) Except for the Foreign Investment Review Board approval, no consent,
authorization, order or approval of, or filing or registration with, any
governmental commission, board or other regulatory body of Australia or the
British Virgin Islands or any state or political subdivision thereof is required
for or in connection with the consummation by Seller of the transaction
contemplated hereby. (iv) Neither the execution and delivery of this Agreement
by Seller, nor the consummation by Seller of the transaction contemplated
hereby, will conflict with or result in a breach of any of the terms, conditions
or provisions of the Company's or Ness' respective Memorandum and Articles of
Association or by-laws, or of any statute or administrative regulation, or of
any order, writ, injunction, judgment or decree of any court or governmental
authority or of any arbitration award to which Ness, the Company or Seller is a
party or by which Ness, the Company or Seller is bound; and (v) True and
complete copies of the Memorandum and Articles of Association and all amendments
thereto, the by-laws as amended and currently in force, all stock records, and
all corporate minute books and records of each of Ness and the Company, have
been furnished for inspection by Purchaser. Said stock records accurately
reflect all share transactions and the current stock ownership of Ness and the
Company, respectively. The corporate minute books and records of each of Ness
and the Company contain true and complete copies of all resolutions adopted by
the stockholders or the board of directors of the respective entity and any
other action formally taken by them respectively as such.
(b) Seller is a corporation duly organized, existing and in good standing
under the laws of its jurisdiction of incorporation. The execution and delivery
of this Agreement by it and the performance by it of all of its obligations
under this Agreement have been duly approved prior to the date of this Agreement
by all requisite action of its board of directors. The approval of its
shareholders, for it to execute this Agreement or consummate the transaction
contemplated hereby has been duly given. This Agreement has been duly executed
and delivered by it. Neither the execution and delivery of this Agreement by
Seller, nor the consummation by it of the transaction contemplated hereby, will
conflict with or constitute a breach of any of the terms, conditions or
provisions of its Articles of Incorporation, by-laws, or other organizational
documents.
5
<PAGE>
(c) The authorized capital stock of (i) the Company consists of a single
class of ordinary shares of common stock, U.S. $1.00 par value, of which 52,557
Shares are issued and outstanding; and (ii) Ness consists of a single class of
ordinary shares of common stock, Australian $1.00 par value, of which 1,041,666
Ness Shares are issued and outstanding. There are no shares of capital stock of
the Company or Ness of any other class authorized, issued or outstanding. All of
the issued and outstanding Shares and Ness Shares have been validly issued, are
fully paid and nonassessable, and are owned beneficially and of record by Seller
or the Company, respectively. Seller has good and valid title to, and ownership
of all 52,557 outstanding Shares, and the Company has good and valid title to,
and ownership of 781,666 Ness Shares, in each case free and clear of all Claims.
There are no outstanding subscriptions, options, warrants, rights (including
preemptive rights), calls, convertible securities or other agreements or
commitments of any character relating to the issued or unissued capital stock or
other securities of the Company or Ness obligating the Company or Ness to issue
any securities of any kind.
(d) The Company has maintained its books, accounts and records in its
usual, regular and ordinary manner, in accordance with GAAP, and all
transactions to which the Company is or has been a party are properly reflected
therein.
(e) Purchaser has been previously provided complete and accurate copies of
the audited consolidated balance sheets, statements of income, retained earnings
and cash flows, notes to financial statements (together with any supplementary
information thereto) and any underlying financial statements of the
aforementioned, including financial statements for the corresponding periods of
Ness, prepared by Deloitte & Touche, of the Company as of and for the years
ended June 30, 1996, June 30, 1997 and June 30, 1998. The financial statements
described in the preceding sentence are hereinafter referred to as the
"Financial Statements". The Financial Statements present accurately and
completely the financial position of the Company as of the dates thereof and the
results of operations and cash flows of the Company for the periods covered by
said statements, in accordance with GAAP consistently applied.
(f) Each of Ness and the Company has no obligation or liability of any
nature whatsoever (direct or indirect, matured or unmatured, absolute, accrued,
contingent or otherwise), whether or not required by GAAP to be provided or
reserved against on a balance sheet (all the foregoing herein collectively being
referred to as the "Liabilities") except for: (i) Liabilities provided for or
reserved against in the Financial Statements; (ii) Liabilities which have been
incurred by the Company or Ness, respectively, subsequent to June 30, 1998, in
the ordinary course of each of Ness' and the Company's respective business and
consistent with each of their respective past practices; and (iii) Liabilities
under the executory portion of any written purchase order, sales order, lease,
agreement or commitment of any kind by which Ness or the Company is bound and
which was entered into in the ordinary course of Ness' or the Company's
respective business and consistent with each of their respective past practices;
(iv) Liabilities under any material contract, lease, or agreement, oral or
written, which if written was previously provided to Purchaser, and if oral a
written description was previously provided to Purchaser; and (v) Liabilities
due to environmental issues affecting any property or other asset of the Company
or
6
<PAGE>
Ness, or use of the property or any other asset of the Company or Ness
previously disclosed to Purchaser. None of the Liabilities described in
subparagraphs (i) through (v) of this paragraph (e) relates to or has arisen out
of a breach of contract, breach of warranty, tort or infringement by or against
Ness or the Company, as the case may be, or any claim or lawsuit involving Ness
or the Company, as the case may be.
(g) (i) All contracts, leases and other instruments previously provided to
Purchaser, and all other contracts or instruments to which Ness or the Company
is a party, are in full force and binding upon the parties thereto. No default
by Ness or the Company has occurred thereunder and, to the best of Seller's
knowledge, no default by the other contracting parties has occurred thereunder.
No event, occurrence or condition exists which, with the lapse of time, the
giving of notice, or both, or the happening of any further event or condition,
would become a default by Ness or the Company thereunder. (ii) Neither the
Company nor Seller is a party to, or bound by, any unexpired, undischarged or
unsatisfied written or oral contract, agreement, indenture, mortgage, debenture,
note or other instrument under the terms of which performance by Seller
according to the terms or conditions of this Agreement will be a default or an
event of acceleration, or grounds for termination, or whereby timely performance
by Seller of this Agreement may be prohibited, prevented or delayed.
(h) Each of Ness and the Company has good and marketable title to its
assets, free and clear of any liens, claims, encumbrances and security
interests, except for liens for non-delinquent taxes. No unreleased mortgage,
trust deed, chattel mortgage, security agreement, financing statement or other
instrument encumbering any of Ness' or the Company's assets has been recorded,
filed, executed or delivered. All of the Company's assets are listed on Exhibit
E, attached hereto.
(i) Since June 30, 1998, the information included in the Financial
Statements has not been altered by: (i) the performance of any of the enumerated
actions in Section 3.1(d) of this Agreement; (ii) any casualty, damage,
destruction or loss, or interruption in use, of any asset or property (whether
or not covered by insurance), on account of fire, flood, riot, strike or other
hazard or Act of God; and (iii) without limitation by the enumeration of any of
the foregoing, the entrance into any transaction other than in the usual and
ordinary course of business in accordance with past practices (the foregoing
representation and warranty shall not be deemed to be breached by virtue of the
entry by Seller into this Agreement or its consummation of the transactions
contemplated hereby).
(j) Neither the Company, nor to the best of Seller's knowledge, Ness, has
suffered or been threatened with any material adverse change in the business,
operations, assets, liabilities, financial condition or prospects of Ness,
including, without limiting the generality of the foregoing, the existence or
threat of a labor dispute, or any material adverse change in, or loss of, any
relationship between Ness and any of its customers, suppliers or key employees.
7
<PAGE>
(k) (i) There is no litigation or proceeding, in law or in equity, and
there are no proceedings or governmental investigations before any commission or
other administrative authority, pending or to the best of Seller's knowledge
threatened against the Company, and (ii) to the best of Seller's knowledge,
there is no litigation or proceeding, in law or in equity, and there are no
proceedings or governmental investigations before any commission or other
administrative authority, pending or threatened against Ness or any of Ness' or
the Company's officers, directors or Affiliates, with respect to or affecting
Ness' or the Company's operations, business, products, sales practices or
financial condition, or related to the consummation of the transaction
contemplated hereby.
(l) Neither the Company, nor to the best of Seller's knowledge Ness, is in
violation of, or delinquent in respect to, any decree, order or arbitration
award or law, statute, or regulation of or agreement with, or permit from, any
governmental authority (or to which the property, assets, personnel or business
activities of the Company or Ness is subject or to which it, itself, is
subject), including, without limitation, laws, statutes and regulations relating
to equal employment opportunities, fair employment practices, unfair labor
practices, terms of employment, occupational health and safety, wages and hours,
discrimination, and zoning ordinances and building codes.
(m) All statutory and other licenses, leases, permissions and authorities
required for the proper and lawful carrying on of the business of the Company
and to the best of Seller's knowledge, Ness, have been duly obtained and are
valid and subsisting and have not been breached;
(n) (i) As used in this Agreement, the following terms shall have the
following meanings: (A) the term "Taxes" means all net income, gross income,
gross receipts, sales, use, ad valorem, transfer, franchise, profits, license,
lease, service, service use, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, windfall profits, customs,
duties or other taxes, fees, assessments or charges of any kind whatever,
together with any interest and any penalties, additions to tax or additional
amounts with respect thereto; and (B) the term "Returns" means all returns,
declarations, reports, statements and other documents required to be filed in
respect of Taxes, and the term "Return" means any one of the foregoing Returns.
(ii) There have been properly completed and filed on a timely basis and in
correct form all Returns required to be filed by the Company. The Company has
timely paid all Taxes and filed all Returns and correctly reflected the facts
regarding the income, business, assets, operations, activities, status or other
matters of the Company, or any other information required to be shown thereon.
All tax deficiencies asserted or assessments made as a result of any
examinations have been fully paid, or are fully reflected as a liability in the
Financial Statements, or are being contested and an adequate reserve therefor
has been established and is fully reflected as a liability in the Financial
Statements.
(o) Seller has disclosed to Purchaser a true and correct list showing: (i)
the name of each bank, safe deposit company or other financial institution in
which the Company has an
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account, lock box or safe deposit box; (ii) the names of all persons authorized
to draw thereon or to have access thereto and the names of all persons and
entities, if any, holding powers of attorney from the Company; and (iii) all
instruments or agreements to which the Company is a party as an endorser, surety
or guarantor, other than checks endorsed for collection or deposit in the
ordinary course of business.
(p) Purchaser has been previously provided with a list and description of
all benefits pursuant to any employment agreement, employee pension benefit
plan, including, without limitation, employee welfare benefit plans, bonus,
deferred compensation, stock purchase, stock option, superannuation funds,
severance plan, salary continuation, vacation, sick leave, fringe benefit,
incentive, insurance, welfare or similar plans or arrangements which the Company
maintains, administers or contributes to.
(q) Seller certifies that neither it, nor any of its directors, officers,
employees, or agents is an official, agent, or employee of any government or
governmental agency or political party or a candidate for any political office
on the date hereof. Seller has not, directly or indirectly, in the name of, on
behalf of, or for the benefit of Purchaser offered, promised or authorized to
pay, or paid any compensation, or gave anything of value to, any official,
agent, or employee of any government or governmental agency, or to any political
party or officer, employee, or agent thereof.
(r) The representations and warranties of Seller or Seller's designee in
this Agreement and any schedule or exhibit attached hereto do not, and the
representations and warranties to be made in the Disclosure Schedule will not,
omit to state a material fact necessary in order to make the representations,
warranties or statements contained herein or therein not misleading.
(s) The copies of all documents furnished by Seller, any designee of Seller
or the Company to Purchaser pursuant to or in connection with this Agreement are
true, correct, complete and accurate.
(t) As used in this Agreement, "Seller's knowledge" and words of similar
import shall mean the actual knowledge of Paul Brown, the sole director of
Seller after due inquiry, which for purposes of this Agreement, shall mean the
same inquiry that a reasonable person who is a beneficial owner of the entire
equity interest in the Company and the beneficial owner of 75.04% of the
outstanding capital stock of Ness would make under these circumstances.
ARTICLE III
Conduct Prior to the Closing
----------------------------
3.1 General. Between the date hereof and the Closing Date:
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(a) Seller shall and shall cause the Company and Ness to give to
Purchaser's officers, employees, agents, attorneys, consultants, accountants and
lenders reasonable access during normal business hours to all of the properties,
books, contracts, documents, records and personnel of the Company and shall
furnish to Purchaser and such persons as Purchaser shall designate to Seller
such information as Purchaser or such persons may at any time and from time to
time reasonably request. Purchaser agrees not to disclose any such information
to any third party other than as set forth below; and to take all reasonable
steps as may be necessary to protect as confidential any such information. The
obligations imposed upon Purchaser shall not apply to information: (i) which at
the time of disclosure is in the public domain or to which Purchaser has prior
knowledge (which was not improperly disclosed to Purchaser); (ii) which is made
available to the general public other than as a result of a disclosure by
Purchaser; (iii) which is disclosed pursuant to a valid order of a court or
regulatory agency or other governmental body or any political subdivision
thereof; or (iv) which the Seller gives prior written consent for disclosure by
Purchaser.
(b) Seller shall use commercially reasonable efforts and make every good
faith attempt (and Purchaser shall cooperate with Seller) to cause the Company
and Ness to (i) obtain all consents specified by Purchaser to the consummation
of the transaction contemplated hereby under or with respect to, any contract,
lease, agreement, purchase order, sales order or other instrument, permit or
environmental permit, where the consummation of the transaction contemplated
hereby would be prohibited or constitute an event of default, or grounds for
acceleration or termination, in the absence of such consent; and (ii) appoint a
designee of Purchaser, on the date hereof or as soon as practicable thereafter,
as an observer to the Board of Directors of Ness, to be given at least two days
prior written notice of every Ness Board of Director meeting, and be allowed to
be present at all portions of all Ness Board of Director meetings.
(c) Seller shall cause the Company and Ness to carry on its business in the
usual and ordinary course, consistent with past practices and shall use its
commercially reasonable efforts to preserve the each of Ness' and Company's
business and the goodwill of its customers, suppliers and others having business
relations with each of the Company and Ness and to retain the business
organization of each of the Company and Ness intact, including keeping available
the services of its present employees, representatives and agents, and to
maintain all of its properties in good operating condition and repair, ordinary
wear and tear excepted.
(d) Without the prior written consent of Purchaser, which shall not be
unreasonably withheld or unduly delayed, and without limiting the generality of
any other provision of this Agreement, Seller shall cause each of the Company
and Ness not to:
(i) amend the applicable Memorandum and Articles of Association;
(ii) make any change to the applicable authorized shares of stock,
or issue any shares of stock of any class or issue or become a party to any
subscriptions, warrants,
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rights, options, convertible securities or other agreements or commitments
of any character relating to the issued or unissued capital stock of Ness
or the Company, or to other equity securities of Ness or the Company, or
grant any stock appreciation or similar rights;
(iii) increase the compensation payable to any employee;
(iv) hire any new employee who shall have, or terminate, other than
for cause, the employment of any employee who has, an annual salary in
excess of $U.S. 50,000 (In the event any employee is terminated for cause,
Seller agrees to give Purchaser written notice upon the termination);
(v) adopt or amend any Employee Benefit Plan;
(vi) sell, transfer or otherwise dispose of any asset or property,
except for sales of inventory in the usual and ordinary course of business
and except for cash applied in payment of either Ness' or the Company's, as
the case may be, liabilities in the usual and ordinary course of business;
(vii) incur or commit to incur any capital expenditures in excess
of U.S. $20,000 in the aggregate;
(viii) incur, assume or guarantee any long-term or short-term
indebtedness, other than short term indebtedness incurred in the ordinary
course of business;
(ix) directly or indirectly, enter into or assume any contract,
agreement, obligation, lease, license or commitment other than in the usual
and ordinary course of business in accordance with past practices; and
(x) pay, declare, accrue or set aside any dividends or any other
distributions, in cash, property or otherwise, on its securities of any
class or purchase, exchange or redeem any of its securities of any class.
(e) Purchaser shall use commercially reasonable efforts to enter into an
underwriting agreement with L.H. Friend, Weinress, Frankson & Presson, Inc.
containing customary terms and conditions, have the SEC declare its S-1
Registration Statement for a public offering of its common stock ("Public
Offering") effective and close such Public Offering.
(f) No party shall intentionally perform any act which, if performed, or
omit to perform any act which, if omitted to be performed, would prevent or
excuse the performance of this Agreement by any party hereto or which would
result in any representation or warranty herein contained of said party being
untrue in any material respect as if originally made on and as of the Closing
Date.
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ARTICLE IV
Conditions to Closing
---------------------
4.1 Conditions to Seller's Obligations. The obligation of Seller to
close the transaction contemplated hereby is subject to the fulfillment of all
of the following conditions on or prior to the Closing Date, upon the non-
fulfillment of any of which, this Agreement may, at Seller's option, be
terminated pursuant to and with the effect set forth in Article VII:
(a) Each and every representation and warranty made by Purchaser shall have
been true and correct when made and shall be true and correct in all material
respects as if originally made on and as of the Closing Date.
(b) All obligations of Purchaser to be performed hereunder through, and
including on, the Closing Date (including, without limitation, all obligations
which Purchaser would be required to perform at the Closing if the transaction
contemplated hereby was consummated) shall have been performed.
(c) No suit, proceeding or investigation shall have been commenced or
threatened by any governmental authority or private person on any grounds to
restrain, enjoin or hinder, or to seek material damages on account of, the
consummation of the transaction contemplated hereby.
(d) The Foreign Investment Review Board shall have approved the
transactions contemplated by this Agreement in accordance with Exhibit F
attached hereto.
4.2 Conditions to Purchaser's Obligations. The obligation of Purchaser
to close the transaction contemplated hereby is subject to the fulfillment of
all of the following conditions on or prior to the Closing Date, upon the non-
fulfillment of any of which, this Agreement may, at Purchaser's option, be
terminated pursuant to and with the effect set forth in Article VII:
(a) Purchaser shall have thirty days from the date hereof to complete its
due diligence review of the Company and Ness to its sole satisfaction (the
"Review Period"), which review shall be conducted by officers and other
employees of Purchaser and Purchaser's attorneys, accountants and other
advisors. Seller shall deliver to Purchaser a final Disclosure Schedule not
later than five days prior to the end of the Review Period (the "Delivery
Date"). If the Disclosure Schedule is not delivered by the Delivery Date, the
Review Period shall be extended by a number of days equal to the actual number
of days after the Delivery Date that the Disclosure Schedule is delivered.
(b) Each and every representation and warranty made by Seller shall have
been true and correct when made and shall be true and correct in all material
respects as if originally made on and as of the Closing Date.
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(c) All obligations of Seller to be performed hereunder through, and
including on, the Closing Date (including, without limitation, all obligations
which Seller would be required to perform at the Closing if the transaction
contemplated hereby was consummated) shall have been performed.
(d) All of the consents referred to in Section 3.1(b) shall have been
obtained (without cost to Purchaser or the Company in excess of the normal and
customary cost associated therewith) or, to the extent the permits and
environmental permits held by either the Company or Ness would terminate upon a
change of control of the Company or Ness, as the case may be, Purchaser shall
have either obtained licenses and permits on substantially the same terms as
such permits and environmental permits, or shall have obtained binding
commitments from the applicable governmental authorities to issue such licenses
and permits to the Company or Ness, as the case may be, following the Closing.
(e) No suit, proceeding or investigation shall have been commenced or
threatened by any governmental authority or private person on any grounds to
restrain, enjoin or hinder, or to seek material damages on account of, the
consummation of the transaction contemplated hereby.
(f) Seller shall have delivered to Purchaser the written opinion of counsel
to Seller, dated as of the Closing Date, in a form reasonably satisfactory to
Purchaser and Purchaser's counsel.
(g) The SEC shall have declared an S-1 Registration Statement for a Public
Offering effective, and the closing of such Public Offering shall have occurred,
resulting in net proceeds to the Company in an amount not less than the sum of
the Cash Portion plus U.S. $6,000,000.
(h) The Foreign Investment Review Board shall have approved the
transactions contemplated by this Agreement in accordance with Exhibit F
attached hereto.
4.3 Casualty. If, prior to the Closing, any material damage to or loss
of any of the assets of or premises occupied by the Company or Ness occurs due
to fire, flood, riot, theft, Act of God or other casualty, which damage or loss
constitutes a material adverse change in the business, operations, assets,
liabilities, financial condition or prospects of the Company or Ness, and if the
parties can not agree on an amount by which to reduce the Purchase Price within
twenty business days from the date of such damage or loss, Purchaser shall, in
its sole discretion, have the right to terminate this Agreement. The adjustments
in accordance with this Section 4.3 are the exclusive adjustments to be made by
reason of such occurrence for the purposes of this Agreement.
ARTICLE V
Post-Closing Agreements
-----------------------
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5.1 Post-Closing Agreements. From and after the Closing, the parties
shall have the respective rights and obligations which are set forth in the
remainder of this Article V.
5.2 Disclosure of Confidential Information. As a further inducement for
Purchaser to enter into this Agreement, Seller agrees that for the longest
period permitted by law after the Closing Date, Seller shall, and shall cause
its Affiliates to, hold in strictest confidence, and not, without the prior
written approval of Purchaser, use for its own benefit or the benefit of any
party other than Purchaser or disclose to any person, firm or corporation other
than Purchaser (other than as required by law) any information of any kind
relating to the Company's or Ness' business, except such information as was
publicly available prior to the Closing Date.
5.3 Use of Trademarks. Seller shall not use and shall not license or
permit any third party to use, any name, slogan, logo or trademark which is
similar or deceptively similar to any of the names or trademarks used in
connection with the business of the Company or Ness.
5.4 Hiring Away Employees. For a period of two (2) years from the
Closing Date, Seller shall not take any actions which are calculated to persuade
any salaried, technical or professional employees, representatives or agents of
the Company or Ness to terminate their association with the Company or Ness, as
the case may be.
5.5 Covenant Not to Compete. As an inducement for Purchaser to enter
into this Agreement, Seller agrees that:
(a) from and after the Closing and continuing for the lesser of five (5)
years from the Closing Date or the longest time permitted by applicable law,
neither Seller nor any of its Affiliates shall do any one or more of the
following, directly or indirectly:
(i) engage or participate, anywhere in the continental United
States, New Zealand or Australia, as an owner, partner, shareholder,
consultant or (without limitation by the specific enumeration of the
foregoing) otherwise in any business which is
competitive with Ness' business, as conducted on the Closing Date or as
about to be conducted on the Closing Date; or
(ii) solicit any customer of Ness which has been a customer of Ness
or its Affiliates within the past two (2) years, to purchase from any
source other than Ness any product or service which could be supplied by
Ness;
(iii) disclosing or using to its advantage the name of any customer
of Ness or of Seller in relation to the business of the Company or Ness; or
(iv) disclosing or using to its advantage any Confidential
Information as defined herein about Ness and its businesses, for the
restraint period;
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For purposes of this Agreement, "Confidential Information" means all information
in any form (written, oral, photographic, electronic, magnetic, or otherwise),
including, without limitation: technical data; sales, marketing, business and
financial information and plans, pro forma financial statements and projections;
customer lists; internal memoranda; and correspondence.
(b) in the event of any breach of paragraph (a) the time period of the
breached covenant shall be extended for the period of such breach. Seller and
its Affiliates recognize that the territorial, time and scope limitations set
forth in this Section 5.5 are reasonable and are required for the protection of
Purchaser and in the event that any such territorial, time or scope limitation
is deemed to be unreasonable by a court of competent jurisdiction, Purchaser and
Seller agree to the reduction of either or any of said territorial, time or
scope limitations to such an area, period or scope as said court shall deem
reasonable under the circumstances.
5.6 Further Assurances. The parties shall execute such further
documents, and perform such further acts, as may be necessary to transfer and
convey the Shares to Purchaser on the terms and subject to the conditions herein
contained and to otherwise comply with the terms and conditions of this
Agreement.
5.7 Injunctive Relief. Seller specifically recognizes that any breach
of Sections 5.2, 5.3, 5.4 or 5.5 will cause irreparable injury to Purchaser and
that actual damages may be difficult to ascertain, and in any event, may be
inadequate. Accordingly (and without limiting the availability of legal or
equitable, including injunctive, remedies under any other provisions of this
Agreement), Seller agrees that in the event of any such breach, Purchaser shall
be entitled to injunctive relief in addition to such other legal and equitable
remedies that may be available. Seller and Purchaser recognize that the absence
of a time limitation in Section 5.2 is reasonable and properly required for the
protection of Purchaser and in the event that the absence of such limitation is
deemed to be unreasonable by a court of competent jurisdiction, Seller agrees
and submits to the imposition of such a limitation as said court shall deem
reasonable.
ARTICLE VI
Indemnification
---------------
6.1 General. From and after the Closing, the parties shall indemnify
each other as provided in this Article VI. No specifically enumerated
indemnification obligation with respect to a particular subject matter as set
forth below shall limit or affect the applicability of a more general
indemnification obligation as set forth below with respect to the same subject
matter.
6.2 Certain Definitions. As used in this Agreement, the following terms
shall have the indicated meanings:
(a) "Damages" shall mean all liabilities, demands, claims, actions or
causes of action, regulatory, legislative or judicial proceedings or
investigations, assessments, levies,
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losses, fines, penalties, damages, costs and expenses, net of any insurance
proceeds, damage recovery or tax benefits, including, without limitation, any
increased premiums, reasonable attorneys', accountants', investigators', and
experts' fees and expenses, sustained or incurred in connection with the defense
or investigation of any such claim;
(b) "Indemnified Party" shall mean a party hereto who is entitled to
indemnification from another party hereto pursuant to this Article VI;
(c) "Indemnifying Party" shall mean a party hereto who is required to
provide indemnification under this Article VI to another party hereto; and
(d) "Third Party Claims" shall mean any claims for Damages which are
asserted or threatened by a party other than the parties hereto, their
successors and permitted assigns, against any Indemnified Party or to which an
Indemnified Party is subject.
6.3 Indemnification Obligations of Seller. Seller shall indemnify, save
and keep harmless Purchaser and its successors and permitted assigns against and
from all Damages sustained or incurred by Purchaser resulting from or arising
out of or by virtue of:
(a) any inaccuracy in or breach of any representation and warranty made
by Seller in this Agreement; and
(b) any breach by Seller of, or failure by Seller to comply with, any of
its respective covenants or obligations under this Agreement (including, without
limitation, its respective obligations under this Article VI).
6.4 Purchaser's Indemnification Covenants. Purchaser shall indemnify,
save and keep harmless Seller and its successors and permitted assigns against
and from all Damages sustained or incurred by Seller resulting from or arising
out of or by virtue of:
(a) any inaccuracy in or breach of any representation and warranty made
by Purchaser in this Agreement or in related document;
(b) any breach by Purchaser of, or failure by Purchaser to comply with,
any of its respective covenants or obligations under this Agreement (including,
without limitation, its obligations under this Article VI); and
(c) any Third Party Claims or Damages that arise out of the Registration
Statement declared effective by the SEC or the Public Offering, other than Third
Party Claims or Damages that arise out of information provided by Seller or Paul
Brown, which Seller or Paul Brown have been advised by Purchaser or otherwise
reasonably believe based on the specific nature of such information will be
relied upon by Purchaser for inclusion in the Registration Statement.
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6.5 Limitation on Indemnification Obligations. (a) All representations
and warranties made by any party to this Agreement shall survive the Closing for
a period of twelve (12) months (the "Survival Period"). (b) (i) The Indemnified
Party shall only be entitled to indemnification pursuant to Article VI hereof
once such Indemnified Party's aggregate claims for indemnification exceed
seventy five thousand U.S. dollars (U.S. $75,000), but after such claims exceed
such amount, the Indemnified Party shall be entitled to seek indemnification for
all indemnification claims in excess of fifty thousand U.S. dollars (U.S.
$50,000) of Damages; and (ii) the indemnification obligations of each party
shall be limited to an amount equal to sixty-five percent (65%) of the Purchase
Price in the aggregate. No party shall be entitled to indemnification for
Damages arising from the breach of any representation or warranty if such party
had actual knowledge of such breach or inaccuracy prior to the Closing.
6.6 Cooperation. Subject to the provisions of Section 6.9, the
Indemnifying Party shall have the right, at its own expense, to participate in
the defense of any Third Party Claim, and if said right is exercised, the
parties shall cooperate in the investigation and defense of said Third Party
claim.
6.7 Subrogation. The Indemnifying Party shall not be entitled to
require that any action be brought against any other person before action is
brought against it hereunder by the Indemnified Party but shall be subrogated to
any right of action to the extent that it has paid or successfully defended
against any Third Party Claim.
6.8 Third Party Claims Subject to Indemnification.
(a) Promptly following the receipt of notice of a Third Party Claim, the
party receiving the notice of the Third Party Claim shall notify the other party
hereto of such Third Party Claim. The failure to give such notice shall not
relieve the Indemnifying Party of its obligations under this Agreement except to
the extent that the Indemnifying Party is prejudiced as a result of the failure
to give such notice. Within fifteen business days after receipt of the notice
by the Indemnifying Party pursuant to the preceding sentence, the Indemnifying
Party shall notify the Indemnified Party whether it elects to control the
defense of the Third Party Claim. If the Indemnifying Party elects to undertake
the defense of such Third Party Claim, it shall do so at its own expense with
counsel of its own choosing and it shall acknowledge in writing without
qualification its indemnification obligations as provided in this Agreement to
the Indemnified Party as to such Third Party Claim. If the Indemnifying Party
elects not to defend the Third Party Claim or fails to pursue such Third Party
Claim diligently, the Indemnified Party shall have the right to undertake,
conduct and control the defense of such Third Party Claim through counsel of its
own choosing. The party that litigates or contests the Third Party Claim shall
keep the other party fully advised of the progress and disposition of such
claim.
(b) In the event the Indemnifying Party elects not to undertake the
defense of the Third Party Claim or fails to pursue diligently the defense of
such a claim and the Indemnified
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Party litigates or otherwise contests or settles the Third Party Claim, then,
provided that a final determination has been made that the Indemnified Party is
entitled to indemnification hereunder, the Indemnifying Party shall promptly
reimburse the Indemnified Party for all amounts paid to settle such claim or all
amounts paid in satisfaction of a judgment against the Indemnified Party in
contesting such claim and in providing its right to indemnification hereunder,
all in accordance with the provisions of this Article VI.
(c) No Third Party Claim will be settled by the Indemnifying Party
without the consent of the Indemnified Party, which consent will not be
unreasonably withheld; provided, however, that if such claim asserts that the
Indemnifying Party is jointly and severally liable and the Indemnified Party
shall be fully released from all liability relating to such Third Party Claim in
connection with such settlement, the Indemnifying Party shall not be required to
obtain the consent of the Indemnified Party. If, however, the Indemnified Party
refuses to consent to a bona fide offered settlement which the Indemnifying
Party wishes to accept, the Indemnified Party may continue to pursue such Third
Party Claim free of any participation by the Indemnifying Party, at the sole
expense of the Indemnified Party. In such event, the Indemnifying Party shall
pay to the Indemnified Party the amount of the offer of settlement which the
Indemnified Party refused to accept, plus the costs and expenses incurred by the
Indemnified Party prior to the date the Indemnifying Party notifies the
Indemnified Party of the offer of settlement, all in accordance with the terms
of this Article VI, and, upon the payment or receipt of such amount, as the case
may be, the Indemnifying Party shall have no further liability with respect to
such Third Party Claim. The Indemnifying Party shall be entitled to recover
from the Indemnified Party any additional expenses incurred by such Indemnifying
Party as a result of the decision of the Indemnified Party to pursue the matter.
6.9 Third Party Claims Not Subject to Indemnification. Seller and
Purchaser shall cooperate with each other with respect to the defense of any
claims or litigation made or commenced by third parties subsequent to the
Closing Date which are not subject to the indemnification provisions contained
in this Article VI, provided that the party requesting cooperation shall
reimburse the other party for the other party's reasonable out-of-pocket costs
and expenses of furnishing such cooperation.
ARTICLE VII
Effect of Termination/Proceeding
--------------------------------
7.1 Right to Terminate. Anything to the contrary herein
notwithstanding, this Agreement and the transaction contemplated hereby may be
terminated at any time prior to the Closing by prompt notice given in accordance
with Section 8.3:
(a) by the mutual written consent of Purchaser and Seller; or
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(b) by either of such parties if the Closing shall not have occurred at or
before 11:59 p.m. on December 31, 1998; provided, however, that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
party whose failure to fulfill any material obligation under this Agreement has
been the cause of or resulted in the failure of the Closing to occur on or prior
to the aforesaid date; or
(c). by Purchaser in accordance with Section 4.3.
7.2 Remedies. In the event of a breach of this Agreement, the non-
breaching party shall not be limited to the remedy of termination of this
Agreement, but shall be entitled to pursue all available legal and equitable
rights and remedies, and shall be entitled to recover all of its reasonable
costs and expenses incurred in pursuing them (including, without limitation,
reasonable attorneys' fees).
ARTICLE VIII
Miscellaneous
-------------
8.1 Fees. Seller and Purchaser shall each be solely responsible for any
and all of their respective costs, fees and expenses, including, without
limitation, expenses of legal counsel, brokers, accountants, and other advisors,
incurred at any time in connection with pursuing or consummating the
transactions contemplated hereby.
8.2 Publicity. Press releases concerning this transaction shall be made
only with the prior agreement of Seller and Purchaser, provided however that
releases otherwise required by law or applicable stock exchange rules, may be
issued by Purchaser upon granting Seller a reasonable opportunity to review and
comment on such release.
8.3 Notices. All notices required or permitted to be given hereunder
shall be in writing and may be delivered by hand, by facsimile, or by
internationally recognized private courier. Notices delivered by hand by
facsimile, or by nationally recognized private carrier shall be deemed given on
the first business day following receipt; provided, however, that a notice
delivered by facsimile shall only be effective if such notice is also delivered
by hand, or deposited in the United States mail, postage prepaid, registered or
certified mail, on or before two (2) business days after its delivery by
facsimile. All notices shall be addressed as follows:
If to Seller:
c/o Paul Brown/International Home Security Investments Limited
c/o Alliance Investments S.A.M.
Le Panorama Bloc AB
57 Rue Grimaldi
MC 98000 MONACO
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Fax: 377 93 25 25 83
With a copy to:
Neal, Gerber and Eisenberg
Two North LaSalle
Suite 2200
Chicago, Illinois 60602
Attention: William Holzman, Esq.
Fax: 312-269-1747
If to Purchaser:
Home Security International, Inc.
77 Pacific Highway
Level 7
North Sydney, New South Wales 2060
Australia
Attention: Chief Financial Officer
Fax: 011-612-9936-2355
With a copy to:
D'Ancona & Pflaum
30 North LaSalle
Suite 2900
Chicago, Illinois 60602
Attention: Fernando Carranza, Esq.
Fax: (312) 580-0923
and/or to such other respective addresses and/or addressees as may be designated
by notice given in accordance with the provisions of this Section 8.3.
8.4 Transfer Taxes. Seller shall pay the cost of all sales, use, excise
and transfer taxes, which may be payable in connection with the transaction
contemplated hereby.
8.5 Arbitration. All disputes, differences, or questions arising out of
or relating to this Agreement, or the validity, interpretation, breach, or
violation or termination thereof, shall be finally and solely determined and
settled by arbitration in Chicago, Illinois in accordance with the rules of the
American Arbitration Association. Within twenty (20) days of Seller's and
Purchaser's failure to resolve a dispute pursuant to this Agreement, each of
Purchaser and Seller shall appoint one person to serve as an arbitrator;
provided, however, that neither Purchaser nor Seller shall appoint any person
that either Purchaser, Seller or their respective affiliates has had
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any material business dealings with at any time during the previous five (5)
year period from the date of appointment. The two arbitrators so appointed shall
mutually select the third arbitrator hereunder within ten (10) days of their
respective appointment. The three (3) arbitrators shall jointly resolve the
dispute within thirty (30) days after the appointment of the third arbitrator.
If either Purchaser or Seller has not properly appointed an arbitrator within
the time period above who meets the criteria set forth above, the arbitrator
properly appointed shall serve as the sole arbitrator to resolve the dispute
pursuant to the terms of this Agreement. The Arbitrators' determination as to a
dispute shall be final and binding on the parties hereto. The party deemed to be
at fault in arbitration shall pay all fees and expenses of the arbitration.
8.6 Entire Agreement. This Agreement and the instruments to be delivered by
the parties pursuant to the provisions hereof constitute the entire agreement
between the parties and shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives, successors and
permitted assigns. Each exhibit and schedule, shall be considered incorporated
into this Agreement. Any amendments, or alternative or supplementary provisions
to this Agreement must be made in writing and duly executed by an authorized
representative or agent of each of the parties hereto .
8.7 Survival; Non-Waiver. All representations and warranties shall survive
the Closing regardless of any investigation or lack of investigation by any of
the parties hereto. The failure in any one or more instances of a party to
insist upon performance of any of the terms, covenants or conditions of this
Agreement, to exercise any right or privilege in this Agreement conferred, or
the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as a subsequent waiver of
any such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party. A breach of any
representation, warranty or covenant shall not be affected by the fact that a
more general or more specific representation, warranty or covenant was not also
breached.
8.8 Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed to be an original, and all such counterparts shall
constitute but one instrument.
8.9 Severability. The invalidity of any provision of this Agreement or
portion of a provision shall not affect the validity of any other provision of
this Agreement or the remaining portion of the applicable provision.
8.10 Applicable Law. This Agreement shall be governed and controlled as to
validity, enforcement, interpretation, construction, effect and in all other
respects by the internal laws of the State of Delaware applicable to contracts
made in that State.
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8.11 Binding Effect; Benefit. This Agreement shall inure to the benefit of
and be binding upon the parties hereto, and their successors and permitted
assigns. Nothing in this Agreement, express or implied, is intended to confer on
any person other than the parties hereto, and their respective successors and
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
8.12 Assignability. This Agreement shall not be assignable by either party
without the prior written consent of the other party, except that after the
Closing, Purchaser may assign its rights and delegate its duties under this
Agreement to any third party. No such assignment shall relieve Purchaser of any
of its liabilities under this Agreement.
8.13 Amendments. This Agreement shall not be modified or amended except
pursuant to an instrument in writing executed and delivered on behalf of each of
the parties hereto.
8.14 Headings. The headings contained in this Agreement are for convenience
of reference only and shall not affect the meaning or interpretation of this
Agreement.
8.15 Representation. Each of the parties acknowledges that (i) each party
has had an opportunity to consult with independent legal counsel concerning the
terms of this Agreement before executing it; (ii) it fully understands all of
the terms and conditions of this Agreement; and (iii) it is entering into this
Agreement knowingly and voluntarily and without coercion, promises or
representations not expressly contained herein.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
INTERNATIONAL HOME SECURITY
INVESTMENTS LIMITED
By:____________________________________________
Its:____________________________________________
HOME SECURITY INTERNATIONAL, INC.
By:____________________________________________
Its:____________________________________________
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Exhibit F
Foreign Investment Review Board Approval
1 For the purpose of this Exhibit F unless contrary to or inconsistent with
the context:
"FIRB" means the Foreign Investment Review Board of the Commonwealth of
Australia.
"Notification" means notification pursuant to section 26 of the Takeovers
Act,
"Prohibition Date" means the date (if any) on which the Purchaser serves
the Seller with a copy of an order under the Takeovers Act prohibiting the
Purchaser from purchasing the Shares.
"Takeovers Act" means the Foreign Acquisition & Takeovers Act 1975 of the
Commonwealth of Australia.
"Treasurer" means the Treasurer of the Commonwealth of Australia.
2 If in the reasonable opinion of the Purchaser, the Purchaser is required to
seek the consent of the Treasurer to the acquisition of the Shares pursuant
to the Takeovers Act Closing is conditional on:
(a) the Treasurer having consented under the Takeovers Act to the purchase
by the Purchaser of the Shares. This consent ("FIRB Approval") will be
deemed to have been granted on the earlier of:
(I) the Purchaser receiving written notice from the Treasurer, (or
on his behalf), which is not subject to any condition which the
Purchaser considers in Its discretion to be unacceptable, to the
effect that there is no objection under the Takeovers Act to the
purchase of the Shares by the Purchaser;
(ii) the expiration of the period during which the Treasurer may make
an order under Part II of the Takeovers Act prohibiting the
purchase of the Shares by the Purchaser without any such order
having been made; or
(iii) if an Interim order prohibiting the purchase of the Shares by
the Purchaser has been made under section 22 of the Takeovers
Act, the expiration of the period provided under the Takeovers
Act for the making of a final order prohibiting the purchase
without any such final order having been made.
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3 The Purchaser must lodge no later than 5 days after the date of this
agreement Notification with FIRB for FIRB Approval which must comply with
the relevant requirements of the Takeovers Act and the regulations in force
under it. Immediately following lodgment of the Notification the Purchaser
must give written confirmation of the details of the lodgment to Seller.
4 The Purchaser must use its reasonable endeavors to pursue and obtain the
FIRB Approval as promptly as possible and must expeditiously respond to any
requests by FIRB for Information.
5 Seller agrees to use all reasonable endeavors, at the written request of
the Purchaser, to assist the Purchaser in obtaining the FIRB Approval.
6 The Purchaser must:
(a) keep Seller informed as to the progress in relation to the
Notification and as to the date of the FIRB Approval or the
Prohibition Date (if either occurs); and
(b) immediately after the FIRB Approval or the Prohibition Date occurs (as
the case may be) notify Seller in writing specifying whether the FIRB
Approval or the Prohibition Date has occurred and also provide copies
of all relevant correspondence, notices and orders in relation to it,
7 The service by the Purchaser of notice on Seller specifying that the
Prohibition Date has occurred will have the effect of immediately
rescinding this Agreement and:
(a) neither party will have any further rights or obligations pursuant to
this agreement except in relation to any antecedent breach of this
agreement; and
(b) any amount paid by the Purchaser to Seller must be refunded to the
Purchaser.
8 If neither the Prohibition Date nor the FIRB Approval has occurred within
42 days from the date of this agreement, then either party will be entitled
at any time prior to the occurrence of the first of those dates by written
notice to the other party to rescind this agreement and clause X.7 will
apply.
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Exhibit 21.1
List of Subsidiaries of Home Security
International, Inc.
1. FAI Home Security Pty Ltd., incorporated in Australia on August 13, 1990.
2. FAI Home Security (ENZED) Ltd., incorporated in Auckland, New Zealand on
April 24, 1997.
3. FAI Finance Corporation Pty Ltd., incorporated in New South Wales,
Australia on October 15, 1991, a 50% subsidiary of the Company.
4. FAI Finance Corporation (NZ) Ltd., incorporated in Auckland, New Zealand
on May 23, 1996, a 50% subsidiary of the Company.
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Exhibit 23.2
ARTHUR
ANDERSEN
Official Financial, Taxation and
Business Consulting Advisor to
the 2000 Olympic Games
----------------------------
17 July 1998 Arthur Andersen
A Member Firm of
Andersen Worldwide SC
----------------------------
The Board of Directors
Home Security International, Inc. 141 Walker Street
Level 7 North Sydney NSW 2060
77 Pacific Highway GPO Box 4329 Sydney NSW 2001
NORTH SYDNEY NSW 2060 02 9964 6000
02 9922 2065 Fax
DX No 1340 Sydney
Dear Sirs
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made as part of this Form S-1
registration for Home Security International, Inc.
Yours faithfully
/s/ Arthur Andersen
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Exhibit 23.3
July 17, 1998
I, Paul Brown, hereby consent to the use of my name in the Registration
Statement on Form S-1 for Home Security International, Inc. and any amendment
thereto, as necessary, as a Prospective Director.
/s/ Paul Brown
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Paul Brown
