<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1999
Registration No.333-59421
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Pre-Effective
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
HOME SECURITY INTERNATIONAL, INC.
(Name of Registrant in its Charter)
Delaware 1731 98-0169495
(State or jurisdiction 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)
111 E. Wacker Drive #2800
Chicago, Illinois 60601-4205
(312) 602-2000
(Name, address and telephone number of agent for service)
Copies to:
Arthur Don, Esq.
Fernando R. Carranza, Esq.
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
(312) 602-2000
FAX (312) 602-3000
---------------
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [X]
CALCULATION OF REGISTRATION FEE
<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(2) per unit(1) price(1) fee(3)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock................ 2,150,000 $9.5625 $20,559,375 $5,716
=====================================================================================
</TABLE>
(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 February 4,
1999.
(2) All shares to be sold by the Selling Shareholder.
(3) Includes $4,522 credit for registration fee paid with the initial S-1 filing
dated July 20, 1998, Registration No. 333-59421.
---------------
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.
================================================================================
<PAGE>
SUBJECT TO COMPLETION DATED FEBRUARY 9, 1999
PROSPECTUS
2,150,000 Shares
LOGO
Home Security International, Inc.
Common Stock
This Prospectus relates to the offer and sale by FAI Home Security Holdings
Pty Ltd. ("FAI" or "Selling Shareholder") of up to 2,150,000 shares (the
"Shares") of Common Stock, $.001 par value, of Home Security International,
Inc. ("Company"). The Shares may be offered by the Selling Shareholder in
transactions on the American Stock Exchange or such other markets upon which the
Company may from time to time list its shares of Common Stock, in privately
negotiated transactions, or by a combination of such methods of sale, at fixed
prices that may be changed, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. See
"Plan of Distribution." Pursuant to a Registration Rights Agreement the Selling
Shareholder shall, for a period of twelve (12) months following the effective
date of this Prospectus, have the ability to sell up to 25% of its holdings in
the Company during any ensuing three month period. Thereafter the Selling
Shareholder will have the ability to sell its entire interest in the Company.
See "Certain Transactions--Transactions with FAI Insurances." The shares of
Common Stock of the Company are traded on the American Stock Exchange under the
symbol "HSI." On February 4, 1999, the last reported sale price for the Common
Stock on the American Stock Exchange was $9.750 per share. See "Price Range of
Common Stock." The Company will receive none of the proceeds from the sale of
the Shares by the Selling Shareholder. See "Use of Proceeds."
-----------
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.
THE 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.
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING NOT CONTAINED IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY SELLING SHAREHOLDER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY OF
THE SECURITIES OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE OF THE SECURITIES MADE UNDER THIS PROSPECTUS SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS OR THAT THE
INFORMATION CONTAINED HEREIN OR THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN
ARE CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
<PAGE>
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary .............................. 1
Risk Factors .................................... 5
Use of Proceeds ................................. 11
Dividend Policy ................................. 11
Price Range of Common Stock ..................... 11
Capitalization .................................. 12
Selected Financial Data ......................... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 15
Business ........................................ 23
Management ...................................... 35
Certain Transactions ............................ 40
Principal Shareholders .......................... 43
Description of Securities ....................... 45
Shares Eligible for Future Sale ................. 47
Plan of Distribution ............................ 48
Legal Matters ................................... 49
Experts ......................................... 49
Additional Information .......................... 49
Certain Forward-Looking Statements .............. 50
Index to Financial Statements ................... F-1
=====================================================
<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. 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, which 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, a smoke alarm/detector, a fire extinguisher, and a fire blanket. In
order to capitalize on its base of customers with installed SecurityGuard
Systems (which the Company believes to be approximately 197,000, which
constitutes the number of units sold since the Company's inception), 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 SecurityGuard System 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 malls 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 their 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 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 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, was the financing source for approximately 74% of
the financed sales of the SecurityGuard System to end users in Australia and
New Zealand for the fiscal year ended June 30, 1998, which constituted 56% of
all sales of the SecurityGuard System in Australia and New Zealand during that
period. 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"), (see
"Business--Strategic Acquisitions"). Further, pursuant to a Deed of Variation
executed February 7, 1999, the Company agreed to make an accelerated payment on
the FFC Note in the amount of $500,000 in exchange for FAI Insurances' waiver
of the FFC Note Payment as regards to the Ness Transaction. See "Certain
Transactions--Transactions with FAI Insurances". 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 FFC's retained earnings and 50% of the net change in
FFC's capital reserves 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, as
amended on October 1, 1998, ("Stock Purchase Agreement"), whereby the Company
purchased 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. The
purchase price for all of the issued and outstanding common stock of IIHSL
consisted of the following: (i) 400,000 shares of Common Stock, (ii) a five year
convertible warrant to purchase 360,000 shares of Common Stock at an exercise
price of $13.00 (the "Ness Warrants"), (iii) cash in the amount of $2,426,000
($126,000 paid concurrent with the execution of the Stock Purchase Agreement and
$2,300,000 paid on the closing of the Ness Transaction); and (iv) a promissory
note, secured by the IIHSL shares, in the amount of $9,098,000, payable in
installments of $400,000 on each of June 30, 1999 and December 31, 1999,
respectively, with the balance of the note due on June 30, 2000 ("Ness Note").
The Company is currently negotiating the purchase of the additional 24.96% of
Ness. See "Business--Strategic Acquisitions."
3
<PAGE>
Summary Selected Financial Data
Summary Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Pro Forma
Years Ended June 30, September 30, Three Months
------------------------------------------------- ------------------- Ended
1994 1995 1996 1997 1998 1997 1998 September 30, 1998(1)
------- ------- ------- -------- -------- -------- -------- ---------------------
(in thousands, except per share and unit sales data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $10,629 $21,437 $26,701 $ 33,465 $ 44,119 $ 11,049 $ 10,226 $ 12,777
Gross profit............ 3,901 7,218 9,116 9,191 17,824 4,723 4,364 6,456
Income (Loss) from
operations............. (54) 2,127 2,510 3,138 7,014 2,224 2,457 2,140
Interest income, net.... 5 65 203 784 226 90 17 (146)
Net income (loss)....... (74) 1,470 1,659 2,292 5,381 1,435 1,605 1,678
Diluted net income per
share of Common
Stock.................. $ 0.51 $ 1.04 $ 0.28 $ 0.31 $ 0.30
Diluted weighted average
shares of Common Stock
outstanding(3)......... 4,500 5,182 5,095 5,162 5,562
Unit Sales Data:(2)
Unit sales.............. 12,235 25,280 31,669 38,071 57,589 13,354 14,949 14,949
Cumulative unit sales... 29,182 54,462 86,131 124,202 181,791 137,556 196,740 196,740
</TABLE>
Summary Balance Sheet Data:
<TABLE>
<CAPTION>
As of
As of June 30, September 30, Pro Forma as of
--------------------------------------------- ----------------- September 30, 1998
1994 1995 1996 1997 1998 1997 1998 As Adjusted(1)
------ ------ ------- ------- ------- ------- ------- ---------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ 247 $1,230 $ 370 $ - $ 7,006 $ 6,351 $ 6,348 $ 3,876
Working capital (deficit)............... (1) 1,684 3,451 (1,754) 3,120 3,509 4,647 4,788
Total assets............................ 2,281 7,671 13,384 15,957 30,485 21,789 30,984 49,617
Total debt, including current portion... 557 - - - 4,737 - 4,516 13,119
Shareholders' equity.................... 369 3,912 9,894 9,790 18,098 14,728 19,503 24,107
</TABLE>
- --------
(1) Gives effect to the Ness Transaction as if it had occurred at the beginning
of the period.
(2) 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.
(3) 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 transaction listed in Note 1 above.
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 addition to the other information in the Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before making an investment in the shares.
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 international
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 fiscal year ended June 30, 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 .6192 on June 30,
1998 and as of September 30, 1998 was valued at 0.5904 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 fiscal year ended June 30,
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 were settled on June 26, 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 acquisition of
Ness 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, June 30, 1997 and June 30, 1998
accounted for approximately 95%, 94%, 94% and 87%, 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 Selling Shareholder. The proceeds from this Offering will be
received in total by the Selling Shareholder, which currently holds a 38.7%
interest in the Company. Pursuant to a Registration Rights Agreement entered
into between the Selling Shareholder and the Company, for a period of twelve
(12) months following the effective date of this Prospectus, FAI will have the
ability to sell up to 25% of its holdings in the Company during any ensuing 3
month period. Thereafter the Selling Shareholder will have the ability to sell
its entire interest in the Company. See "Certain Transactions--Transactions with
FAI Insurances".
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".
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 has issued 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 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 did 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, including the Selling Shareholder, or by existing holders of
outstanding options and warrants, under Rule 144 of the Act, pursuant to the
exercise of registration rights (including the Registration Rights Agreement
entered into between the Selling Stockholder and the Company dated February 7,
1999, see "Certain Transactions--Tranactions with FAI Issuances") 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.
10
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Shares of Common
Stock sold by the Selling Shareholder.
DIVIDEND POLICY
Except for a final dividend distribution to FAI Insurances made prior to the
initial public offering ("IPO") of approximately $5.9 million (including a
partial return of capital of approximately $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. See "Certain Transactions--
Transactions with FAI Insurances".
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 June 30, 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
</TABLE>
<TABLE>
<CAPTION>
Fiscal June 30, 1999
--------------------
<S> <C> <C>
First Quarter (July 1-September 30)...................... 13.000 8.375
Second Quarter (October 1-December 31)................... 11.250 7.500
</TABLE>
On February 4, 1999, the last reported sale price of the Common Stock as
reported by the American Stock Exchange was $9.750. 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.
11
<PAGE>
CAPITALIZATION
The following table sets the capitalization of the Company as of September 30,
1998 as adjusted to reflect 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 financial statements, the notes thereto
included elsewhere in this Registration Statement.
<TABLE>
<CAPTION>
September 30, 1998
---------------------
Adjusted for
the Ness
Actual Acquisition
------- ------------
<S> <C> <C>
Total Debt (1)......................................... $ 4,517 $ 13,120
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, 5,550,500
as adjusted for the 400,000 shares of
Common Stock issued pursuant to the
Ness Transaction (2)................................ 5 6
Additional Paid in Capital(3).......................... 16,111 20,715
Secured Note........................................... (2,375) (2,375)
Foreign Currency Translation Reserve................... (1,178) (1,178)
Retained Earnings...................................... 6,939 6,939
------- -------
Total Shareholders' Equity......................... 19,502 24,107
------- -------
Total Capitalization............................... $24,019 $37,227
======= =======
</TABLE>
- --------
(1) Represents the current and long-term debt of the Company. Pursuant to the
Ness Transaction the Company issued a promissory note, secured by the IIHSL
Shares, in the amount of $9,098,000 (discounted to $8,603,000 for financial
reporting purposes), payable in installments of $400,000 on each of June 30,
1999 and December 31, 1999, with the balance of the note due on June 30,
2000. If any portion of the principal amount of the Note is still
outstanding on October 1, 1999, the Company shall issue an additional five
year warrant to purchase 200,000 shares of HSI Common Stock at an exercise
price of $13.00 per share. Likewise, if any portion of the principal amount
of the Note is still outstanding on January 1, 2000, the Company shall issue
an additional five year warrant to purchase 200,000 shares of HSI common
stock at an exercise price of $13.00 per share.
(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 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 exercise of
the IPO Warrants, at an exercise price of $16.50 per share, (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.
12
<PAGE>
SELECTED FINANCIAL DATA
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, 1994, 1995, 1996, 1997 and 1998 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 three month
period ended September 30, 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 three months ended September 30, 1998 is unaudited, and has been derived
from the financial data of the Company after giving effect to the Ness
Transaction as though it had occurred at the beginning of such period. See "Pro
forma financial Statements".
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Pro Forma
Years Ended June 30, September 30, Three Months Ended
----------------------------------------------- ------------------ September 30, 1998
1994 1995 1996 1997 1998 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............... $10,629 $ 21,437 $ 26,701 $ 33,465 $ 44,119 $ 11,049 $ 10,226 $12,777
Cost of goods sold...... (6,728) (14,219) (17,585) (24,274) (26,295) (6,326) (5,862) (6,321)
------- -------- -------- -------- -------- -------- -------- -------
Gross profit............ 3,901 7,218 9,116 9,191 17,824 4,723 4,364 6,456
General and
administrative
expenses............... (3,955) (5,091) (6,606) (6,053) (10,810) (2,499) (1,907) (3,316)
------- -------- -------- -------- -------- -------- -------- ------
Income (Loss) from
operations............. (54) 2,127 2,510 3,138 7,014 2,224 2,457 3,140
Interest income (cost),
net.................... 5 65 203 784 226 90 17 (146)
------- -------- -------- -------- -------- -------- -------- ------
Income (Loss) before
taxes, equity in income
of affiliated companies
and minority interest.. (49) 2,192 2,713 3,922 7,240 2,314 2,474 2,994
Income tax expense...... (25) (722) (1,054) (1,630) (2,111) (879) (917) (1,242)
------- -------- -------- -------- -------- -------- -------- ------
Income (Loss) before
equity in income of
affiliated companies
and minority interest
See R (1).............. (74) 1,470 1,659 2,292 5,129 1,435 1,557 1,752
Equity in income of
affiliated companies... -- -- -- -- 252 -- 48 48
Minority Interest....... -- -- -- -- -- -- -- (122)
------- -------- -------- -------- -------- -------- -------- ------
Net income (loss)....... $ (74) $ 1,470 $ 1,659 $ 2,292 $ 5,381 $ 1,435 $ 1,605 $1,678
======= ======== ======== ======== ======== ======== ======== ======
Diluted net income per
share of Common
Stock(3)............... $ 0.51 $ 1.04 $ 0.28 $ 0.31 $ 0.30
======== ======== ======== ======== ======
Diluted weighted average
shares of Common Stock
outstanding(3)......... 4,500 5,182 5,095 5,162 5,562
Unit Sales Data:(2)
Unit sales.............. 12,235 25,280 31,669 38,071 57,589 13,354 14,949 14,949
Cumulative unit sales... 29,182 54,462 86,131 124,202 181,791 137,556 196,740 196,740
</TABLE>
- --------
(1) Gives effect to the Ness Transaction as if it had occurred at the beginning
of the period.
(2) 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.
(3) 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.
13
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
As of June 30, As of September 30, Pro Forma as of
--------------------------------------- -------------------- September 30, 1998
1994 1995 1996 1997 1998 1997 1998 As Adjusted(1)
------ ------ ------- ------- ------- ------- ------- ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 247 $1,230 $ 370 $ -- $ 7,006 $ 6,351 $ 6,348 $ 3,876
Working capital
(deficit).............. (1) 1,684 3,451 (1,754) 3,120 3,509 4,647 4,788
Total assets............ 2,281 7,671 13,384 15,957 30,485 21,789 30,984 49,617
Total debt, including
current portion........ 557 -- -- -- 4,737 -- 4,516 13,120
Shareholders' equity.... 369 3,912 9,894 9,790 18,098 14,728 19,503 24,107
</TABLE>
14
<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. Because of fluctuations in the values of
15
<PAGE>
currencies in which the Company receives revenues against the U.S. dollar, the
Company believes that period to period comparisons of reported financial
results, may not fully reflect sales and other operating trends for the periods
compared.
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 were settled on June 26, 1998. For the
fiscal year ended June 30, 1998 the Company recorded a gain of $355,000 on its
derivatives. As of September 30, 1998 the Company had no outstanding derivative
contracts.
Year 2000 disclosure
The Company is currently in the process of evaluating its information
technology infrastructure ("ITI") for Year 2000 compliance. In this regard, the
Company has identified three (3) areas of exposure. First, the Company's
operating environment, which includes the following: software, hardware, and the
remaining infrastructure. The software and hardware exposures have been
identified as either "mission critical" or "non-mission critical". Mission
critical software includes the Company's accounting package, customer databases,
and operating systems, including Windows 95 and Windows NT. The Company is
presently undergoing a review process with regard to mission critical software.
The Company expects to achieve Year 2000 compliance for all mission critical
software by early 1999, and anticipates that the costs to achieve compliance
will not have a material impact on the financial condition or results of
operations of the Company. Mission critical hardware encompasses the data
communication infrastructure and all server end hardware. The Company has
employed an external information technology firm to review its mission critical
hardware and provide an analysis of the Company's potential risks, and
alternatives to ensure Year 2000 compliance. Such review is in its last stages,
and the Company expects to achieve Year 2000 compliance for its mission critical
hardware by the end of 1998. All non-mission critical software and hardware and
all of the remaining infrastructure will be evaluated in early 1999. Second, all
major vendors have begun to be contacted in writing, with a request to supply a
response in writing, which confirms the services or products they supply are
Year 2000 compliant. In this regard, the Company has obtained confirmation from
Ness that the SecurityGuard System is Year 2000 compliant. The Company has also
adopted a policy requiring written confirmation of Year 2000 compliance from any
prospective vendor. Last, the Company will ensure all subsidiaries, including
each of FFC and Ness, implement the above strategies to ensure Year 2000
compliance. Additionally, FFC is currently involved in a joint project with FAI
General Insurance Company Limited ("FAI General"), a subsidiary of FAI
Insurances, to identify, categorize and if necessary, update, all software and
hardware components to ensure Year 2000 compliance. FFC has obtained
confirmation from the vendor of its financial database package, that such
software is Year 2000 compliant. Furthermore, in regards to Ness, the Company
has begun to utilize the same internal and external resources identified above,
to test the manufacturing infrastructure of Ness for Year 2000 compliance. If
necessary, the Company will reprogram or replace any non-compliant manufacturing
equipment. The Company does not expect that the cost, if any, to modify any of
its or its subsidiaries ITI and/or other infrastructures, in order to ensure
Year 2000 compliance will have a material impact on its financial condition or
results of operations. This statement is a Year 2000 Readiness disclosure
entitled to protection as provided in the Year 2000 Information and Readiness
Disclosure Act.
16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
-------------------- ------------------
1996 1997 1998 1997 1998
----- ----- ------ ----- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............................. 65.9% 72.5% 59.6% 57.3% 57.3%
----- ----- ----- ----- -----
Gross profit.................................... 34.1% 27.5% 40.4% 42.7% 42.7%
General and administrative expenses............. 24.7% 18.1% 24.5% 22.6% 18.6%
----- ----- ----- ----- -----
Income from operations.......................... 9.4% 9.4% 15.9% 20.1% 24.0%
Interest income, net............................ 0.8% 2.3% 0.5% 0.8% 0.2%
----- ----- ----- ----- -----
Income before income taxes, equity in income of
affiliated companies........................... 10.2% 11.7% 16.4% 20.9% 24.2%
Income tax expense.............................. 4.0% 4.9% 4.8% 8.0% 9.0%
----- ----- ----- ----- -----
Income (Loss) before equity in income of
affiliated companies........................... 6.2% 6.8% 11.6% 13.0% 15.2%
Equity in income of affiliated companies........ -- -- .6 -- .5
----- ----- ----- ----- -----
Net income...................................... 6.2% 6.8% 12.2% 13.0% 15.7%
</TABLE>
Comparison of three months ended September 30, 1998 and September 30, 1997.
Net Sales: Net sales decreased by $0.8 million or 7% from $11.0 million for
the three months ended September 30, 1997 to $10.2 million for the three months
ended September 30, 1998. The decrease in net sales was primarily due to the
decline in the value of the Australian Dollar ("AUD") against the U.S. dollar.
The value of the AUD against the USD declined from an average conversion rate of
0.7328 for the three months ended September 30, 1997 to 0.5858 for the three
months ended September 30, 1998. Australian net sales denominated in local
currency increased by 16% for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997. The increase denominated
in local currency was attributable to a 19% increase in unit sales in Australia
from 9,348 units for the three months ended September 30, 1997 to 11,092 units
for the three months ended September 30, 1998.
Net sales for the European, South African and North American markets increased
$0.8 million or 72% from $1.1 million for the three months ended September 30,
1997 to $1.9 million for the three months ended September 30, 1998. This
increase was primarily attributable to a 49% increase in unit sales in the
European, South African and North American markets from 1,517 units for the
three months ended September 30, 1997 to 2,256 units for the three months ended
September 30, 1998.
Cost of Goods Sold: Cost of goods sold decreased by $0.4 million from $6.3
million to $5.9 million. This reduction is primarily due to the decline in the
value of the AUD and NZD against the U.S. dollar. As a percentage of net sales,
cost of goods sold remained stable at 57.3% for the three months ended September
30, 1997 and 1998, respectively.
General and Administrative Expenses: General and administrative expenses were
$1.9 million for the three months ended September 30, 1998, compared to $2.5
million for the three months ended September 30, 1997. Total general and
administrative expenses, as a percentage of net sales, decreased to 18.6% for
the three months ended September 30, 1998 compared to 22.6% for the three months
ended September 30, 1997. The reduction in general and administrative expenses
as a percentage of net sales was primarily due to the following factors: (i) a
10% reduction in overheads within the Australian operations from AUD$2.52
million for the three months ended September 30, 1997 to AUD$2.27 million for
the three months ended September 30, 1998; and (ii) general and
administrative expenses for the European, South African and North American
operations remained stable at $0.4 million for the three months ended September
30, 1997 and 1998 respectively despite an increase in net sales of 72% for the
same periods.
Income From Operations: Income from operations increased 14% from $2.2 million
for the three months ended September 30, 1997 to $2.5 million for the three
months ended September 30, 1998.
Interest Income: Interest income remained stable at $0.1 million for the three
months ended September 30, 1997 and 1998, respectively.
Interest Expense: Interest expense for the three months ended September 30,
1998 was $100,000. This included interest payments of $99,000 to FAI Insurances
pursuant to the FFC Note. There was no interest expense for the three months
ended September 30, 1997.
Income Tax Expense: The effective rate of tax decreased from 38% for the three
months ended September 30, 1997 to 37% for the three months ended September 30,
1998. This reduction is primarily attributable to the increase in 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 three months ended September 30, 1998 was $48,000. This was calculated by
taking the Company's 50% share of FFC's net income of $222,000 for the three
months ended September 30, 1998 and deducting amortization of goodwill for the
same period of $174,000. There was no equity in income of affiliates for the
three months ended September 30, 1997 as the FFC Transaction took place on
December 31, 1997.
Net Income: Net income increased 14% from $1.4 million for the three months
ended September 30, 1997 to $1.6 million for the three months ended September
30, 1998.
Comparison of fiscal years ended June 30, 1998 and June 30, 1997.
Net Sales: Net sales increased by $10.6 million or 32% from $33.5 million
for the fiscal year ended June 30, 1997 to $44.1 million for the fiscal year
ended June 30, 1998. The increase in net sales was primarily due to the
following factors: (i) a 19% increase in net sales in the Australia and New
Zealand markets, from $32.8 million for the fiscal year ended June 30, 1997 to
$39.0 million for the fiscal year ended June 30, 1998, which was attributable
to a 36% increase in unit sales in Australia and New Zealand from 36,892 units
for the fiscal year ended June 30, 1997 to 50,081 units for the fiscal year
ended June 30, 1998; and (ii) the inclusion in the fiscal year ended June 30,
1998 of $5.1 million from the European, South African and North American
markets, including $3.4 million for the nine months ended March 31, 1998,
which were not part of the Company's results for the nine months ended March
31, 1997. Unit sales in these markets for the fiscal year ended June 30, 1998
were 7,508 units compared to 2,649 units for the fiscal year ended June 30,
1997, an increase of 183%. Sales during the nine months ended March 31, 1997
of 1,618 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".
Cost of Goods Sold: Cost of goods sold increased by $2.0 million from $24.3
million to $26.3 million. This represented a decrease, as a percentage of net
sales, from 73% to 60% for the fiscal years ended June 30, 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
fiscal year ended June 30, 1997. As adjusted to exclude this related party
royalty charge of $3.6 million, cost of goods for the fiscal year ended June
30, 1997 would have been $20.6 million, which was 62% of revenues. This
reduction from 62% to 60% was due primarily to a change in the Chief Executive
Officer's compensation package, from a commission basis (recorded in cost of
17
<PAGE>
goods sold) for the fiscal year ended June 30, 1997, to a base salary plus 10%
of net profit after tax (recorded in general and administrative expenses) for
the fiscal year ended June 30, 1998.
Management Fees Received--Related Party: Management fees received from a
related party for the fiscal year ended June 30, 1997 comprises management fee
income totaling $0.6 million, which for the fiscal year ended June 30, 1998,
is eliminated as an intercompany transaction.
General and Administrative Expenses: General and administrative expenses
were $10.8 million for the fiscal year ended June 30, 1998, compared to $6.6
million for the fiscal year ended June 30, 1997. General and administrative
expenses for the fiscal year ended June 30, 1998, however, included $2.3
million of expenses relating to the European, North American and South African
operations, which were only part of the Company's operations for the three
months ended June 30, 1997. Included in the $2.3 million is a provision of
$0.4 million due to delays in the product approval process in Belgium and a
$0.3 million charge was expensed in relation to the establishment of the U.S.
market. General and administrative expense also included an offsetting gain of
$0.4 million resulting from the settlement of its derivative contracts. Total
general and administrative expenses, as a percentage of net sales (as adjusted
to exclude the management fee income of $0.6 million received from a related
party in the 1997 period) increased to 24.5% for the fiscal year ended June
30, 1998 compared to 19.7% for the fiscal year ended June 30, 1997. The re-
classification of the Chief Executive Officer's compensation package resulted
in an increase of $1.3 million or 2.9% as a percentage of net sales for the
fiscal year ended June 30, 1998 as compared to the fiscal year ended June 30,
1997.
Income From Operations: Net income from operations increased from $3.1
million for the fiscal year ended June 30, 1997 to $7.0 million for the fiscal
year ended June 30, 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 $0.9 million from $6.1 million for the fiscal year ended June 30,
1997 compared to $7.0 million for the fiscal year ended June 30, 1998.
Interest Income: Interest income decreased from $837,000 for the fiscal year
ended June 30, 1997 to $450,000 for the fiscal year ended June 30, 1998.
However, the fiscal year ended June 30, 1997 included related party interest
income of $756,000. Excluding interest income received from related parties
for the fiscal year ended June 30, 1997, interest income increased from
$82,000 to $450,000 for the fiscal years ended June 30, 1997 and 1998
respectively. The increase during the 1998 period was attributable to higher
cash balances.
Interest Expense: Interest expense for the fiscal year ended June 30, 1998
was $225,000. This included interest payments of $217,000 to FAI Insurances
pursuant to the FFC Note. For the fiscal year ended June 30, 1997 there was no
interest expense for the Company.
Income Tax Expense: The effective rate of tax decreased from 42% for the
fiscal year ended June 30, 1997 to 29% for the fiscal year ended June 30,
1998. This reduction is primarily attributable to the following factors: (i)
the introduction of income earned in the United Kingdom, South Africa and
Canada all of which have lower tax rates than Australia; and (ii) the purchase
by the Company, on June 30, 1998, of a 49% interest in a partnership that has
entered into an agreement with Prime Life Corporation to acquire a retirement
village in Melbourne, Australia. The investment in the partnership provided
the Company with a one-time tax deduction with a permanent difference for tax
purposes of $1.7 million for the fiscal year ended June 30, 1998.
Equity in Income of Affiliated Companies: Equity in income of affiliates for
the fiscal year ended June 30, 1998 was $252,000. This was calculated by
taking the Company's 50% share of FFC's net income of $414,000 for the six
months ended June 30, 1998 and deducting amortization of goodwill for the same
period of $161,000. There was no equity in income of affiliates for the fiscal
year ended June 30, 1997 as the FFC Transaction took place on December 31,
1997.
Net Income: Net income increased from $2.3 million for the fiscal year ended
June 30, 1997 to $5.4 million for the fiscal year ended June 30, 1998.
However, as described above, the fiscal year ended June 30, 1997
18
<PAGE>
included related party charges of $3.6 million in royalty payments, interest
income of $0.8 million and management fee income of $0.6 million. As adjusted
to exclude these related party charges and interest income, net income
increased 42% from $3.8 million for the fiscal year ended June 30, 1997 to
$5.4 million for the fiscal year ended June 30, 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".
19
<PAGE>
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.
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.
20
<PAGE>
Effective October 1, 1998, the Company executed an amendment to the Stock
Purchase Agreement, dated as of July 17, 1998, ("Stock Purchase Agreement")
through which the Company acquired 100% of the issued and outstanding stock (the
"IIHSL Shares") of IIHSL. Pursuant to the Stock Purchase Agreement, the Company
paid aggregate consideration consisting of: (i) 400,000 shares of the Company's
common stock, $.001 par value per share ("HSI Common Stock"); (ii) five year
convertible warrants to purchase 360,000 shares of HSI Common Stock at an
exercise price of $13.00 per share; (iii) cash in the amount of $2,426,000
($126,000 paid concurrent with the execution of the Purchase Agreement and
$2,300,000 to be paid upon closing of the Transaction); (iv) a promissory note,
secured by the IIHSL Shares, in the amount of $9,098,000, payable in
installments of $400,000 on each of June 30, 1999 and December 31, 1999, with
the balance of the note due on June 30, 2000 ("Ness Note"); and, (v) a non-
refundable re-negotiation fee of $200,000. If any portion of the principal
amount of the Ness Note is still outstanding on October 1, 1999, the Company
shall issue an additional five year warrant to purchase 200,000 shares of HSI
Common Stock at an exercise price of $13.00 per share. Likewise, if any portion
of the principal amount of the Note is still outstanding on January 1, 2000, the
Company shall issue an additional five year warrant to purchase 200,000 shares
of HSI common stock at an exercise price of $13.00 per share.
Cashflow from operations decreased from $1.4 million for the three months
ended September 30, 1997 to $0.2 million for the three months ended September
30, 1998. The decrease in cash flow provided by operations was attributable to
(i) early repayment of creditors within the European, South African and North
American operations. Early repayment of creditors enabled these operations to
reduce the cost of inventories by taking advantage of favorable exchange rates,
and (ii) capitalization in prepayments and other assets of (a) costs relating to
the purchase of IIHSL, and (b) costs associated with the filing of a Form S-1
with the Securities and Exchange Commission on July 20, 1998.
Accounts receivable increased during the three months ended September 20,
1998 as a result of the continued expansion of the Distributor Network.
Net cash used in investing activities raised a surplus of $1.3 million
during the three months ended September 30, 1997 in contrast to a deficit of
$0.6 million during the three months ended September 30, 1998. The deficit in
net cash used in investing activities was due to the following factors: (i) an
advance of $0.2 million to FFC; (ii) purchase of additional capital assets of
$0.1 million; and (iii) short term loan granted of $0.3 million.
Net cash generated from financing activities raised a surplus of $3.7
million during the three months ended September 30, 1997 in contrast to zero
for the three months ended September 30, 1998. The $3.7 million surplus during
the three months ended September 30, 1997 resulted from the sale of shares in
the IPO in July 1997.
21
<PAGE>
The Company believes that internally generated cashflows will be adequate
to support currently planned business operations over the next twelve months.
The Company's strategy for growth is based on the expansion of its 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 make repayments due on the FFC Note such as the
$694,117 payment made on December 31, 1998 and if the Company acquires the
remaining 24.96% interest of Ness, for such acquisition. 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.
22
<PAGE>
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, which 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, a smoke alarm/detector, a
rechargeable fire extinguisher, and a fire blanket. In order to capitalize on
its base of customers with installed SecurityGuard Systems (which the Company
believes to be approximately 197,000, which constitutes the number of units
sold since the Company's inception), 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.
23
<PAGE>
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 by increasing the size
of the Distributor Network in those countries in which it now operates. In
addition, the Company expects to expand its operations by initiating the
Distributor Network in new international markets 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. 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.
24
<PAGE>
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.
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 achieves increased 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 which enhances community
awareness of the Company. The Company believes this increased community
awareness is important to its ability to generate high quality sales leads.
International Expansion. The Company is committed to actively expanding its
international operations and is placing greater emphasis on those operations
as 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. Prior to appointment in a new market, each
new Distributor must successfully complete an intensive twelve week training
program at the Company's offices in Australia. The Distributors bear all costs
of commencing operations in their respective market, other than initial
recruitment and product approval expenses.
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 197,000, which constitutes the number of units sold since the
Company's inception). 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.
Vertical Integration. In order to enhance sales and improve operating
efficiencies and margins, the Company in December 1997 closed one strategic
acquisition, the FFC Transaction, and in October 1998 closed a second strategic
acquisition, the Ness Transaction. Pursuant to the FFC Transaction, the Company
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 renters. Although
for the fiscal year ended June 30, 1998, approximately 80% of the
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principal amount of all consumer loans 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 fiscal year ended
June 30, 1998, approximately 75% financed their purchase (and approximately
74% of those purchases were financed by FFC). 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. See "Business--Strategic
Acquisitions."
The Company also acquired 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 fiscal year
ended June 30, 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 on-line monitoring
services to its existing base of customers. See "Business--Strategic
Acquisitions."
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 50,081 units in fiscal year 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 nineteen
international distributor offices located in Belgium (one), Canada (one),
Germany (one), the Netherlands (six), South Africa (four), the United Kingdom
(three) and the United States (three). Of the nineteen international offices,
fifteen were opened during the fiscal year ended June 30, 1998; three in the
United States, three in the United Kingdom, and six in the Netherlands. Unit
sales for the international markets have increased from 1,157 units in fiscal
year 1995 to 7,508 units in fiscal year 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 Company's SecurityGuard alarm was designed and developed by Ness and 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, was approximately AUD $2090
per account customer for the fiscal year ended June 30, 1998, 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
for alarm system manufacture, 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
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. 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.
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 June 30, 1998 it has entered into 17,252 extended
warranty contracts. The percentage of contracts divided between twelve and
twenty-four-month contracts were 38% and 62% 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.
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
SecurityGuard System 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
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collection of crime awareness and fire safety surveys conducted in shopping
malls 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 the
SecurityGuard System, 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 mall "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 the individual makes a purchase, receives a valuables register, a book
containing crime, fire and general home safety tips and a personal attack alarm.
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. 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 the utilization of these selling methods is an effective
means of generating quality leads and a high frequency of in-home sales
appointments from such leads. By focusing on persons who participate in its
promotions and surveys, and confirming the individuals' continued interest
through follow-up telephone contact to arrange in-home appointments, the
Distributor Network identifies those persons most likely to respond favorably to
its sales efforts. This has led to sales rates from home visits which are much
higher than for companies which rely on random door to door sales. The Company
also 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.
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 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.
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
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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 their 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 SecurityGuard 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 on SecurityGuard
System 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 June 30, 1998, the
Company had 758 Independent Agents (including 164 agents in training and 132
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) commissions to
Independent Agents, (ii) the cost of the SecurityGuard System 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 June 30, 1998, the Company had fifty-one Area Distributors,
including fifteen 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 Area Distributors. In addition to
earning profits on sales made by their own distribution business, Distributors
receive a commission override for all purchases by
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Area Distributors within the Distributor Network that are attributed to them
by the Company. Independent Agents working under a Distributor are paid the
same commission structure as those working under an Area Distributor. As of
June 30, 1998, the Company had thirty-seven Distributors, including nine in
markets outside of Australia and New Zealand.
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 SecurityGuard Systems sold, but earn a
greater proportion of the sales price as commission than that earned by an
Independent Agent. As of June 30, 1998 there were ten persons who had been
designated as Dealers by the Company.
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, was the financing source for
approximately 74% of the financed sales of the SecurityGuard System to end
users in Australia and New Zealand for the fiscal year ended June 30, 1998,
which constituted 56% of all sales of the SecurityGuard System in Australia
and New Zealand during that period. 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 was paid 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 ("FFC Note
Payment"). Pursuant to a Deed of Variation executed February 7, 1999, the
Company agreed to make an accelerated payment on the FFC Note in the amount of
$500,000 in exchange for FAI Insurances' waiver of the FFC Note Payment as
regards to the Ness Transaction, as well as other considerations. See "Certain
Transactions--Transactions with FAI Insurances." 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 FFC's retained earnings and
50% of the net change in FFC's capital reserves 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 fiscal year period ended June 30, 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 fiscal year ended June 30, 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's loan receivables carry a blended interest
rate of approximately 23%.
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
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outstanding loan balance from FAI Insurances (which was $20,398,608 as of
September 30, 1998). In addition, pursuant to a shareholders agreement, 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.
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 net effect of the arrangement
provides Westpac with approximately one-third of the interest collected by FFC,
in exchange for providing FFC with the funds. The maximum currently available to
FFC under the Receivables Purchase Agreement is AUD $50 million. The Company
believes that the Receivables Purchase 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".
FFC's main office is located in Sydney, Australia. FFC also maintains an
office in Auckland, New Zealand. As of June 30, 1998, FFC had forty-two
employees in Australia and fourteen employees in New Zealand.
Ness Transaction
On July 17, 1998 the Company entered into a Stock Purchase Agreement with
Integral Investments Limited ("Integral"), amended as of October 1, 1998 (the
"Stock Purchase Agreement"), whereby it purchased all of the issued and
outstanding common stock of Integrated International Home Security Limited
("IIHSL"), a British Virgin Islands company that owns 75.04% of the issued and
outstanding common stock of Ness Security Products Pty Ltd., an Australian
company, a leading designer and manufacturer of security alarm products in
Australia and the Company's sole supplier of its SecurityGuard alarm (the "Ness
Transaction"). As a result of the Ness Transaction, Integral obtained the right
to designate one nominee for election to the board of directors of the Company.
Paul Brown, the sole shareholder of Integral was designated the nominee of
Integral.
Pursuant to the Stock Purchase Agreement, as amended on October 1, 1998, the
Company paid aggregate consideration consisting of: (i) 400,000 shares of common
stock; (ii) a five year convertible warrant to purchase 360,000 of Common Stock
at an exercise of $13.00; (iii) cash in the amount of $2,426,000 ($126,000 paid
concurrent with the execution of the Purchase Agreement and $2,300,000 to be
paid upon closing of the Transaction); and (iv) a promissory note,secured by the
IIHSL Shares, in the amount of $9,098,000, payable in installment of $400,000 on
each of June 30, 1999 and December 31, 1999, respectively, with the balance of
the note due on June 30, 2000 ("Ness Note"). If any portion of the principal
amount of the Ness Note is still outstanding on October 1, 1999, the Company
shall issue an additional five year warrant to purchase 200,000 shares of the
Company's Common Stock at an exercise price of $13.00 per share. Likewise, if
any portion of the principal amount of the Ness Note is still outstanding on
January 1,2000, the Company shall issue an additional five year warrant to
purchase 200,000 shares of the Company's Common Stock at an exercise price of
$13.00 per share. Additionally, Integral designated International Home Security
International Limited to receive all securities pursuant to the Ness
Transaction.
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 for such systems 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 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 remote arming/disarming
capabilities; (iii) Quantum Dual, a leading security alarm detector which
combines a passive infra-red sensor and a doppler microwave to detect intruders
far more reliably than conventional detectors. Quantum Dual also utilizes a
microprocessor 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 an ISO 9001
certified 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
32
<PAGE>
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 requires 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 June 30, 1998, Ness had 137 employees in Australia and five
employees in Hong Kong.
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, and 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.
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 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".
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
33
<PAGE>
authorities. In certain jurisdictions, the Company is required to obtain
licenses or permits prior to the 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 September 30, 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 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 certain portions of the space. 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.
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
The executive officers and directors of the Company and their ages as of
December 29, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
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 29 Executive Vice President of Operations
Timothy M. Mainprize(1) 50 Director
Steven Rabinovici(1)(2) 46 Director
Paul Brown(3) 38 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Integrated Investments Limited, the sole stockholder of IIHSL and seller in
the Ness Transaction, designated Mr. Brown in October 1998, as its director
nominee pursuant to the rights granted to it in the Ness Transaction.
Mr. Bradley D. Cooper is the founder of the Company and has been its Chief
Executive Officer since its inception in 1985. 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
35
<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 currently a consultant to FAI Insurances Limited as well as a
number of other companies. Mr. Mainprize was Chief Financial Officer of FAI
Insurances, where he was also responsible for its Information Technology and was
a member of the Investment Committee. Mr. Mainprize was with FAI Insurances
since 1988 and was appointed a director of FAI Insurances in 1993, a position he
held until January 1999.
Mr. Steven Rabinovici was elected a director of the Company in April 1997. He
is currently the Chairman of the Board of Complete Management, Inc. ("CMI"), a
position he has held since December, 1995. CMI is a medical management services
company. From December, 1992 through December, 1995 he also served as 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. Paul Brown has been a private investor in different entities including the
sole beneficial owner of Integrated International Home Security Investments
Limited ("IIHSL") and corporate consultant for the last five years. Integrated
Investments Limited, the sole shareholder of IIHSL and seller in the Ness
Transaction, has designated Mr. Brown as its director nominee, effective October
1, 1998, pursuant to the rights granted to it in the Stock Purchase Agreement
relating to the Ness Transaction.
Pursuant to the Ness Transaction, International Home Security Investments
Limited (the "IIHSL Shareholder"), 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 as
the nominee of the IIHSL Shareholder.
Steven A. Rothstein and Dennis J. Puleo each resigned from the Board of
Directors, effective as of December, 1998, and were not replaced by the Company.
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.
36
<PAGE>
Class I Directors. The following persons serve as Class I directors with their
term expiring in 1998: Steven Rabinovici.
Class II Directors. The following persons serve as Class II directors with
their term expiring in 1999: Timothy M. Mainprize.
Class III Directors. The following person serves as a Class III director with
his term expiring in 2000: Bradley D. Cooper and Paul Brown.
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. Pursuant to the 1997 Non-Employee Director Stock Option Plan
options to purchase a total of 20,000 shares have been granted to date to the
Company's non-employee directors, at an exercise price of $10.00 per share, and
on the day after each Annual Meeting of Stockholders each non-employee director
will be granted options to purchase 2,500 shares of Common Stock at an exercise
price equal to the closing market price on the date of such meeting. All options
will be exercisable six months after the effective date of grant of said options
and expire on the fifth anniversary of such date. 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.
37
<PAGE>
Executive Employment Agreements
Certain executive employment agreements 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 and
continue through June 30, 2000.
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, 1998, Mr. Appleby received remuneration, based on the
number of units sold, of $652,586 and a bonus of $341,052. 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, 1998, Mr. Knowles received remuneration, based on
the number of units sold, of $339,043 and a bonus of $136,421.
Mr. Youngman's agreement provides for a base salary of $75,000 and he is not
entitled to any bonus.
The executive employment agreement for each of Mr. Whitaker and Ms. Hilbert
provides for a base salary of $67,000.
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.
Executive Compensation
The following table sets forth the compensation paid by the Company for the
years ended June 30, 1998, 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, 1998 exceeded $100,000 (together, the "Named
Executive Officers").
38
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------
Securities
Underlying
Stock All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation
--------------------------- ---- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Bradley D. Cooper(1)............ 1998 $700,000 $575,458 250,000 --
Chairman of the Board and Chief
Executive Officer 1997 $692,192 -- -- --
1996 $ 59,708 -- -- --
Robert D. Appleby............... 1998 $652,586 $341,052 165,000 --
Executive Vice-President of
International Business 1997 $476,468 $146,270 -- --
Development 1996 $113,826 $ 78,860 -- --
Geoffrey D. Knowles............. 1998 $339,043 $136,421 85,000 --
Vice President of Marketing 1997 $312,400 -- -- --
1996 $110,693 -- -- --
</TABLE>
- --------
(1) The salary paid to Mr. Cooper in fiscal year 1997 consisted solely of
commissions for each SecurityGuard System sold by the Company. Mr.
Cooper's employment agreement became effective with the IPO, and the
consulting agreement with Speakeasy Pty Ltd which has replaced the
employment agreement, eliminated this commission arrangement.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of Annual Rates of Stock
Securities % of Total Exercise Price Appreciation
Underlying Options Granted Price per For Option Term
Options to Employees in Share Expiration ---------------------
Name Granted(#) Fiscal Year ($/Sh.) Date(1) 5%($) 10%($)
- ---- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Bradley D. Cooper....... 250,000 33.3 10.00 7/15/07 1,572,237 3,984,356
Robert D. Appleby....... 165,000 22.0 10.00 4/8/08 1,037,676 2,629,675
Geoffrey D. Knowles..... 85,000 11.3 10.00 4/8/08 534,560 1,354,681
</TABLE>
- --------
(1) 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 on October 31, 2003, or
earlier in increments upon the Company achieving certain unit sales
numbers outside of Australia and New Zealand prior to October 31, 2003.
Note, no options were exercised during the last fiscal year.
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 on October 31, 2003, or earlier in
increments upon the Company achieving certain unit sales numbers outside of
Australia and New Zealand prior to October 31, 2003. On December 14, 1998,
subject to the approval of the stockholders of the Company at the annual meeting
(expected to occur in February, 1999), the Board of Directors approved an
amendment to the 1997 Employee Stock Option Plan which increased the shares by
400,000.
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 February 1998), all
non-employee directors continuing to serve as such will receive, on the day
following each annual meeting of shareholders, 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.
39
<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 the Company, 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 December 31, 1998 Mr. Cooper was
no longer obligated to FAI Insurances under the term loan as the outstanding
amount at that time was forgiven.
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 May 16, 1997 Vision Publishing Pty Limited ("Vision"), an entity owned by
Bradley D. Cooper, entered into a loan arrangement with FAI Finance Corporation
Pty Limited ("FFC"), then a wholly owned subsidiary of FAI Insurances, through
which Mr. Cooper borrowed an amount of $468,602 at a 14% interest rate. The loan
arrangement called for periodic payments of principal and interest. As of June
30, 1998, Vision was obligated under this loan arrangement in the amount of
$41,005.
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 fiscal year ended June 30, 1998, Mr. Cooper made
interest payments totaling $159,873.
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 June 30, 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
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<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 June 30, 1998 the aggregate principal amount of the FFC
Note, plus accrued interest, totaled approximately $4,737,135. The payment of
the principal balance of this note is secured by the FFC Shares purchased by the
Company in the FFC Transaction. See "Business--Strategic Acquisitions".
On February 7, 1999, the Company entered into a Registration Rights Agreement
with the Selling Shareholder, FAI Home Security Holdings Pty Ltd, a wholly owned
subsidiary of FAI Insurance. Through the first year anniversary date of the
Registration Rights Agreement, the Selling Shareholder will have the ability to
sell up to 25% of its then current holdings in the Company during any ensuing 3
month period. Thereafter, the Selling Shareholder will have the ability to sell
its entire interest in the Company without limitation. After the one year
anniversary date of the Registration Rights Agreement, the Selling Shareholder
has also agreed, that in the event of a secondary offering of debt or
securities, to enter into a lock-up agreement not to sell its shares for a
period not to exceed ninety (90) days.
As part of the Registration Rights Agreement, the Company also entered into a
Deed of Variation which amended the payment terms of the FFC Transaction.
Pursuant to the Deed of Variation, the Company agreed to make an accelerated
payment of $500,000 on June 30, 1999 in reduction of the outstanding balance on
the FFC Note, in exchange for FAI Insurances' waiver of the FFC Note Payment for
the Ness Transaction and any subsequent purchase of the remaining 24.96%
interest in Ness, and the establishment of $2,000,000 credit facility for FFC.
See "Business--Strategic Acquisitions". The Deed of Variation also provides that
the FFC Note Payment will be due in the event of an issuance of debt or equity
(of whatever type or nature) to the public or any other capital raising,
including any issuance of securities to any entity irrespective of whether the
capital raised is cash or another form of consideration.
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 resigned as a
director in December, 1998, and National Securities waived its rights of
nomination at that time.
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<PAGE>
Transactions with Integral Investments Limited and Paul Brown
On July 17, 1998 the Company entered into a Stock Purchase Agreement with
Integral Investments Limited ("Integral"), amended as of October 1, 1998 (the
"Stock Purchase Agreement"), whereby it purchased all of the issued and
outstanding common stock of Integrated International Home Security Limited
("IIHSL"), a British Virgin Islands company that owns 75.04% of the issued and
outstanding common stock of Ness Security Products Pty Ltd., an Australian
company, a leading designer and manufacturer of security alarm products in
Australia and the Company's sole supplier of its SecurityGuard alarm (the "Ness
Transaction"). As a result of the Ness Transaction, Integral obtained the right
to designate one nominee for election to the board of directors of the Company.
Paul Brown, the sole shareholder of Integral was designated the nominee of
Integral.
Pursuant to the Stock Purchase Agreement, the Company agreed to pay aggregate
consideration consisting of: (i) 400,000 shares of Common Stock; (ii) a five
year convertible warrant to purchase 360,000 of Common Stock at an exercise
price of $13.00; (iii) cash in the amount of $2,426,000 ($126,000 paid
concurrent with the execution of the Purchase Agreement and $2,300,000 to be
paid upon closing of the Transaction); and (iv) a promissory note, secured by
the IIHSL Shares, in the amount of $9,098,000, payable in installments of
$400,000 on each of June 30, 1999 and December 31, 1999, respectively, with the
balance of the note due on June 30, 2000 ("Ness Note"). If any portion of the
principal amount of the Ness Note is still outstanding on October 1, 1999, the
Company shall issue an additional five year warrant to purchase 200,000 shares
of the Company's Common Stock at an exercise price of $13.00 per share.
Likewise, if any portion of the principal amount of the Ness Note is still
outstanding on January 1,2000, the Company shall issue an additional five year
warrant to purchase 200,000 shares of the Company's Common Stock at an exercise
price of $13.00 per share. Additionally, Integral designated International Home
Security International Limited to receive all securities pursuant to the Ness
Transaction.
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.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of December 29, 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(1)
----------------- -----------------
Number of Number of
Shares Percent Shares Percent
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Executive Officers and Directors(2)
Bradley D. Cooper(3).................. 300,000 5.4% 300,000 5.4%
Terrence J. Youngman(4)............... 18,000 * 18,000 *
Robert D. Appleby..................... -- -- -- --
Mark Whitaker(5)...................... 16,000 * 16,000 *
Geoffrey D. Knowles................... -- -- -- --
Felicity A. Hilbert(5)................ 16,000 * 16,000 *
Steven Rabinovici(6).................. 5,000 * 5,000 *
Timothy M. Mainprize(7)............... 5,000 * 5,000 *
Paul Brown(8)......................... 760,000 12.9% 760,000 12.9%
All executive officers and directors
as a group(9) persons)(9)............ 1,120,000 18.6% 1,120,000 18.6%
Five Percent Shareholders
FAI Home Security Holdings Pty
Ltd.(10)............................. 2,150,000 38.7% 2,150,000 38.7%
Level 7, 77 Pacific Highway
North Sydney, NSW 2060 Australia
Robertson, Stephens & Company
Investment Management L.P.(11)....... 796,600 14.4% 796,600 14.4%
555 California St., Suite 2600
San Francisco, CA 94104
Heartland Advisors, Inc.(12).......... 1,357,900 24.5% 1,357,900 24.5%
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) 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.
(3) Includes 250,000 shares owned by Mr. Cooper and 50,000 shares issuable
upon the exercise of options which are deemed exercisable.
(4) Represents 18,000 shares issuable upon the exercise of options which are
deemed exercisable.
(5) Represents 16,000 shares issuable upon the exercise of options which are
deemed exercisable.
(6) Represents 5,000 shares issuable upon the exercise of options which are
deemed exercisable. Does not include 10,000 shares held in a custodial
account, of which Mr. Rabinovici is the custodian for Mr. Rabinovici's
adult son.
(7) Represents 5,000 shares issuable upon the exercise of options which are
deemed exercisable. Does not include 2,150,000 shares beneficially owned by
FAI Insurance Limited, of which Mr. Mainprize is a director and the Chief
Financial Officer. See also Note 9 below.
(8) Includes 400,000 shares issued to International Home Security Investments
Limited pursuant to the Ness Transaction, as defined below, of which Paul
Brown is the sole beneficial owner, and 360,000 shares issuable upon the
exercise of the Ness Warrants also issued to International Home Security
Investments Limited pursuant to the Ness Transaction. (See "Certain
Transactions--Transactions with Integrated Investments Limited and Paul
Brown").
(9) Includes 650,000 shares, 360,000 shares issuable upon the exercise of the
Ness Warrants and 110,000 shares issuable upon the exercise of options
which are deemed exercisable.
(10) A wholly owned subsidiary of FAI Insurances Limited. Based on information
reported on Schedule 13G, filed on February 19, 1998. See also Note 7
above.
(11) 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. Robertson, Robertson
Stephens Investment Management Co. ("Parent"), and Parent's 100% parent,
BankAmerica Corporation, each share beneficial ownership of the 796,600
shares held by Orphan, and other subsidiaries. Based on information
reported on Schedule 13G, filed on September 30, 1998.
(12) Based on information reported on Schedule 13G, Amendment No. 3, filed on
December 10, 1998.
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44
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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. As of the date this Prospectus is declared effective, 5,550,500 shares of
Common Stock of the Company will be issued and outstanding, including 400,000
shares issued pursuant to the Ness transaction. 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 issued to the IIHSL
Shareholder 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
45
<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.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has outstanding 5,550,500 shares of Common Stock,
including 400,000 shares issued pursuant to the Ness transaction. All of the
2,150,000 shares registered in this Prospectus, 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 650,000 shares will be subject to certain restrictions, as defined
under Rule 144 (the "Restricted Shares"). Specifically, under Rule 144 250,000
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 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 55,505 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
impair the Company's ability to raise capital through a sale of its securities.
47
<PAGE>
PLAN OF DISTRIBUTION
All of the Shares of Common Stock being offered hereby will be sold by
the Selling Shareholders. An aggregate of 2,150,000 Shares of Common Stock may
be offered and sold pursuant to this Prospectus by the Selling Shareholder. The
Selling Shareholder will pay all expenses in connection with the registration of
the Shares offered hereby up to a maximum of $75,000. Such Shares have been
included in the Registration Statement of which this Prospectus forms a part.
The 2,150,000 shares of Common Stock being offered by the Selling
Shareholder pursuant to this Prospectus may be offered and sold from time to
time as market conditions permit on the American Stock Exchange or such other
markets upon which the Company may list shares of its Common Stock from time to
time, at prices and terms then prevailing or at prices related to the then
current market price, or in negotiated transactions. The Shares may be sold by
one or more of the following methods, without limitations: (a) a block trade in
which a broker or dealer so engaged will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face transactions between sellers and purchasers without a
broker/dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers and dealers may be deemed to be "Underwriters" within the
meaning of the Securities Act in connection with such sales.
Because the Selling Shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, the Selling Shareholders
will be subject to prospectus delivery requirements under the Securities Act.
Furthermore, in the event of a "distribution" of the Shares, such Selling
Shareholders, any selling broker or dealer and any "affiliated purchasers" may
be subject to Regulation M under the Exchange Act, which Regulation would
prohibit, with certain exceptions, any such person from bidding for or
purchasing any security which is the subject of such distribution until his
participation in that distribution is completed. In addition, Regulation M
prohibits any stabilizing bid or stabilizing purchase for the purpose of
pegging, fixing or stabilizing the price of Common Stock in connection with this
offering.
The Company has entered into agreements with the Selling Shareholder to
register their Shares under applicable federal and state securities laws. The
agreements between the Company and the Selling Shareholders provide for cross-
indemnification of the Selling Shareholders and the Company for losses, claims,
damages, liabilities and expenses arising, under certain circumstances, out of
registration of the Shares. See "Certain Transactions--Transactions with FAI
Insurances".
To comply with certain states' securities laws, if applicable, the shares
of Common Stock registered hereunder will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Shares may not be sold or offered unless they
have been registered or qualified for sale in such states or an exception for
registration or qualification is available and is complied with.
48
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Shares offered hereby will be
passed upon for the Company by D'Ancona & Pflaum. 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 and Deloitte & Touche 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
49
<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".
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Home Security International, Inc.:
Report of Independent Public Accountants................................ F-3
Consolidated Statements of Income for the Years Ended June 30, 1996,
1997 and 1998 and the unaudited Three Months Ended September 30, 1997
and 1998............................................................... F-4
Consolidated Balance Sheets as at June 30, 1997 and 1998 and unaudited
as at September 30, 1998............................................... F-5
Consolidated Statements of Cashflows for the Years Ended June 30, 1996,
1997 and 1998 and the unaudited Three Months Ended September 30, 1997
and 1998............................................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1996, 1997 and 1998 and the unaudited Three Months Ended
September 30, 1998..................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Cooper International Group:
Report of Independent Public Accountants................................ F-22
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-23
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-24
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-25
Notes to Combined Financial Statements.................................. F-26
FAI Finance Corporation Pty Limited:
Report of Independent Public Accountants................................ F-32
Consolidated Statements of Income for the Years Ended June 30, 1996,
1997 and 1998 and the unaudited Three Months Ended September 30, 1997
and 1998............................................................... F-33
Consolidated Balance Sheets as of June 30, 1997 and 1998 and the
unaudited as at September 30, 1998..................................... F-34
Consolidated Statements of Cashflows for the Year Ended June 30, 1996,
1997 and 1998 and the unaudited Three Months Ended September 30, 1997
and 1998............................................................... F-35
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1996, 1997 and 1998 and the unaudited Three Months Ended
September 30, 1998..................................................... F-36
Notes to Consolidated Financial Statements.............................. F-37
Integrated International Home Security Limited:
Report of Independent Public Accountants................................ F-46
Consolidated Statements of Income for the Nine Months Ended June 30,
1996 and the Year Ended June 30, 1997 and 1998......................... F-47
Consolidated Balance Sheets as of June 30, 1997 and 1998................ F-48
Consolidated Statements of Cashflows for the Nine Months Ended June 30,
1996 and the Year Ended June 30, 1997 and 1998......................... F-49
Consolidated Statements of Changes in Shareholders Equity for the Nine
Months Ended June 30, 1996 and the Year Ended June 30, 1997 and 1998... F-50
Notes to Consolidated Financial Statements.............................. F-51
Pro Forma Financial Statements............................................ F-59
Pro Forma Statement of Operations for the Three Months Ended September
30, 1998............................................................... F-60
Pro Forma Statement of Operations for the Fiscal Year Ended June 30,
1998................................................................... F-61
Pro Forma Balance Sheet as of September 30, 1998........................ F-63
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 Home Security
International, Inc. as of June 30, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998 in conformity with generally accepted accounting principles
in the United States of America.
The consolidated financial statements of Home Security International, Inc.
as of September 30, 1998 and for the three months ended September 30, 1998 and
1997, which are presented solely for comparative purposes, were not audited by
Independent Public Accountants.
/s/ Arthur Andersen
Sydney
July 24, 1998
F-3
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
----------------------------------------- --------------------------
1996 1997 1998 1997 1998
Note $US $US $US $US $US
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
Net sales.................................... 2 26,700,922 33,464,595 44,118,502 11,048,697 10,226,238
Cost of goods sold - related party ......... 15 (2,750,468) (3,647,376) - - -
- other.................. (14,834,094) (20,626,411) (26,294,641) (6,325,736) (5,861,610)
----------- ----------- ----------- ---------- ----------
Gross profit................................. 9,116,360 9,190,808 17,823,861 4,722,961 4,364,628
Management fees received - related parties... 15 - 559,002 - - -
General and administrative expenses.......... (6,606,377) (6,612,318) (10,810,316) (2,498,647) (1,907,113)
----------- ----------- ----------- ---------- ----------
Income from operations....................... 2,509,983 3,137,492 7,013,545 2,224,314 2,457,515
Non operating income - other................. - 6,740 - - -
Interest income - related party............ 15 75,087 755,613 26,679 - -
- other.................... 175,719 81,790 423,526 90,010 115,497
Interest expenses - related party............ 15 (47,625) (60,046) (216,629) - (98,783)
- other.................... - - (7,904) - (1,204)
----------- ----------- ----------- ---------- ----------
Income before taxes and equity in
income of affiliated companies............. 2,713,164 3,921,589 7,239,217 2,314,324 2,473,025
Income tax expense........................... 14 (1,054,170) (1,629,973) (2,111,084) (878,882) (916,864)
----------- ----------- ----------- ---------- ----------
Income before equity in income of
affiliated companies....................... 1,658,994 2,291,616 5,128,133 1,435,442 1,556,161
Equity in income of affiliated
companies.................................. 10 - - 252,417 - 48,452
----------- ----------- ----------- ---------- ----------
Net income................................... 1,658,994 2,291,616 5,380,550 1,435,442 1,604,613
=========== =========== =========== ========== ==========
Net income per common share
Basic earnings per share................... $ 0.37 $ 0.51 $ 1.05 $ 0.29 $ 0.31
Diluted earnings per share................. $ 0.37 $ 0.51 $ 1.04 $ 0.28 $ 0.31
Weighted average number of shares outstanding
Basic...................................... 4,500,000 4,500,000 5,117,125 5,017,000 5,150,500
Diluted.................................... 4,500,000 4,500,000 5,181,612 5,094,761 5,162,457
</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, September 30,
1997 1998 1998
Note $US $US $US
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents...................................... 118 7,006,183 6,348,337
Accounts receivable - related party............................ 15 2,025,455 - -
Accounts receivable - trade, net............................... 3 615,560 874,745 1,623,622
Inventories.................................................... 4 1,277,104 2,032,443 2,145,496
Prepaid expenses and other current assets...................... 5 449,458 1,173,449 1,779,844
---------- ---------- ----------
Total current assets 4,367,695 11,086,820 11,897,299
---------- ---------- ----------
Non-current assets
Investment in partnership...................................... 9 - 303,424 289,296
Investment in affiliated companies............................. 10 - 7,405,130 7,345,315
Capital assets, net............................................ 7 869,571 1,068,237 1,016,412
Intangibles, net............................................... 8 10,142,077 9,601,923 9,466,885
Deferred income taxes.......................................... 14 549,393 1,016,652 966,045
Receivables - related party.................................... 15 24,366 - -
Other non-current assets....................................... 3,748 3,115 2,970
---------- ---------- ----------
Total non-current assets 11,589,155 19,398,481 19,086,923
---------- ---------- ----------
Total assets 15,956,850 30,485,301 30,984,222
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft................................................. 31,795 - -
Note payable - FAI Insurances Group............................ 10,15 - 619,233 590,400
Payables - trade............................................... 4,018,147 4,280,422 2,945,104
Accrued warranty............................................... 411,778 247,126 221,863
Accrued security callout....................................... 486,864 382,222 367,709
Other accrued liabilities...................................... 206,970 148,168 154,513
Lease liability................................................ 19,068 28,704 26,401
Income tax payable............................................. 467,961 1,608,648 2,262,214
Deferred income................................................ 479,307 650,949 681,484
---------- ---------- ----------
Total current liabilities.................................... 6,121,890 7,965,472 7,249,688
---------- ---------- ----------
Non-current liabilities
Note payable - FAI Insurances Group............................ 10,15 - 4,117,902 3,926,160
Lease liability................................................ 44,877 33,342 29,104
Accrued security callout....................................... - 91,944 92,194
Deferred income................................................ - 177,769 184,491
---------- ---------- ----------
Total non-current liabilities 44,877 4,420,957 4,231,949
---------- ---------- ----------
Total liabilities 6,166,767 12,386,429 11,481,637
---------- ---------- ----------
Shareholders' equity
Preferred stock $.001 value; 1,000,000 shares authorized,
none outstanding.............................................. - - -
Common stock $.001 value; 20,000,000 shares authorized
and 4,500,000, 5,150,500 and 5,150,500 shares issued and
outstanding as of June 30, 1997, June 30, 1998 and September
30, 1998, respectively........................................ 18 4,500 5,150 5,150
Additional paid-in capital..................................... 10,238,691 16,111,311 16,111,311
Secured note................................................... 6 - (2,375,000) (2,375,000)
Accumulated other comprehensive loss........................... (406,534) (976,565) (1,177,465)
Retained earnings (accumulated losses)......................... (46,574) 5,333,976 6,938,589
---------- ---------- ----------
Total shareholders' equity................................... 9,790,083 18,098,872 19,502,585
---------- ---------- ----------
Total liabilities and shareholders' equity................... 15,956,850 30,485,301 30,984,222
========== ========== ==========
</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>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------- -----------------------
1996 $US 1997 $US 1998 $US 1997 $US 1998 $US
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cashflow from operating activities
Net income.......................................... 1,658,994 2,291,616 5,380,550 1,435,442 1,604,613
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation...................................... 11,192 42,100 181,835 54,910 64,355
Amortisation of goodwill.......................... 226,498 391,924 540,154 142,880 135,038
Equity in income of affiliated companies.......... - - (252,417) - (48,453)
Deferred income taxes............................. (1,143,650) (138,947) (585,314) 835,253 733,196
Provision for losses on accounts receivable....... 58,213 100,715 670,988 170,427 (153,797)
Increase in operating assets:
Accounts receivable - trade...................... (21,925) (203,120) (1,025,880) (580,746) (602,942)
Inventories...................................... (239,731) (965,610) (930,349) (615,442) (124,738)
Prepaid expenses and other assets................ (305,224) (33,054) (830,074) (247,210) (458,456)
Increase (decrease) in operating liabilities:
Accounts payable................................. (489,880) 2,159,629 1,051,807 41,837 (998,259)
Accrued liabilities.............................. 734,742 1,193,531 1,774,149 163,206 74,138
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities...... 489,229 4,838,784 5,975,449 1,400,557 224,695
---------- ---------- ---------- ---------- ----------
Cashflow from investing activities
Proceeds from sale of capital assets................ 112,062 - - - -
Additions to capital assets......................... (70,701) (871,894) (553,404) (101,163) (85,492)
Investment in affiliated companies.................. - - (2,000,578) - (234,333)
Investment in partnership........................... - - (303,424) - -
Short term loans (granted)/ repayments received..... (3,129) 295,353 23,488 (197,420) (291,030)
Receipt from /(payments to) related parties......... (1,429,568) 2,137,679 1,020,054 1,590,066 -
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................................... (1,391,336) 880,925 (1,813,864) 1,291,483 (610,855)
---------- ---------- ---------- ---------- ----------
Cashflow from financing activities
Dividend and trust distribution paid................ - (5,294,296) - - -
Return of capital................................... - (581,928) - - -
Capital subscribed.................................. - - 3,934,678 4,130,000 -
Share issue costs................................... - - (436,408) (432,262) -
Increase (decrease) in bank overdraft............... - 31,795 (29,055) (30,626) -
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities................................... - (5,844,429) 3,469,215 3,667,112 -
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash held.................... (902,107) (124,721) 7,630,800 6,359,152 (386,160)
---------- ---------- ---------- ---------- ----------
Cash at the beginning of the financial period........... 1,229,501 369,837 118 118 7,006,183
Effect of exchange rate changes on cash................. 42,443 (244,998) (624,735) (8,715) (271,686)
---------- ---------- ---------- ---------- ----------
Cash at the end of the financial period................. 369,837 118 7,006,183 6,350,555 6,348,337
========== ========== ========== ========== ==========
Supplemental disclosure of cashflow information:
Interest paid....................................... 59,945 515,763 224,533 - 99,988
Income taxes paid................................... 1,279,393 946,230 1,249,831 - 148,632
</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>
Accumulated
Capital Stock Issued Additional Retained Other Total
-------------------- Paid-in Comprehensive Earnings Comprehensive Secured Shareholders'
Shares Amount Capital Income Unappropriated Income (loss) Note Equity
--------- --------- ----------- ------------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 2 $ 2 $ 2,085,090 $ 1,831,194 $ (4,240) $ - $ 3,912,046
Comprehensive income
Net Income 1996 [1,658,994] 1,658,994 1,658,994
Other Comprehensive income,
net of tax
Foreign currency
translation Adjustment 390,933
-------------
Other Comprehensive income 390,933 390,933 390,933
Comprehensive income [2,049,927]
=============
Additional paid-in capital 3,931,854 3,931,854
--------- -------- ----------- -------------- ------------ ---------- ------------
BALANCE, JUNE 30, 1996 2 2 6,016,944 3,490,188 386,693 - 9,893,827
Comprehensive income
Net Income 1997 [2,291,616] 2,291,616 2,291,616
Other Comprehensive income,
net of tax
Foreign currency
translation Adjustment (533,335)
-------------
Other Comprehensive income
(loss) (553,335) (553,335) (553,335)
Comprehensive income [1,758,281]
=============
Additional paid-in capital 1 1 4,803,675 4,803,676
Dividends and Trust
Distributions and
return of capital (581,928) (5,294,296) (5,876,224)
Reorganisation Adjustments 4,499,997 4,497 (534,082) (239,892) (769,477)
--------- -------- ----------- -------------- ------------- ---------- ------------
BALANCE, JUNE 30, 1997 4,500,000 4,500 10,238,691 (46,574) (406,534) - 9,790,083
Comprehensive income
Net Income 1998 [5,380,550] 5,380,550 5,380,550
Other Comprehensive income,
net of tax
Foreign currency
translation Adjustment (570,031)
-------------
Other Comprehensive income
(loss) (570,031) (570,031) (570,031)
Comprehensive income [4,810,519]
=============
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)
--------- -------- ----------- -------------- ----------- ----------- -----------
BALANCE, JUNE 30,1998 5,150,500 $ 5,150 $16,111,311 $ 5,333,976 $ (976,565) $(2,375,000) $18,098,872
Comprehensive income
Net Income July 1-
September 30, 1998 [1,604,613] 1,604,613 1,604,613
Other Comprehensive income,
net of tax
Foreign currency
translation Adjustment (200,900)
-------------
Other Comprehensive income (200,900) (200,900) (200,900)
Comprehensive income [1,403,713]
--------- -------- ----------- ============= -------------- ----------- ----------- -----------
BALANCE,
SEPTEMBER 30, 1998 5,150,500 $ 5,150 $16,111,311 $ 6,938,589 $(1,177,465) $(2,375,000) $19,502,585
========= ======== =========== ============== =========== =========== ===========
The movements from July 1, 1998 to September 30, 1998 are unaudited.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in US$ unless stated otherwise)
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business--
Home Security International, Inc. ("HSI") was incorporated in the state of
Delaware, United States of America, on April 11, 1997. On June 30, 1997 HSI
acquired from a subsidiary of FAI Insurances Limited the capital stock of 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"). Home Security International (Canada), Inc. (incorporated in
Ontario, Canada on July 24, 1997), Home Security International (UK) Limited
(incorporated in Cardiff, United Kingdom on July 30, 1997) and Home Security
International (SA) (Proprietary) Limited (incorporated in Midrand, South Africa
on August 7, 1997) were incorporated with HSI being sole shareholder to each.
HSI and it's wholly owned subsidiaries are all collectively called "the
Company". The background to the acquisition (which was accounted for as a
reorganization) 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 Limited on June 30, 1997.
The International Operations were acquired by FAI Home Security Holdings
Pty Limited on March 31, 1997 from various companies controlled by Bradley D.
Cooper (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 ("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 $208,894 for the NZ Note.
The main business activities of the Company are the sale, service and
monitoring of security alarm systems, which are sold via a distributor network
to residential and small business premises in the countries of operations.
The security alarm system, "SecurityGuard", and other major components are
supplied exclusively by Ness Security Products Pty Limited, an unrelated company
based in Sydney, Australia (See Note 18).
On December 31, 1997 the Company acquired 50 percent of the equity interest
in FAI Finance Corporation Pty Limited (together with its subsidiary FAI Finance
Corporation (NZ) Limited, herein call "FFC") from FAI Insurances Ltd. FFC is a
consumer finance company in both Australia and New Zealand and finances a
significant portion of customer accounts financed by the Company's
distributorship network in Australia and New Zealand.
b) Principles of Consolidation and Basis of Preparation--
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). The investment in FFC and the Partnership (see Note 9) are
recorded using the equity method.
The acquisition of FAI Home Security Pty Limited and FAI Home Security
(ENZED) Limited was accounted for as a reorganization of entities under common
control on an historic cost basis in a manner similar to a pooling of interests.
F-8
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in US$ unless stated otherwise)
The acquisition of the International Operations by HSI's predecessor and
the acquisition of the interest in FFC and the Partnership were accounted for
using the purchase method. The consolidated statements of income for the years
ended June 30, 1997 and 1996 include the financial statements of the Company and
FAI Home Security (NZ) Limited and FAI Home Security (NZ) Trust as those
entities were under common control during those years. Results of the
International Operation for the three months ended June 30, 1997 have been
included in the 1997 consolidated financial statements as those operations were
acquired by HSI'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 for the fiscal year. The
resulting translation effects are reflected in shareholders' equity.
The functional currency of 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 (SA)(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.
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 revenue derived is recognized on a straight-
line basis over the life of the warranties. All unearned portions of the
warranties are treated in the balance sheet as "Deferred Income".
F-9
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(All amounts in US$ unless stated otherwise)
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) Capital assets --
Capital assets are recorded at cost. Maintenance and repairs are expensed in
the period to which they relate. Depreciation on capital assets 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
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 management based
on the expected future undiscounted operating cash flows of the related business
unit. Based upon its most recent analysis, management believes that no material
impairment of intangible assets exists at September 30, 1998.
The excess of cost over fair value of the assets of FFC acquired will be
amortized using the straight-line method over twenty 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 based on management's best estimate of
future warranty costs. Management's estimate is based upon historical warranty
costs and is periodically adjusted to reflect actual experience. Changes in
these estimates could result in an adjustment to the provision maintained.
F-10
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in US$ unless stated otherwise)
o) Security call-out--
The Company provides a security call-out service for emergency response for
five years from the date of installation. A provision for estimated security
call-outs is recorded based on management's best estimate of future security
call-out costs. Management's estimate is based upon historical security call-out
costs and is periodically adjusted to reflect actual experience. Changes in
these estimates could result in an adjustment to the provision maintained.
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 sales 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, 1996.
Diluted earnings per share 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 June 1997
and has been 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, ("Disclosure about Segments of an Enterprise and Related
Information") was issued in June 1997 and has been adopted by the Company
effective July 1, 1998. SFAS No. 131 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.
SFAS No. 132, ("Employers, Disclosure about Pensions and Other Post
Retirement Benefits") was issued in February 1998 and has been adopted by the
Company effective July 1,1998. 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)
(All amounts in US$ unless stated otherwise)
NOTE 2: NET SALES
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
---------------------------------- -----------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Direct retail sales....................... 1,366,926 - - - -
Distributor sales......................... 25,053,110 33,183,267 42,858,457 10,878,651 9,908,291
Other..................................... 497,637 516,601 1,553,592 239,163 358,422
---------- ---------- ---------- ---------- --------------
Gross sales............................... 26,917,673 33,699,868 44,412,049 11,117,814 10,266,713
Less: Returns and rebates................. (216,751) (235,273) (293,547) (69,117) (40,475)
---------- ---------- ---------- ---------- --------------
Net sales................................. 26,700,922 33,464,595 44,118,502 11,048,697 10,226,238
========== ========== ========== ========== =============
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
<TABLE>
<CAPTION>
June 30, September 30,
----------------------- -------------
1997 1998 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Accounts receivable................................ 745,280 1,643,980 2,233,375
Less: Allowances for doubtful accounts............. (129,720) (769,235) (609,753)
---------- ---------- ------------
615,560 874,745 1,623,622
========== ========== ============
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
June 30, September 30,
----------------------- -------------
1997 1998 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Wholesale stock.................................... 879,476 1,727,670 1,841,732
Sales aids......................................... 397,628 304,773 303,764
---------- ---------- ------------
1,277,104 2,032,443 2,145,496
========== ========== =============
</TABLE>
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
----------------------- -------------
1997 1998 1998
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Prepayments........................................ 210,556 557,355 464,901
Sundry debtors..................................... 238,902 616,094 1,314,943
---------- ---------- -------------
449,458 1,173,449 1,779,844
========== ========== =============
</TABLE>
F-12
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in US$ unless stated otherwise)
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 issuance of a five year, 7.0%
semi-annual interest bearing note secured by the shares issued to the value of
$2,375,000.
NOTE 7: CAPITAL ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
---------------------- -------------
1997 1998 1998
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures................................... 216,064 204,373 202,419
Office equipment......................................... 157,051 236,610 232,314
Motor vehicles........................................... 164,884 273,373 248,933
Computer equipment....................................... 255,764 402,906 452,098
Leasehold improvements................................... 114,140 180,895 178,696
Less: Accumulated depreciation........................... (38,332) (229,920) (298,048)
--------- --------- ------------
869,571 1,068,237 1,016,412
========= ========= ============
</TABLE>
NOTE 8: INTANGIBLES
<TABLE>
<CAPTION>
June 30, September 30,
----------------------- -------------
1997 1998 1998
---------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Goodwill on investment................................... 10,803,072 10,803,072 10,803,072
Less: Accumulated amortization........................... (660,995) (1,201,149) (1,336,187)
---------- ---------- ----------
10,142,077 9,601,923 9,466,885
========== ========== ==========
</TABLE>
Goodwill represents the excess of the purchase price paid by the then
ultimate parent entity, FAI Insurances Limited over the fair value of assets
acquired as part of the reorganization.
F-13
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(All amounts in US$ unless stated otherwise)
NOTE 9: INVESTMENT IN PARTNERSHIP
Effective June 30, 1998, the Company purchased a 49 percent interest in a
partnership (the "Partnership") that has entered into an agreement with Prime
Life Corporation Limited to acquire a retirement village in Melbourne,
Australia. The $289,296 investment in the Partnership, which was accounted for
using the purchase method. As the acquisition occurred on June 30, 1998, the
Company has not recognized any Partnership earnings in either the 1998 fiscal
year or the three months ended September 30, 1998.
In addition to the Company's interest in the Partnership two senior
management personnel also purchased a combined interest in the Partnership of 30
percent.
NOTE 10: INVESTMENT IN AFFILIATED COMPANIES
On December 31, 1997 the Company purchased 50 percent of the issued and
outstanding shares (the "FFC Shares") of FAI Finance Corporation Pty Limited and
its subsidiary FAI Finance Corporation (NZ) Limited (FFC) from FAI Insurances
Ltd (the "FFC Transaction"). FFC, a consumer finance company with operations in
Australia and New Zealand, finances a significant portion of the Company's
financed sales.
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 percent interest in FFC for
the same consideration plus 50 percent 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 (as defined below).
The purchase price of $6,546,000, including direct costs incurred during
the acquisition, was allocated to the net assets of FFC based on the estimated
fair market values. As a result of the allocation, $5,617,000 of the purchase
price was allocated to goodwill.
During the fiscal year ended June 30, 1998, FFC declared a dividend of
$1,771,200. The Company has classified its 50 percent share of the dividend as
"Investment in affiliated companies", as the dividend was reinvested in FFC
during the quarter ended September 30, 1998.
Also included in "Investment in affiliated companies" is an unsecured, non-
interest bearing loan to FFC, repayable on demand, of $531,360.
The purchase price for the FFC Shares was paid through the issuance of a
five year promissory note (the "FFC Note"), bearing interest at 7.75% per annum,
secured by the FFC Shares. Principal payments, which are payable in Australian
dollars, are due on the following dates;
<TABLE>
<CAPTION>
December 31-
<S> <C>
1998 590,400
1999 1,180,800
2000 1,180,800
2001 1,180,800
2002 383,760
---------
4,516,560
=========
F-14
</TABLE>
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(All amounts in US$ unless stated otherwise)
NOTE 11: 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 the short maturities of those instruments. 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 which have not changed
significantly.
NOTE 12: LEASE COMMITMENTS
The operating lease commitments of the Company consist of property rentals
and computer equipment leases.
<TABLE>
<CAPTION>
June 30, September 30,
---------------- -------------
1997 1998 1998
------- ------- -------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Payable not later than one year............................... 181,166 175,094 176,202
Payable later than one year but not later than two years...... 181,166 175,094 176,202
Payable later than two years but not later than three years... 179,243 159,536 154,011
Payable later than three years but not later than four years.. 173,717 100,204 78,887
Payable later than four years but not later than five years... 126,143 - -
------- ------- -------------
841,435 609,928 585,302
======= ======= =============
Three Months Ended
Year Ended June 30, September 30,
------------------------- ------------------
1996 1997 1998 1997 1998
------- ------- ------- ------ ------
(Unaudited)
Rental expense................................................ 218,610 214,229 316,220 65,889 55,025
======= ======= ======= ====== ======
</TABLE>
NOTE 13: SEGMENT INFORMATION
The Company operates principally in one industry segment including the
sale, service and monitoring of security alarm systems. The Company's area of
current operations is principally in Australia and New Zealand with operations
in the United Kingdom, Europe, 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.
F-15
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(All amounts in US$ unless stated otherwise)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------ ----------------------
1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Net sales:
Australia........................... 21,937,533 22,488,078 31,361,814 7,770,794 7,225,291
New Zealand......................... 4,763,389 10,327,184 7,622,952 2,192,631 1,137,419
United Kingdom...................... - 547,083 3,469,824 876,694 1,442,172
South Africa........................ - - 921,770 54,755 258,975
Canada.............................. - 102,250 742,142 153,823 47,755
United States....................... - - - - 114,626
---------- ---------- ---------- ---------- ----------
26,700,922 33,464,595 44,118,502 11,048,697 10,226,238
========== ========== ========== ========== ==========
Income (loss) from operations
before related party royalty
payment:
Australia........................... 3,707,419 3,956,520 7,238,129 1,663,515 1,791,349
New Zealand......................... 1,553,032 2,839,174 1,111,518 520,248 146,531
United Kingdom...................... - 90,175 (124,231) 129,841 767,561
South Africa........................ - (8,481) 105,137 8,255 (16,658)
Canada.............................. - (40,400) (854,025) (23,635) 139,445
United States....................... - (52,120) (462,983) (73,910) (370,713)
---------- ---------- ---------- ---------- ----------
5,260,451 6,784,868 7,013,545 2,224,314 2,457,515
Less: Related party royalty payments.. (2,750,468) (3,647,376) - - -
---------- ---------- ---------- ---------- ----------
2,509,983 3,137,492 7,013,545 2,224,314 2,457,515
========== ========== ========== ========== ==========
Income (loss) from operations:........
Australia........................... 1,448,608 1,457,489 7,238,129 1,663,515 1,791,349
New Zealand......................... 1,061,375 1,690,829 1,111,518 520,248 146,531
United Kingdom...................... - 90,175 (124,231) 129,841 767,561
South Africa........................ - (8,481) 105,137 8,255 (16,658)
Canada.............................. - (40,400) (854,025) (23,635) 139,445
United States....................... - (52,120) (462,983) (73,910) (370,713)
---------- ---------- ---------- ---------- ----------
2,509,983 3,137,492 7,013,545 2,224,314 2,457,515
========== ========== ========== ========== ==========
Depreciation:
Australia........................... 11,192 36,453 161,421 52,678 60,423
New Zealand......................... - 3,757 3,221 768 432
United Kingdom...................... - - 11,434 - 3,046
South Africa........................ - - - - -
Canada.............................. - 2,225 5,759 1,464 454
United States....................... - - - - -
---------- ---------- ---------- ---------- ----------
11,192 42,435 181,835 54,910 64,355
========== ========== ========== ========== ==========
</TABLE>
F-16
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(All amounts in US$ unless stated otherwise)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------- ----------------------
1996 1997 1998 1997 1998
------------ ---------- ---------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Amortization.......................... 226,498 391,924 540,154 142,880 135,038
============ ========== ========== ========== =========
Capital expenditure:
Australia........................... 70,701 856,205 551,668 98,784 83,693
New Zealand......................... - 9,696 20,448 1,985 -
United Kingdom...................... - - 42,305 2,787 1,799
South Africa........................ - - - - -
Canada.............................. - 43,648 26,897 - -
United States....................... - - - - -
------------ ---------- ---------- ---------- ---------
70,701 909,549 641,318 103,556 85,492
============ ========== ========== ========== =========
June 30, September 30,
------------------------- -------------
1997 1998 1998
------------ ---------- -------------
(Unaudited)
Identifiable assets:
Australia........................... 13,055,853 18,164,341 11,062,229
New Zealand......................... 430,468 518,269 730,631
United Kingdom...................... 418,863 1,765,934 1,556,292
South Africa........................ 24,368 188,227 420,957
Canada.............................. 183,631 882,889 901,060
United States....................... 1,843,549 1,959,458 9,964,716
---------- ---------- ----------
15,956,732 23,479,118 24,635,885
Corporate assets.................... 118 7,006,183 6,348,337
---------- ---------- ----------
15,956,850 30,485,301 30,984,222
========== ========== ==========
</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.
F-17
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(All amounts in US$ unless stated otherwise)
NOTE 14: INCOME TAX
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>
Three Months Ended
Year Ended June 30, September 30,
--------------------------------- ---------------------
1996 1997 1998 1997 1998
--------- --------- --------- -------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax expense at statutory rates.. 940,639 1,351,883 2,657,809 823,293 790,901
Tax effect of permanent and other differences:
Over (under) provision for income tax in
prior years................................ (862) (8,538) (5,622) - 10,542
Deduction allocated from investment in
Partnership................................ - - (600,609) -
Non-deductible expenses and other items...... 32,854 145,535 (129,548) 7,824 43,079
Amortization of goodwill..................... 81,539 141,093 189,054 47,765 73,342
--------- --------- --------- -------- ----------
1,054,170 1,629,973 2,111,084 878,882 916,864
========= ========= ========= ======== ==========
The tax expense is split between:
Current...................................... 699,653 1,711,286 2,578,343 981,204 2,262,214
Deferred..................................... 354,517 (81,313) (467,259) (102,322) (1,345,350)
--------- --------- --------- -------- ----------
1,054,170 1,629,973 2,111,084 878,882 916,864
========= ========= ========= ======== ==========
</TABLE>
FAI Home Security Pty Limited purchased tax losses on June 30, 1996 from
FAI Home Security Holdings Pty Limited and FAI Insurances Limited for $110,202
and $766,344, respectively. These tax losses were utilized during the 1996
financial year by offsetting them against taxable income.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets are comprised of timing differences on:
Provisions not currently deductible for tax purposes for:
Doubtful accounts...................................... 46,982 216,023 153,937
Warranty............................................... 118,293 87,373 85,142
Security call-out...................................... 126,563 146,003 142,183
Extended warranty...................................... 172,550 295,046 303,641
Other.................................................. 60,851 29,130 60,763
Sundry accruals............................................ 29,638 11,146 13,815
Tax losses carried forward................................. - 352,898 270,706
Prepayments................................................ (5,484) (120,967) (64,142)
------- --------- -------------
Net deferred tax assets....................................... 549,393 1,016,652 966,045
======= ========= =============
</TABLE>
F-18
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts in US$ unless stated otherwise)
NOTE 15: RELATED PARTY TRANSACTIONS
At June 30, 1997, FAI Finance Corporation (NZ) Limited was related by the
majority holding of the then ultimate parent entity of FFC and the Company, FAI
Insurances Limited.
Interest has been charged on all amounts due to or payable from all related
parties, with the exception of the amount payable to FAI Home Security Pty
Limited, a subsidiary of the Company, 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. During
fiscal 1997 FAI Home Security Pty Limited incurred staff and administration
costs on behalf of FAI Home Security Holdings Pty Limited whereas FAI Finance
Corporation (NZ) Limited incurred costs to administer the New Zealand customer
loan book.
During the years ended June 30, 1996 and 1997 royalties were paid to the
Company's then 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.
FAI General Insurance Company Limited, a subsidiary of FAI Insurances Ltd,
leases office space to FAI Home Security Pty Limited at a commercial rate.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Amounts due from related parties:
Current assets:
FAI Home Security Holdings Pty Limited.. 2,025,455 - -
Non-current assets:
FAI Secure Home Finance Pty Limited..... 24,366 - -
</TABLE>
The FAI Secure Home Finance Pty Limited loan was unsecured and non-interest
bearing. The FAI Home Security Holdings Pty Limited loan was unsecured and non-
interest bearing until June 30, 1997. As of July 1, 1997 interest was charged on
the loan at the Westpac Bank indicator rate.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Amounts due to related party:
Current liabilities:
FAI Insurances Limited........ - 619,233 590,400
Non-current liabilities:
FAI Insurances Limited......... - 4,117,902 3,926,160
</TABLE>
The above loans relate to the acquisition of FFC. Refer to Note 10 for
further details on the terms and conditions of the loans.
F-19
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts in US$ unless stated otherwise)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
-------------------------------- ------------------
1996 1997 1998 1997 1998
--------- --------- ---------- ------ -------
(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 - - -
Non exclusive database license fee paid by
FAI Insurances Limited to:
FAI Home Security Pty Limited................ - - 338,362 - -
FAI Home Security (ENZED) Limited............ - - 72,207 - -
Royalty fees paid to:
FAI Insurances Limited....................... 2,750,468 3,647,376 - - -
Interest on loans paid to:
FAI Insurances Limited....................... - - 216,629 - 98,783
Interest on loans received from:
FAI Home Security Holdings Pty Limited....... - - 26,679 - -
FAI Finance Corporation (NZ) Ltd............. 75,087 755,613 - - -
Management fees paid to:
FAI Finance Corporation (NZ) Ltd............. 43,628 58,394 - - -
Management fees received from:
FAI Home Security Holdings Pty Limited....... - 559,002 - - -
Office rentals paid to:
FAI General Insurance Company Limited........ 218,613 213,240 207,870 52,815 109,117
Computer rentals paid to:
FAI Home Security Holdings Pty Limited....... 96,925 92,937 - - -
</TABLE>
NOTE 16: STOCK OPTION PLANS
The Company has two stock option plans.
1997 Stock Option Plan. The Company has adopted the 1997 Stock Option Plan
(the "1997 Plan"), under which the Compensation Committee may grant options to
purchase up to an aggregate of 750,000 shares of Common Stock to management,
employees and advisers of the Company. The 1997 Plan provides for the grant of
stock options ("Options"), including incentive stock options within the meaning
of Section 422 of the United States Internal Revenue Code of 1986, as amended
(the "Code"), and non-statutory stock options that do not qualify as stock
options under Section 422 of the Code ("Non-Statutory Options"). The Company has
issued a total of 750,000 options under the 1997 Stock Option Plan, all at an
exercise price of $10.00 per share, including 250,000 to Mr. Cooper, 90,000 to
Mr. Youngman and 80,000 to each of Mr. Whitaker and Ms. Hilbert, granted on July
15, 1997 and 165,000 to Mr. Appleby and 85,000 to Mr. Knowles, granted on April
8, 1998. Each of these Options vests in annual 20% increments over a five year
period, with the first 20% vested and exercisable on the first anniversary of
the grant date, except that 85,000 Options granted to Mr. Appleby and 55,000
Options granted to Mr. Knowles will vest in increments upon the Company
achieving certain unit sales numbers outside of Australia and New Zealand prior
to June 30, 1999 or if the Company fails to achieve the targeted unit sales
number on October 31, 2003.
F-20
<PAGE>
HOME SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in US$ unless stated otherwise)
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 initial stock offering ("IPO"), all four non-employee directors
received options to purchase 5,000 shares of Common Stock at $10.00 per share
under the 1997 Non-Employee Director Stock Option Plan. Commencing with the
first annual meeting of the shareholders following the IPO, 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.
NOTE 17: DERIVATIVES
During the year ended June 30, 1998 the Company had entered into a forward
currency exchange contract with a maturity date of June 30, 1998. Under the
contract the Company agreed to sell AUD$1,000,000 and to receive $680,000 on
maturity.
The Company also entered into two foreign currency options, which matured 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.
The above derivatives were closed out on June 26, 1998. For the year ended
June 30, 1998 the Company recorded a gain of $355,000 on its derivatives. As at
September 30, 1998 the Company has no outstanding derivative contracts.
NOTE 18: SUBSEQUENT EVENTS
a) Ness transaction--
Effective October 1, 1998, the Company purchased 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 percent of the issued and outstanding common stock of Ness Security
Products Pty Limited ("Ness"). Ness is a leading manufacturer of security alarm
products in Australia and the Company's sole supplier of the SecurityGuard
alarm. The purchase price for the issued and outstanding Common Stock of IIHSL
consisted of the following: (i) 400,000 shares of the Company's 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 (the
"Ness Warrants"), (iii) cash in the amount of $2,426,000 ($126,000 paid
concurrent with the execution of the Purchase Agreement and $2,300,000 to be
paid upon closing of the Transaction); (iv) a promissory note, secured by the
IIHSL Shares, in the amount of $9,098,000, payable in installments of $400,000
on each of June 30,1999 and December 31, 1999, with the balance of the note due
on June 30, 2000 ("Note"); and, (v) a non-refundable re-negotiation fee of
$200,000.
F-21
<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-22
<PAGE>
COOPER INTERNATIONAL GROUP
COMBINED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Period Year Nine months
Ended Ended ended
June 30, June 30, March 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 statements.
F-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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
</TABLE>
The management fees relate to an apportionment of costs incurred by FAI
Home Security Holdings Pty Limited on behalf of FAI Home Security (UK) Trust and
FAI Home Security (Canada) Unit Trust.
<TABLE>
<CAPTION>
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-31
<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, 1998 and 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years in the period ended June 30, 1998. 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, 1998 and 1997 and the
results of its operations and its cash flows for each of the three years in
the period ended 30 June 1998 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 September 30, 1998, and 1997, which are
presented solely for comparative purposes, were not audited by Independent
Public Accountants.
/s/ Arthur Andersen
Sydney
August 20, 1998
F-32
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
Note $US $US $US $US $US
------ --------- ---------- ---------- ---------- ---------
(Unaudited)
Interest income.............................. 2,814,877 6,399,516 8,589,957 2,033,792 2,102,711
Interest expenses - related party............ 11 (75,087) (755,741) (1,297,681) (217,268) (374,220)
- other.................... (145,479) (1,170,662) (1,154,521) (316,755) (298,843)
---------- ---------- ---------- ---------- ---------
Net interest income.......................... 2,594,311 4,473,113 6,137,755 1,499,769 1,429,648
Management fee income - related party........ 11 43,628 61,675 69,075 20,878 7,706
----------- ----------- ----------- ---------- ---------
Operating revenues........................... 2,637,939 4,534,788 6,206,830 1,520,647 1,437,354
General and administrative expenses - other.. 4 (888,377) (2,042,788) (3,001,603) (718,295) (761,755)
Bad debts and allowance for losses........... 2 (402,017) (807,800) (766,270) (219,477) (307,960)
----------- ----------- ---------- ---------- ---------
Income before taxes.......................... 1,347,545 1,684,200 2,438,957 582,875 367,639
Income tax expense........................... 10 (491,898) (580,205) (919,232) (207,872) 76,075
----------- ----------- ----------- ---------- ---------
Net income................................... 855,647 1,103,995 1,519,725 375,003 443,714
========== =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-33
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
------------------------- -------------
1997 1998 1998
Note $US $US $US
---- ---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents..................... 5 211,096 241,889 2,621,802
Receivables................................... 2
Consumer loans.............................. 29,780,843 38,138,274 33,118,933
Business finance loans...................... 1,020,528 592,076 609,148
---------- ---------- ----------
Total receivables....................... 30,801,372 38,730,350 33,728,081
Less: Allowance for losses of receivables... 2 550,974 592,709 639,917
---------- ---------- ----------
Net receivables......................... 30,250,398 38,137,641 33,088,164
Prepaid expenses and other current assets..... 6 684,198 873,729 118,864
Restricted Deposits........................... 7,14 893,588 913,553 1,080,181
Plant and equipment, net...................... 8 343,050 410,415 414,289
Deferred income taxes......................... 10 208,814 209,319 228,846
Intangibles................................... 9 296,440 232,387 218,243
---------- ---------- ----------
Total assets............................ 32,887,583 41,018,933 37,770,389
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Bank overdraft.............................. 1,541,954 441,916 -
Borrowing--Westpac Banking Corporation...... 14 11,641,113 16,260,681 13,894,234
Payables--trade............................. 84,793 637,975 32,518
Accrued liabilities......................... 43,141 55,532 62,007
Provision for interim dividend.............. - 1,857,700 -
Income tax payable.......................... 1,063 375,645 522,644
Payables--related party..................... 11 17,445,050 20,582,441 20,398,608
---------- ---------- ----------
Total liabilities........................ 30,757,113 40,211,890 34,910,011
---------- ---------- ----------
Shareholders' equity
Common stock ($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 2,193,292
Accumulated other comprehensive loss........ (64,101) (1,049,553) (1,297,632)
Retained earnings........................... 1,822,003 1,484,028 1,927,742
---------- ---------- ----------
Total shareholders' equity............... 2,130,470 807,043 2,860,378
---------- ---------- ----------
Total liabilities and
shareholders' equity................... 32,887,583 41,018,933 37,770,388
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-34
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
-------------------------------------------- ----------------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
------------- ------------ ------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cashflow from operating activities
Net income......................................... 855,647 1,103,995 1,519,725 375,003 443,714
Adjustments to reconcile net income to
Net cash from Operating activities:
Depreciation....................................... 24,860 55,318 127,353 27,238 40,159
Amortization of goodwill........................... 17,185 35,020 15,333 3,834 3,324
Deferred taxes and income tax payable.............. 43,308 (613,974) 364,378 201,008 137,362
Provision for losses on term loans receivable...... 257,633 279,192 150,871 91,050 74,155
(Increase) decrease in operating assets:
Prepaid expenses and other assets.................. (244,198) (450,320) (332,444) 394,800 724,138
Increase (decrease) in operating liabilities:
Accounts payable................................... 201,529 7,443 639,357 (64,507) (592,196)
Accrued liabilities................................ (15,679) 12,306 21,888 12,114 8,999
------------- ------------ ------------- ------------ ------------
Net cash provided by operating activities............ 1,140,285 428,980 2,506,461 1,040,540 839,655
------------- ------------ ------------- ------------ ------------
Cashflow from investing activities
Additions to plant and equipment................... (107,277) (258,225) (273,951) (46,279) (61,554)
Term loans funded.................................. (22,930,642) (33,411,428) (53,485,579) (12,800,376) (6,246,914)
Collection of principal............................ 9,950,145 23,706,843 38,112,514 9,126,255 9,559,455
------------- ------------ ------------- ------------ ------------
Net cash provided by (used in) investing activities.. (13,087,774) (9,962,810) (15,647,016) (3,720,400) 3,250,987
------------- ------------ ------------- ------------ ------------
Cashflow from financing activities
Net proceeds from borrowings....................... 8,444,131 (420,924) 7,244,019 489,791 (1,609,300)
Decrease in restricted deposits.................... (788,600) (104,988) (188,062) (93,114) (209,166)
Receipts from related parties...................... 3,890,195 8,679,306 7,094,301 2,997,292 538,635
Increase (decrease) in bank overdraft.............. 11,819 1,530,134 (923,065) (604,300) (421,339)
------------- ------------ ------------- ------------ ------------
Net cash provided by (used in) financing activities.. 11,557,545 9,683,528 13,227,193 2,789,669 (1,701,170)
------------- ------------ ------------- ------------ ------------
Net increase (decrease) in cash held................. (389,944) 149,699 86,638 109,809 2,389,472
------------- ------------ ------------- ------------ ------------
Cash at the beginning of the financial period........ 379,406 17,576 211,096 211,096 241,889
Effect of exchange rate change on cash held.......... 28,114 43,821 (55,845) (46,893) (9,559)
------------- ------------ ------------- ------------ ------------
Cash at the end of the financial period.............. 17,576 211,096 241,889 274,012 2,621,802
============= ============ ============= ============ ============
Supplemental disclosure of cashflow information
Interest paid........................................ 220,566 755,742 2,452,201 534,023 673,063
Income taxes paid.................................... 497,783 1,200,788 286,592 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-35
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Stock Issued
----------------------
($1 Australian dollar Accumulated
par value) Additional Retained Other Total
Shares Paid-in Comprehensive Earnings Comprehensive Shareholders'
Equity Amount Capital Income Unappropriated Income(Loss) Cash Dividend
$US $US $US $US $US $US $US $US
---------- ---------- ---------- ------------- --------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 50,002 36,976 335,592 (137,639) (14,151) - 220,778
Comprehensive income
Net income 1996 [855,647] 855,647 855,647
Other Comprehensive
income, (loss) net
of tax
Foreign currency
translation
adjustment 50,729
-------------
Other Comprehensive
income (loss) 50,729 50,729 50,729
Comprehensive income [906,376]
============
---------- ---------- ---------- --------------- ------------- ------------ ------------
BALANCE, JUNE 30, 1996 50,002 36,976 335,592 718,008 36,578 - 1,127,154
Comprehensive income
Net income 1997 [1,103,995] 1,103,995 1,103,995
Other Comprehensive
income, (loss) net
of tax
Foreign currency
translation
adjustment (100,679)
-------------
Other Comprehensive
income (loss) (100,679) (100,679 (100,679)
Comprehensive income [1,003,316]
============
---------- ---------- ---------- --------------- ------------- ------------ ------------
BALANCE, JUNE 30, 1997 50,002 36,976 335,592 1,822,003 (64,101) - 2,130,470
Comprehensive income
Net income 1997 [1,519,725] 1,519,725 1,519,725
Other Comprehensive
income, (loss) net
of tax
Foreign currency
translation
adjustment (985,452)
-----------
Other Comprehensive
income (loss) (985,452) (985,452) (985,452)
Comprehensive income [534,273]
===========
Cash dividend declared
($36.15 per share) (1,857,700) (1,857,700)
---------- ---------- ---------- -------------- ------------ ------------ -----------
BALANCE, JUNE 30, 1998 50,002 36,976 335,592 3,341,728 (1,049,553) (1,857,700) 807,043
Comprehensive income
Net income
July 1-September 30,
1998 [443,714] 443,714 443,714
Other Comprehensive
income, (loss) net
of tax
Foreign currency
translation
Adjustment (236,000)
-------------
Other Comprehensive
income (loss) (236,000) (248,079) (248,079)
Comprehensive income [207,714]
===========
Additional paid in
capital 1,857,700 1,857,700
--------- ---------- ---------- -------------- ----------- ------------ ------------
BALANCE, SEPT 30, 1998 $ 50,002 $ 36,976 $2,193,292 $ 3,785,442 $(1,297,632) $ (1,857,700) $ 2,860,378
========= ========== ========== ============== ============ ============ ============
The movements from July 1, 1998 to September 30, 1998 are unaudited.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-36
<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. The capital stock of FAI
Finance Corporation (NZ) Ltd is owned by FAI Finance Corporation Pty Ltd.
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 for 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-37
<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:
Years
-----
Office equipment........ 7.7
Plant................... 4.0
Motor vehicles.......... 6.5
Computer equipment...... 4.0
Leasehold improvements.. 6.0
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.
m) New Accounting Pronouncements--
Certain reclassifications have been made to the prior year statements to
make them consistent with the current year presentation.
F-38
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2: LENDING ASSETS
Lending assets include loan 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, June 30, 1998,
September 30, 1997 and September 30, 1998.
b) Contractual Maturity of Loan Receivables (unaudited) -
The contractual maturities of FFC's receivables at September 30, 1998 are
due as follows:
<TABLE>
<CAPTION>
1998 1999 After2000 Total
$US $US $US $US
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Consumer loans.......... 16,559,467 13,247,573 3,311,893 33,118,933
Business finance loans.. 426,404 182,744 - 609,148
---------- ---------- --------- ----------
Total loans........ 16,985,871 13,430,317 3,311,893 33,728,081
========== ========== ========= ==========
</TABLE>
The average yield on FFC's receivables for the three months ended September
31, 1998 was 24.41% per annum.
c) Allowance for Losses -
<TABLE>
<CAPTION>
June 30, September 30,
---------------- -------------
1997 1998 1998
$US $US $US
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Balance at the beginning of the year.. 271,781 550,974 592,709
Provision for losses.................. 279,193 41,735 47,208
------- ------- -------
Balance at the end of the year........ 550,974 592,709 639,917
======= ======= =======
</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 in the reserves maintained.
d) Bad Debts and Allowance for losses -
Bad debts and allowance for losses comprise:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
--------------------------- ------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
-------- -------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Increase in allowance for losses.. 257,633 279,193 41,735 79,389 47,208
Bad debts charged off............. 144,384 528,607 724,535 140,088 260,752
------- ------- ------- ------- -------
Total............................. 402,017 807,800 766,270 219,477 307,960
======= ======= ======= ======= =======
</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, 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-39
<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>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------- --------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
------- --------- --------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Employee salaries..... 370,786 836,372 1,255,840 272,278 326,692
Communications........ 68,925 315,020 303,533 102,420 63,403
Space costs........... 39,138 104,812 190,607 46,491 48,415
Legal fees............ 16,642 81,337 92,107 37,509 9,422
Depreciation.......... 24,860 55,318 127,355 27,238 40,159
Research information.. 43,699 99,591 133,126 31,920 39,692
Office expenses....... 130,280 175,695 379,379 88,280 81,195
Travel................ 3,256 6,319 59,200 5,229 28,080
Bank charges.......... 108,151 72,081 140,893 41,563 32,238
Other................. 82,640 296,243 319,563 65,367 92,459
------- --------- --------- ------- -------
Total.............. 888,377 2,042,788 3,001,603 718,295 761,755
======= ========= ========= ======= =======
</TABLE>
NOTE 5: CASH
<TABLE>
<CAPTION>
June 30, September 30,
----------------- -------------
1997 1998 1998
$US $US $US
------- ------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash on hand............................... 373 594 569
Cash at bank............................... 210,723 241,295 2,621,233
------- ------- ---------
211,096 241,889 2,621,802
======= ======= =========
</TABLE>
NOTE 6: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
------------------ -------------
1997 1998 1998
$US $US $US
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Prepayments................................... 46,628 25,208 19,543
Sundry debtors................................ 637,570 848,521 99,321
------- ------- -------
684,198 873,729 118,864
======= ======= =======
</TABLE>
NOTE 7: RESTRICTED DEPOSITS
<TABLE>
<CAPTION>
June 30, September 30,
------------------ -------------
1997 1998 1998
$US $US $US
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Deposits - Westpac Banking Corporation........ 893,588 913,553 1,080,181
------- ------- ---------
893,588 913,553 1,080,181
======= ======= =========
</TABLE>
Access to the funds in this account is restricted in accordance with the
Receivables Purchase Agreement entered into with Westpac Banking Corporation.
Refer to Note 14.
F-40
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, September 30,
------------------ ------------------
1997 1998 1998
$US $US $US
------- ------- ------------------
(Unaudited)
<S> <C> <C> <C>
Office equipment.................................... 104,574 165,836 160,188
Plant............................................... 29,318 32,587 60,152
Motor vehicles...................................... 47,210 73,121 70,054
Computer equipment.................................. 177,738 246,211 266,560
Leasehold improvements.............................. 68,582 77,200 73,825
Less: Accumulated depreciation...................... (84,372) (184,540) (216,490)
------- -------- ---------
343,050 410,415 414,289
======= ======== =========
</TABLE>
NOTE 9: INTANGIBLES
<TABLE>
<CAPTION>
June 30, September 30,
------------------ ------------------
1997 1998 1998
$US $US $US
------- ------- ------------------
(Unaudited)
<S> <C> <C> <C>
Initial goodwill on investment...................... 335,592 278,864 265,880
Amortization of goodwill............................ (39,152) (46,477) (47,637)
------- ------- -------
296,440 232,387 218,243
======= ======= =======
</TABLE>
Goodwill represents the excess of the purchase price paid by FAI Insurances
Limited, over the fair value of assets acquired when FAI General Insurance
Company 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>
Three Months Ended
Year Ended June 30, September 30,
------------------------------- --------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
------- ------- ------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax expense at statutory rates...... 474,017 591,684 852,599 204,198 129,621
Tax effect of permanent and other differences:......
Over provision for income tax in prior years...... 696 (42,152) - - (214,265)
Non-deductible expenses and other items........... - 24,336 61,113 3,674 7,458
Amortization of goodwill............................ 17,185 6,337 5,520 - 1,111
Change in tax rates in deferred tax benefits...... - - - - -
------- ------- ------- ------- --------
491,898 580,205 919,232 207,872 (76,075)
======= ======= ======= ======= ========
The tax expense is split between:
Current............................................. 482,101 710,273 880,302 183,038 (85,957)
Deferred............................................ 9,797 (130,068) 38,930 24,834 9,882
</TABLE>
Tax losses have been purchased by FFC at June 30, 1996 for $497,783 and June 30,
1997 for $671,751 from FAI Insurances Group. These were utilized during the
financial year.
F-41
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
June 30, September 30,
-------------------- -------------
1997 1998 1998
$US $US $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................................ 198,351 192,179 221,042
Leave......................................... 15,530 17,948 20,352
Other......................................... 4,389 3,648 5,483
Sundry accruals.................................... - 4,205 4,656
Deferred costs..................................... - (5,374) (12,606)
Prepayments........................................ (9,456) 4,972 (2,206)
Tax losses carried forward......................... - (8,259) (7,875)
------- ------- -------
Net deferred tax asset................................ 208,814 209,319 228,846
======= ======= =======
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
FAI Home Security (NZ) Trust, FAI Home Security Holdings (New Zealand) Limited
and FAI General Insurance Company Ltd, each of which is owned by FAI Insurances
Limited, are related by the 50 percent holding of FAI Insurances Limited, in FAI
Finance Corporation Pty Limited as at September 30, 1998.
FAI Home Security Pty Limited, which is owned by the Company, is related by its
50 percent holding in FAI Finance Corporation Pty Limited as at September 30,
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, September 30,
-------------------- -------------
1997 1998 1998
$US $US $US
----------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
Amounts due to related party:
Non Current Liabilities
FAI Insurances Limited............................ - 9,563,073 9,412,988
FAI General Insurance Company Ltd................. 7,511,515 10,424,200 10,180,291
FAI Home Security Pty Limited..................... - 309,617 531,360
FAI Home Security (NZ) Trust...................... 9,546,227 - -
FAI Home Security Holdings (New Zealand) Limited.. 387,308 285,551 273,969
---------- ---------- ----------
17,445,050 20,582,441 20,398,608
========== ========== ==========
</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, FAI General Insurance Company Ltd and FAI Home Security Pty Limited
loans. The FAI Insurances Limited and FAI General Insurance Company Ltd loans
were 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. The FAI Home Security Pty Limited loan is non interest bearing
and repayable on demand. As from January 1, 1998, FAI Insurances Limited and FAI
General Insurances Company Ltd, together, agreed to match funding provided by
FAI Home Security Pty Limited to FFC. These loans are noninterest bearing and
repayable on demand. As at September 30, 1998 $531,360 of the FAI General
Insurances Company Ltd loan balance and all of the FAI Home Security Pty Limited
loan balance fell under this category.
F-42
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
---------------------------- ------------------
1996 1997 1998 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.................. 67,174 754,176 314,582 214,701 -
FAI Home Security Holdings
(New Zealand) Limited....................... 7,913 1,565 28,957 2,567 6,302
Interest on loans paid by FAI Finance
Corporation Pty Limited to:
FAI General Insurance Company Ltd. ........... - - 414,619 - 189,087
FAI Insurances Ltd. .......................... - - 539,523 - 180,829
Management fees received by FAI Finance
Corporation (NZ) Limited from:
FAI Home Security Holdings
(New Zealand) Limited...................... 43,628 61,675 40,701 11,697 7,706
Vision Publishing Pty Limited................. - - 28,374 9,181 -
Office rentals paid by FAI Finance
Corporation Pty Limited to:
FAI General Insurance Company Limited......... 65,611 51,535 98,503 8,629 9,373
</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 Insurances Limited and FAI
General Insurance Company 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.
NOTE 13: SEGMENT INFORMATION
The following table shows certain financial information by geographical
region.
F-43
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended June 30, September 30,
------------------------------------- -----------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net interest income:
- Australia......................... 2,480,922 3,496,927 4,452,019 1,379,506 1,512,885
- New Zealand....................... 113,389 976,186 1,685,736 654,286 589,826
--------- --------- --------- --------- ---------
2,594,311 4,473,113 6,137,755 2,033,792 2,102,711
========= ========= ========= ========= =========
Operating revenues:
- Australia......................... 2,481,860 3,496,927 4,480,393 1,103,342 1,048,803
- New Zealand....................... 156,079 1,037,861 1,726,437 417,306 388,551
--------- --------- --------- --------- ---------
2,637,939 4,534,788 6,206,830 1,520,648 1,437,354
========= ========= ========= ========= =========
Bad debts and allowance for losses:
- Australia......................... 401,610 754,141 579,972 215,900 136,602
- New Zealand....................... 407 53,659 186,298 3,577 171,358
--------- --------- --------- --------- ---------
402,017 807,800 766,270 219,477 307,960
========= ========= ========= ========= =========
Net income:
- Australia............................. 781,853 750,864 1,021,385 216,104 102,916
- New Zealand........................... 73,794 353,131 498,340 158,899 340,798
--------- --------- --------- --------- ---------
855,647 1,103,995 1,519,725 375,003 443,714
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
-------------------------- -------------
1997 1998 1998
$US $US $US
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Identifiable assets
- Australia.................................................... 22,543,219 30,225,503 27,434,522
- New Zealand.................................................. 10,344,364 10,793,430 10,335,867
---------- ---------- -------------
32,887,583 41,018,933 37,770,389
========== ========== =============
</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 sub-ordinated loan with Westpac equal to the greater of
$2,362,000 and 25% of the outstanding sold receivable 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 sub-ordinated loan to Westpac
to a maximum of $3,542,000.
FFC is required to maintain a cash reserve account (restricted deposit)
with Westpac, the balance of which is not less than the greater of $590,000 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 sub-ordinated loan have been met. The balance of the account is only
available to FFC after all outstanding obligations to Westpac and the sub-
ordinated 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
1.25% per annum. In addition, FFC pays program and line fees as agreed between
the parties.
F-44
<PAGE>
FAI FINANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The current limit of the facility provided by Westpac is $17,712,000
(utilized at June 30, 1998 - $13,894,000). 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.
NOTE 15: DERIVATIVES
FFC has entered an interest rate collar with Westpac. Under the collar FFC
has capped its interest payable on a notional borrowing of $17,712,000 at 13.5%
per annum, until August 14, 2000. FFC has also set a floor on the same notional
principal and maturity, at 5.53% per annum.
F-45
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE]
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Integrated International Home Security Limited
We have audited the consolidated balance sheets of Integrated International Home
Security Limited (the "Company") as of June 30, 1998 and 1997, the related
consolidated statements of income and cashflows for the years ended June 30,
1998 and 1997 and the period from September 19, 1995 (date of incorporation) to
June 30, 1996 and the related consolidated statements of changes in
shareholders' equity for the years ended June 30, 1998 and 1997 (all expressed
in United States dollars). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an 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 our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
1997, the results of its operations and its cashflows for the years ended June
30, 1998 and 1997 and the period from September 19, 1995 to June 30, 1996 and
its changes in shareholders' equity for the years ended June 30, 1998 and 1997
in accordance with generally accepted accounting principles in the United States
of America.
The consolidated balance sheet of the Company as of September 30, 1998, the
consolidated statements of income and cashflows for the three month period ended
September 30, 1998 and 1997 and the consolidated statement of changes in
shareholders' equity for the three month period ended September 30, 1998 were
not audited by us and, accordingly, we do not express an opinion on them.
/s/ Deloitte & Touche
November 27, 1998
British Virgin Islands
F-46
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Three Months Ended
June 30, June 30, September 30,
----------- -------------------------- --------------------------
1996 1997 1998 1997 1998
Note $US $US $US $US $US
---- ----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Sales......................................... 2 12,416,172 16,193,399 24,223,877 6,085,312 5,720,174
Cost of goods sold................................ (8,261,507) (9,451,379) (13,455,073) (3,500,920) (3,561,727)
---------- ---------- ---------- ---------- ----------
Gross profit...................................... 4,154,665 6,742,020 10,768,804 2,584,392 2,158,447
General and administrative expenses............... (2,348,876) (3,554,358) (5,705,936) (939,944) (1,075,202)
Research and development expenses................. (293,266) (594,904) (851,159) (191,708) (175,822)
---------- ---------- ---------- ---------- ----------
Income from operations............................ 1,512,523 2,592,758 4,211,709 1,452,740 907,423
Interest income - other........................ 10,158 8,361 13,899 - 1,829
Interest expenses - related party................ 13 (249,003) - - - -
- other........................ (9,561) (200,674) (126,997) (40,898) (15,439)
---------- ---------- ---------- ---------- ----------
Income before taxes and minority interest......... 1,264,117 2,400,445 4,098,611 1,411,842 893,813
Income tax expense................................ 12 (321,529) (719,857) (1,451,887) (520,015) (403,365)
---------- ---------- ---------- ---------- ----------
Income before minority interest................... 942,588 1,680,588 2,646,724 891,827 490,448
Minority interest................................. (456,450) (444,392) (781,785) (258,273) (122,416)
---------- ---------- ---------- ---------- ----------
Net Income........................................ 486,138 1,236,196 1,864,939 633,554 368,032
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-47
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
Year Ended June 30, September 30,
---------------------- --------------
1997 1998 1998
Note $US $US $US
---- --------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents....................... 66,824 458,355 28,263
Accounts receivable, net........................ 3 3,013,841 3,772,704 3,641,870
Inventories..................................... 4 3,981,194 4,771,845 5,515,991
Prepaid expenses and other current assets....... 5 93,955 45,191 466,237
---------- ---------- ----------
Total current assets......................... 7,155,814 9,048,095 9,652,361
---------- ---------- ----------
Non - current assets
Capital assets, net............................. 6 1,671,287 1,536,605 1,588,336
Intangibles, net................................ 7 - 234,022 216,791
Deferred income taxes........................... 12 315,096 375,470 343,263
Other non-current assets........................ 10,227 - -
---------- ---------- ----------
Total non - current assets................... 1,996,610 2,146,097 2,148,390
---------- ---------- ----------
Total assets................................. 9,152,424 11,194,192 11,800,751
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft.................................. - - 25,092
Payables - trade................................ 2,213,940 3,027,063 3,409,859
Accrued liabilities............................. 443,867 621,432 689,234
Lease liability................................. 10 217,443 219,367 158,791
Income tax payable.............................. 12 852,898 1,142,889 1,322,662
Current portion of long term borrowings......... 8 745,200 619,200 442,800
---------- ---------- ----------
Total current liabilities.................... 4,473,348 5,629,951 6,048,438
---------- ---------- ----------
Non - current liabilities
Lease liability................................. 10 694,813 476,719 454,546
Long term borrowings............................ 8 745,200 - -
Payables - related party........................ 13 593,998 - -
Accrued liabilities............................. 74,558 53,212 -
---------- ---------- ----------
Total non - current liabilities.............. 2,108,569 529,931 454,546
---------- ---------- ----------
Total liabilities............................ 6,581,917 6,159,882 6,502,984
---------- ---------- ----------
Minority interest in subsidiary company........... 895,476 1,546,615 1,669,033
Shareholders' equity
Common stock $1.00 value; 52,557 (1997--1,000)
shares authorized issued and outstanding..... 1,000 52,557 52,557
Additional paid-in capital...................... - 470,610 470,610
Accumulated other comprehensive income.......... (48,303) (622,745) (849,738)
Retained earnings............................... 1,722,334 3,587,273 3,955,305
---------- ---------- ----------
Total shareholders' equity................... 1,675,031 3,487,695 3,628,734
---------- ---------- ----------
Total liabilities and shareholders' equity... 9,152,424 11,194,192 11,800,751
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-48
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED STATEMENTS OF CASHFLOWS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Three Months Ended
June 30, June 30, September 30,
---------- ------------------------ --------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
---------- ---------- ---------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cashflow from operating activities
Net income....................................... 486,138 1,236,196 1,864,939 633,554 368,032
Adjustments to reconcile net income to net cash
from operating activities:
Minority interest................................ 867,260 28,216 755,985 258,273 122,418
Depreciation..................................... 50,826 211,711 186,778 99,645 86,192
Amortisation of goodwill......................... - - 299,920 11,031 6,297
Amortisation of leased assets.................... 28,279 154,439 229,515 57,670 50,761
Profit on sale of property, plant and equipment.. (15,031) (9,486) 53,380 10,880 -
Finance lease costs.............................. 9,969 88,470 88,882 24,265 17,238
Deferred taxes and income tax payable............ 332,233 338,091 315,778 509,348 247,675
Provision for losses on accounts receivable...... 28,390 2,079 82,227 8,614 3,542
Provision for obsolescence....................... 235,963 28,362 193,926 21,534 26,568
(Increase) decrease in operating assets:
Accounts receivable - trade...................... (2,662,253) 317,515 (1,285,683) (808,158) (48,183)
Inventories...................................... 415,968 (799,957) (1,358,512) (273,667) (992,661)
Prepaid expenses and other assets................ (171,274) 79,209 19,090 (104,290) (309,580)
Increase (decrease) in operating liabilities:
Accounts payable................................. 2,277,389 (577,571) 564,113 480,106 111,711
Accrued liabilities.............................. 488,195 91,520 243,874 42,820 334,721
---------- ---------- ---------- -------- --------
Net cash provided by operating activities............ 2,372,052 1,188,794 2,254,212 971,625 24,731
---------- ---------- ---------- -------- --------
Cashflow from investing activities...................
Proceeds from sale of plant and equipment........ 49,183 59,398 11,573 2,153 -
Acquisition of business assets................... (3,686,726) (914,570) - - -
Consideration for acquisition of subsidiary,
net of cash acquired........................... - - (411,936) (407,509) -
Additions to plant and equipment................. (973,513) (484,830) (465,427) (105,132) (252,923)
---------- ---------- ---------- -------- --------
Net cash used in investing activities................ (4,611,056) (1,340,002) (865,790) (510,488) (252,923)
---------- ---------- ---------- -------- --------
Cashflow from financing activities
Capital subscribed............................... 1,000 - 522,167 - -
Finance lease payments........................... (31,891) (157,536) (294,389) (61,272) (67,467)
Increase in bank overdraft....................... - - - - 25,092
Funds from sale and leaseback of fixed assets.... - 458,298 - - -
Receipts from related parties.................... 410,539 183,898 (493,564) - -
Net proceeds from (repayments of) borrowings..... 2,365,800 (745,200) (681,000) (200,567) (147,600)
---------- ---------- ---------- -------- --------
Net cash provided by (used in) financing activities.. 2,745,448 (260,540) (946,786) (261,839) (189,975)
--------- -------- -------- -------- --------
Net increase/(decrease) in cash held................. 506,444 (411,748) 441,636 199,298 (418,167)
---------- ---------- ---------- -------- --------
Cash at the beginning of the financial period........ - 506,445 66,824 66,824 458,355
Effect of exchange rate change on cash held.......... - (27,873) (50,105) (23,424) (11,925)
---------- ---------- ---------- -------- --------
Cash at the end of the financial period.............. 506,444 66,824 458,355 242,698 28,263
========== ========== ========== ======== ========
Supplemental disclosure of cashflow information:
Interest paid........................................ 258,565 235,101 126,997 40,898 13,592
Income taxes paid.................................... - 472,948 1,104,592 - 157,708
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-49
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Capital Stock Issued Additional Retained Other Total
-------------------- Paid-in Comprehensive Earnings Comprehensive Shareholders'
Shares Amount Capital Income Unappropriated Loss Equity
-------- -------- ---------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 1,000 1,000 - 486,138 16,260 503,398
Comprehensive income
Net Income 1997 [1,236,196] 1,236,196 1,236,196
Other Comprehensive income,
net of tax
Foreign currency
translation
Adjustment (64,563)
----------
Other Comprehensive income (64,563) (64,563) (64,563)
Comprehensive income [1,171,633]
==========
-------- -------- -------- --------- ------- ---------
BALANCE, JUNE 30, 1997 1,000 1,000 - 1,722,334 (48,303) 1,675,031
Comprehensive income
Net Income 1998 [1,864,939] 1,864,939 1,864,939
Other Comprehensive income,
net of tax
Foreign currency
translation
Adjustment (574,442)
----------
Other Comprehensive income (574,442) (574,442) (574,442)
Comprehensive income [1,290,497]
==========
Additional paid-in capital 51,557 51,557 470,610 522,167
-------- -------- -------- --------- ------- ---------
BALANCE, JUNE 30, 1998 52,557 52,557 470,610 3,587,273 (622,745) 3,487,695
Comprehensive income
Net Income July 1 -
September 30, 1998 [368,032] 368,032 368,032
Other Comprehensive income,
net of tax
Foreign currency
translation
Adjustment (226,993)
----------
Other Comprehensive income (226,993) (226,993) (226,993)
Comprehensive income [141,039]
==========
-------- -------- -------- --------- ------- ---------
BALANCE, SEPTEMBER 30,
1998 52,557 52,557 470,610 3,955,305 (849,738) 3,628,734
======== ======== ======== ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-50
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 : NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business -
Integrated International Home Security Pty Limited (the "Company") was
incorporated in the British Virgin Islands on September 19, 1995 under the
International Business Companies Act and acts as an investment holding company.
On October 3, 1995 the Company acquired 51.84 % of Ness Security Products Pty
Limited ("Ness"), incorporated in Sydney, Australia on June 22, 1995.
Subsequently the Company acquired a further 23.2% to bring its total holdings in
Ness to 75.04 % as at June 30, 1998. On October 3, 1995 Ness acquired the
business of manufacture, assembly and sale of security alarms from Westinghouse
Break & Signal Company (Australia) Limited ("Westinghouse") a member of the BTR
Nylex Group for the fair value of net business assets, being $3,686,726. On July
29, 1997 Ness acquired 100% of National Fire & Safety (S.E. Asia) Limited
("NF&S"), incorporated in Hong Kong on May 12, 1992. On September 3, 1997 Ness
acquired a 50% holding in Ness Security USA, Inc ("Ness USA"), incorporated in
Florida on November 12, 1996. Ness acquired the remaining 50% of shares in Ness
USA on March 3, 1998.
The Company acts as an investment holding company. Ness is the principal
trading entity. The main business activities of Ness are the design,
manufacture and sale of high quality security products. Ness is the exclusive
supplier of Home Security International, Inc.'s ("HSI") security alarm system,
"SecurityGuard". Currently more than 67 percent of all Ness sales are made to
subsidiary's of HSI.
b) Principles of Consolidation and Basis of Preparation -
The accompanying consolidated financial statements comprise the accounts of
the Company and its controlled entities, Ness, Ness USA and NF&S 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 on consolidation.
The minority interest represents the 24.96% separate public ownership of
Ness Security Products Pty Limited.
The acquisition of both NF&S and Ness USA as at September 30, 1998 were
accounted for as 100% acquisitions.
c) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term investments with
maturities of three months or less from the date of purchase. Cash and cash
equivalents are stated at cost, which approximates market value.
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 accumulated as a separate component in
shareholders' equity.
The functional currency of each entity is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Integrated International Home Security Limited - US dollars
Ness - Australian dollars
Ness USA - US dollars
NF&S - Hong Kong dollars.
</TABLE>
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.
f) Income Taxes -
F-51
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS - (Continued)
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.
g) Revenue Recognition -
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates. Ness warrants its products against defects in design,
materials and workmanship for one year. A provision for estimated future costs
relating to warranty expenses is recorded when products are shipped.
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 work in progress, finished goods and raw materials.
Inventories are stated at the lower of cost (first-in, first-out method), or
market. The elements of cost include direct labour and materials, variable
overhead and the full absorption of fixed manufacturing overhead. Provision for
potentially obsolete or slow moving inventory is made based on managements'
analysis of inventory levels and future sales forecasts.
j) Capital assets -
Capital assets are recorded at cost. Maintenance and repairs are expenses
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.. 10.0
Office equipment........ 6.5
Plant and machinery..... 5.0
Motor vehicles.......... 6.5
</TABLE>
k) Leased Assets -
Leased assets classified as finance leases are capitalized as fixed assets.
The amount initially brought to account is the present value of minimum lease
payments. A financed lease is one, which effectively transfers from the lessor
to the lessee substantially all the risks and benefits incidental to ownership
of the leased property. Capitalized leased assets are amortized on a straight-
line basis over the estimated useful life of the asset. Finance lease payments
are allocated between interest expense and the reduction of lease liability over
the term of the lease. The interest expense is determined by applying the
interest rate implicit in the lease to the outstanding lease liability at the
beginning of each lease payment period.
Operating lease payments are charged as an expense in the period in which
they are incurred.
l) Acquisition of assets -
Assets acquired are recorded at the cost of acquisition, being the purchase
consideration determined as at the date of acquisition, plus costs incidental to
the acquisition.
m) Research and Development -
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at discovery of new knowledge
which will be useful in developing new products or processes, or significantly
enhancing existing products or production processes, and the implementation of
such through design, testing of product alternatives or construction of
prototypes. Ness expenses all research and development costs as they are
incurred.
n) Pension and other Benefit Plans -
Ness contributes to a pension plan on behalf of its employees. The pension
plan is an accumulation fund and Ness has no liability to members under the
plan. Ness has no other pension or other employment benefit plans.
o) Intangible Assets -
Intangible assets represent the excess of cost over fair value of assets
acquired and are amortized using the straight-line method over ten years. The
carrying value of intangible assets is periodically reviewed by Ness based on
the expected future undiscounted operating cash flows of the related business
unit. Goodwill relating to Ness USA was fully amortized as at June 30, 1998,
based on management's assessment of the expected future undiscounted operating
cash flows of Ness USA. Based upon its most recent analysis and subsequent
adjustments, management believes that no material impairment of intangible
assets exists at September 30, 1998.
p) Derivative Financial Instruments -
Ness periodically enters into forward currency exchange contracts and
options to manage the risk of foreign currency fluctuations when purchasing raw
materials offshore. The change in fair value of the contracts is recognized
immediately and included in the determination of net income. Ness is not a
trader in derivative securities, and has not used speculative derivative
products for the purpose of generating earnings from changes in market
conditions.
q) New Accounting Pronouncements -
As of July 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses net income and foreign currency
translation adjustments, in the statement of changes in shareholders' equity.
F-52
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 2: NET SALES
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Three Months Ended
June 30, June 30, September 30,
---------- ------------------------- -----------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
---------- ---------- ---------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Product sales................. 12,409,843 16,195,419 24,473,427 6,084,027 5,616,674
Other......................... 46,255 21,373 18,111 1,285 103,500
---------- ---------- ---------- --------- ---------
Gross sales................... 12,456,098 16,216,792 24,491,538 6,085,312 5,720,174
Less: returns and rebates..... (39,926) (23,393) (267,661) - -
---------- ---------- ---------- --------- ---------
Net sales..................... 12,416,172 16,193,399 24,223,877 6,085,312 5,720,174
=========== ========== ========== ========= =========
</TABLE>
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
<TABLE>
<CAPTION>
June 30, September 30,
------------------------ -------------
1997 1998 1998
$US $US $US
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Accounts Receivable......................... 3,042,747 3,883,837 3,752,490
Less: allowances for doubtful debts......... (28,906) (111,133) (110,620)
--------- --------- -------------
3,013,841 3,772,704 3,641,870
========= ========= =============
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
June 30, September 30,
----------------------- -------------
1997 1998 1998
$US $US $US
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Finished goods.......................... 1,142,485 2,568,648 2,651,202
Work in progress........................ 567,470 367,872 548,140
Raw materials........................... 2,522,578 2,280,590 2,771,524
--------- --------- -------------
4,232,533 5,217,110 5,970,866
Less: provision for obsolescence........ (251,339) (445,265) (454,875)
--------- --------- -------------
3,981,194 4,771,845 5,515,991
========= ========= =============
</TABLE>
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
----------------- -------------
1997 1998 1998
$US $US $US
------ ------ -------------
(Unaudited)
<S> <C> <C> <C>
Prepayments............. 60,264 9,077 302,240
Director's loan......... - - 95,375
Sundry debtors.......... 33,691 36,114 68,622
------ ------ -------------
93,955 45,191 466,237
====== ====== =============
</TABLE>
The Director's loan is unsecured, repayable on demand and bears interest at
commercial rates.
NOTE 6: CAPITAL ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
------------------------ -------------
1997 1998 1998
$US $US $US
--------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Furniture and fixtures................. 100,372 126,873 124,410
Office equipment....................... 107,120 196,095 204,114
Plant.................................. 1,532,546 1,594,828 1,761,004
Motor vehicles......................... 343,899 326,004 310,841
Less: Accumulated depreciation......... (412,650) (707,195) (812,033)
--------- --------- -------------
1,671,287 1,536,605 1,588,336
========= ========= =============
</TABLE>
F-53
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 7: INTANGIBLES
June 30, September 30,
----------------- -------------
1997 1998 1998
$US $US $US
------- -------- -------------
(Unaudited)
Initial goodwill on Investment.. - 506,724 450,280
Amortisation of goodwill........ - (272,702) (233,489)
------- -------- -----------
- 234,022 216,791
======= ======== ===========
Goodwill represents the excess of the purchase price paid by the immediate
parent entity, Ness Security Products Pty Limited, over the fair value of assets
acquired when Ness purchased its 100% shareholding in Ness Asia on July 29,
1997, its 50% shareholding in Ness USA on September 3, 1997 and the remaining
50% shareholding in Ness USA on March 3, 1998. Goodwill relating to Ness Asia is
being amortized on the straight-line basis over a period of 10 years. Goodwill
relating to Ness USA was fully amortized as at June 30, 1998, based on
management's assessment of the expected future undiscounted operating cash flows
of Ness USA.
NOTE 8: LONG TERM BORROWINGS
On June 6, 1996 Ness entered into a $1,771,200 loan agreement with Westpac
Banking Corporation with a duration of 3 years maturing on March 31, 1999.
Interest is payable quarterly in advance at a rate of 10.2%. The loan is secured
by a registered mortgage debenture over all assets and uncalled capital of Ness
Security Products Pty Limited.
June 30, September 30,
----------------- -------------
1997 1998 1998
$US $US $US
--------- -------- -----------
(Unaudited)
Total long term borrowings................... 1,490,400 619,200 442,800
Less: current portion of long term borrowing. 745,200 619,200 442,800
--------- -------- ---------
Long term borrowings........... 745,200 - -
========= ======== =========
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
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. The carrying amounts
reflected in the combined balance sheets for cash equivalents, accounts
receivable and payable approximate their respective fair values due to short
maturities of those instruments.
F-54
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10: LEASE COMMITMENTS
Ness leases several production facilities and motor vehicles under long -
term leases and has the option to purchase the facilities for a normal cost at
the termination of the lease. Included in plant and equipment are the following
assets held under capital leases:
<TABLE>
<CAPTION>
June 30, September 30,
---------------- -------------
1997 1998 1998
$US $US $US
-------- --------- -------------
(Unaudited)
<S> <C> <C> <C>
Motor vehicles.............................. 331,137 286,991 273,643
Office equipment............................ 37,260 32,829 29,520
Plant and machinery......................... 719,102 721,748 688,179
--------- --------- --------
1,087,499 1,041,568 991,342
Less: accumulated amortization.............. (154,439) (401,803) (433,625)
--------- --------- --------
933,060 639,765 557,717
========= ========= ========
</TABLE>
The following is a schedule by year of future gross minimum rental payments
for all finance leases reconciled to the present value of net minimum finance
lease payments as of September 30, 1998.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
$US $US $US
---------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Payable not later than one year............ 307,883 283,201 269,873
Payable later than one year but not
later than two years...................... 307,883 339,860 310,194
Payable later than two years but not
later than three years.................... 372,634 137,909 85,413
Payable later than three years
but not later than four years............. 121,270 31,572 30,092
Payable later than four years
but not later than five years............. - 18,417 10,035
--------- ------- --------
Minimum finance lease payments............. 1,109,670 810,959 705,607
Less: amount representing interest......... 197,414 114,873 92,270
--------- ------- --------
Present value of net minimum
finance lease payments.................... 912,256 696,086 613,337
Less: current portion...................... 217,443 219,367 158,791
--------- ------- --------
Long-term obligations under finance lease.. 694,813 476,719 454,546
========= ======= ========
</TABLE>
The operating lease commitments of the Ness consist of property rentals
used as offices in Sydney, Melbourne, Brisbane and Perth.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
$US $US $US
---------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Payable not later than one year........... 244,981 268,511 238,116
Payable later than one year
but not later than two years............. 241,034 192,049 178,335
Payable later than two years
but not later than three years........... 231,130 173,659 165,582
Payable later than three years
but not later than four years............ 200,054 166,229 154,955
Payable later than four years
but not later than five years............ 191,112 105,866 63,089
Payable later than five years............. 143,334 - -
--------- ------- --------
1,251,645 906,314 800,077
========= ======= ========
</TABLE>
F-55
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 11: SEGMENT INFORMATION
The Company's subsidiaries operate principally in one industry segment,
which includes the design, manufacture and sale of high quality security
products. Ness's area of current operations is principally in Australia, with
subsidiaries in the USA and Hong Kong. Information about the Company's
operations split by geographic location is shown below.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Three Months Ended
June 30, June 30, September 30,
----------------- ------------------------ ----------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales: (Unaudited)
Australia.................... 12,416,172 16,193,399 22,454,219 5,930,911 5,520,250
Hong Kong.................... - - 1,113,169 125,109 199,924
United States................ - - 656,489 29,292 -
---------- ---------- ---------- ---------- ---------
12,416,172 16,193,399 24,223,877 6,085,312 5,720,174
========== ========== ========== ========== =========
Income (Loss) from Operations:
Australia.................... 1,517,712 2,598,383 3,999,244 1,473,857 1,004,704
Hong Kong.................... - - 4,298 (2,635) (3,334)
United States................ (5,189) (5,625) 208,167 (18,482) (93,947)
---------- ---------- ---------- ---------- ---------
1,512,523 2,592,758 4,211,709 1,452,740 907,423
========== ========== ========== ========== =========
Depreciation:
Australia.................... 50,826 211,711 180,677 99,486 61,139
Hong Kong.................... - - 1,979 159 545
United States................ - - 4,122 - 24,508
---------- ---------- ---------- ---------- ---------
50,826 211,711 186,778 99,645 86,192
========== ========== ========== ========== =========
Amortization:
Australia.................... 28,279 154,439 491,514 4,315 57,058
Hong Kong.................... - - 6,856 6,716 -
United States................ - - 31,065 - -
---------- ---------- ---------- ---------- ---------
28,279 154,439 529,435 11,031 57,058
========== ========== ========== ========== =========
Capital expenditure:
Australia.................... 1,312,029 844,114 458,368 175,356 258,830
Hong Kong.................... - - 1,998 1,236 1,808
United States................ - - 5,061 - -
---------- ---------- ---------- ---------- ---------
1,312,029 844,114 465,427 176,592 260,638
========== ========== ========== ========== =========
June 30, September 30,
----------------------- -------------
1997 1998 1998
$US $US $US
---------- ---------- -------------
(Unaudited)
<S> <C> <C> <C>
Identifiable Assets
Australia............. 9,085,600 10,138,759 11,516,427
Hong Kong............. - 347,028 256,061
United States......... - 250,050 -
---------- ---------- ----------
9,085,600 10,735,837 11,772,488
Corporate assets...... 66,824 458,355 28,263
---------- ---------- ----------
9,152,424 11,194,192 11,800,751
========== ========== ==========
</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.
F-56
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 12: INCOME TAX
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 Three Months Ended
June 30, June 30, September 30,
----------------- ---------------------- --------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
--------- -------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax expense at statutory rates..... 456,950 742,604 1,475,884 516,985 399,963
Tax effect of permanent and other differences:
Non-deductible expenses and other items......... 19,834 28,927 27,967 3,030 3,266
Non-assessable expenses and other items......... (57,246) (51,674) (61,956) - (2,131)
Amortization of goodwill........................ - - 96,788 - 2,267
Timing difference and tax losses not bought to
account as deferred tax assets............... - - (101,718) - -
Other........................................... - - 14,922 - -
Restatement of purchased future tax benefits.... (98,009) - - - -
-------- -------- --------- --------- ---------
321,529 719,857 1,451,887 520,015 403,365
======== ======== ========= ========= =========
The tax expense is split between:
Current......................................... 479,179 852,898 1,142,889 1,304,438 1,322,662
Deferred........................................ (157,650) (133,041) 308,998 (784,423) (919,297)
-------- -------- --------- --------- ---------
321,529 719,857 1,451,887 520,015 403,365
======== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
---------------- -------------
1997 1998 1998
$US $US $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............................................ 10,406 19,347 19,722
Warranty.................................................. 40,613 33,746 32,176
Stock obsolescence........................................ 90,482 86,226 91,780
Investment dimunition..................................... - 83,944 36,538
Employee entitlements..................................... 142,885 152,213 162,972
Other..................................................... 24,180 (36,544) (35,819)
Sundry accruals............................................... 26,186 46,310 43,455
Prepayments................................................... (19,656) (9,772) (7,561)
-------- -------- --------
Net deferred tax assets.......................................... 315,096 375,470 343,263
======== ======== ========
</TABLE>
F-57
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO FINANCIAL STATEMENTS-(Continued)
Note 13: RELATED PARTY TRANSACTIONS
The Company and Integral Investments Limited ("IIL") are related by IIL's
100% holding in the share capital of the Company as of June 30, 1997.
The Company and Vanuatu International Trust Company Limited ("VITCO") are
related by the VITCO's 4% minority holding in Ness as of June 30, 1996. On
October 3, 1995 VITCO agreed to lend Ness $2,066,400 to finance the remainder of
the purchase price of business assets from Westinghouse. The duration of the
loan was 3 years, with monthly repayment of $68,990, bearing interest at a rate
of 15% on outstanding balances. On June 6, 1996 Ness paid out the VITCO loan in
full, using funds from a $1,771,200 loan agreement with Westpac Banking
Corporation taken out on June 6, 1996.
<TABLE>
<CAPTION>
June 30, September 30,
------------------- -------------
1997 1998 1998
$US $US $US
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Amounts due to related party:
Non-current liabilities
Integral Investments Limited............... 593,989 - -
</TABLE>
The above loan is repayable on demand and bears no interest.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended Three Months Ended
June 30, June 30, September 30,
--------- ------------ ------------------
1996 1997 1998 1997 1998
$US $US $US $US $US
--------- ----- ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income is stated after the following items:
Interest on direct advances paid by Ness:
VITCO........................................... 249,003 - - - -
</TABLE>
F-58
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
Introduction
The accompanying unaudited pro forma statements of operations for the
fiscal year ended June 30, 1998 and the three months ended September 30, 1998
have been prepared after giving effect to the pro forma adjustments described in
the notes thereto as if the 50% acquisition of FAI Finance Corporation Pty
Limited ("FFC") and the 100% acquisition of Integrated International Home
Security Limited ("IIHSL") took place on July 1, 1997. The unaudited pro forma
balance sheet as of September 30, 1998 has been prepared as if the IIHSL
acquisition took place on September 30, 1998. 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 statements of
operations were outstanding during the period described therein.
The unaudited pro forma statements of operations 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
periods 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 IIHSL as found in this Form-8KA, and
the historical financial statements of Home Security International, Inc ("HSI")
and FFC, as found in the Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, and the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
F-59
<PAGE>
Pro Forma Statement of Operations for three months ended September 30, 1998
<TABLE>
<CAPTION>
HSI IIHSL
Consolidated Consolidated Pro Forma
September 30, September 30, Pro Forma September 30,
1998 1998 (1) Adjustments Note 1998
------------- ------------- ----------- ---- -------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $10,226 $ 5,720 $(3,169) (2) $12,777
Cost of goods sold - other (5,862) (3,562) 3,169 (2) (6,255)
- inventory revaluation - - (66) (3) (66)
------- ------- -------
Gross profit 4,364 2,158 6,456
General and administrative expenses (1,907) (1,075) (158) (4) (3,140)
Research and development - (176) (176)
------- ------- -------
Income from operations 2,457 907 3,140
Interest income (expense), net 18 (14) (150) (5) (146)
------- ------- -------
Income before income taxes, equity in income
of affiliated companies and minority interest 2,475 893 2,994
Income tax expense (917) (403) 78 (6) (1,242)
------- ------- -------
Income before equity in income of affiliated
companies and minority interest 1,558 490 1,752
Equity in income of affiliated companies 48 - 48
Minority interest - (122) (122)
------- ------- -------
Net income (loss) $ 1,606 $ 368 $ 1,678
======= ======= =======
Diluted weighted average shares of Common Stock
outstanding 5,162 400 (7) 5,562
Diluted net income per share of Common Stock $ 0.31 $ 0.30
</TABLE>
- ----------------------
(1) The consolidated information reported for IIHSL reflects 100% of the
statement of operations data of Ness Security Products Pty Limited ("Ness"),
adjusted by the "Minority Interest" line entry to reflect IIHSL's historical
ownership of 75.04% of Ness.
(2) Represents elimination of all sales and purchases between Ness and HSI for
the three months ended September 30, 1998.
(3) Represents elimination of profit recognized by Ness on the net change in
inventory carried by HSI for the three months ended September 30, 1998.
(4) Represents the amortization charge for the period of $158,000 resulting from
the amortization of intangible assets of $12,664,000 arising from the
acquisition of IIHSL using an amortization period of 20 years.
(5) Represents the imputed interest expense on the promissory note balance
outstanding during the period, a non-cash item.
(6) Represents the tax effect of the adjustments referred to in Notes 3 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%.
(7) Represents issuance of 400,000 shares of Common Stock in connection with the
IIHSL acquisition and the dilutive effect, if any, of all outstanding
options and warrants.
F-60
<PAGE>
Pro Forma Statement of Operations for fiscal year ended June 30, 1998
<TABLE>
<CAPTION>
HSI
Consolidated IIHSL Pro Forma
June 30, Consolidated (1) Pro Forma June 30,
1998 June 30, 1998 Adjustments Note 1998
------------ ---------------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $ 44,119 $ 24,224 $(18,802) (2) $ 49,541
Cost of goods sold - other (26,295) (13,455) 18,802 (2) (20,948)
- inventory revaluation - - (348) (3) (348)
-------- -------- ---------
Gross profit 17,824 10,769 28,245
General and administrative expenses (10,810) (5,706) (633) (4) (17,149)
Research and development - (851) (851)
-------- -------- ---------
Income from operations 7,014 4,212 10,245
Interest income (expense), net 226 (113) (622) (5) (509)
-------- -------- ---------
Income before income taxes, equity in income
of affiliated companies and minority interest 7,240 4,099 9,736
Income tax expense (2,111) (1,452) 349 (6) (3,214)
-------- -------- ---------
Income before equity in income of affiliated
companies and minority interest 5,129 2,647 6,522
Equity in income of affiliated companies 252 - (19) (7) 233
Minority interest - (782) 106 (8) (676)
-------- -------- ---------
Net income (loss) $ 5,381 $ 1,865 $ 6,079
======== ======== =========
Diluted weighted average shares of Common Stock
outstanding 5,182 456 (9) 5,638
Diluted net income per share of Common Stock $ 1.04 $ 1.08
- ----------------------
</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 HSI for
the fiscal year ended June 30, 1998.
(3) Represents elimination of profit recognized by Ness on the net change in
inventory carried by HSI for the fiscal year ended June 30, 1998.
(4) Represents the amortization charge for the period of $633,000 resulting from
the amortization of intangible assets of $12,664,000 arising from the
acquisition of IIHSL using an amortization period of 20 years.
(5) Represents the imputed interest expense on the promissory note balance
outstanding during the period, a non-cash item.
(6) Represents the tax effect of the adjustments referred to in Notes 3 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%.
F-61
<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 $ 602,159 $ 258,000
============ =========
50 percent equity in income of FFC $ 129,000
Amortization of goodwill (148,000)
---------
Equity in loss of affiliated companies $ (19,000)
=========
</TABLE>
The equity in loss of FFC 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 Limited 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
Banking Corporation ("Westpac") indicator rate.
Equity in loss of affiliated companies is calculated after amortization of
goodwill of $5,891,000 arising from the acquisition of FFC on December 31,
1997. Goodwill has been amortized as if the acquisition of FFC had taken
place on July 1, 1997, over a period of 20 years, which result in an
amortization charge for the six month period ended December 31, 1997 of
$148,000.
(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 IIHSL acquisition and the dilutive effect, if any, of all outstanding
options and warrants.
F-62
<PAGE>
Pro Forma Balance Sheet as of September 30, 1998
<TABLE>
<CAPTION>
HSI IIHSL Pro
Consolidated Consolidated Forma
September 30, September 30, Pro Forma September 30,
1998 1998 Adjustments Note 1998
------------- ------------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 6,348 $ 28 $(2,500) (1) $ 3,876
Accounts receivable, net 1,624 3,642 (2,747) (2) 2,519
Inventories 2,145 5,516 7,661
Prepaid expenses and other current assets 1,780 466 (585) (3) 1,661
------- ------- ------- -------
Total current assets 11,897 9,652 (5,832) 15,717
------- ------- ------- -------
Non-current assets
Investment in partnership 289 - 289
Investment in affiliated companies 7,345 - 7,345
Plant and equipment, net 1,016 1,588 2,604
Intangibles, net 9,467 217 12,664 (5) 22,348
Deferred income taxes 966 344 1,310
Other non-current asset 4 - 4
------- ------- ------- -------
Total non-current assets 19,087 2,149 12,664 33,900
------- ------- ------- -------
Total assets $30,984 $11,801 $ 6,832 $49,617
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft $ - $ 25 $ - $ 25
Note payable--FAI Insurances Group 590 - 590
Note payable--Integral Investments Limited - - 378 (4) 378
Accounts payable--trade 2,945 3,410 (2,747) (2) 3,608
Accrued liabilities 744 689 1,433
Lease liability 26 158 184
Income taxes payable 2,262 1,323 3,585
Deferred income 683 - 683
Current portion of long term borrowings - 443 443
------- ------- ------- -------
Total current liabilities 7,250 6,048 (2,369) 10,929
------- ------- ------- -------
Non-current liabilities
Long term lease liability 29 455 484
Accrued liabilities 92 - 92
Deferred income 185 - 185
Note payable--FAI Insurances Group 3,926 - 3,926
Note payable--Integral Investments Limited - - 8,225 (4) 8,225
------- ------- ------- -------
Total non-current liabilities 4,232 455 8,225 12,912
------- ------- ------- -------
Total liabilities 11,482 6,503 5,856 23,841
------- ------- ------- -------
Minority interest 1,669 1,669
Shareholders' equity
Common stock 5 53 (52) (6) 6
Additional paid-in capital 16,111 471 4,133 (6) 20,715
Secured note issue (2,375) - (2,375)
Accumulated other comprehensive loss (1,178) (850) 850 (7) (1,178)
Retained earnings 6,939 3,955 (3,955) (7) 6,939
------- ------- ------- -------
Total shareholders' equity 19,502 3,629 976 24,107
------- ------- ------- -------
Total liabilities and shareholders' equity $30,984 $11,801 $ 6,832 $49,617
======= ======= ======= =======
</TABLE>
F-63
<PAGE>
(1) Represents the cash effect of the acquisition of IIHSL summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment (reduced by $126,000 deposit paid concurrent
with the execution of the Purchase Agreement) $(2,300,000)
Non-refundable re-negotiation fee (200,000)
-----------
Cash reserves utilized $(2,500,000)
===========
</TABLE>
(2) Represents the elimination of Accounts receivable and Accounts payable
between HSI and IIHSL of $2,747,000.
(3) Represents prepaid acquisition expenses as of September 30, 1998.
(4) Represents the present value of a promissory note, secured by the IIHSL
Shares, discounted at a rate appropriate for a debt with similar terms and
credit ratings. Total nominal amount payable of $9,098,000, $400,000 of
which is due on June 30, 1999.
(5) Represents the goodwill generated from the Acquisition computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $ 2,300,000
Initial deposit 126,000
Re-negotiation fee 200,000
Fair value of promissory note 8,603,000
Issuance of 400,000 shares in Common Stock at $10.25 per share 4,100,000
Issuance of 360,000 warrants (valued at $1.40 per share) 504,000
Acquisition expenses 460,000
Net identifiable assets IIHSL (3,629,000)
-----------
Purchase price in excess of tangible and other intangible
net assets $12,664,000
===========
</TABLE>
(6) Represents the impact of the Equity transactions of the Acquisition:
<TABLE>
<CAPTION>
<S> <C>
Issuance of 400,000 shares in Common Stock at $10.25 per share $4,100,000
Issuance of 360,000 warrants (valued at $1.40 per share) 504,000
Elimination of IIHSL Common Stock and Paid-in-Capital (523,000)
----------
Total $4,081,000
==========
</TABLE>
(7) Elimination of IIHSL accumulated other comprehensive loss and retained
earnings.
(c) Exhibits
23.1 Consent of Deloitte and Touche
F-64
<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, payable in connection
with the sale of the Shares being registered hereby. All amounts are estimates:
the total estimated fees set forth below shall be paid in full by the Selling
Shareholder.
<TABLE>
<S> <C>
SEC Registration Fees (includes State)........................ $ 6,500
Accountants' Fees and Expenses................................ $25,000
Legal Fees and Expenses....................................... $40,000
Printing and Engraving........................................ $10,000
-------
Total..................................................... $81,500
=======
</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
Integral Investments
Limited............... 10/1/98 Common Stock 400,000 $4,100,000 Common Stock of Integrated
International Home Security
Limited
</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>
<S> <C>
2.1 Share Purchase Agreement relating to the purchase of shares in
FAI Home Security Pty Limited and FAI Home Security (ENZED)
Limited (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>
<S> <C>
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
Limited, 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
Company and Terrance J. Youngman (4)
10.8 Executive Service Agreement dated July 15, 1997 between the
Company and Robert D. Appleby (4)
10.9 Executive Service Agreement dated July 15, 1997 between the
Company and Mark Whitaker (4)
10.10 Executive Service Agreement dated July 15, 1997 between the
Company and Geoffrey D. Knowles (4)
10.11 Executive Service Agreement dated July 15, 1997 between the
Company and Felicity A. Hilbert (4)
10.12 Option Agreement dated September 5, 1994 between Bradley D.
Cooper 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
Limited (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, and as amended
October 1, 1998, between the Company and International Home
Security Investments Limited.
10.22 Registration Rights Agreement
+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>
<S> <C>
23.2 Consent of Arthur Andersen
+23.3 Consent of Paul Brown
23.4 Consent of Deloitte & Touche
24.1 Power of Attorney for Paul Brown
</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
+ Previously Filed.
Item 17. Undertakings
(1) The Company will file, during any period in which offers or sells
securities are being made, 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 arising
after the effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or together, represent a
fundamental change in the information in the registration statement; and (iii)
Include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information.
(2) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination 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 February 9, 1999.
Home Security International, Inc.
/s/ Bradley D. Cooper
By:__________________________________
Bradley D. Cooper
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bradley D. Cooper Chairman and Chief Executive February 9, 1999
____________________________________ Officer (Principal
Bradley D. Cooper Executive Officer)
/s/ Mark Whitaker Chief Financial Officer, February 9, 1999
____________________________________ Executive Vice President of
Mark Whitaker Finance and Treasurer
(Principal Financial and
Accounting Officer)
* Director February 9, 1999
____________________________________
Timothy M. Mainprize
* Director February 9, 1999
____________________________________
Steve Rabinovici
/s/ Paul Brown Director February 9, 1999
____________________________________
Paul Brown
</TABLE>
/s/ Bradley D. Cooper
*----------------------------------
Bradley D. Cooper, Attorney-In-Fact
II-6
<PAGE>
Exhibit 5.1
February 8, 1999
Home Security International, Inc.
Level 7, 77 Pacific Highway
North Sydney, NSW 2060
Re: Form S-1 Registration Statement
No. 333-59421
Gentlemen:
We have acted as counsel to Home Security International, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"), of a Registration Statement on Form S-1 (the "Registration
Statement") relating to the registration of 2,150,000 shares of the Company's
Common Stock (the "Shares") held by FAI Home Security Holdings Pty Ltd.
("Selling Shareholder").
As such counsel, we have examined the Registration Statement and such other
papers, documents and certificates of public officials and certificates of
officers of the Company as we have deemed relevant and necessary as a basis for
the opinions hereinafter expressed. In such examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals and the conformity to original documents of all documents
submitted to us as conformed or photostatic copies.
Based upon and subject to the foregoing, it is our opinion that the Shares
covered by the Registration Statement to be issued by the Company and sold by
the Selling Shareholder, when issued and delivered in accordance with the terms
described in the Registration Statement will be legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus constituting a part of the Registration Statement,
and any and all amendments thereto.
Very truly yours,
D'Ancona & Pflaum, L.L.C.
By: Fernando R. Carranza
-----------------------------
Its: Member
-----------------------------
FRC/AD:jms
<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").
RECITALS
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.
AGREEMENTS
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
<PAGE>
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.
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.
3
<PAGE>
(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 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.
4
<PAGE>
(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 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.
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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.
(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
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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 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).
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(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.
(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
8
<PAGE>
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 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 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.
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ARTICLE III
Conduct Prior to the Closing
----------------------------
3.1 General. Between the date hereof and the Closing Date:
-------
(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.
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(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, 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.
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(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.
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:
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<PAGE>
(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.
(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.
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(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
-----------------------
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:
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(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;
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
15
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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, 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
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<PAGE>
(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.
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.
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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 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
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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
(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.
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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
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.
Level 7, 77 Pacific Highway
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
20
<PAGE>
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 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.
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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.
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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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
INTERNATIONAL HOME SECURITY
INVESTMENTS LIMITED
By: /s/ Paul Brown
-------------------------------
Its: Director
------------------------------
HOME SECURITY INTERNATIONAL, INC.
By: /s/ Mark Whitaker
-------------------------------
Its: Chief Financial Officer
------------------------------
23
<PAGE>
AMENDMENT NO. 1 TO THE
STOCK PURCHASE AGREEMENT
This Amendment (the "Amendment") dated as of September 30, 1998 to the
Stock Purchase Agreement (the "Purchase Agreement") dated as of July 17, 1998,
by and between Integral 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"), is entered
into between Seller and Purchaser.
RECITALS
--------
A. Purchaser and Seller have heretofore entered into the Purchase
Agreement, which provides, among other things, for the acquisition by Purchaser
of all the outstanding capital stock of the Company. All capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Purchase Agreement.
B. Purchaser and Seller wish to enter into this Amendment to amend certain
provisions of and exhibits to the Purchase Agreement.
C. As further inducement for Seller to enter into this Amendment, Purchaser
will deliver a non-refundable renegotiation fee of two hundred thousand dollars
(U.S. $200,000) to Seller contemporaneous with the signing of this Amendment.
AGREEMENTS
----------
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Status of Purchase Agreement. Except as specifically set forth herein,
the Purchase Agreement and each of the Exhibits thereto shall remain in full
force and effect and shall not be waived, modified, superseded or otherwise
affected by this Amendment. This Amendment is not to be construed as a release,
waiver or modification of any of the terms, conditions, representations,
warranties, covenants, rights or remedies set forth in the Purchase Agreement,
except as specifically set forth herein. The effective date of this Amendment
shall be 12:01 A.M., Sydney, Australia time, October 1, 1998.
2. Amendments to the Purchase Agreement.
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<PAGE>
2.1 Section 1.2(i) of the Purchase Agreement. Section 1.2(i) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
" 1.2 Purchase Price. The aggregate purchase price (the "Purchase Price")
of the Shares shall be equal to the sum of (i) eleven million three hundred
ninety eight thousand dollars (U.S. $11,398,000) (the "Cash Portion");"
2.2 Section 1.3 of the Purchase Agreement. Section 1.3 of the Purchase
Agreement is hereby deleted in its entirety and replaced with the following:
"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 was delivered by Purchaser to Seller
contemporaneous with the signing of the Purchase Agreement and shall be credited
against the Purchase Price; (B) two million three hundred thousand dollars (U.S.
$2,300,000) payable at the Closing, by wire transfer of immediately available
funds per the wire transfer instructions attached hereto as Exhibit B; and (C) a
secured promissory note in the amount of nine million ninety eight thousand
dollars (U.S. $9,098,000) (the "Note") in the form attached hereto as Exhibit C;
(ii) the Share Portion shall be paid by Purchaser's delivery of a certificate
representing 400,000 shares of HSI Common Stock; 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."
2.3 Section 1.4 of the Purchase Agreement. Section 1.4 of the Purchase
Agreement is hereby deleted in its entirety and replaced with the following:
"1.4 Appointment to Board of Directors. Purchaser will cause Paul Brown 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, subject to the approval of the Board
of Directors of Purchaser, which shall not be unreasonably withheld, 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; (ii) the date on which Seller, Paul
Brown or another entity controlled directly or indirectly by 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 and the Additional Warrants, as
defined herein) equal to at least five percent (5.0%) of the outstanding HSI
Common Stock; provided however, that if Purchaser would be under no obligation
to cause Paul Brown or his nominee to be re-elected to the Board of Directors,
and the Note has not been paid in full, 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 Note is repaid in full."
25
<PAGE>
2.4 Section 1.5 of the Purchase Agreement. Section 1.5 of the Purchase
Agreement is hereby deleted in its entirety and replaced with the following:
"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 (i) an
executed side letter agreement regarding a three million dollar (U.S.
$3,000,000) hold back arrangement (the "Holdback Agreement") in the event the
principal amount of the Note is reduced to less than three million dollars (U.S.
$3,000,000) prior to the end of the Survival Period (as defined herein), and
(ii) an executed side letter agreement designating a recipient on behalf of
Seller of the Share Portion, the Warrant and the warrants, if any, issued
pursuant to the Note (the "Additional Warrants"). 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."
2.5 Section 2.1(b) of the Purchase Agreement. Section 2.1(b) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(b) Purchaser has full corporate power and authority to enter into and
perform this Agreement and the Note. The execution and delivery by Purchaser of
this Agreement and the Note and the performance by Purchaser of its obligations
hereunder and thereunder 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 and the Note have been duly executed and delivered by a duly
authorized officer of Purchaser."
2.6 Section 2.1(e) of the Purchase Agreement. Section 2.1(e) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(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, the Note, the Warrant or the Additional Warrants
will be a default or an event of acceleration, or
26
<PAGE>
grounds for termination, or whereby timely performance by Purchaser according to
the terms of this Agreement, the Note, the Warrant or the Additional Warrants
may be prohibited, prevented or delayed."
2.7 Section 2.1(g) of the Purchase Agreement. Section 2.1(g) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(g) The issuance and delivery of the Share Portion, the Warrant and the
Additional Warrants 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 and the Additional Warrants, when issued in
accordance with the terms of this Agreement, the Warrant, or the Additional
Warrants, 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 and the Additional Warrants are exercised or expire in accordance with
their respective terms, the number of shares of HSI Common Stock issuable upon
exercise of the Warrant, or the Additional Warrants, as the case may be."
2.8 Section 2.1(k) of the Purchase Agreement. Section 2.1(k) of the
Purchase Agreement is hereby added to the Purchase Agreement to read as follows:
"(k) As of the Closing Date, there is no indebtedness which is senior in
right of payment to the Note."
2.9 Section 3.1(e) of the Purchase Agreement. Section 3.1(e) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(e) Intentionally omitted."
2.10 Section 4.2(g) of the Purchase Agreement. Section 4.2(g) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(g) The Board of Directors of Purchaser shall have approved the
transactions contemplated by this Amendment."
2.11 Section 5.8 of the Purchase Agreement. A new Section 5.8 is hereby
added to the Purchase Agreement to read as follows:
"5.8 Purchaser Covenants. Purchaser expressly covenants and agrees that as
long as the Note is outstanding, (a) it will operate each of Ness and the
Company in a commercially reasonable fashion (which includes the maintenance of
adequate insurance, the maintenance of their respective property and the
maintenance of books and records), (b) it will provide Seller, or its nominee to
the Board of Directors, with copies of all reports filed with the SEC and will
27
<PAGE>
provide to such party such other information that it reasonably requests from
time to time, (c) it will provide Seller, or its nominee to the Board of
Directors, with all information provided to other members of the Board of
Directors contemporaneous with providing such information to the other members
of the Board of Directors (such monthly information shall include material Ness
financial data), (d) it will comply in all material respects with all laws, and
(e) it will not take any of the following actions without the prior written
approval of Seller: (i) the sale, lease, disposition of all or substantially all
of the assets of Ness or the Company; (ii) the merger or consolidation of Ness
or the Company with or into any other corporation, corporations or other entity,
including a sale of all or substantially all of the assets of Ness by means of a
sale of the Ness Shares or of the Company by means of a sale of the Shares;
(iii) the liquidation or winding up of the business and operations of Ness or
the Company; or (iv) the incurrence by Purchaser of any indebtedness senior in
right of payment to or pari passu with the Note or the incurrence by Ness or the
Company of any indebtedness outside the ordinary course of business, consistent
with past practice; provided however, that any transaction involving the
acquisition of the capital stock of Ness not currently owned by the Company,
including any related financing transaction shall not be a violation of this
Section 5.8."
2.12 Section 6.4(c) of the Purchase Agreement. Section 6.4(c) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(c) Intentionally omitted."
2.13 Section 6.5(a) of the Purchase Agreement. Section 6.5(a) of the
Purchase Agreement is hereby deleted in its entirety and replaced with the
following:
"(a) All representations and warranties made by any party to this Agreement
shall survive the signing of the Agreement until July 17, 1999 (the "Survival
Period")."
2.14 Section 6.10 of the Purchase Agreement. A new Section 6.10 is hereby
added to the Purchase Agreement to read as follows:
"6.10 Purchaser's Right of Set-Off. If Purchaser claims that Seller owes
Purchaser any amount pursuant to the terms of this Agreement, including any
amounts under this Article VI, Purchaser shall deliver to Seller written notice
of such claim specifying the amount and nature of such claim (a "Set-Off
Notice"). If Seller disputes the proposed claim, Seller shall deliver written
notice of such Dispute (a "Set-Off Dispute Notice") to Purchaser within ten (10)
days after Seller's receipt of the Set-Off Notice. If Seller fails to deliver
the Set-Off Dispute Notice to Purchaser within such ten (10) day period, Seller
shall be entitled to set off such claim against any amounts due Seller under the
Note or the Holdback Agreement. If Seller delivers a Set-Off Dispute Notice to
Purchaser within such ten (10) day period, and the disputed amount to be set-off
against the Note or the Holdback Agreement would otherwise be due and payable,
the parties shall submit the matter for arbitration pursuant to Section 8.5 of
this Agreement. During
28
<PAGE>
the period of any such dispute, Purchaser shall not be deemed to be in default
under the Note for failure to pay Seller the disputed amount under the Note, the
Note shall remain outstanding and Purchaser shall continue to comply with its
covenants hereunder and thereunder. Purchaser may not deliver a Set-Off Notice
or set off any claim against the Note if an event of default has occurred and is
continuing under the Note."
2.15 Section 8.3 of the Purchase Agreement. Section 8.3 of the Purchase
Agreement is hereby deleted in its entirety and replaced with the following:
"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/Integral Investments Limited
c/o Alliance Investments S.A.M.
Le Panorama Bloc AB
57 Rue Grimaldi
MC 98000 MONACO
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.
c/o Arthur Don, Secretary
D'Ancona & Pflaum
30 North LaSalle, Suite 2900
Chicago, Illinois 60602
Fax: (312) 580-0923
29
<PAGE>
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."
3. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
[The remainder of this page has been left intentionally blank.]
30
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment and caused the
same to be duly delivered on their behalf on the day and year first written
above.
INTEGRAL INVESTMENTS LIMITED
By: /s/ Paul Brown
-------------------------------
Its: Director
------------------------------
HOME SECURITY INTERNATIONAL, INC.
By: /s/ Mark Whitaker
-------------------------------
Its: Chief Financial Officer
------------------------------
31
<PAGE>
Exhibit 10.22
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of February 7, 1999 by and between Home Security International, Inc., a
Delaware corporation (the "Company"), FAI Home Security Holdings Pty Ltd., a
corporation organized under the laws of Australia (the "Stockholder") and FAI
Insurance Ltd., a corporation organized under the laws of Australia ("FAI").
Each of the Company, Stockholder or FAI may be referred to herein as a "Party,"
or collectively as the "Parties.
RECITALS:
WHEREAS, Stockholder holds 2,150,000 shares of Common Stock of the Company
(the "Shares") representing 38.7% of the total shares outstanding, which Shares
are beneficially owned by FAI, the immediate parent of Stockholder.
WHEREAS, on December 31, 1997 the Company entered into a Share Sale
Agreement with FAI for a 50% interest in FAI Finance Corporation Pty Ltd.
("FFC"), for U.S. $7.04 Million, payable in an initial cash payment of U.S. $1.6
Million with the remainder payable in a five year note with interest at 7 3/4%
("FFC Note"). The Share Sale Agreement obligates the Company to pay 40% of any
subsequent debt or capital offering to FAI in payment of the FFC Note (the
"Capital Raising Obligation").
WHEREAS, as partial consideration for this Agreement, FAI has agreed: (i)
to amend the Share Sale Agreement to vary the Capital Raising Obligation; (ii)
to provide FFC with a credit facility of up to Two Million Dollars ($2,000,000);
and (iii) for the twelve (12) month period occurring immediately after the
Registration Statement is declared effective, Stockholder agrees not to sell an
amount in excess of twenty-five percent (25%) of the Shares (held at the time of
execution of this Agreement) in any three month period, without the express
written consent of the Company;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS:
1. Definitions.
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Affiliate: A Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with a
specified Person.
Common Stock: The common stock, no par value per share, of the Company.
Dollars: All monetary amount in this Agreement are in U.S. Dollars.
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Exchange Act: The Securities Exchange Act of 1934, as amended from time to
time, and the rules and regulations promulgated thereunder.
Person: An individual, partnership, corporation, limited liability
company, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
Prospectus: The prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
Registrable Securities: (a) The shares of Common Stock issued to the
Stockholder and any securities issued or issuable with respect to the shares of
Common Stock referred to in the foregoing clause by way of stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. Any Registrable
Security will cease to be a Registrable Security when (i) a registration
statement covering such Registrable Security has been declared effective by the
SEC and the Registrable Security has been disposed of pursuant to such effective
registration statement, (ii) the Registrable Security is sold under
circumstances in which all of the applicable conditions of Rule 144 (or any
similar provisions then in force) under the Securities Act are met, (iii) the
Registrable Security has been otherwise transferred, the Company has delivered a
new certificate or other evidence of ownership for it not bearing a legend
restricting further transfer, and it may be resold without subsequent
registration under the Securities Act, (iv) the Registrable Securities which are
owned by the Stockholder may be sold in the public market without limitation as
to manner of sale.
Registration Expenses: See Section 6 hereof.
Registration Statement: The Registration Statement of the Company that
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus included therein, all amendments and
supplements to such Registration Statement, including post-effective amendments,
all exhibits and all material incorporated by reference in such Registration
Statement.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended from time to time,
and the rules and regulations promulgated thereunder.
Underwritten Offering: An offering in which securities of the Company are
sold to an underwriter for reoffering to the public.
2. Registration Rights.
(a) Registration. The Company will, as soon as practicable and in any event
within 60 days following the execution of this Agreement, file a Registration
Statement with the Commission to register under the Securities Act the
Registrable Securities ("The Registration")
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Upon execution of this Agreement, the Stockholder shall provide the Company with
a check in the amount of $25,000.00 (the "Deposit") to cover a portion of the
Company's reasonable costs and expenses incurred by it in connection with such
Registration in an amount not to exceed $75,000.00 (excluding SEC registration
fees), all in accordance with the terms of Section 6 hereof. Any amount of the
Deposit not expended by the Company in connection with such Registration shall
be promptly refunded to the Stockholder, and any additional expenses incurred by
the Company in connection with such Registration in excess of the Deposit shall
promptly be paid by the Stockholder to the Company upon request. The Company
shall provide reasonable documentation to the Stockholder regarding the
Company's costs and expenses incurred in connection with such the Registration.
The Stockholder shall be liable for any costs and expenses incurred by the
Company in connection with such Registration, subject to the $75,000.00 limit
detailed above, including those directly related to bringing the Company's
reports filed under the Exchange Act in compliance with the SEC's rules and
regulations. In the event that the Registration shall be in the form of an
Underwritten Offering, the underwriter or underwriters utilized in any such
Underwritten Offering, shall be subject to the approval of the Company and
Stockholder; which approval shall not be unreasonably withheld.
(b) The Company will use its reasonable best efforts to cause the
Registration Statement to become effective as soon as practicable after filing.
(c) The Company will use its reasonable best efforts to keep the
Registration Statement effective pursuant to Rule 415 at all times until the
earlier of (A) the date on which all of the Registrable Securities have been
sold and (B) the date on which the Registrable Securities (in the opinion of
counsel to the Company in substance reasonably acceptable to the Stockholder)
may be sold without volume limitations in a public transaction pursuant to an
available exemption from the requirements of registration under the Securities
Act (the "Registration Period").
(d) The Stockholder will cooperate with the Company in connection with a
registration of the Registrable Shares and will furnish (i) such information as
may be reasonably required by the Company or by the Commission in connection
therewith and (ii) such representations, undertakings and agreements as may be
reasonably required by the Commission in connection therewith.
(e) Preparation; Reasonable Investigation. In connection with the
preparation and filing of each Registration Statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such Registration Statement, their underwriters, if
any, and their respective counsel and accountants, the opportunity to
participate in the preparation of such Registration Statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and will give each of them such access to its books and
records and such opportunities to discuss the business of the Company with its
officers and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of such holders' and such
underwriters' respective counsel, to conduct a reasonable investigation within
the meaning of the Securities Act; provided, however, that the holders of the
Registrable Securities, and their agents, shall bear all costs associated with
such investigation and agree to maintain all
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information of a non-public nature confidential, including but not limited to
information relating to the Company, its officers, directors, employees, agents
and affiliates.
3. Obligations of the Stockholder and FAI.
In connection with the registration of the Registrable Securities, the
Stockholder and FAI shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities that Stockholder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request.
(b) Each of the Stockholder and FAI agree to cooperate with the Company as
reasonably requested by the Company in connection with the preparation and
filing of any Registration Statement hereunder.
(c) Stockholder may not participate in any underwritten registration
hereunder unless it (i) agrees to sell its Registrable Securities on the basis
provided in any underwriting arrangements in usual and customary form entered
into by the Company, (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements, and (iii) agrees to
pay its pro rata share of all underwriting discounts and commissions and any
expenses in excess of those payable by the Company pursuant to Section 6 below.
Nothing in this Section 3 (c) shall be construed to create any additional rights
regarding the registration of Registrable Securities in any Person otherwise
than as set forth herein.
(d) For the twelve (12) month period occurring immediately after the
Registration Statement is declared effective, Stockholder agrees not to sell an
amount in excess of twenty-five percent (25%) of the Shares (held at the time of
execution of this Agreement) in any three month period, without the express
written consent of the Company.
(e) FAI agrees to provide FFC with a credit facility of up to Two Million
Dollars ($2,000,000). As of the execution of this Agreement, FAI has established
the credit facility referenced herein.
(f) Concurrent with the execution of this Agreement, FAI agrees to amend
the Share Sale Agreement to vary the Company's obligation to make the Capital
Payment and to execute a Variation Deed, in substantially the form attached
hereto as Exhibit A to this Agreement.
4. Hold-Back Agreement. Each holder of Registrable Securities agrees,
after expiration of the twelve (12) month period referenced in Section 3(d) of
this Agreement, if requested by the managing underwriters in an Underwritten
Offering, not to effect any public sale or distribution of securities of the
Company of the same class as the securities included in the applicable
registration statement, including a sale pursuant to Rule 144 under the
Securities
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Act (except as part of such Underwritten Registration), during the 10-day period
prior to the filing of the registration statement with respect to such
Underwritten Offering, and during the 90-day period beginning on the effective
date of the registration statement with respect to such Underwritten Offering,
to the extent timely notified in writing by the Company or the managing
underwriters, and to the extent reasonably requested by the underwriters in an
Underwritten Offering, each holder of Registrable Securities agrees to enter
into a lock-up agreement with the underwriters of any public registration of the
Company's securities in substantially the form entered into by the directors,
executive officers and holders of five percent of the Common Stock of the
Company; provided, however, that the time period of the lockup shall not exceed
90 days.
5. Registration Procedures. In connection with the Company's
registration obligations pursuant to Section 2 hereof, the Company will use
commercially reasonable efforts to effect such registration to permit the sale
of such Registrable Securities in accordance with the intended method or methods
of distribution thereof, and pursuant thereto the Company will as expeditiously
as possible, with its own counsel:
(a) prepare and file with the SEC, as soon as practicable, a Registration
Statement relating to the applicable registration on any appropriate form under
the Securities Act, which form shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods of
distribution thereof and shall include all financial statements of the Company,
and use commercially reasonable efforts to cause such Registration Statement to
become effective as soon as possible; provided that the Company shall have the
right to delay filing or effectiveness of a Registration Statement filed
pursuant to Section 2(a) hereto or the commencement of a public distribution of
Registrable Securities, as applicable, for up to 60 days if the Company's Board
of Directors determines, in good faith, that the filing or effectiveness thereof
or the commencement of such public distribution could materially interfere with
a pending extraordinary transaction involving the Company or bona fide financing
plans of the Company or would require disclosure of information, the premature
disclosure of which would be materially detrimental to the best interests of the
Company, so long as the Company promptly thereafter complies with the
requirements of Section 5(j) hereof, if applicable;
(b) prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep the
Registration Statement effective for two years, or such shorter period which
will terminate when all Registrable Securities covered by such Registration
Statement have been sold; cause the Prospectus to be supplemented by any
required Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 under the Securities Act; and comply with the provisions of all
securities covered by such Registration Statement during the applicable period
in accordance with the intended method or methods of distribution by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus; the Company shall not be deemed to have used commercially reasonable
efforts to keep a Registration Statement effective during the applicable period
if it voluntarily takes any action that would result in Stockholder not being
able to sell such Registrable Securities during that period unless such action
is required under applicable law; provided that the Company shall be entitled to
defer filing any of the foregoing for a period of sixty (60) days if the Company
shall in good faith and for valid business reasons defer such filings, which
valid business reasons shall include, without limitation, the acquisition or
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<PAGE>
divestiture of assets, so long as the Company promptly thereafter complies with
the requirements of Section 5(j) hereof, if applicable;
(c) notify the Stockholder and the managing underwriters, if any, promptly,
and (if requested by any such Person) confirm such advice in writing, (1) when
the Prospectus or any Prospectus supplement or post-effective amendment has been
filed, and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective, (2) of any request by the SEC for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the SEC of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose, (4) if at any time the representations and
warranties of the Company contemplated by paragraph (l) below cease to be true
and correct, (5) of the receipt by the Company of any notification with respect
to the suspension of the qualification of the Registrable Securities for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose and (6) of the happening of any event which makes any statement made in
the Registration Statement, the Prospectus or any document incorporated therein
by reference untrue or which requires the making of any changes in the
Registration Statement, the Prospectus or any document incorporated therein by
reference in order to make the statements therein not misleading;
(d) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(e) upon demand, furnish to Stockholder and each managing underwriter,
without charge, at least one original signed copy of the Registration Statement
and any post effective amendment thereto, including financial statements and
schedules, all documents incorporated therein by reference and all exhibits
(including those incorporated by reference and such number of conformed copies
of such documents as such parties may reasonably request);
(f) deliver to each Stockholder and the underwriters, if any, without
charge, as many copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such Persons may reasonably request;
the Company consents to the use of the Prospectus or any amendment or supplement
thereto by Stockholder and the underwriters, if any, in connection with the
offering and sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto;
(g) prior to any public offering of Registrable Securities, register or
qualify or cooperate with the Stockholder, the underwriters, if any, and their
respective counsel in connection with the registration or qualification of such
Registrable Securities for offer and sale under the securities or blue sky laws
of such jurisdictions as Stockholder or underwriter reasonably requests in
writing and do any and all other acts or things necessary or advisable to enable
the disposition in such jurisdictions of the Registrable Securities covered by
the Registration Statement;
(h) cooperate with Stockholder and the managing underwriters, if any, to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends; and
enable such Registrable Securities to be in such
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<PAGE>
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters;
(i) cause the Registrable Securities covered by the applicable Registration
Statement to be registered with or approved by such other governmental agencies
or authorities as may be necessary to enable the Stockholder or the
underwriters, if any, to consummate the disposition of such Registrable
Securities;
(j) promptly upon the occurrence of any event contemplated by Section 5(a),
5(b) or 5(c) (6) above, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities, the Prospectus will
not contain an untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading;
(k) cause all Registrable Securities covered by the Registration Statement
to be listed or approved for listing on each securities exchange on which
similar securities issued by the Company are then listed and approved for
quotation;
(l) enter into such agreements (including an underwriting agreement) and
take all such other actions in connection therewith in order to expedite or
facilitate the disposition of such Registrable Securities and in connection
therewith, whether or not an underwriting agreement is entered into and whether
or not the registration is an Underwritten Registration, (1) make such
representations, warranties, covenants and indemnities to Stockholder and the
underwriters, if any, in form, substance and scope as are customarily made by
issuers to underwriters in primary underwritten offerings; (2) obtain opinions
of counsel to the Company and updates thereof (which counsel and opinions (in
form, scope and substance) shall be reasonably satisfactory to the managing
underwriters, if any, and the Stockholder, covering the matters customarily
covered in opinions requested in Underwritten Offerings and such other matters
as may be reasonably requested by Stockholder and underwriters); and (3) obtain
"cold comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to the Stockholder and the underwriters,
if any, such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in connection with
primary Underwritten Offerings;
(m) comply with all applicable rules and regulations of the SEC and make
available to its security holders, as soon as reasonably practicable, earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder (or any similar rule promulgated under the Securities Act),
covering any 12-month period (or 90 days after the end of any 12-month period if
such period is a fiscal year) (i) commencing at the end of any fiscal quarter in
which Registrable Securities are sold to underwriters in a firm commitment or
reasonable efforts underwritten offering and (ii) if not sold to underwriters in
such an offering, commencing on the day of the first fiscal quarter of the
Company after the effective date of a Registration Statement;
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(n) cooperate with Stockholder and each underwriter participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD");
(o) keep the Stockholder advised of the status of any registration
statement filed under Section 2 and coordinate the effective date of such
registration statement with the Stockholder; and
(p) take such other lawful actions as shall be reasonable to facilitate the
registration of the Registrable Securities.
The Company may require Stockholder to furnish to the Company such
information regarding the distribution of such securities as the Company may
from time to time reasonably request in writing and to enter into agreements
related to the distribution of the Registrable Securities that are designed to
insure compliance with the Exchange Act.
The Stockholder hereby agree by acquisition of such Registrable Securities
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 5(c) hereof, such holder will forthwith
discontinue disposition of Registrable Securities until such holder's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
5(j) hereof, or until it is advised in writing (the "Advice") by the Company
that the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
Prospectus, and, if so directed by the Company such holder will deliver to the
Company (at the Company's expense), all copies, other than permanent file copies
then in such holder's possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice. In the event the
Company shall give any such notice, the time periods regarding the effectiveness
of Registration Statements set forth in Section 2 hereof and Section 5(b) hereof
shall be extended by the number of days during the period from and including the
date of the giving of such notice pursuant to Section 5(c) (6) hereof to the
date when the Stockholder shall receive copies of the supplemented or amended
prospectus contemplated by Section 5(j) hereof or the Advice.
6. Registration Fees. Subject to the $75,000.00 limit provided in
Section 2(a) hereof, all reasonable expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation:
all registration and filing fees; all fees associated with a required listing of
the Registrable Securities on any securities exchange; fees and expenses with
respect to filings required to be made with the NASD; fees and expenses of
compliance with securities or blue sky laws (including fees and disbursements of
counsel for the underwriters or holders of Registrable Securities in connection
with blue sky qualifications of the Registrable Securities and determination of
their eligibility for investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the Registrable Securities
being sold may designate); printing expenses, messenger, telephone and delivery
expenses; fees and disbursements of counsel for the Company (which shall be
solely selected by the Company) and customary fees and expenses for independent
certified public accountants retained by the Company (including the expenses of
any comfort letters or costs associated with the delivery by independent
certified public accountants of a comfort letter or comfort letters requested
pursuant to Section 5(l) hereof); securities acts liability insurance, if the
Company so desires; all internal
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expenses of the Company (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties);
the expense of any annual audit; and the fees and expenses of any Person,
including special experts, retained by the Company (all such expenses being
herein called "Registration Expenses") will be borne by the Stockholder
regardless of whether the Registration Statement becomes effective. Under no
circumstances shall the Company have any obligation to pay any underwriting
fees, discounts, or commissions attributable to the sale of Registrable
Securities, or any legal fees and expenses of counsel to the holders of
Registrable Securities.
7. Indemnification: Contribution.
(a) Indemnification by Company. The Company agrees to indemnify and hold
harmless Stockholder, FAI and its officers, directors, employees, agents and
Affiliates against all losses, claims, damages, liabilities and expenses
(including reasonable attorneys fees) arising out of or based upon any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus or any amendment or supplement
thereto or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by the Stockholder or FAI for
use therein.
(b) Indemnification by Holder of Registrable Securities. Stockholder agrees
to indemnify and hold harmless the Company, its directors, officers, employees,
agents, and Affiliates, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act) and each
other holder against any losses, claims, damages, liabilities and expenses
(including reasonable attorneys fees) resulting from any untrue statement of a
material fact or any omission of a material fact required to be stated in the
Registration Statement or Prospectus or preliminary prospectus or any amendment
or supplement thereto or necessary to make the statements therein not
misleading, to the extent, but only to the extent, that such untrue statement or
omission is contained in any information or affidavit so furnished in writing by
such holder to the Company specifically for inclusion in such Registration
Statement or Prospectus or any amendment or supplement thereto.
(c) Conduct of Indemnification Proceedings. Any person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification, provided, however,
that the failure of any indemnified party to give such notice shall not relieve
the indemnified party of its obligations under this section, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice and (ii) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party;
provided, however, that any Person entitled to indemnification hereunder shall
have the right to employ separate counsel and to participate in the defense of
such claim, but the fees and expenses of such counsel shall be at the expense of
such Person unless (a) the indemnifying party has agreed to pay such fees or
expenses, (b) the indemnifying party shall have failed to assume the defense of
such claim and employ counsel reasonably satisfactory to such Person or (c)
based upon advice of counsel of such Person, a conflict of interest may exist
between such Person and the indemnifying party with respect to such claims (in
which case, if the Person notifies the indemnifying party in writing that such
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Person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such Person), in each of which events the fees and
expenses of such counsel shall be at the expense of the indemnifying party. The
indemnifying party will not be subject to any liability for any settlement made
without its consent (but such consent will not be unreasonably withheld), but if
settled with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, the indemnifying party shall
indemnify and hold harmless the indemnified parties from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment.
No indemnified party will be required to consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
(d) Contribution. If for any reason the indemnification provided for in the
preceding clauses (a) and (b) is unavailable to an indemnified party or
insufficient to hold it harmless as contemplated by, the preceding clauses (a)
and (b), then each indemnifying party shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage or
liability (net of income tax effect) in such proportion as is appropriate to
reflect not only the relative benefits received by the indemnified party and
each such indemnifying party, but also the relative fault of the indemnified
party and each such indemnifying party, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of the
Stockholder on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the party's relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentations.
8. Miscellaneous.
(a) Rule 144. The Company shall timely file the reports required to be
filed by it under the Securities Act and the Exchange Act (including but not
limited to the reports under Section 13 and 15(d) of the Exchange Act referred
to in subparagraph (c) of Rule 144 adopted by the Commission under the
Securities Act) and the rules and regulations adopted by the Commission
thereunder (or, if the Company is not required to file such reports, will, upon
the request of any holder of Registrable Securities, make publicly available
other information) and will take such further action as any holder of
Registrable Securities may reasonably request, all to the extent required from
time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by:
(i) Rule 144 under the Securities Act, as such Rule may be amended
from time to time, or
(ii) Any similar rule or regulation hereafter adopted by the
Commission.
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Upon the request of any holder of Registrable Securities, the Company will
deliver to such holder a written statement as to whether it has complied with
the requirements of this Section 8(a).
(b) Remedies. Each party hereto, in addition to being entitled to exercise
all rights provided herein, including recovery of damages, will be entitled to
specific performance of its right under this Agreement. Each party hereto agrees
that monetary damages would not be adequate compensation for any loss incurred
by reason of a breach by it of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a remedy
at law would be adequate.
(c) Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
without the written consent of the Company, the Stockholder and FAI.
(d) Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered first-class
mail, telecopier, or air courier guaranteeing overnight delivery:
If to the Company:
Home Security International, Inc.
Level 7
77 Pacific Highway
North Sydney, NSW 2060
Australia
ATTN: Mark Whitaker
If to the Stockholder:
FAI Home Security Holdings Pty, Ltd.
333 Kent Street
Sydney, NSW 2000
Australia
ATTN: Secretary of the Company
To FAI:
FAI Insurances, Ltd.
333 Kent Street
Sydney, NSW 2000
Australia
ATTN: Secretary of the Company
If to any transferee, at the address given by such transferee to
the Company.
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(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
Parties, including, without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities who agree in writing to
be bound by the obligations of Stockholder and FAI. Specifically, FAI may assign
its rights and obligations under this Agreement to HIH Investment Holdings
Limited ACN:008 664 293 or HIH Insurance Limited ACN: 008 636 575; provided,
however, that such entities agree to be bound by the terms of this Agreement.
(f) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE.
(i) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(j) Entire Agreement. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter hereof.
(k) Injunctive Relief. The Parties recognizes that any breach by it of this
Agreement will cause irreparable injury to the other Party 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),
the Parties agrees that in the event of any such breach, the non-breaching Party
shall be entitled to injunctive relief in addition to such other legal and
equitable remedies that may be available.
(l) Arbitration. Except as otherwise provided in subparagraph (a) and (j)
above, all disputes, differences, or questions arising out of or relating to
this Agreement, or the validity, interpretation, breach, violation or
termination thereof (including disputes arising under this Clause), shall be
finally and solely determined and settled by arbitration in Chicago, Illinois in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. Such arbitration shall be conducted by a panel of three
arbitrators, one of which shall be selected by the Stockholder and one of which
shall be selected by the Company. The two arbitrators so selected shall mutually
appoint a third arbitrator. If any Party hereto fails to appoint an arbitrator
12
<PAGE>
within twenty (20) days of its receipt of notice of a dispute, the other Party
hereto shall select the arbitrator that was to be selected by such delinquent
party. In any such arbitration proceedings, the arbitrators shall adopt and
apply the provisions of the Federal Rules of Civil Procedure relating to
discovery so that each party shall allow and may obtain discovery of any matter
not privileged which is relevant to the subject matter involved in the
arbitration to the same extent as if such arbitration were a civil action
pending in a United States District Court. The arbitrators may proceed to an
award notwithstanding the failure of any Party to participate in such
proceedings. The prevailing Party in the arbitration proceeding shall be
entitled to an award of reasonable attorney fees incurred in connection with the
arbitration in such amount as may be determined by the arbitrators. The award of
the arbitrators shall be (i) the sole and exclusive remedy of the Parties, (ii)
enforceable in any court of competent jurisdiction and (iii) final and binding
on the Parties. Each Party irrevocably consents to personal jurisdiction and to
ex parte action should any Party refuse to participate in such proceedings.
Notwithstanding the foregoing, nothing herein shall preclude a Party from
seeking appropriate injunctive or other interlocutory relief in any court of
competent jurisdiction to enforce its rights hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first written above.
HOME SECURITY INTERNATIONAL, INC.
By:________________________________
Title:_____________________________
Its:_______________________________
FAI HOME SECURITY HOLDINGS PTY LTD.
By:________________________________
Title:_____________________________
Its:_______________________________
FAI INSURANCES LTD.
By:________________________________
Title:_____________________________
Its:_______________________________
13
<PAGE>
EXHIBIT A
FORM OF
DEED OF VARIATION
-----------------
14
<PAGE>
FAI INSURANCES LIMITED
ACN 004 304 545
FAI HOME SECURITY PTY LIMITED
ACN 050 064 214
HOME SECURITY INTERNATIONAL INC.
DEED OF VARIATION
MINTER ELLISON
Lawyers
Minter Ellison Building
44 Martin Place
SYDNEY NSW 2000
DX 117 Sydney
Telephone (02) 9210 4444
Facsimile (02) 9235 2711
MJM 10733331
<PAGE>
DEED OF VARIATION
DEED dated February 1999
BETWEEN FAI INSURANCES LIMITED ACN 004 304 545 of Level 8, 333 Kent
Street, Sydney, New South Wales, 2000 ('FAI')
AND FAI HOME SECURITY PTY LIMITED ACN 050 064 214 of 7/77 Pacific
Highway, North Sydney, New South Wales ('FHS')
AND HOME SECURITY INTERNATIONAL INC. c/o D'Ancona and Pflaum of 111
East Wacker Drive, Suite 2800, Chicago, Illinois, USA 60601-4205
('HSI')
RECITALS
A. FAI and FHS are parties to a Share Sale Agreement dated 31 December 1997
('Share Sale Agreement') under which FAI sold to FHS half of the issued
shares in FAI Finance Corporation Pty Limited.
B. Under clause 4.2 of the Share Sale Agreement, FAI and FHS agreed that the
Purchase Price was to be paid in instalments on each date that FHS or a
Related Body Corporate of FHS receives proceeds from any issue of debt or
equity instruments to the public or effects any capital raising.
C. As part of the consideration payable for the acquisition of the shares in
Integrated International Home Security Limited, Home Security International
(a Related Body Corporate of FHS) issued shares valued at US$4.1 million
and warrants worth US$504,000 to Integral Investments Limited and executed
a promissory note in respect of the HSI Group Debt.
D. FAI contends that FHS is obliged to pay FAI up to 40% of the sums referred
to in Recital C towards payment of the balance of the Purchase Price under
the Share Sale Agreement. FHS does not concede that this is the case.
E. FAI and FHS have agreed to vary the terms for payment of the balance of the
Purchase Price set out in clause 4.2 of the Share Sale Agreement on the
terms and conditions of this Deed.
<PAGE>
2
AGREEMENT
1. DEFINITIONS AND INTERPRETATION
In this Deed:
'Capital Raising' means any issue of debt or equity instruments (of
whatever type or nature) to the public or any other capital raising
undertaken by the HSI Group (including, without limitation, any issue of
securities to an entity not within the HSI Group and irrespective of
whether the capital raised is cash or another form of consideration);
'HSI Group' means HSI and/or any of its Related Bodies Corporate including
(without limitation) its wholly owned subsidiary, FHS;
'HSI Group Debt' means the sum of US$9,098,000, being the amount owed by
the HSI Group to Integral Investments Limited as part of the consideration
for the acquisition of Integrated International Home Security Limited;
'Purchase Price' has the same meaning as in the Share Sale Agreement;
'Related Body Corporate' has the same meaning as in the Share Sale
Agreement; and
'Share Sale Agreement' means the agreement referred to in Recital A.
1.1 Interpretation
In this Deed, unless the context indicates otherwise:
(a) the singular includes the plural and vice versa;
(b) other grammatical forms of defined words and expressions have
corresponding meanings; and
(c) a reference to a clause is a reference to a clause of this Deed.
2. FHS WAIVER
Subject to clause 4 and clause 5, FAI agrees not to enforce any right which
it may have under the Share Sale Agreement to receive payment of part of
the Purchase Price as a result of the transaction referred to in Recital C.
3. VARIATION OF SHARE SALE AGREEMENT
Subject to clause 4 and clause 5, FAI and FHS agree that the operation of
clause 4.2 of the Share Sale Agreement is varied to the following extent:
(a) FHS will not be obliged to pay FAI any part of the proceeds received
from any Capital Raising undertaken before the HSI Group Debt has been
repaid (or otherwise discharged), provided that the proceeds of any
such Capital Raising
<PAGE>
3
are applied by the HSI Group towards repayment of the HSI Group Debt;
(b) FHS will be obliged to pay FAI:
(i) 40% (or such lesser percentage as will be sufficient to pay the
balance of the Purchase Price) of the proceeds of any Capital
Raising undertaken after repayment of the HSI Group Debt; and
(ii) if the proceeds of a Capital Raising undertaken before the HSI
Group Debt is repaid exceed the amount required to repay the HSI
Group Debt, the full amount of that excess (or such lesser amount
as will be sufficient to pay the balance of the Purchase Price);
and
(c) FHS will not be obliged to pay FAI any part of the proceeds of any
capital raising undertaken by the HSI Group in connection with the
acquisition of the shareholding in Ness Security Products Pty Limited
held by Circosta Pty Limited in its capacity as trustee for the Naz
Circosta Unit Trust.
4. HSI GROUP OBLIGATIONS
4.1 FHS or HSI (on behalf of FHS) will pay FAI the sum of $500,000 on 30 June
1999 in reduction of the outstanding balance of the Purchase Price.
4.2 HSI will immediately give FAI details and adequate documentation (to the
satisfaction of FAI) of:
(a) each Capital Raising;
(b) the amount of consideration received by the HSI Group in respect of
each Capital Raising;
(c) if the consideration referred to in clause 4.2(b) is not cash, the
value attributed to that consideration in the financial statements of
the HSI Group;
(d) all payments made towards repayment of the HSI Group Debt and any
other reductions or partial discharges of the HSI Group Debt; and
(e) the satisfaction (or other discharge) of the HSI Group's obligations
to repay the HSI Group Debt.
5. CONDITION
Clause 2 and clause 3(a) are subject to, and conditional upon:
(a) compliance by HSI with all its obligations under the agreement titled
'Registration Rights Agreement' between HSI and FAI and dated on or
about the date of this Deed relating to the registration of the shares
FAI holds in HSI by the Securities and Exchange Commission of the
United States of America; and
<PAGE>
4
(b) compliance by HSI and FHS with their obligations under clause 4.1 and
clause 4.2.
6. GENERAL
6.1 This Deed may be executed in counterparts.
6.2 Each party must bear its own costs of preparing and executing this Deed and
must pay all stamp duty or other taxes of a similar nature on this Deed for
which the party is liable under the Duties Act 1998.
6.3 A provision or a right under this Deed may not be waived except by a waiver
in writing signed by the party granting the waiver, and will be effective
only to the extent specifically set out in that waiver.
6.4 This Deed is governed by the laws of New South Wales and each party
unconditionally and irrevocably submits to the non-exclusive jurisdiction
of the courts of that State.
EXECUTED as a deed.
THE COMMON SEAL of FAI )
INSURANCES LIMITED is fixed to this )
document in accordance with its constitution )
in the presence of )
/s/ Rodney S. Adler /s/ Robert F. Baulderstone
.................................... .......................................
Signature of director Signature of director/company secretary
(Please delete as applicable)
Rodney S. Adler Robert F. Baulderstone
.................................... .......................................
Name of director (print) Name of director/company secretary
(print)
THE COMMON SEAL of FAI HOME )
SECURITY PTY LIMITED is fixed to this )
document in accordance with its constitution )
in the presence of )
.................................... .......................................
Signature of director Signature of director/company secretary
(Please delete as applicable)
.................................... .......................................
Name of director (print) Name of director/company secretary
(print)
<PAGE>
5
THE COMMON SEAL of HOME )
SECURITY INTERNATIONAL INC. is )
fixed to this document in accordance with its )
constitution in the presence of )
............................... ...........................................
Signature of director Signature of director/company secretary
(Please delete as applicable)
............................... ...........................................
Name of director (print) Name of director/company secretary (print)
<PAGE>
Exhibit 23.2
February 8, 1999 Arthur Andersen
A Member Firm of
Andersen Worldwide SC
The Board of Directors 141 Walker Street
Home Security International Inc. North Sydney 2060
Level 7 GPO Box 4329 Sydney NSW 2001
77 Pacific Highway 02-9964 6000
NORTH SYDNEY NSW 2060 02 9922 2065 Fax
DX 1340 Sydney
Dear Sirs:
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this pre-
effective Amendment No. 1 to Form S-1 Registration for Home Security
International Inc.
Yours faithfully,
/s/ Arthur Andersen
<PAGE>
Exhibit 23.4
February 8, 1999 Delotte & Touche
Omar Hodge Building
P.O. Box 3083
Road Town, Tortola
The Board of Directors British Virgin Islands
Home Security International Inc. Tel (284) 494-2868
Level 7 Facsimile: (284) 494-7889
77 Pacific Highway e-mail: [email protected]
NORTH SYDNEY NSW 2060
Dear Sirs:
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this pre-
effective Amendment No. 1 to Form S-1 Registration for Home Security
International Inc.
Yours faithfully,
/s/ Deloitte & Touche
<PAGE>
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director 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 and Mark Whitaker, and each of them,
his 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 statements 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.
/s/ Paul Brown
- --------------
Paul Brown Director February 8, 1999
II-5
