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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __ to ___
Commission file number: 1-14502
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 or organization) Identification No.)
Level 7, 77 Pacific Highway, North Sydney, NSW, 2060
(Address of principal executive offices)
(011) (612) 9936-2424
(Registrant's telephone number, including area code)
------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Names of each exchange
Title of Each Class on which registered
------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
------------------------------------------------------
Indicate by check mark whether the Registrant (l) 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.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
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PURPOSE OF AMENDMENT
The registrant has determined to furnish the information required in Part III of
its Annual Report on Form 10-K for the fiscal year ended June 30, 2000 rather
than to incorporate it by reference to information to be contained in the
registrant's definitive proxy statement. The registrant hereby amends Part III
of the Annual Report on Form 10-K as follows to include the information required
by Part III.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers, as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Bradley D Cooper......................... 40 Chairman of the Board of Directors and
Chief Executive Officer
Christopher MacDonnell................... 36 Chief Operating Officer
Terrence J. Youngman..................... 45 President
Robert D. Appleby........................ 49 Executive Vice President of International Business
Development
Mark Whitaker............................ 33 Chief Financial Officer, Treasurer, Executive Vice
President of Finance
</TABLE>
Mr. Bradley D. Cooper is the founder of the predecessor of the Company and
has been the Company's and its predecessor's Chief Executive Officer since its
inception in 1985. Mr. Cooper became Chairman of the Board of the Company on May
1, 1997 and served in such capacity until March 4, 2000. Mr. Cooper is also Vice
President of the Collingwood Football Club, Chairman of the Customer Service
Institute of Australia, Director of the Elizabethan Theatre Trust, Chairman of
Vision Publishing Pty Ltd, a business publishing and conference company,
Chairman of Brad Cooper's Mentor Club, and Co-founder and Chairman of the
Kindness Foundation, an organization which launched National Kindness Week in
Australia during 1999.
Mr. Christopher MacDonnell is the Chief Operating Officer and is
responsible for management of all senior departmental managers and overall
Company operations, a position he has held since February 2000. Previous to his
current position Mr. MacDonnell was a partner of Ferrier Hodgson (NSW), a firm
of chartered accountants, specializing in insolvency and corporate
reconstruction from May 1999 to February 2000 and from 1995 to March 1999, he
was Manager Special Projects of FAI Insurances Limited.
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
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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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's Directors and
executive officers, and persons who own more than 10% of the Company's Common
Stock, to file with the Securities and Exchange Commission (the "SEC") initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock of the Company. Officers, Directors and greater than 10%
shareholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely upon a review of the copies of such reports furnished to the
Company and written representations from the executive officers and Directors of
the Company, the Company believes that none of the Company's Directors,
executive officers, and persons who own more than 10% of the Company's were
delinquent in their Section 16(a) filing requirements during fiscal 2000.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation paid
to the Company's Chief Executive Officer and to each of the Company's other
three most highly compensated executive officers who received at least $100,000
in salary and bonus during the last fiscal year (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------- -------------
Securities
Underlying
Stock All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation
----------------------------------------------------- ------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Bradley D. Cooper 2000 $700,000 -- -- --
President of Sales 1999 $700,000 $478,521 -- --
1998 $700,000 $575,458 250,000 --
Robert D. Appleby 2000 $239,526 -- -- --
Executive Vice President of International 1999 $536,746 -- -- --
Business Development 1998 $652,586 $341,052 165,000 --
</TABLE>
________________
EMPLOYMENT AGREEMENTS
Bradley D. Cooper
In July, 1997 the Company entered into a three-year employment agreement
with Mr. Cooper who receives a base salary of $700,000 per year. Mr. Cooper is
entitled to a bonus equivalent to 10% of the Company's Net Profit After Tax
("NPAT"). Mr. Cooper did not receive a bonus for fiscal year 2000 as the company
was not profitable in that year and the Company did not issue to him any stock
options. Mr. Cooper bears all expenses associated with his employment including
rent and administrative support. Mr. Cooper is reimbursed reasonable travel and
other business expenses at the discretin of the board of directors. These
reimbursements totaled $154,000 in fiscal 2000.
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Robert D. Appleby
In July, 1997 the Company entered into a three-year employment agreement
with Mr. Appleby who does not receive a base salary, but instead is remunerated
on a commission basis only. Mr. Appleby is paid a commission, in Australian
dollars, of $16 per sale of "SecurityGuard" product in all the company's markets
(provided the product has not been returned, and no refund of the purchase price
has been made). In fiscal year ended June 30, 2000, Mr. Appleby received
remuneration based upon units sold of $239,526, a decrease of 55% from the
fiscal year ended June 30, 1999. The decrease in the total dollar amount of Mr.
Appleby's remuneration reflects both the decrease in unit sales growth of 49%
from fiscal 1999 to fiscal 2000, from 54,801 units to 27,402 units and the
decline in the conversion rate of the Australian dollar compared to the United
States dollar from 0.62711 at June 30, 1999 to 0.59712 at June 30, 2000. For
fiscal year ended June 30, 2000, Mr. Appleby was not eligible for and did not
receive a bonus and the Company did not issue to him any stock options.
Terrence J. Youngman
In July, 1997 the Company entered into a three-year employment agreement
with Mr. Youngman who receives an annual salary of $125,000 (US$74,640)
Australian dollars and the use of a fully maintained motor vehicle which the
Company leases for Mr. Youngman. For fiscal year ended June 30, 2000,
Mr. Youngman was not eligible for and did not receive a bonus and the Company
did not issue to him any stock options.
LONG-TERM INCENTIVE PLAN
The Company does business in a direct selling environment whereby sales
executives are traditionally compensated on a commission only basis and
operational executives are compensated at a competitive level of compensation to
attract and retain talented management. The Company's success in such an
environment depends, in a large part, on its ability to retain its key sales and
marketing executives. The Company must provide sales executives with long and
short-term incentives to maximize the unit sales growth of the Company, which
ultimately maximizes corporate performance. The rewards to key sales executives
must be appropriate within the Company's hierarchical sales distribution network
structure to retain such key executives.
Therefore, compensation paid to key sales executives must be of a level to
ensure that it exceeds the performance based commission structures paid to
independent distributors in the field. By achieving this objective the Company
retains key sales executives of the highest quality, maximizing shareholder
value.
As a result, the Compensation Committee's policies are designed to:
. Reward senior executives for corporate performance by linking a
substantial portion of total compensation to the achievement of
measurable performance objectives;
. Align the interests of senior executives with the stockholders in order
to maximize stockholder value; and
. Utilize short and long term compensation, as it is critical in
attracting and retaining executives.
Based upon the philosophy indicated above the four primary components of
executive compensation are base salary, commissions, bonuses and stock options.
To achieve these objectives, the Compensation Committee has developed
compensation packages for senior executives utilizing all four components of
executive compensation.
There are 1,150,000 shares of common stock of the Company reserved for
issuance under the 1997 Stock Option Plan of which the Company has issued
767,500 shares. Of the 767,500 shares, 710,000 shares are currently subject to
issued and outstanding options granted by the Compensation Committee at an
exercise price of $10.00, including 250,000 shares subject to options granted to
Mr. Cooper, 165,000 shares subject to options granted to Mr. Appleby, 90,000
shares subject to options granted to Mr. Youngman and 80,000 shares subject to
options granted to Mr. Whitaker. These options vest in annual 20% increments
over a five year period from the grant date, except options to purchase 85,000
shares granted to Mr. Appleby which will vest on October 31, 2003, or earlier in
increments upon the Company achieving certain sales numbers outside Australia
and New Zealand prior to October 31, 2003.
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OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to the Named Executive Officers in fiscal year 2000.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to each of the
Named Executive Officers concerning the exercise of options to purchase common
stock during the fiscal year ended June 30, 2000, as well as unexercised options
to purchase common stock held as of the end of such fiscal year.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Shares Unexercised Options at Fiscal In-the-Money Options at
Acquired Value Year End (#) Fiscal Year End
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
-------------------------- ---------------- -------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Bradley D. Cooper -- -- 150,000/100,000(2) --/--
Robert D. Appleby -- -- 32,000/133,000(3) --/--
Terrence J. Youngman -- -- -- --/--
Christopher MacDonnell -- -- -- --/--
</TABLE>
______________
(1) Based on the difference between the stock price at June 30, 2000, $1.25,
and the exercise price of the options, $10.00, multiplied by the number of
exercisable and unexercisable in-the-money options, respectively.
(2) These options become exercisable in annual 20% increments over a five year
period from the date of grant.
(3) Of the options granted to Mr. Appleby, options to purchase 80,000 shares,
become exercisable in annual 20% increments over a five year period from
the date of grant. The remaining options to purchase 85,000 shares, granted
to Mr. Appleby, become exercisable on October 31, 2003, or earlier in
increments upon the Company achieving certain sales numbers outside
Australia and New Zealand prior to October 31, 2003.
BOARD OF DIRECTORS
TERMS
The Board of Directors of the Company is divided into three classes of
directors serving staggered three-year terms.
Class I Directors. The following person serves as a Class I directors with
his term expiring at the annual meeting to be held following June 30, 2001:
Steven Rabinovici.
Class II Directors. The following persons serve as Class II directors with
their terms expiring at the annual meeting to be held following June 30, 2002:
Rodney Adler and Harry Singer.
Class III Directors. The following persons serve as Class III directors with
their terms expiring at the annual meeting to be held following June 30, 2000:
Bradley D. Cooper and Paul Brown.
DIRECTOR COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee.
The Audit Committee's functions are to recommend annually to the Board of
Directors the appointment of the independent public accountants of the Company,
to discuss and review the scope and the fees of the prospective annual audit and
to review the results thereof with the Company's independent public accountants,
to review and approve non-audit services of the independent public accountants,
to review compliance with existing major
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accounting and financial policies of the Company, to review the adequacy of the
financial organization of the Company, and to review management's procedures and
policies relative to the adequacy of the Company's internal accounting controls.
Paul Brown and Steven Rabinovici currently serve on the Audit Committee.
The Compensation Committee's functions are to review and approve annual
salaries and bonuses for all executive officers, to review, approve and
recommend to the Board the terms and conditions of all employee benefit plans or
changes thereto and to administer the Corporation's various stock option plans.
Steven Rabinovici and Harry Singer currently serve on the Compensation
Committee.
The Company does not have a Nominating Committee or an Executive Committee.
REMUNERATION 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 20,000 shares of Common Stock at an exercise price of $10.00
per share, options to purchase 7,500 shares of Common Stock at an exercise price
of $10.6975 per share, and options to purchase 7,500 shares of Common Stock at
an exercise price of $2.1875 per share have been granted to date to the
Company's non-employee directors. 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 grant. All such options become exercisable six months
after the effective date of grant of said options and expire on the tenth
anniversary of such date. The shares underlying the 1997 Non-Employee Director
Stock Option Plan have been registered on Form S-8.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 11, 2000, the beneficial ownership
of equity securities of the Company of each of the directors and each of the
executive officers of the Company listed in the Summary Compensation Table
below, and of all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Beneficial Ownership (1)
---------------------------
Number of
Shares Percent
------------- ------------
<S> <C> <C>
Executive Officers and Directors (2)
Bradley D. Cooper (3).............................................................. 400,000 6.9%
Robert D. Appleby (4).............................................................. 32,000 *
Mark Whitaker (5).................................................................. 52,420 *
Steven Rabinovici (6).............................................................. 10,000 *
Paul Brown (7)..................................................................... 1,265,000 21.7
Christopher MacDonnell............................................................. -- --
Rodney Adler (8)................................................................... 600,000 10.3
Terrence Youngman (9).............................................................. 59,875 1.0
Harry Singer (10).................................................................. 2,500 *
All executive officers and directors 39.9
as a group (8 persons) (11)...................................................... 2,421,795
Five Percent Shareholders
FAI Home Security Holdings Pty Ltd. (12)........................................... 2,730,000 46.8
Level 7, 77 Pacific Highway
North Sydney, NSW 2060 Australia
RS Investment Management Co. LLC (13).............................................. 767,100 13.2
388 Market Street, Suite 200
San Francisco, CA 94111
</TABLE>
_________
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* 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) 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) Represents 250,000 shares owned by Mr. Cooper and 150,000 shares issuable
upon the exercise of options which are currently exercisable.
(4) Represents shares issuable upon the exercise of options which are currently
exercisable.
(5) Represents 4,420 shares owned by Mr. Whitaker and 48,000 shares issuable
upon the exercise of options which are currently exercisable.
(6) Represents 10,000 shares issuable upon the exercise of options which are
currently exercisable. Does not include 10,000 shares held in a custodial
account for Mr. Rabinovici's adult son, of which Mr. Rabinovici is the
custodian.
(7) 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 warrants issued to International Home Security Investments
Limited pursuant to the Ness Transaction, 400,000 shares issuable upon
exercise of additional warrants issued to International Home Security
Investments Limited pursuant to the Ness Note, 5,000 shares issuable upon
the exercise of options issued to Mr. Brown under the Company's 1997 Non-
Employee Director Stock Option Plan, all of which are currently exercisable
and 100,000 shares purchased by Mr. Brown in May of 2000 in a privately
negotiated transaction which cleared on the open market. (See "Certain
Transactions--Transactions with Integrated Investments Limited and Paul
Brown").
(8) Includes 600,000 shares purchased by Mr. Adler in May of 2000 in a
privately negotiated transaction which cleared on the open market.
(9) Represents 5,500 shares owned by Mr. Youngman and 375 shares owned by
Glowross Pty. Limited of which Mr. Youngman is a beneficial owner and
54,000 shares issuable upon the exercise of options which are currently
exercisable.
(10) Represents shares issuable upon the exercise of options which are currently
exercisable.
(11) Includes 1,360,295 shares owned, 760,000 shares issuable upon the exercise
of the warrants held by International Home Security Investments Limited and
301,500 shares issuable upon the exercise of options which are currently or
deemed exercisable.
(12) A wholly owned subsidiary of FAI Insurances Limited which is a wholly owned
subsidiary of HIH Insurance Limited. Based on information reported on
Schedule 13D, filed November 5, 1999, by HIH Insurance Limited.
(13) Includes 625,100 shares held of record by The RS Orphan Fund, L.P.
("Orphan"), of which RS Value Group LLC. ("Value") is the General Partner.
RS Investment Management, L.P. ("Investment") is the Manager of Value. RS
Investment Management Co. LLC ("Management Co.") is the General Partner of
Investment. Each of Management, Investment and Value share investment and
voting power over the 767,100 shares. Based on information reported on
Schedule 13G, Amendment No. 3, filed on February 10, 2000.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions Involving Bradley D. Cooper
In 1990, FAI Insurances Limited and certain of its subsidiaries ("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 alarm 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 June 30, 2000 FAI Insurances had
forgiven this loan.
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 Ltd 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 Ltd approximately $692,192. This management agreement
terminated on the closing of the Company's initial public offering 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 Company's initial public offering. Under this agreement, in fiscal
year 2000, the Company paid Mr. Cooper $700,000 and reimbursed travel expenses
totaling $154,000 as approved by the board of directors.
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, 2000, this loan had been fully repaid.
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, 2000, Mr. Cooper made
interest payments totaling $166,705 under this loan.
In December 1998, the FAI Home Security Distributors Association, an
association formed by the Company's distributors in Australia, reorganized into
FAI Home Distributors Pty Ltd. (collectively, the "Association"). The purpose of
the Association is to collect and utilize funds received from the Company's
Distributors to develop the business of the Company in Australia and New
Zealand, i.e. to identify target sales areas, train the sales force, organize
conventions of distributors and the sales force, etc. Although the Association's
prime source of funds is from the distributors, the Company, through its
Australian subsidiary, also advances funds to the Association to pay for certain
promotional activities which funds are then repaid to the Company over time. As
of June 23, 1999, Mark Whitaker, the Company's Chief Financial Officer was
appointed as the Association's sole director and shareholder due to the
Association's continued working capital deficit. Mr. Whitaker receives no
compensation for his services as a director and has waived his rights to receive
any distributions as a shareholder from the Association. At June 30, 2000, the
Association owed the Company $862,032 as a result of the above advances. Due to
the uncertainty of the recoverability of the advanced funds the Company fully
provided for these amounts as of June 30, 2000.
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In December 1998, prior to the appointment of Mr. Whitaker as sole director
and shareholder of the Association, the Association, with the unanimous consent
of the Company's distributors in Australia, agreed to pay the Company for the
distributors' bad debts accumulated by the Company for inventory advances made
to individual distributors from time to time (the "Company Receivable"). At the
same time, in consideration for Mr. Cooper guaranteeing the repayment of the
Company Receivable and any future bad debts, the Association, with the unanimous
consent of the Company's distributors in Australia, agreed to pay Mr. Cooper
either $23,395 per month or $45.60 per unit sold per month towards repayment of
$1,635,870 in debt accumulated by Mr. Cooper in developing the business prior to
the Company's initial public offering (the "Cooper Receivable"), which debt was
not acquired by FAI Insurances with the International Assets in 1997.
The Company Receivable is repayable by the Association in equal monthly
payments of $5,336 until paid in full. The Association has also agreed to repay
the Company for any future bad debts of the distributors within one year of
demand by the Company. In addition, Mr. Cooper has agreed to guarantee all
payments by the Association to the Company.
The Company has given notice under the guarantee provided by the
Association to recover $1.3 million in bad debts relating to the Company
Receivable. The Company is seeking to recover these bad debts after the 365 day
notice period which is due to occur July 21, 2001. The Company is seeking legal
advice as to its ability to recover these debts in the event the Association and
Brad Cooper are unable to meet its obligations. The extent to which, if any, the
guarantees provided by the Association and Brad Cooper are enforceable to repay
Distributor bad debts is uncertain.
In February 1999, Mr. Cooper and FAI Finance Corporation Pty Limited
("FFC"), the Company's formerly-owned 50%-owned subsidiary (sold by the Company
in March 2000, see section of this Proxy Statement titled "Transactions with FAI
Insurances"), entered into a transaction whereby FFC purchased $561,479 of the
Cooper Receivable (the "Factoring Transaction") from Mr. Cooper for $364,563.
As part of the Factoring Transaction, the Association entered into an agreement
to pay FFC $561,479, bearing interest at a rate of 14.5% per annum, in twenty-
four monthly installments of $23,395. The balance remaining due to FFC from the
Association at the time the Company sold FFC was $514,278. In addition, as part
of the Factoring Transaction, (i) the Association gave FFC the right to first
priority on all contributions and payments received by the Association,
including moneys advanced from the Company for promotional activities to the
Association, (ii) Mr. Cooper secured the Association's payments to FCC with
personal assets, and (iii) Mr. Cooper agreed to indemnify FFC for any losses
which might arise as a result of any non-payment or insolvency of Home
Distributors or any dispute between the parties.
On April 12, 2000 FFC agreed to extend the Factoring Transaction of
February 1999 to the remaining debt of $693,264 owned by the Association to Mr.
Cooper. The payments are to commence at the completion of the initial factoring
Transaction in March 2001.
During the years ended June 30, 1997 and 1998, 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 loans on
June 30, 1997 and June 30, 1998 were $14,076 and $131,376, respectively. These
personal loan balances were paid in full as of August 31, 1998.
In November 1999, Vision Publishing Pty Limited ("Vision"), an entity owned
by Bradley D. Cooper, entered into a warehouse agreement with Ness Security
Products Pty Limited, a wholly owned subsidiary of the Company. Under the terms
of this agreement Vision leases a portion of the Ness warehouse space for
approximately $1,446 per month. An amount of $12,761 remained unpaid as at
June 30, 2000.
Transactions with FAI Insurances
The Company leases from FAI General Insurances Limited, a subsidiary of FAI
Insurances Limited ("FAI"), a stockholder of the Company, approximately 824
square meters of office space for its principal executive and operational
offices located at Levels Ground 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. In fiscal year 2000, the Company incurred
rent to FAI General Insurances Limited of $156,329 under this lease. An amount
of $147,135 remained unpaid at June 30, 2000.
The Company acquired 50% of the outstanding securities (the "FFC Shares")
of FFC on December 31, 1997 from FAI Insurances (the "FFC Transaction") for a
note in the amount of AUD $10,750,000 (US$7,059,525) (the "FFC Note") and
acquired an option (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. The payment of the principal
balance of this note was secured by the FFC Shares purchased by the Company in
the FFC Transaction.
Effective March 31, 2000, the Company, through its wholly-owned subsidiary
FAI Home Security Pty. Limited ("FHS"), sold its 50% interest in FFC to FAI for
approximately $8,117,567 (the "Sale"). On or about April 7, 2000, FAI paid the
Company, through its subsidiary $2,400,000, and the remainder of the Sale price
was paid on or around April 26, 2000. FAI, which owns approximately 47% of the
outstanding common stock of the Company, is a wholly owned subsidiary of HIH
Insurance Limited ("HIH").
In connection with FHS's purchase of FFC in Fiscal 1997, FAI provided FHS
with vendor financing, approximately $4,439,175 of which remains outstanding
(the "FAI Note"). Pursuant to the terms of the Sale, FAI has agreed to extend
the payment terms of the FAI Note which will be guaranteed by a security
interest in Ness
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Security Products Pty. Ltd. Upon receipt of the proceeds of the Sale, the
Company paid to Integrated Investments Limited ("IIL") $8,200,000 in full
settlement of the $8,298,000 due to IIL on June 30, 2000 (the "IIL Payment").
The reduction in the amount paid versus that owed as of June 30, 2000 reflects a
discount for the time value of money. To the extent that the proceeds from the
Sale were insufficient to pay IIL in full, FAI lent the shortfall to FHS and
added such amount to the FAI Note which accrues interest annually at the rate of
7.75% and requires monthly payments of principal and interest over sixty months.
On August 3, 2000 and August 17, 2000 HIH provided the Company with
approximately $0.5 million and $1.5 million, respectively, in short term debt
financing, at a rate of 7.75% per annum, with principal and interest payable at
call (on demand). The short term financing is unsecured.
The $2.0 million infusion of capital by HIH increased cash reserves of the
Company to approximately $2.6 million. The Company has further access to an
overdraft facility of approximately $570,000. It is the intention of the Company
to utilize the proceeds of this short term financing to: (i) fund the current
deficiency in cash flow from operations; (ii) repay outstanding creditors; and
(iii) fund a major recruitment campaign in the Company's Australian market.
The Company has entered into an agreement to sell 49% of its shareholding
in Ness Security Products ("Ness") for cash consideration of $AUD17.5m to HIH
(the "Ness Sale"). From the sale proceeds the Company has agreed to repay
$AUD13 million to HIH in relation to the FAI Note and short term finance
provided by HIH. Furthermore, HIH has agreed to provide additional funds of
$AUD2.5 million by June 30, 2001.
In addition to the above described transactions, pursuant to the terms of
the Sale, FFC has agreed to increase the limit on its existing factoring
facility with FHS from approximately $3,061,500 to approximately $4,592,250.
Rodney Adler, a director of HIH, and Paul Brown, the owner of IIL, are also
directors of the Company.
Sutter Securities, Inc. issued a fairness opinion to the Company stating
that the Sale was in the best interest of the public shareholders of HSI and a
reasonable third-party transaction.
Transactions with Integral Investments Limited and Paul Brown
On July 17, 1998, the Company entered into a stock purchase agreement with
Integral Investments Limited ("IIL"), amended as of October 1, 1998 (the "Ness
Agreement"), whereby it agreed to purchase all of the issued and outstanding
common stock of Integrated International Home Security Limited ("IIHSL"), a
British Virgin Islands company that owned 75.04% of the issued and outstanding
common stock of Ness Security Products Pty Ltd. ("Ness"), an Australian company,
is 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, IIL obtained the right to
designate one nominee for election to the board of directors of the Company.
Paul Brown, the sole shareholder of IIL was designated the nominee of IIL.
Pursuant to the Ness 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 shares 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"). Pursuant to the Ness
Note, because a portion of the principal amount of the Ness Note was outstanding
on October 1, 1999 and January 1, 2000, the Company issued two additional five
year warrants, each permits purchase of 200,000 shares of the Company's Common
Stock at an exercise price of $13.00 per share. IIL designated IIHSL to receive
all securities issued pursuant to the Ness Transaction and the Ness Note.
Upon receipt of the proceeds of its sale of FFC (described above), the
Company paid to IIL $8,200,000 in full settlement of the $8,298,000 due to IIL
on June 30, 2000 (the "IIL Payment"). The reduction in the amount paid versus
that owed as of June 30, 2000 reflects a discount for the time value of money.
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On August 4, 2000 the Company received $0.5 million of additional unsecured
external funding from IIHSL, at a rate of 10% per annum, with interest payable
weekly in arrears, and the balance payable upon successful completion of any
capital or equity raising or from proceeds from the sale of assets. Paul Brown,
a director of the Company, is also a director and sole shareholder of IIHSL.
Pursuant to a consulting arrangement, the Company paid Arlington Management
Ltd., a company wholly-owned by Paul Brown, $65,000 for management services
rendered during fiscal year ended June 30, 2000. Under this consulting
arrangement, Arlington Management Ltd. receives monthly payments for management
services provided by Paul Brown to the Company. This arrangement is cancelable
at any time by either party.
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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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to its
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
HOME SECURITY INTERNATIONAL, INC.
By:/s/ Bradley D. Cooper
--------------------------------------
Bradley D. Cooper
Chairman and Chief Executive Officer
Dated: October 30, 2000
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