<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended December 31, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number
001-14502
------------------------
HOME SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0169495
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Level 7, 77 Pacific Highway
North Sydney, NSW Australia 2060
(Address of principal executive (Zip Code)
offices)
(011) (612) 9936-2424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Number of Shares of Common Stock Outstanding on February 14, 2000:
5,828,278
- --------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 30,
NOTE -------------------------------
1999$ 1999$
---------------------------------------------
ASSETS
- ------
Current assets
<S> <C> <C> <C>
Cash and cash equivalents 2,976,240 2,254,048
Accounts receivable - related party 217,516 827,392
Accounts receivable - trade, net 3,190,633 3,786,078
Inventories 2 6,974,109 5,774,041
Prepaid expenses and other current assets 1,508,016 2,263,492
--------------------------------
Total current assets 14,866,514 14,905,051
--------------------------------
Non-current assets
Investment in partnership 323,398 -
Investments in affiliated companies 7,874,928 7,858,895
Intangibles, net 23,014,184 22,851,155
Deferred income taxes 1,057,558 1,668,038
Other non-current assets 4,340,838 4,340,618
--------------------------------
Total non-current assets 36,610,906 36,718,706
--------------------------------
Total assets 51,477,420 51,623,757
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft 150,938 -
Note payable - FAI Insurance Group 1,313,400 1,301,400
Note payable - Integral Investments Limited 8,394,024 8,301,191
Payables - trade 3,714,810 2,718,147
Other current liabilities 4,276,825 4,322,875
--------------------------------
Total current liabilities 17,849,997 16,643,613
--------------------------------
Non-current liabilities
Note payable - FAI Insurance group 3,447,675 3,416,175
Borrowing - FAI Finance Corporation Pty Limited - 1,494,335
Lease liability 720,510 533,481
Other non-current liabilities 385,585 464,420
--------------------------------
Total non-current liabilities 4,553,770 5,908,411
--------------------------------
Total liabilities 22,403,767 22,552,024
--------------------------------
Stockholders' equity
Preferred stock $.001 value; 1,000,000 shares
authorized, none outstanding - -
Common stock $.001 value; 20,000,000 shares
authorized and 5,828,278 shares issued and
outstanding as of June 30, 1999 and
December 31, 1999 Respectively. 5,828 5,828
Additional paid-in capital 22,309,708 22,309,708
Warrants 504,000 784,000
Secured Note (2,375,000) (2,375,000)
Accumulated other comprehensive loss 3 (452,532) (568,081)
Retained earnings 9,081,649 8,915,278
--------------------------------
Total stockholders' equity 29,073,653 29,071,733
--------------------------------
Total liabilities and stockholders' equity 51,477,420 51,623,757
================================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements
2
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six months ended
NOTE December 31, December 31,
------------------------------------------------------------------------
1998$ 1999$ 1998$ 1999$
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 12,185,335 8,607,206 22,411,573 18,127,280
Cost of goods sold (5,847,541) (4,305,517) (11,709,151) (9,078,494)
------------------------------------------------------------------------
Gross profit 6,337,794 4,301,689 10,702,422 9,048,786
General and administrative expenses (3,353,479) (3,789,836) (5,087,101) (7,046,796)
Amortization and depreciation (685,484) (696,807) (858,975) (1,320,006)
Research and development expenses (190,221) (223,469) (190,221) (430,482)
------------------------------------------------------------------------
Income from operations 2,108,610 (408,423) 4,566,125 251,502
Non-operating income (loss)
Interest income - (326,830) - (326,830)
106,923 66,990 222,420 134,710
Interest expenses - related party (100,763) (90,847) (199,546) (182,232)
- other (179,272) (167,224) (180,476) (339,855)
------------------------------------------------------------------------
Income (Loss) before taxes and equity
in income of affiliated companies and
minority interest 1,935,498 (926,334) 4,408,523 (462,705)
Income tax (expense)/benefit (932,080) 447,836 (1,848,944) 241,047
------------------------------------------------------------------------
Income (Loss) before equity in income
of affiliated companies and
minority interest 1,003,418 (478,498) 2,559,579 (221,658)
Equity in income of affiliated companies 4 190,134 26,476 238,586 55,288
Minority interest (156,671) - (156,671) -
------------------------------------------------------------------------
Net income (loss) 1,036,881 (452,022) 2,641,494 (166,370)
========================================================================
Net income per common share
Basic earnings per share $ 0.19 $ -0.08 $ 0.49 $ -0.03
Diluted earnings per share $ 0.19 $ -0.08 $ 0.49 $ -0.03
Weighted average number of shares
outstanding
Basic 5,550,500 5,828,278 5,350,500 5,828,278
Diluted 5,550,500 5,828,537 5,356,479 5,828,407
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 30,
----------------------------------
1998$ 1999$
----------------------------------
<S> <C> <C>
Net cash provided by/(used in) operating activities 924,579 (360,320)
----------------------------------
Cashflow from investing activities
Purchase of controlled entity, net of cash acquired (3,087,082) -
Additions to capital assets (509,702) (560,481)
Other cash inflows/(outflows) from investing activities 166,558 (484,719)
----------------------------------
Net cash used in investing activities (3,430,226) (1,045,200)
----------------------------------
Cashflow from financing activities
Net proceeds/(repayments) from/(of) borrowings (158,150) 884,777
Other cash outflows from financing activities 99,975 (149,559)
----------------------------------
Net cash used in financing activities (58,175) 735,218
----------------------------------
Net decrease in cash held (2,563,822) (670,302)
----------------------------------
Cash at the beginning of the financial period 7,006,183 2,976,240
Effect of exchange rate change on cash (103,461) (51,890)
----------------------------------
Cash at the end of the financial period 4,338,900 2,254,048
==================================
Supplemental disclosure of cashflow information:
Interest paid 187,477 185,040
Income taxes paid 2,529,225 494,986
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation and Basis of Preparation -
The condensed consolidated financial statements presented herein and these
notes have been prepared by Home Security International, Inc. ("the Company"),
without audit. In the opinion of the registrants' management, the unaudited
condensed consolidated financial statements included in this filing on Form 10-Q
reflect all adjustments which consist of normal recurring adjustments necessary
to present fairly the financial information.
The financial statements should be read in conjunction with the
consolidated financial statements as of and for the fiscal year ended June 30,
1999 and the footnotes thereto included in the Company's Annual Report on Form
10-K.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP"). The investment in FAI Finance Corporation Pty Limited
("FFC") is recorded using the equity method.
All inter-company accounts and transactions have been eliminated upon
consolidation.
5
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
<TABLE>
<CAPTION>
NOTE 2: INVENTORIES June 30, December 30,
-------------------------------------
1999$ 1999$
<S> <C> <C>
-------------------------------------
Finished goods 3,527,596 2,813,311
Work in progress 288,382 374,620
Raw materials 3,158,131 2,586,110
-------------------------------------
6,974,109 5,774,041
=====================================
</TABLE>
NOTE 3: COMPREHENSIVE INCOME
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 notes to the condensed consolidated financial
statements for interim reporting purposes.
Total Comprehensive Income for the three and six-month periods ended
December 31, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------------
1998$ 1999$
-------------------------------------
<S> <C> <C>
Net Income 1,036,881 (452,022)
Other comprehensive (loss) income:
Foreign currency translation adjustment 218,645 (33,110)
------------------------------------
Total comprehensive income 1,255,526 (485,132)
====================================
Six Months Ended
December 31,
------------------------------------
1998$ 1999$
------------------------------------
<S> <C> <C>
Net Income 2,641,494 (166,370)
Other comprehensive (loss) income:
Foreign currency translation adjustment 17,745 (115,549)
------------------------------------
Total comprehensive income 2,659,239 (281,919)
====================================
</TABLE>
6
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 4: EQUITY IN INCOME OF 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
Limited (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. Selected summarized financial information for FFC is presented
below.
<TABLE>
<CAPTION>
Three months ended
December 31,
-------------------------------
1998$ 1999$
-------------------------------
<S> <C> <C>
Net interest income 2,011,735 2,072,994
Net income 523,624 204,992
</TABLE>
<TABLE>
<CAPTION>
Six months ended
December 31,
-------------------------------
1998$ 1999$
-------------------------------
<S> <C> <C>
Net interest income 3,441,383 4,345,045
Net income 759,858 415,570
</TABLE>
Reconciliation of equity in income of affiliated companies for the three
and six-month period ended December 31, 1998 and 1999 is shown below.
<TABLE>
<CAPTION>
Three months ended
December 31,
-------------------------------
1998$ 1999$
-------------------------------
<S> <C> <C>
50 percent of Net income of affiliated company - FFC 261,812 102,496
Amortization of goodwill - FFC (71,678) (76,020)
-------------------------------
Equity in income of affiliated companies 190,134 26,476
===============================
</TABLE>
<TABLE>
<CAPTION>
Six months ended
December 31,
-------------------------------
1998$ 1999$
-------------------------------
<S> <C> <C>
50 percent of Net income of affiliated company - FFC 379,929 207,785
Amortization of goodwill - FFC (141,343) (152,497)
-------------------------------
Equity in income of affiliated companies 238,586 55,288
===============================
</TABLE>
7
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This discussion and analysis of the Company's financial condition and
results of operations contains certain forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities exchange Act
of 1934, as amended (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
filing, 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, currency
fluctuation as identified more fully below 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, including the customers' and media's
perception of the Company, adverse media, and actions taken or omitted to be
taken by third parties, including the Company's stockholders, 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. Such
factors include, but are not limited to, the risks identified above and the
risks detailed under the caption "Risk Factors" in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999 and expanded upon herein,
and as detailed from time to time in the Company's other filings made with the
Securities and Exchange Commission.
Additional Risk Factor
History of Decrease in Security Alarm Sales; Variability of Quarterly
Operating Results. The Company has experienced significant decreases in its
security alarm sales for the past three fiscal quarters. While the Company has
taken a number of measures to increase its revenues from the sale of security
alarms, decrease its operating expenses, and attain profitability, there can be
no assurance that these measures will succeed or that the Company will become
profitable. Furthermore, as it is difficult to predict the success of the
Company's new sales strategy which focuses on base monitoring services,
historical results should not be relied upon as an indication of future
performance.
Overview
Currently, the Company through the Distributor Network, sells, installs,
monitors and services a residential security alarm system marketed under the
trade name SecurityGuard, principally in Australia, with operations in Europe,
New Zealand, North America and South Africa. The SecurityGuard alarm and other
major components are manufactured exclusively by Ness Security Products Pty
Limited ("Ness"), a recently acquired subsidiary.
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 monitoring
8
<PAGE>
contracts are collected and recognized monthly over the life of the monitoring
contracts. 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.
9
<PAGE>
Recent Developments
On Line Monitoring Program - New Customers
During the last two quarters, the Company devoted substantial resources and
personnel to developing and testing of a new sales strategy allowing the
customer the option of receiving the SecurityGuard System alarm for an
affordable monthly payment over either a 36 or 60 month period (the "On-line
Monitoring Program").
This new On-line Monitoring Program represents a dynamic change from the
Company's previous strategy of simply selling its alarm system at full price
with little opportunity for continued customer access or revenue generation
except for selling periodic upgrades. The On-line Monitoring Program is based on
a United States market model that has been adopted by many major security
companies whereby the equipment and the monitoring component are repaid through
a monthly interest free contract. Under this program connection and installation
are provided to the customer free of charge. The new On-line Monitoring Program
does not require the customer to make any initial installment payment or down
payment for the alarm equipment nor does the connection include an interest
charge under the 36 or 60 month monitoring commitment.
The Company will continue to record revenues from SecurityGuard System
sales upon shipment by the Company to the Distribution network for the On-line
Monitoring Program. The On-line Monitoring Program will result in the Company
receiving lower margins as a result of the Company providing for the cost of
monitoring supplied through a third party over the 36 or 60 month period. The
initial cash inflow from the On-line Monitoring Program will also be reduced as
compared to the Company's former sales program as the cost of monitoring is paid
on an installment basis over the life of the contract. However, at the
completion of the initial contract, the Company will thereafter recognize a
monthly on-line fee less the cost of providing this service for the lifetime of
the connection.
The Company has completed the test marketing of its new strategy in the
Australia and New Zealand markets. The Company intends to rollout its new
monitoring package through its Australian Distribution network beginning in the
end of March 2000. The Company intends to launch its On-line Monitoring Program
in the United States in its third quarter ending March 31, 2000. The Company
intends to begin testing the On-line Monitoring Program in the United Kingdom
late in the fourth fiscal quarter ending June 30, 2000 and then begin testing in
the growing Netherlands market later in the calendar year ending December 31,
2000. It is the Company's intention to launch a program in each market that
provides a basic security package consisting of an alarm and on-line monitoring
services for three to five years. The Company plans to recruit distributors from
within the industry to sell its security packages and to utilize own
distribution program to sell these new services as well. The Company has
suspended its sales in South Africa pending an evaluation of the South African
market's suitability to the On-line Monitoring Program.
Upgrade Program - Existing Customers
The Company has continued to contact its existing customer-base to offer
its 5-year on-line monitoring services package (the "Upgrade Program"). During
the three months ended December 31, 1999, the Company upgraded 2,818 alarm
systems with on-line monitoring services. These new connections represented a
57% increase from the on-line monitoring connections made in the preceding three
months ended September 30, 1999. As of December 31, 1999, more than 6,500 of the
Company's existing 250,000 customers have entered into agreements to purchase
the Company's on-line monitoring services.
The Company will recognize on an installment basis the revenue from the
Upgrade Program over the period of each contract. All selling and installation
cost for the Upgrade Program have been capitalized and will be expensed over the
period of each contract. All setup and development expenses relating to the
Upgrade Program have been expensed as incurred.
10
<PAGE>
The Upgrade Program generates an initial cash outflow consisting of
product, installation and sales commission costs. The Company has completed an
initial funding facility to finance the initial cash deficiency and intends to
increase or replace this facility to ensure the Upgrade Program can be expanded.
Results of Operations
Comparison of three months ended December 31, 1999 and December 31, 1998.
Net Sales: Net sales decreased by $3.6 million or 30% from $12.2 million
for the three months ended December 31, 1998 to $8.6 million for the three
months ended December 31, 1999. Distributor sales decreased by $4.3 million or
41% from $10.4 million for three months ended December 31, 1998 to $6.1 million
for the three months ended December 31, 1999.The reduction in Distributor sales
was primarily a result of a 44% decline in total sales from 14,861 units for the
three months ended December 31, 1998 to 8,276 for the three months ended
December 31, 1999. Direct Retail Sales (sales of manufactured goods by Ness to
third parties other than the Company) increased by $0.7 million or 39% from $1.8
million for three months ended December 31, 1998 to $2.5 million for the three
months ended December 31, 1999.
Units sold in the Australian market decreased 47% from 11,437 units for the
three months ended December 31, 1998 to 6,091 units for the three months ended
December 31, 1999. Units sold in New Zealand decreased 72% from 1,556 units for
the three months ended December 31, 1998 to 428 units for the three months ended
December 31, 1999.
The decline in number of units sold in Australia and New Zealand was
attributable to:
(i) A reduction in the number of Distributor offices currently selling in
the Australian and New Zealand market caused by poor sales results.
(ii) A reduction in the number of independent sales agents due to (i).
(iii) The delay in the introduction of the Online Monitoring Program (which
promotes the Company's new product SecurityGuard 3) into the
Distribution network.
Unit sales in Europe and the United Kingdom increased 18% from 1,405 units
for the three months ended December 31, 1998 to 1,661 for the three months ended
December 31, 1999. In particular, unit sales in the Netherlands increased 75%
from 879 for the three months ended December 31, 1998 to 1,540 for the three
months ended December 31, 1999.
The reduction in unit sales was also caused by the Company's intentional
suspension of sales in the South African market to concentrate the resources of
the Company on the Australian, New Zealand, USA and European markets. The South
African market has typically represented a low margin business for the company.
The Company recorded no unit sales in South Africa during the three months ended
December 31, 1999 compared to 259 for the three months ended December 31, 1998.
Cost of Goods Sold: Cost of goods sold decreased 26% from $5.8 million for
the three months ended December 31, 1998 to $4.3 million for the three months
ended December 31, 1999. As a percentage of net sales, cost of goods sold
increased 2% from 48% for the three months ended December 31, 1998 to 50% for
the three months ended December 31, 1999. The increase in cost of goods sold is
primarily attributable to expensing the costs associated with developing and
testing the new On-line Monitoring Program.
General and Administrative Expenses: General and administrative expenses
were $3.8 million for the three months ended December 31, 1999, compared to $3.4
million for the three months ended December 31, 1998.
11
<PAGE>
Total general and administrative expenses, as a percentage of net sales,
increased 16% to 44% for the three months ended December 31, 1999 compared to
28% for the three months ended December 31, 1998.
The increase in general and administrative expenses as a percentage of net
sales was primarily attributable to:
(i) The fixed nature of the expenses relating to the administration and
provision of service to the distribution network.
(ii) Market research, consulting and travel expenses incurred by the
Company in Australia and New Zealand relating to the Task Force
program ("Task Force") undertaken by the Company in June 1999. This
program involved a comprehensive survey of 8,000 customers and focus
groups throughout the Australia and New Zealand market, creation of
new marketing techniques and ultimately the creation of the new
online monitoring program. All expenses have been recognized as they
were incurred.
(iii) Implementation costs associated with the launch of the new
SecurityGuard 3 product in both Australia and New Zealand.
(iv) Marketing and development costs relating to the Upgrade Program
resulting in 2,818 connections to on-line monitoring from its
existing 250,000 home customer base.
(v) Program development costs relating to the United States market and
the On-line Monitoring Program.
Amortization and depreciation: Amortization and depreciation remained
stable at $0.7 million for both the three months ended December 31, 1998 and the
three months ended December 31, 1999
Research and Development: Research and Development expense remained stable
at $0.2 million for the three months ended December 31, 1999 and 1998,
respectively. Research and Development expenses represents costs incurred by
Ness in relation to product approvals and the design and development of new
products.
Income From Operations: Income from operations decreased 119% from $2.1
million for the three months ended December 31, 1998 to a loss of $0.4 million
for the three months ended December 31, 1999. The decrease in income from
operations reflects the reduction in unit sales in the three months ended
December 31, 1999.
Non Operating Income (Loss) - Other: Non Operating Income (Loss) - Other
represents the write-off of the Company's 49% interest in the Bayside
Partnership purchased June 30, 1998, which had entered into an agreement with
Prime Life Corporation to acquire a retirement village in Melbourne, Australia.
The Company has been unable to reach an agreement as to the appropriate
management fee to be charged for the administration of this passive investment.
The Company has terminated this relationship to focus its resources on its core
business.
The investment in the partnership provided the Company with a permanent
difference for tax purposes of $1.6 million (approximately $0.6 million after
tax) for the fiscal year ended June 30, 1998. Due to changes in tax laws this
benefit was reversed for the fiscal year ended June 30, 1999 and has
subsequently been reinstated as a result of the write-off in the interest in the
partnership and is reflected in Income Tax Expense for the three months ended
December 31, 1999.
Interest Income: Interest income remained constant at $0.1 million for the
three months ended December 31, 1999 and 1998.
12
<PAGE>
Interest Expense--related party: Interest expense--related party is derived
from the vendor-financed loan initiated as part of the FFC Transaction on
December 31, 1997. Interest expense--related party remained constant at $0.1
million for the three months ended December 31, 1999 and 1998.
Interest Expense--other: Interest expense--other for the three months ended
December 31, 1999, and 1998 was $0.2 million. The interest charge for both the
three months ended December 31, 1999 and 1998 consisted of a non-cash imputed
interest charge of $0.2 million recorded in order to comply with the U.S. GAAP
purchase accounting principles. Pursuant to the Stock Purchase Agreement through
which the Company acquired 100% of the issued and outstanding stock of
Integrated International Home Security Limited ("IIHSL"), the Company issued a
non-interest bearing promissory note, secured by the IIHSL shares, in the amount
of $9,098,000. U.S. GAAP requires a discount to be recorded for debt securities
issued in connection with an acquisition with an interest rate fixed materially
below the effective rate or current yield of an otherwise comparable security.
Income Tax Expense: The effective rate of tax remained stable at 48% for
both the three months ended December 31, 1998 and 1999. Income tax expense for
the three months ended December 31, 1999 was reduced by: the re-instatement of
the permanent difference for tax purposes of $1.6 million (approximately $0.6
million after tax) derived from the investment in the Bayside Partnership which
was written off as at December 31, 1999. Income tax expense was further
increased by: (i) the capital write-off of the investment in the Bayside
Partnership of $0.3 million for which the Company at present has no offsetting
capital gain; (ii) non-deductible amortization of goodwill of $0.4 million for
the three months ended December 31, 1999; and (iii) reversal of future tax
benefit relating to the South African operation of $0.1 million.
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased from $190,000 for the three months ended December 31, 1998 to $26,000
for the three months ended December 31, 1999. This was calculated by taking the
Company's 50% share of FFC's net income of $102,000 for the three months ended
December 31, 1999 and deducting amortization of goodwill for the same period of
$76,000. The decrease in FFC's net income during the three months ended December
31, 1999 as compared to the three months ended December 31, 1998 was primarily
attributable to the Company's reduction in unit sales.
Minority Interest: Minority interest for the three months ended December
31, 1998 represents an independent third party's ownership of 24.96% of Ness,
and the corresponding profit allocation for the three months ended December 31,
1998. Effective April 9, 1999 the Company acquired the remaining 24.96% interest
in Ness, eliminating the minority interest.
Net Income (loss): Net income (loss) decreased from a gain of $1.0 million
for the three months ended December 31, 1998 to a loss $0.5 million for the
three months ended December 31, 1999. This was primarily attributable to the 44%
decline in total sales from 14,861 units for the three months ended December 31,
1998 to 8,276 for the three months ended December 31, 1999.
Comparison of six months ended December 31, 1999 and December 31, 1998.
Net Sales: Net sales decreased by $4.3 million or 19% from $22.4 million
for the six months ended December 31, 1998 to $18.1 million for the six months
ended December 31, 1999. Distributor sales decreased by $7.6 million or 37% from
$20.6 million for six months ended December 31, 1998 to $13.0 million for the
six months ended December 31, 1999. The reduction in Distributor sales was
primarily a result of a 42% decline in total sales from 29,738 units for the six
months ended December 31, 1998 to 17,281 for the six months ended December 31,
1999. Direct Retail Sales increased by $3.3 million or 183% from $1.8 million
for six months ended December 31, 1998 to $5.1 million for the six months ended
December 31, 1999. The increase in Direct Retail Sales was primarily
attributable to the inclusion of an additional $2.6 million in Direct Retail
Sales for the three months ended September 30, 1999. The IIHSL acquisition was
effective October 1, 1998 and therefore the additional Direct Retail Sales did
not apply for the three months ended September 30, 1998.
The decline in number of units sold in Australia and New Zealand is
attributable to:
13
<PAGE>
(i) A reduction in the number of Distributor offices currently selling in
the Australian and New Zealand market caused by poor sales results.
(ii) A reduction in the number of independent sales agents due to (i).
(iii) The delay in the introduction of the Online Monitoring Program into
the Distribution network.
Unit sales in Europe and the United Kingdom increased 13% from 2,773 units
for the six months ended December 31, 1998 to 3,126 for the six months ended
December 31, 1999. In particular, unit sales in the Netherlands increased 77%
from 1,576 for the six months ended December 31, 1998 to 2,791 for the six
months ended December 31, 1999.
The Company has intentionally suspended selling in the South African market
to concentrate the resources of the Company on the Australian, New Zealand, USA
and European markets. The South African market recorded 90 unit sales during
the six months ended December 31, 1999 compared to 386 for the six months ended
December 31, 1998.
Cost of Goods Sold: Cost of goods sold decreased 22% from $11.7 million for
the six months ended December 31, 1998 to $9.1 million for the six months ended
December 31, 1999. As a percentage of net sales, cost of goods sold decreased 2%
from 52% for the six months ended December 31, 1998 to 50% for the six months
ended December 31, 1999. The decrease in cost of goods sold is primarily
attributable to the increase in Direct Retail Sales as a percentage of net sales
for the six months ended December 31, 1999.
General and Administrative Expenses: General and administrative expenses
were $7.0 million for the six months ended December 31, 1999, compared to $5.1
million for the six months ended December 31, 1998. Total general and
administrative expenses, as a percentage of net sales, increased 16% to 39% for
the six months ended December 31, 1999 compared to 23% for the six months ended
December 31, 1998. The increase in general and administrative expenses as a
percentage of net sales was primarily attributable to:
(i) The fixed nature of the expenses relating to the administration and
provision of service to the distribution network.
(ii) Market research, consulting and travel expenses incurred by the
Company in Australia and New Zealand relating to the Task Force
program formed by the Company in June 1999. This program involved a
comprehensive survey of 8,000 customers as well as focus groups
throughout the Australia and New Zealand market, creation of new
marketing techniques and ultimately the creation of the new online
monitoring program. All expenses have been recognized as they were
incurred.
(iii) Implementation costs associated with the launch of the new
SecurityGuard 3product in both Australia and New Zealand.
(iv) Marketing and development costs relating to Upgrade Program resulting
in the 2.818 connections to on-line monitoring from its existing
250,000 home customer base.
(v) Program development costs relating to the United States market and
the On-line Monitoring Program
Amortization and depreciation: Amortization and depreciation increased by
44% from $0.9 million for the six months ended December 31, 1998 to $1.3 million
for the six months ended December 31, 1999. This was directly attributable to:
(i) the inclusion of $0.2 million of additional depreciation and amortization of
capital assets relating to Ness and; (ii) the inclusion of $0.2 million of
additional amortization relating to
14
<PAGE>
goodwill recorded upon the acquisition of IIHSL. The IIHSL acquisition was
effective October 1, 1998 and therefore the additional depreciation and
amortization described in clause (i) and (ii) above did not apply for the three
months ended September 30, 1998.
Research and Development: Research and Development expense was $0.4 million
for the six months ended December 31, 1998 compared to $0.2 million for the
three months ended December 31, 1998. The $0.2 million increase is directly
attributable to the exclusion of $0.2 million of Research and Development
expenses relating to Ness for the three months ended September 30, 1998.
Research and Development expenses represent costs incurred by Ness in relation
to product approvals and the design and development of new products.
Income From Operations: Income from operations decreased 93% from $4.6
million for the six months ended December 31, 1998 to $0.3 million for the six
months ended December 31, 1999. The decrease in income from operations reflects
the reduction in unit sales in the six months ended December 31, 1999.
Non Operating Income (Loss) - Other: Non Operating Income (Loss) - Other
represents the write-off of the Company's 49% interest in the Bayside
Partnership purchased June 30, 1998, which had entered into an agreement with
Prime Life Corporation to acquire a retirement village in Melbourne, Australia.
The Company had been unable to reach an agreement as to the appropriate
management fee to be charged for the administration of this passive investment.
The company has terminated this relationship to focus its resources on its core
business.
The investment in the partnership provided the Company with a permanent
difference for tax purposes of $1.6 million (approximately $0.6 million after
tax) for the fiscal year ended June 30, 1998. Due to changes in tax laws this
benefit was reversed for fiscal year ended June 30, 1999 and has subsequently
been reinstated as a result of the write-off of the interest in the partnership.
Interest Income: Income from operations decreased 50% from $0.2 million for
the six months ended December 31, 1998 to $0.1 million for the six months ended
December 31, 1999. The decrease in interest income is directly attributable to
the reduction in the Company's Cash and Cash Equivalents from $4.3 million as at
December 31, 1998 to $2.3 million as at December 31, 1999.
Interest Expense--related party: Interest expense--related party is derived
from the vendor-financed loan initiated as part of the FFC Transaction on
December 31, 1997. Interest expense--related party remained constant at $0.2
million for the six months ended December 31, 1999 and 1998, respectively.
Interest Expense--other: Interest expense--other for the six months ended
December 31, 1999, and 1998 was $0.3 and $0.2 million respectively. The interest
charge for both the six months ended December 31, 1999 and 1998 consisted of a
non-cash imputed interest charge recorded in order to comply with the U.S. GAAP
purchase accounting principles. Pursuant to the Stock Purchase Agreement through
which the Company acquired 100% of the issued and outstanding stock of IIHSL,
the Company issued a non-interest bearing promissory note, secured by the IIHSL
shares, in the amount of $9,098,000. U.S. GAAP requires a discount to be
recorded for debt securities issued in connection with an acquisition with an
interest rate fixed materially below the effective rate or current yield of an
otherwise comparable security.
Income Tax Expense: The effective rate of tax was 52% for the three months
ended December 31, 1999 as compared with 42% for the six months ended December
31, 1998. Income tax expense for the six months ended December 31, 1999 was
reduced by the re-instatement of the permanent difference for tax purposes of
$1.6 million (approximately $0.6 million after tax) derived from the investment
in the Bayside Partnership which was written off as at December 31, 1999. Income
tax expense was further increased by: (i) the capital write-off of the
investment in the Bayside Partnership of $0.3 million for which the Company at
present has no offsetting capital gain; and (ii) non-deductible amortization of
goodwill of $0.7 million for the six months ended December 31, 1999; and (iii)
reversal of future tax benefits relating to the South African operation of $0.1
million.
15
<PAGE>
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased from $240,000 for the six months ended December 31, 1998 to $55,000
for the six months ended December 31, 1999. This was calculated by taking the
Company's 50% share of FFC's net income of $207,000 for the six months ended
December 31, 1999 and deducting amortization of goodwill for the same period of
$152,000. The decrease in FFC's net income during the six months ended December
31, 1999 as compared to the six months ended December 31, 1998 was primarily
attributable to the Company's reduction in unit sales.
Minority Interest: Minority interest for the six months ended December 31,
1998 represents an independent third party's ownership of 24.96% of Ness, and
the corresponding profit allocation for the six months ended December 31, 1998.
Effective April 9, 1999 the Company acquired the remaining 24.96% interest in
Ness, eliminating the minority interest
Net Income (loss): Net income (loss) decreased from a gain of $2.6 million
for the six months ended December 31, 1998 to a loss $0.2 million for the six
months ended December 31, 1999. This was primarily attributable to the 42%
decline in total sales from 29,738 units for the six months ended December 31,
1998 to 17,281 for the six months ended December 31, 1999.
Liquidity and Capital Resources
Cashflow from operations declined $1.3 million from a cash-inflow of $0.9
million for the six months ended December 31, 1998 to a cash-outflow of $0.4
million for the six months ended December 31, 1999.
The decline in cashflow from operation was primarily due to the $2.8
million decline of net income from $2.6 million for the six months ended
December 31, 1998 to a net loss of $0.2 million for the six months ended
December 31, 1999. Inventory levels have been reduced during the six months
ended December 31, 1999 to match the decline in sales during the six months
ended December 31, 1999. The reduction in inventory has had a positive impact of
$1.2 million on cashflow.
Net cash used in investing activities decreased from $3.4 million for the
six months ended December 31, 1998 to $1.0 million for the six months ended
December 31, 1999. Net cash used in investing activities for the six months
ended December 31, 1998 primarily consisted of consideration paid and costs
associated with the acquisition of IIHSL. Net cash used in investing activities
for the six months ended December 31, 1999 primarily consisted of (i)
capitalized monitoring dialers of $0.2 million; (ii) $0.3 million for the
purchase of capital assets; and (iii) a short term loan of $0.5 million granted
to FAI Home Distributors Pty Limited.
Net cash generated from financing activities increased from a deficit of
$60,000 for the six months ended December 31, 1998 to a surplus of $740,000 for
the six months ended December 31, 1999. The surplus consisted of; (i) cash
received of $1,284,000 for the sale of upgrade monitoring receivables to FFC
pursuant to the Receivables Purchase Agreement ("RPA"); (ii) a $400,000 Ness
Note installment paid on July 7, 1999; and (iii) bank overdraft repayments of
$150,000.
The principal source of the Company's liquidity historically has been
cashflow from operations. The Company currently has a $0.7 million unused credit
facility with Westpac Banking Corporation. The Company is currently
investigating a securitization program for its upgrade monitoring program with
Westpac Banking Corporation.
FFC-Receivables Purchase Agreement
- ----------------------------------
On December 22, 1999, the Company entered into the Receivables Purchase
Agreement ("RPA") with FAI Finance Corporation Pty Limited ("FFC"), the
Company's 50% owned subsidiary. Under this agreement, the Company has the right
to sell eligible upgrade monitoring receivables to FFC and undertakes to
continue to service the receivables in exchange for an upfront cash payment
equal to the sum of the total receivable less 15% retained as sub-ordinated
debt. This facility specifically relates to the Company's Upgrade Program
offering five-year monitoring contracts to its existing 250,000 residential
customers. Previously, the Company has funded this program from cash flow from
operations.
16
<PAGE>
Under the RPA, the Company must maintain a sub-ordinated loan with FFC
equal to 15% of the outstanding receivable sold. The sub-ordinated loan as at
December 31, 1999 was $190,000.
The Company has not recognized the sales of receivables under the agreement
as a sale for financial reporting purposes. The sales proceeds received from FFC
have been recognized as secured borrowing, and interest and line fees under the
FFC facility have been recognized as interest expense. Under the agreement the
Company pays interest to FFC at 12.5% per annum on the used portion of the
facility plus a line fee of 2.0%. The current limit of the facility provided by
FFC is $3,254,000. At December 31, 1999, $1,284,000 was outstanding under this
facility.
The Company intends to seek a larger facility to facilitate the expansion
of this program with either FFC or other financial institution.
Transactions with HIH
- ---------------------
The Company has experienced a significant decline in cash flow from
operations for the six months ending December 31, 1999. As a result the Company
has been negotiating with HIH Insurance Limited ("HIH"), the ultimate
shareholder of 47% of the Common Stock of HSI, the refinancing of a number of
obligations due on or before June 30, 2000, which would result in a new credit
facility from HIH. The facility transaction is conditioned upon the approval of
HSI Board of Directors and the delivery of a fairness opinion by an independent
financial advisor that the transaction terms are no less favorable than those
obtainable from a third party other than HIH.
The Company has outstanding payment obligations of $400,000 due on December
31, 1999 and further payment obligations of $8,298,000 which become due on June
30, 2000 pursuant to the promissory note ("the Ness Note") originating from the
acquisition of IIHSL. As of October 1, 1999, and January 1, 2000 the Company has
issued five year convertible warrants to purchase 400,000 shares of Common Stock
at an exercise price of $13.00 per share to Integral Investments Limited ("IIL")
pursuant to the terms originating from the acquisition of IIHSL.
The Company is currently negotiating the refinancing of the Ness Note with
HIH, the ultimate shareholder of 47% of the common stock of HSI. It is
contemplated that HIH will finance the Company's repayment of the Ness Note
through a three- to five-year term credit facility, secured by the Company's
interest in Ness and all of Ness's assets, consisting of one bullet repayment at
the end of the term bearing interest at a negotiated commercial rate. The
Company expects to enter in this facility during the fiscal quarter ended March
31, 2000. In addition, HIH will be permitted to nominate two directors to the
Board of Directors of the Company and will receive warrants to acquire a number
of shares of common stock of the Company to be negotiated.
The Company is also negotiating a one-year deferment of the current $1.3
million outstanding obligation under the promissory note entered into in
connection with the Company's acquisition of FFC from HIH which note became due
on December 31, 1999. In exchange for the deferment, the Company expects to
relinquish its option to purchase the remaining 50% equity interest in FFC which
option is exercisable until December 31, 2001.
Assuming the expansion of the RPA with FFC or the replacement of this
facility by another financier 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 successful roll-out of
the new generation of On-line Monitoring Program through its Distributor Network
into existing and new markets and the sale of five-year on-line monitoring
contracts through its Upgrade Program to its existing 250,000 residential
customers.
The initial generation of new accounts under the new On-line Monitoring
Program will not require
17
<PAGE>
additional funding by the Company, as the Company will continue to supply
equipment to its Distribution network on a cash on delivery ("COD") basis. The
new connections achieved by its Distribution network will be funded by FFC, a
50% owned subsidiary of the Company. At the completion of the initial three-
to five-year monitoring contract, the Company will receive the monthly on-line
fee less the cost of providing this service for the lifetime of the connection.
The Company may be required to obtain additional capital to fund growth
from other financing sources if the cashflow generated by its Australian, New
Zealand and European operations is insufficient to meet the cash requirements of
expanding its on-line monitoring services. 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, liquidity and financial position.
Currency Fluctuations
Although the Company's principal operations are concentrated in Australia
and New Zealand, it conducts operations throughout the world. Accordingly, the
Company's financial performance could be adversely affected by fluctuations in
currency exchange rates as well as changes in duty rates. 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 increased in value relative to the U.S. dollar from .5904 on
December 31, 1998 to .6507 on December 31, 1999. 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part III, Item 7, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
No material changes have occurred that would effect the information
presented in the Company's Annual Report on Form 10-K for the year ended June
30, 1999.
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On December 6, 1999, the Company held its 1999 Annual Meeting of Stockholders.
The following person was elected as a Class II director to hold office until the
2002 Annual Meeting of Stockholders: Harry Singer. The number of votes cast
for, withheld and abstained with respect to such nominee were as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Nominee For Against Abstained
- --------------------------------- ------------------ -------------------- ---------------------------
<S> <C> <C> <C>
Harry Singer 3,704,175 12,600 0
</TABLE>
The Stockholders also voted to approve the ratifications of the selection
of Arthur Andersen LLP as independent auditors for the Company for the fiscal
year ended June 30,2000. 3,716,775 shares were cast for such selection; 0
shares were cast against such selection; and 0 shares abstained.
ITEM 5. Other Information
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 10.1 Warrant Certificate to International Home Securities
Investments Ltd. dated 10/1/99 convertible into 200,000 shares of Common Stock.
Exhibit 10.2 Form of Warrant Certificate to International Home Securities
Investments Ltd. dated 1/1/00 convertible into 200,000 shares of Common Stock.
Exhibit 27.1 Financial Data Schedule
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME SECURITIES INTERNATIONAL, INC.
(Registrant)
By: /s/ Bradley D. Cooper
--------------------------------------------
Bradley D. Cooper
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark Whitaker
-------------------------------------------
Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: February 14, 2000
19
<PAGE>
EXHIBIT D
---------
AT THE TIME OF THIS WARRANT CERTIFICATE, NEITHER THE RIGHTS REPRESENTED BY THIS
WARRANT CERTIFICATE NOR THE SHARES EXERCISABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE MAY NOT BE
SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER
THE ACT OR AN APPLICABLE EXEMPTION THEREFROM, UPON THE OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
HOME SECURITY INTERNATIONAL, INC.
Warrant to Purchase Common Stock
--------------------------------
This Warrant Certificate certifies that INTERNATIONAL HOME SECURITY
INVESTMENTS LIMITED, a British Virgin Islands company ("Holder"), is the
------
registered holder of 200,000 warrants (the "Warrants") to purchase shares of
--------
Common Stock, U.S. $.001 par value per share (the "Shares"), of HOME SECURITY
------
INTERNATIONAL, INC., a Delaware corporation (the "Company"), on the terms and
-------
subject to the conditions set forth below. Each Warrant entitles Holder, upon
exercise, to receive from the Company one share (the "Conversion Ratio") of
----------------
fully paid, nonassessable Common Stock of the Company for U.S. $13.00 (the
"Warrant Exercise Price").
----------------------
DEFINITIONS
-----------
SECTION I. Definitions. The following words and terms as used in this
-----------
Warrant Certificate shall have the following meanings:
"Affiliate" means, with respect to a Person, any other Person that,
---------
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person.
"Board" means the Board of Directors of the Company.
-----
"Business Day" means a day other than a Saturday, a Sunday or a day on
------------
which banking institutions in the City of New York are authorized or obligated
by law or required by executive order to be closed.
"Common Stock", when used with reference to stock of the Company, means all
------------
shares now or hereafter authorized of any class of the common stock of the
Company.
"Convertible Securities" shall mean any securities issued by the Company
----------------------
after the date hereof which are convertible into, or exchangeable for, directly
or indirectly, shares of Common Stock.
<PAGE>
"Person" means a domestic or foreign individual or corporation,
------
partnership, limited liability company, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"SEC" means the Securities and Exchange Commission.
---
"Securities Act" means the Securities Act of 1933, as the same may be
--------------
amended from time to time, and the regulations thereunder.
"Trading Day" shall mean any day on which the American Stock Exchange is
-----------
open for trading on a regular basis.
SECTION II. Termination of Warrants. All of the Warrants evidenced by
-----------------------
this Warrant Certificate shall be fully vested and exercisable as of the date
hereof. The Warrants represented by this Warrant Certificate may not be
exercised after 5:00 p.m., Chicago, Illinois local time, on the fifth
anniversary of the date hereof (October 1, 2004) and, to the extent not
exercised on or before 5:00 p.m., Chicago, Illinois, local time, on such date,
such Warrants shall become void.
SECTION III. Exercise of Warrant. Subject to the terms and conditions
-------------------
hereof, the Warrants may be exercised by Holder, at any time after the date
hereof, in blocks of not less than twenty five thousand (25,000) shares, by (i)
delivery of a written notice to the Company, in the form of the Subscription
Notice attached as Exhibit A hereto, (ii) payment by Holder to the Company of an
---------
amount equal to the Warrant Exercise Price times the number of Warrants so
exercised (plus any applicable issue or transfer taxes) in cash or by certified
or official bank check in immediately available funds, (iii) the surrender of
this Warrant Certificate, properly endorsed, at the principal office of the
Company (or at such other agency or office of the Company as the Company may
designate by notice to Holder) and (iv) delivery to the Company by Holder of a
letter in the form of Exhibit B hereto, provided however, that Holder may not
---------
exercise any portion of the Warrants more than twice in any calendar quarter
without the prior written consent of the Chief Executive Officer of the Company,
which shall not be unreasonably withheld. Upon the Business Day following each
exercise of Holder's rights to purchase Shares, Holder shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding that
the transfer books of the Company shall then be closed or certificates
representing such Shares shall not then have been actually delivered to Holder.
As soon as practicable after each such exercise of this Warrant, the Company
shall issue and deliver to Holder a certificate or certificates for the Shares
issuable upon such exercise, registered in the name of Holder or its designee.
If, at the time of exercise, Holder has not elected to exercise all Warrants
that have not already been previously exercised pursuant to the terms of this
Warrant Certificate, upon the Company's receipt of each of the documents
referred to in this Section III, in addition to the issuance of a stock
certificate representing the Shares, including any legends restricting the
transfer of such Shares under the Securities Act, issuable upon exercise of the
Warrants, the Company shall issue a new Warrant Certificate to Holder, on the
same terms as set forth herein, representing the number of Warrants that have
not been previously exercised. Fractional shares of Common Stock shall not be
issued upon the exercise of the Warrants. In lieu thereof, the Company shall
pay Holder cash in an amount equal to such fractional share interest multiplied
by the closing price of a share of Common Stock as of the date of exercise.
2
<PAGE>
SECTION IV. Covenants as to Common Stock. The Company covenants and
----------------------------
agrees that all Shares which may be issued upon the exercise of any Warrant
represented by this Warrant Certificate will, upon issuance and payment of the
Warrant Exercise Price applicable to such Shares, be validly issued, fully paid
and nonassessable. The Company further covenants and agrees that during the
period within which the any portion of this Warrant Certificate may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock to provide for the exercise of the
entire outstanding portion of this Warrant Certificate and that the par value of
said Shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
SECTION V. Reorganization, Reclassification, Issuance of Additional Shares
---------------------------------------------------------------
of Common Stock, Etc. (a) In case of any capital reorganization, or of any
- --------------------
reclassification of the capital stock, of the Company (other than a change in
par value or from par value to no par value or from no par value to par value or
as a result of a split-up or combination) or in case of the consolidation or
merger of the Company with or into any other corporation or entity (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in the Common Stock being changed into or exchanged for
stock or other securities or property of any other person), or of the sale of
the properties and assets of the Company as, or substantially as, an entirety to
any other corporation, this Warrant Certificate shall, after such capital
reorganization, reclassification of capital stock, consolidation, merger or
sale, entitle Holder to purchase the kind and number of shares of stock or other
securities or property of the Company, or of the corporation or entity resulting
from such consolidation or surviving such merger or to which such sale shall be
made, as the case may be, to which the holder hereof would have been entitled if
it had held the Common Stock issuable upon the exercise hereof immediately prior
to such capital reorganization, reclassification of capital stock,
consolidation, merger or sale, and in any such case appropriate provision shall
be made with respect to the rights and interests of Holder hereunder to the end
that the provisions hereof (including, without limitation, provisions for
adjustment of the number or class of shares purchasable upon the exercise of
this Warrant Certificate) shall thereafter be applicable, as nearly as may be in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of the rights represented hereby. The Company shall not effect
any such consolidation, merger or sale, unless prior to or simultaneously with
the consummation thereof the successor corporation or entity (if other than the
Company) resulting from such consolidation or merger or the corporation or
entity purchasing such assets shall assume by written instrument executed and
mailed or delivered to Holder at the address of Holder appearing on the books of
the Company, the obligation to deliver to Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, Holder may
be entitled to purchase.
SECTION VI. Antidilution Provisions. (a) The Conversion Ratio shall be
-----------------------
subject to adjustment from time to time as provided in this Section VI. For
purposes of this Section VI, the term "Common Stock" includes the Shares and any
------------
other class of equity interest in the Company having no preference over the
Shares as to distributions which may be authorized in the future by an amendment
to the Company's Certificate of Incorporation. (b) In case the Company shall,
at any time after the date this Warrant Certificate was first issued, with
respect to all of the holders of its outstanding Common Stock (i) declare a
dividend on the outstanding Common Stock payable in shares or rights to acquire
shares of its Common Stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares, or
3
<PAGE>
EXHIBIT D
---------
AT THE TIME OF THIS WARRANT CERTIFICATE, NEITHER THE RIGHTS REPRESENTED BY THIS
WARRANT CERTIFICATE NOR THE SHARES EXERCISABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED FOR OFFER OR SALE UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"). THE WARRANTS REPRESENTED BY THIS WARRANT CERTIFICATE MAY NOT BE
SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER
THE ACT OR AN APPLICABLE EXEMPTION THEREFROM, UPON THE OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
HOME SECURITY INTERNATIONAL, INC.
Warrant to Purchase Common Stock
--------------------------------
This Warrant Certificate certifies that INTERNATIONAL HOME SECURITY
INVESTMENTS LIMITED, a British Virgin Islands company ("Holder"), is the
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registered holder of 200,000 warrants (the "Warrants") to purchase shares of
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Common Stock, U.S. $.001 par value per share (the "Shares"), of HOME SECURITY
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INTERNATIONAL, INC., a Delaware corporation (the "Company"), on the terms and
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subject to the conditions set forth below. Each Warrant entitles Holder, upon
exercise, to receive from the Company one share (the "Conversion Ratio") of
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fully paid, nonassessable Common Stock of the Company for U.S. $13.00 (the
"Warrant Exercise Price").
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DEFINITIONS
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SECTION I. Definitions. The following words and terms as used in this
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Warrant Certificate shall have the following meanings:
"Affiliate" means, with respect to a Person, any other Person that,
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directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person.
"Board" means the Board of Directors of the Company.
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"Business Day" means a day other than a Saturday, a Sunday or a day on
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which banking institutions in the City of New York are authorized or obligated
by law or required by executive order to be closed.
"Common Stock", when used with reference to stock of the Company, means all
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shares now or hereafter authorized of any class of the common stock of the
Company.
"Convertible Securities" shall mean any securities issued by the Company
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after the date hereof which are convertible into, or exchangeable for, directly
or indirectly, shares of Common Stock.
<PAGE>
"Person" means a domestic or foreign individual or corporation,
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partnership, limited liability company, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"SEC" means the Securities and Exchange Commission.
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"Securities Act" means the Securities Act of 1933, as the same may be
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amended from time to time, and the regulations thereunder.
"Trading Day" shall mean any day on which the American Stock Exchange is
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open for trading on a regular basis.
SECTION II. Termination of Warrants. All of the Warrants evidenced by
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this Warrant Certificate shall be fully vested and exercisable as of the date
hereof. The Warrants represented by this Warrant Certificate may not be
exercised after 5:00 p.m., Chicago, Illinois local time, on the fifth
anniversary of the date hereof (October 1, 2004) and, to the extent not
exercised on or before 5:00 p.m., Chicago, Illinois, local time, on such date,
such Warrants shall become void.
SECTION III. Exercise of Warrant. Subject to the terms and conditions
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hereof, the Warrants may be exercised by Holder, at any time after the date
hereof, in blocks of not less than twenty five thousand (25,000) shares, by (i)
delivery of a written notice to the Company, in the form of the Subscription
Notice attached as Exhibit A hereto, (ii) payment by Holder to the Company of an
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amount equal to the Warrant Exercise Price times the number of Warrants so
exercised (plus any applicable issue or transfer taxes) in cash or by certified
or official bank check in immediately available funds, (iii) the surrender of
this Warrant Certificate, properly endorsed, at the principal office of the
Company (or at such other agency or office of the Company as the Company may
designate by notice to Holder) and (iv) delivery to the Company by Holder of a
letter in the form of Exhibit B hereto, provided however, that Holder may not
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exercise any portion of the Warrants more than twice in any calendar quarter
without the prior written consent of the Chief Executive Officer of the Company,
which shall not be unreasonably withheld. Upon the Business Day following each
exercise of Holder's rights to purchase Shares, Holder shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding that
the transfer books of the Company shall then be closed or certificates
representing such Shares shall not then have been actually delivered to Holder.
As soon as practicable after each such exercise of this Warrant, the Company
shall issue and deliver to Holder a certificate or certificates for the Shares
issuable upon such exercise, registered in the name of Holder or its designee.
If, at the time of exercise, Holder has not elected to exercise all Warrants
that have not already been previously exercised pursuant to the terms of this
Warrant Certificate, upon the Company's receipt of each of the documents
referred to in this Section III, in addition to the issuance of a stock
certificate representing the Shares, including any legends restricting the
transfer of such Shares under the Securities Act, issuable upon exercise of the
Warrants, the Company shall issue a new Warrant Certificate to Holder, on the
same terms as set forth herein, representing the number of Warrants that have
not been previously exercised. Fractional shares of Common Stock shall not be
issued upon the exercise of the Warrants. In lieu thereof, the Company shall
pay Holder cash in an amount equal to such fractional share interest multiplied
by the closing price of a share of Common Stock as of the date of exercise.
2
<PAGE>
SECTION IV. Covenants as to Common Stock. The Company covenants and
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agrees that all Shares which may be issued upon the exercise of any Warrant
represented by this Warrant Certificate will, upon issuance and payment of the
Warrant Exercise Price applicable to such Shares, be validly issued, fully paid
and nonassessable. The Company further covenants and agrees that during the
period within which the any portion of this Warrant Certificate may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of Common Stock to provide for the exercise of the
entire outstanding portion of this Warrant Certificate and that the par value of
said Shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
SECTION V. Reorganization, Reclassification, Issuance of Additional Shares
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of Common Stock, Etc. (a) In case of any capital reorganization, or of any
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reclassification of the capital stock, of the Company (other than a change in
par value or from par value to no par value or from no par value to par value or
as a result of a split-up or combination) or in case of the consolidation or
merger of the Company with or into any other corporation or entity (other than a
consolidation or merger in which the Company is the surviving corporation and
which does not result in the Common Stock being changed into or exchanged for
stock or other securities or property of any other person), or of the sale of
the properties and assets of the Company as, or substantially as, an entirety to
any other corporation, this Warrant Certificate shall, after such capital
reorganization, reclassification of capital stock, consolidation, merger or
sale, entitle Holder to purchase the kind and number of shares of stock or other
securities or property of the Company, or of the corporation or entity resulting
from such consolidation or surviving such merger or to which such sale shall be
made, as the case may be, to which the holder hereof would have been entitled if
it had held the Common Stock issuable upon the exercise hereof immediately prior
to such capital reorganization, reclassification of capital stock,
consolidation, merger or sale, and in any such case appropriate provision shall
be made with respect to the rights and interests of Holder hereunder to the end
that the provisions hereof (including, without limitation, provisions for
adjustment of the number or class of shares purchasable upon the exercise of
this Warrant Certificate) shall thereafter be applicable, as nearly as may be in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of the rights represented hereby. The Company shall not effect
any such consolidation, merger or sale, unless prior to or simultaneously with
the consummation thereof the successor corporation or entity (if other than the
Company) resulting from such consolidation or merger or the corporation or
entity purchasing such assets shall assume by written instrument executed and
mailed or delivered to Holder at the address of Holder appearing on the books of
the Company, the obligation to deliver to Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, Holder may
be entitled to purchase.
SECTION VI. Antidilution Provisions. (a) The Conversion Ratio shall be
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subject to adjustment from time to time as provided in this Section VI. For
purposes of this Section VI, the term "Common Stock" includes the Shares and any
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other class of equity interest in the Company having no preference over the
Shares as to distributions which may be authorized in the future by an amendment
to the Company's Certificate of Incorporation. (b) In case the Company shall,
at any time after the date this Warrant Certificate was first issued, with
respect to all of the holders of its outstanding Common Stock (i) declare a
dividend on the outstanding Common Stock payable in shares or rights to acquire
shares of its Common Stock, (ii) subdivide the outstanding Common Stock, (iii)
combine the outstanding Common Stock into a smaller number of shares, or
3
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,254,048
<SECURITIES> 0
<RECEIVABLES> 4,613,470
<ALLOWANCES> 0
<INVENTORY> 5,774,041
<CURRENT-ASSETS> 14,905,051
<PP&E> 4,340,618
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,623,757
<CURRENT-LIABILITIES> 16,643,613
<BONDS> 0
0
0
<COMMON> 5,828
<OTHER-SE> 29,065,905
<TOTAL-LIABILITY-AND-EQUITY> 51,623,757
<SALES> 8,607,206
<TOTAL-REVENUES> 8,347,366
<CGS> 4,305,517
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,710,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 258,071
<INCOME-PRETAX> (926,334)
<INCOME-TAX> 447,836
<INCOME-CONTINUING> (478,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 26,476
<NET-INCOME> (452,022)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
