-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EcdOFa2OksNcYca1yiy+cZv1PwC+Q6rQisUh9ah7pxRbNA8mDCmy7V7v2x1S1i+C GMdPolq/yAptpyD3mmtcsg== 0000950131-01-001061.txt : 20010223 0000950131-01-001061.hdr.sgml : 20010223 ACCESSION NUMBER: 0000950131-01-001061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0001038262 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 980169495 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14502 FILM NUMBER: 1541635 BUSINESS ADDRESS: STREET 1: LEVEL 7 77 PACIFIC HIGHWAY CITY: NORTH SYDNEY STATE: C3 ZIP: 00000 BUSINESS PHONE: 3125802354 10-Q 1 0001.txt FORM 10-Q 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, 2000. 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 Identification No.) organization) Unit 3, 167 Prospect Highway Seven Hills, NSW Australia 2147 (Address of principal executive (Zip Code) offices) (011) (612) 8825-9700 (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 12, 2001: 5,828,278 ================================================================================ PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements HOME SECURITY INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, ------------------------------------ 2000 2000 NOTE $US $US -------------------------------------------------- ASSETS - ------ Current assets Cash and cash equivalents 1,394,133 2,630,432 Accounts receivable - trade, net 2,317,748 2,283,000 Inventories 2 8,036,329 5,744,841 Prepaid expenses and other current assets 398,742 725,051 ----------------------------- Total current assets 12,146,952 11,383,324 ----------------------------- Non-current assets Capital assets, net 5,646,876 4,535,718 Intangibles, net 20,499,355 13,454,262 Accounts receivable - trade, net 150,735 648,846 Other non-current assets 3,689,699 3,338,664 ----------------------------- Total non-current assets 29,986,665 21,977,490 ----------------------------- Total assets 42,133,617 33,360,814 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities Bank overdraft 510,023 327,067 Note payable - FAI Insurance Group 3,861,290 351,432 Borrowing - FAI Finance Corporation Pty Limited 1,154,022 1,058,970 Payables - trade 4,554,290 3,033,755 Accrued security callout 198,057 134,767 Lease liability 314,328 229,166 Deferred income 1,447,994 3,024,390 Other current liabilities 1,981,639 1,647,458 ----------------------------- Total current liabilities 14,021,643 9,807,005 ----------------------------- Non-current liabilities Note payable - FAI Insurance group 3,659,703 1,051,087 Borrowing - FAI Finance Corporation Pty Limited 3,619,976 2,852,054 Accrued warranty 113,506 174,843 Accrued security callout 116,048 60,334 Deferred income 1,640,151 2,242,277 Other non-current liabilities 631,098 448,655 ----------------------------- Total non-current liabilities 9,780,482 6,829,250 ----------------------------- Total liabilities 23,802,125 16,636,255 ----------------------------- Minority interest - 3,668,032 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. 5,828 5,828 Additional paid-in capital 22,309,708 22,309,708 Warrants 1,064,000 1,064,000 Secured Note (2,375,000) (2,375,000) Accumulated other comprehensive loss 3 (644,814) (1,381,872) Retained deficit (2,028,230) (6,566,137) ----------------------------- Total stockholders' equity 18,331,492 13,056,527 ----------------------------- Total liabilities and stockholders' equity 42,133,617 33,360,814 =============================
The accompanying notes are an integral part of these consolidated financial statements HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six months ended December 31, December 31, --------------------------------------------------------------------------- 1999 2000 1999 2000 NOTE $US $US $US $US --------------------------------------------------------------------------------- Net Sales 8,607,206 8,370,229 18,127,280 14,133,147 Cost of goods sold (4,305,517) (5,926,430) (9,078,494) (9,570,354) -------------------------------------------------------------------- Gross profit 4,301,689 2,443,799 9,048,786 4,562,793 General and administrative expenses (3,789,836) (3,376,026) (7,046,796) (7,439,771) Amortization and depreciation (696,807) (554,798) (1,320,006) (1,159,222) Research and development expenses (223,469) (320,445) (430,482) (366,710) -------------------------------------------------------------------- Income (loss) from operations (408,423) (1,807,470) 251,502 (4,402,910) Non-operating income (loss) (326,830) 396,228 (326,830) 396,228 Interest income 66,990 117,744 134,710 151,118 (90,847) (205,327) (182,232) (441,886) Interest expenses - related party - other (167,224) (4,118) (339,855) (20,259) -------------------------------------------------------------------- Loss before taxes and equity in income of affiliated companies (926,334) (1,502,943) (462,705) (4,317,709) Income tax (expense) benefit 447,836 (73,179) 241,047 (220,198) -------------------------------------------------------------------- Loss before equity in income of affiliated companies (478,498) (1,576,122) (221,658) (4,537,907) Equity in income of affiliated companies 26,476 - 55,288 - -------------------------------------------------------------------- Net loss (452,022) (1,576,122) (166,370) (4,537,907) =========================================================================== Net loss per common share Basic loss per share $-0.08 $-0.27 $-0.03 $-0.78 Diluted loss per share $-0.08 $-0.27 $-0.03 $-0.78 Weighted average number of shares outstanding Basic 5,828,278 5,828,278 5,828,278 5,828,278 Diluted 5,828,537 5,828,278 5,828,407 5,828,278
The accompanying notes are an integral part of these consolidated financial statements HOME SECURITY INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)
Six months ended December 31, -------------------------------- 1999 2000 $US $US -------------------------------- Net cash used in operating activities (360,320) (1,797,984) Cashflow from investing activities Proceeds from sale of investment in subsidiary - 9,798,250 Short term loans granted (485,608) - Additions to capital assets (560,481) (188,209) Other cash inflows/(outflows) from investing activities 889 (167,970) -------------------------------- Net cash (used in) provided by investing activities (1,045,200) 9,442,072 -------------------------------- Cashflow from financing activities Net proceeds/(repayments) from/(of) borrowings 884,777 (6,031,929) Other cash outflows from financing activities (149,559) (266,080) --------------------------------- Net cash (used in) provided by financing activities 735,218 (6,298,009) -------------------------------- Net increase (decrease) in cash held (670,302) 1,346,079 -------------------------------- Cash at the beginning of the financial period 2,976,240 1,394,133 Effect of exchange rate change on cash (51,890) (109,780) -------------------------------- Cash at the end of the financial period 2,254,048 2,630,432 ================================ Supplemental disclosure of cashflow information: Interest paid 185,040 462,145 Income taxes paid 494,986 - - ------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements 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, 2000 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"). All inter-company accounts and transactions have been eliminated upon consolidation.
NOTE 2: INVENTORIES June 30, December 31, 2000 2000 $US $US ------------------------------------- Finished goods 3,946,765 3,112,637 Work in progress 372,676 368,848 Raw materials 4,403,478 3,374,860 ------------------------------------- 8,722,919 6,854,344 Less: provision for obsolescence (686,590) (1,109,530) ------------------------------------- 8,036,329 5,744,841 =====================================
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. HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (Unaudited) Total Comprehensive Income for the three and six-month periods ended December 31, 1999 and 2000 was as follows:
Three Months Ended December 31, ---------------------------------------------- 1999 2000 $US $US ---------------------------------------------- Net Income (452,022) (1,576,122) Other comprehensive income (loss): Foreign currency translation adjustment (33,110) (1,020,044) ---------------------------------------------- Total comprehensive income (loss) (485,132) (2,596,166) ============================================== Six Months Ended December 31, ---------------------------------------------- 1999 2000 $US $US ---------------------------------------------- Net Income (166,370) (4,537,907) Other comprehensive income (loss): Foreign currency translation adjustment (115,549) (737,058) ---------------------------------------------- Total comprehensive income (loss) (281,919) (5,274,965) ==============================================
NOTE 4: NESS SALE On December 22, 2000, the Company, through its wholly-owned subsidiary FAI Home Security Pty. Limited completed the sale of 49% of its shareholding in Ness Security Products Pty. Limited for cash consideration of $9.8 million ($AUD17.5 million) to HIH Insurance Limited ("HIH") ("Ness Sale"). A deposit of approximately $2.5 million ($AUD4.5 million) was paid by HIH to the Company on September 29, 2000 in relation to the Ness Sale. The Company used the remainder of the sales proceeds to repay $7.3 million ($AUD13 million) to HIH in relation to (i) FAI Insurance Limited note representing vendor financing for the Company's purchase of FAI Finance Corporation Pty Limited in December 1997; and (ii) short term finance provided by HIH in May and August, 2000. Furthermore, in connection with the sale, HIH agreed to provide the Company with additional funds of $1.4 million ($AUD2.5 million) by June 30, 2001. The Company received the additional funds from HIH on January 12, 2001. The Company has filed a Report on Form-8K, as amended in relation to this sale including unaudited Pro Forma financial statements. Unaudited Pro Forma net income adjusted as though the Ness Sale took place at the beginning of the periods being reported on is shown below. HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited)
Six Months Ended December 31, -------------------------------------------- 1999 2000 $US $US -------------------------------------------- (in thousands except per share data) Pro forma net sales 18,127 14,133 Pro forma income from operations 416 (4,238) Pro forma net income 471 (4,094) Pro forma net income per common share Basic earnings per share 0.08 (0.70) Diluted earnings per share 0.08 (0.70) Pro forma weighted average number of shares outstanding Basic 5,828 5,828 Diluted 5,828 5,828
NOTE 5: NEW BUSINESS MODEL The Company implemented a business plan, which the management believes will ultimately result in the generation of positive cash flows from its operating activities. The business model has and will take the following approaches. 1. Reduction in General and Administrative Expenses During July and August 2000, the Company made 33 staff reductions as part of cost control initiatives, reducing the total employees from 279 to 246. The Company intends to further reduce the total number of employees during the next six months through both natural attrition and redundancies. The expenses associated with both marketing and service have also been reviewed. Through the use of technology, reductions of expenses associated with service are expected and a number of marketing initiatives will be discontinued. The management structure of the Company has been revised and the appropriate cost reductions made in relation to the number of officers and executives required for the Company's operating activities. As part of this process, Mr. Cooper agreed to terminate his consultancy agreement with the Company, being $700,000 per year and 10% of the Company's net profit after tax, in consideration for a termination payment of $175,000. The Company intends to renegotiate Mr. Cooper's consultancy agreement. Until this process is complete, Mr. Cooper has agreed to a monthly consultancy payment of $28,000 per month. 2. Closure of Unprofitable markets within the Company The Company has reviewed each segment of its operating activities and has identified a number of markets it intends to close or seek a joint venture partner to fund market development. These markets are expected to close or have joint venture partners prior to March 2001. HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 3. Increased Margins The Company intends to pursue all opportunities to produce improved margins to the group. 4. Reduction in Finance Costs The Ness Sale has resulted in a reduction in finance costs associated with the FFC Note and the Company's other short term debt funding. The Company continues to seek reductions in financing costs associated with its ongoing monitoring program. 5. Going Concern There is substantial uncertainty about the Company's ability to continue as a going concern. To continue as a going concern it must achieve the improvements in operating performance outlined in points 1-5 above. The achievement of this improvement in operating performance is uncertain. Management believes that the cash received from the Ness Sale (see Note 4) in conjunction with the new business model, will be sufficient to achieve the improvement in operating performance required for the Company to continue as a going concern. Prior to the Company's December 15, 2000 receipt of a letter from its independent public accountants, Arthur Andersen, confirming that its client-auditor relationship between the Company and Arthur Andersen had ceased. Arthur Andersen advised the Company that should the situation remain unresolved at year-end, the auditors report on those financial statements may be modified as a result of going concern uncertainty. 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 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, 2000 and expanded upon herein, and as detailed from time to time in the Company's other filings made with the Securities and Exchange Commission. Continuing Losses As reflected in the Company's financial statements, the Company has suffered a significant reduction in revenue during the six months ended December 31, 2000, resulting in a net operating loss of $4,537,907 for such period. Such losses have been accompanied by a change in the Company's business model from a direct seller of security systems, which recognized receivables and margins at the point of sale, to a seller of monitoring services with revenue recognition occurring over the life of the monitoring contract. On December 22, 2000 the Company completed a transaction to sell 49% of Ness Security Products Pty. Limited ("Ness") (the Company's manufacturing operation). The future success of the Company is dependent on it utilizing the proceeds received from this sale to achieve increased sales volumes and a reduction in expenses. While the Company believes the cash raised from the sale of Ness will be sufficient to finance the changes needed to achieve the sales targets forecasted and therefore continue as a going concern, there is no certainty as to whether (i) the proceeds of the Ness sale will be sufficient to fund current operations; (ii) the predicted level of sales activity under the new business model will be achieved; or (iii) that the necessary cost reductions under the new business model will be achieved. The unproven success of the new business model raises substantial uncertainty about the Company's ability to continue as a going concern. See Note 5 to Consolidated Financial Statement. Additionally, the Company's significant reduction in revenue has caused the Company's market capitalization to no longer meet the guideline required by the American Stock Exchange (the "AMEX") for the continued listing of the Company's shares. Should the Company's shares become delisted from the AMEX, whether voluntarily or involuntarily, such an action may have a materially adverse effect on the market value of the Company's shares and shareholders' liquidity. Recent Developments - Revenue Recognition Prior to the introduction of on-line monitoring the Company sold security equipment directly to its distribution network and immediately recognized its revenues and margin at the point of sale. The distribution network contracted directly with the consumer as an "authorized distributor" of the Company. The Company under this agreement retained the right to the customer base. As of July 1, 2000 the Company changed the nature of its sales transactions with its distribution network, whereby the Company began to sell the Bundled Security Package directly to the consumer, with all customers entering into a monitoring agreement with the Company at the point of sale. Despite selling directly to the consumer, the Company still defers a portion of the revenues over the period that the monitoring services are supplied (typically sixty (60) months). The "authorized distributor" is paid an installation and connection commission directly by the Company for each customer connected to monitoring. Comparison of three months ended December 31, 1999 and December 31, 2000. Net Sales: Net sales decreased by $0.2 million or 2% from $8.6 million for the three months ended December 31, 1999 to $8.4 million for the three months ended December 31, 2000. The reduction in net sales was primarily a result of a 55% decline in total unit sales from 8,276 units for the three months ended December 31, 1999 to 3,698 units for the three months ended December 31, 2000. Revenues did not decrease in proportion to unit sales due to the change in business model, whereby the Company began to sell the Bundled Security Package directly to the consumer. For the three months ended December 31, 2000 the Company recognized on its Australian standard package sales of approximately $1,328 per unit (net of factoring charges) and deferred an amount of approximately $274 relating to monitoring services compared to approximately $802 per unit relating to equipment sales to distribution network for the three months ended December 31, 1999. No deferral of monitoring services was applicable in the three months ended December 30, 1999. Monitoring revenues of $0.7 million relating to the supply of monitoring services were deferred for the three months ended December 31, 2000 and will be recognized over the period the services are supplied (approximately sixty (60) months from the date of each monitoring service contract). Sales of manufactured goods not sold through the distributor network ("Direct Retail Sales") decreased by $0.4 million or 16% from $2.5 million for the three months ended December 31, 1999 to $2.1 million for the three months ended December 31, 2000. Units sold in the Australian market decreased 49% from 6,091 units for the three months ended December 31, 1999 to 3,126 units three months ended December 31, 2000. Units sold in New Zealand decreased 57% from 428 units for the three months ended December 31, 1999 to 183 units for the three months ended December 31, 2000 The decline in number of units sold in Australia and New Zealand is attributable to: (i) A reduction in the number of Distributor offices currently selling in the Australian and New Zealand market. (ii) A reduction in the number of independent sales agents due to (i). (iii) Increased competition. Unit sales in Europe and the United Kingdom decreased 81% from 1,661 units in the three months ended December 31, 1999 to 322 units for the three months ended December 31, 2000. The reduction in unit sales was a result of the closure of distribution outlets in both markets. As of December 31, 2000 the Company had accumulated 23,422 monitored accounts compared to approximately 6,500 monitored accounts as at December 31, 1999. Cost of Goods Sold: Cost of goods sold increased from $4.3 million for the three months ended December 31, 1999 to $5.9 million for the three months ended December 31, 2000. As a percentage of net sales, cost of goods sold increased 20% from 50% for the three months ended December 31, 1999 to 70% for the three months ended December 31, 2000. The increase in cost of goods as a percentage of net sales is attributable to the change in the business model, whereby the Company sells the Bundled Security Package directly to the consumer, the "authorized distributor" is paid on installation and connection commission directly by the Company for each customer connected to monitoring. As a result of the change in business model, a reduction in margin in the Australian market of approximately $95 per unit was introduced to facilitate a lower purchase price to consumers with the introduction of on-line monitoring. This reduction in margin was a result of increased competitive forces within the Company's target market. General and Administrative Expenses: General and administrative expenses were $3.4 million for the three months ended December 31, 2000, compared to $3.8 million for the three months ended December 31, 1999. Total general and administrative expenses, as a percentage of net sales, decreased 3% to 41% for the three months ended December 31, 2000 compared to 44% for the three months ended September 30, 1999. The decrease in general and administration expenses reflects the benefits of cost control initiatives implemented by management over the past six months. The Company intends to further reduce general and administrative expenses during the next six months through further cost reduction initiatives which may include: (i) using technology to reduce expenses associated with services; (ii) revising certain marketing initiatives; and (iii) revising the Company's management structure. The Company completed the integration of all head office operations into the manufacturing facility in Sydney and the closure of the corporate office in December 2000. Amortization and Depreciation: Amortization and depreciation decreased $0.1 million from $0.7 million for the three months ended December 31, 1999 to $0.6 million for the three months ended December 31, 2000. The decrease was attributable to (i) a reduction in goodwill amortization as a result of the impairment of goodwill recorded in June 2000; and (ii) a reduction in depreciation of capital assets resulting from the sale of Company assets, in particular motor vehicles no longer required. Research and Development: Research and Development expenses increased $0.1 million from $0.2 million for the three months ended December 31, 1999 to $0.3 million for the three months ended December 31, 2000. This increase was attributable to costs incurred by Ness in relation to product approvals and the design and development of new products. Loss From Operations: Loss from operations increased from $0.4 million for the three months ended December 31, 1999 to $1.8 million for the three months ended December 31, 2000. The increase in loss from operations reflects the reduction in unit sales experienced in the three months ended December 31, 2000 with no commensurate decrease in general and administrative costs for the three months ended December 31, 2000. Non-Operating Income (Loss): Non-operating income (loss) increased from a loss of $0.3 million for the three months ended December 31, 1999 to a gain of $0.4 million for the three months ended December 31, 2000. The $0.4 million gain for the three months ended December 31, 2000 represents the profit on the 49% sale of Ness Security Products Pty. Limited effective December 22, 2000. The loss of $0.3 million for the three months ended December 31, 1999 represents the write-off of the Company's 49% interest in the Bayside Partnership purchased on June 30, 1998. Interest Income: Interest income remained stable at $0.1 million for the three months ended December 31, 1999 and 2000, respectively. Interest Expense-related party: Interest expense-related party increased from $0.1 million for the three months ended December 31, 1999 to $0.2 million. Interest expense-related party consists of interest payments on: (a) the vendor- financed loan initiated as part of the FFC Transaction on December 31, 1997, and amended as at March 31, 2000; and (b) the funding facility initiated on December 22, 1999 to finance the initial cash deficiency of the internally financed Upgrade Program. There were no interest charges relating to this facility in the three months ended December 31, 1999. Interest Expense-other: Interest expense-other was $4,118 for the three months ended December 31, 2000 compared to $167,224 for the three months ended December 31, 1999. The interest charge for the three months ended December 31, 1999 consisted of a non-cash imputed interest charge $0.2 million recorded in order to comply with the United States Generally Accepted Accounting Principles ("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 premium to be recorded for debt securities issued with an interest rate fixed materially above or below the effective rate or current yield of an otherwise comparable security. The note was settled March 31, 2000 and not reflected for the three months ended December 31, 2000. Income Tax Expense (Benefit): As the Company has incurred continuing net operating losses for the three months ended December 31, 2000, it has recognized tax benefits of $0.6 million. However, valuation reserves of the same amount have been established as the recovery of such assets is uncertain. Realization of deferred tax benefits associated with net operating losses ("NOL") and credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these NOL and credit carryforwards may expire unused and, accordingly, has established a valuation allowance against them of $2.4 million as of June 30, 2000. Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable. However, due to the sale of 49% of the company's 100% shareholding in Ness ("Ness Sale - See Note 4") the Company does not expect to group income with Ness for tax purposes. As a result the Company has taken the appropriate tax expenses of $0.1 million in relation to the Ness operations as a separate entity within the group. This is compared to an income tax benefit of $0.4 million for the three months ended December 31, 1999. Equity in Income of Affiliated Companies: Equity in income of affiliates decreased from $26,000 to $0 as a result of the sale of the company's 50% shareholding in FAI Finance Corporation Pty. Limited ("FFC") effective March 31, 2000. Net Loss: Net Loss increased from $0.5 million for the three months ended December 31, 1999 to $1.6 million for the three months ended December 31, 2000. Comparison of six months ended December 31, 1999 and December 31, 2000. Net Sales: Net sales decreased by $4.0 million or 22% from $18.1 million for the six months ended December 31, 1999 to $14.1 million for the six months ended December 31, 2000. The reduction in net sales was primarily a result of a 55% decline in total unit sales from 17,281 units for the six months ended December 31, 1999 to 7,331 units for the six months ended December 31, 2000. Revenues did not decrease in proportion to unit sales due to the change in business model, whereby the Company began to sell the Bundled Security Package directly to the consumer. For the six months ended December 31, 2000 the Company recognized on its Australian standard package sales of approximately $1,328 per unit (net of factoring charges) and deferred an amount of approximately $274 relating to monitoring services compared to approximately $802 per unit relating to equipment sales to distribution network for the six months ended December 31, 1999. No deferral of monitoring services was applicable in the six months ended December 30, 1999. Monitoring revenues of $1.2 million relating to the supply of monitoring services were deferred for the six months ended December 31, 2000 and will be recognized over the period the services are supplied (approximately sixty (60) months from the date of each monitoring service contract). Sales of manufactured goods not sold through the distributor network ("Direct Retail Sales") decreased by $0.5 million or 10% from $5.1 million for the six months ended December 31, 1999 to $4.6 million for the six months ended December 31, 2000. Units sold in the Australian market decreased 56% from 12,886 units for the six months ended December 31, 1999 to 5,632 units for the six months ended December 31, 2000. Units sold in New Zealand decreased 37% from 981 units for the six months ended December 31, 1999 to 614 units for the six months ended December 31, 2000. The decline in number of units sold in Australia and New Zealand is attributable to: (i) A reduction in the number of Distributor offices currently selling in the Australian and New Zealand market. (ii) A reduction in the number of independent sales agents due to (i). (iii) Increased competition. Unit sales in Europe and the United Kingdom decreased 72% from 3,126 units in the six months ended December 31, 1999 to 868 units for the six months ended December 31, 2000. The reduction in unit sales was a result of the closure of distribution outlets in both markets. As of December 31, 2000 the Company had accumulated 23,422 monitored accounts compared to approximately 6,500 monitored accounts as at December 31, 1999. Cost of Goods Sold: Cost of goods sold increased from $9.1 million for the six months ended December 31, 1999 to $9.6 million for the six months ended December 31, 2000. As a percentage of net sales, cost of goods sold increased 18% from 50% for the six months ended December 31, 1999 to 68% for the six months ended December 31, 2000. The increase in cost of goods as a percentage of net sales is attributable to the change in the business model, whereby the Company sells the Bundled Security Package directly to the consumer, the "authorized distributor" is paid on installation and connection commission directly by the Company for each customer connected to monitoring. As a result of the change in business model, a reduction in margin in the Australian market of approximately $95 per unit was introduced to facilitate a lower purchase price to consumers with the introduction of on-line monitoring. This reduction in margin was a result of increased competitive forces within the Company's target market. General and Administrative Expenses: General and administrative expenses were $7.4 million for the six months ended December 31, 2000, compared to $7.0 million for the six months ended December 31, 1999. Total general and administrative expenses, as a percentage of net sales, increased 14% to 53% for the six months ended December 31, 2000 compared to 39% for the six months ended September 30, 1999. The increase in general and administration expenses for the six months ended December 31, 2000 compared to the six months ended December 30, 1999 is attributable to the following: (i) The fixed nature of the expenses relating to the provision of service to the customer base and the administration of the distribution network. (ii) Employee redundancy payments and salaries of $0.2 million relating to the reduction of staff numbers by 33 employees within the company's operations. (iii) Legal fees relating to the Class Action of $0.1 million. (vi) Doubtful debts relating to FAI Home Distributors Pty Limited in the amount of $0.2 million. The Company expects to see reductions in general and administrative expenses during the next six months as the impact of cost reduction initiatives are realized, which may include: (i) using technology to reduce expenses associated with services; (ii) revising certain marketing initiatives; and (iii) revising the Company's management structure. Amortization and Depreciation: Amortization and depreciation decreased $0.1 million from $1.3 million for the six months ended December 31, 1999 to $1.2 million for the six months ended December 31, 2000. The decrease was attributable to (i) a reduction in goodwill amortization as a result of the impairment of goodwill recorded in June 2000; and (ii) a reduction in depreciation of capital assets resulting from the sale of Company assets, in particular motor vehicles no longer required. Research and Development: Research and Development expenses remained stable at $0.4 million for both the six months ended December 31, 1999 and December 31, 2000. Income (Loss) From Operations: Income (Loss) from operations decreased from a gain of $0.3 million for the six months ended December 31, 1999 to a loss of $4.4 million for the six months ended December 31, 2000. The increase in loss from operations reflects the reduction in unit sales experienced in the six months ended December 31, 2000 with no commensurate decrease in general and administrative costs for the six months ended December 31, 2000. Non-Operating Income (Loss): Non-operating income (loss) increased from a loss of $0.3 million for the six months ended December 31, 1999 to a gain of $0.4 million for the six months ended December 31, 2000. The $0.4 million gain for the six months ended December 31, 2000 represents the profit on the 49% sale of Ness Security Products Pty. Limited effective December 22, 2000. The loss of $0.3 million for the six months ended December 31, 1999 represents the write-off of the Company's 49% interest in the Bayside Partnership purchased June 30, 1998. Interest Income: Interest income remained stable for the six months ended December 31, 1999 and 2000, respectively. Interest Expense-related party: Interest expense-related party increased from $0.2 million for the six months ended December 31, 1999 to $0.4 million. Interest expense-related party consists of interest payments on: (a) the vendor- financed loan initiated as part of the FFC Transaction on December 31, 1997, and amended as at March 31, 2000; and (b) the funding facility initiated on December 22, 1999 to finance the initial cash deficiency of the internally financed Upgrade Program. There were no interest charges for this facility in the six months ended December 31, 1999. Interest Expense-other: Interest expense-other was $20,259 for the six months ended December 31, 2000 compared to $339,855 for the six months ended December 31, 1999. The interest charge for the six months ended December 31, 1999 consisted of a non-cash imputed interest charge $0.3 million recorded in order to comply with the United States Generally Accepted Accounting Principles ("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 premium to be recorded for debt securities issued with an interest rate fixed materially above or below the effective rate or current yield of an otherwise comparable security. The note was settled March 31, 2000 and not reflected for the six months ended December 31, 2000. Income Tax Expense (Benefit): As the Company has incurred continuing net operating losses for the six months ended December 31, 2000, it has recognized tax benefits of $1.2 million. However, valuation reserves of the same amount have been established as the recovery of such assets is uncertain. Realization of deferred tax benefits associated with net operating losses ("NOL") and credit carryforwards is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these NOL and credit carryforwards may expire unused and, accordingly, has established a valuation allowance against them of $2.4 million as of June 30, 2000. Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carryforward period are significantly reduced or alternative tax strategies are no longer viable. However, due to the sale of 49% of the company's 100% shareholding in Ness ("Ness Sale - See Note 4") the Company does not expect to group income with Ness for tax purposes. As a result the company has taken the appropriate tax expenses of $0.2 million in relation to the Ness operations as a separate entity within the group. This compared to an income tax benefit of $0.2 million for the six months ended December 31, 1999. Equity in Income of Affiliated Companies: Equity in income of affiliates decreased from $55,000 to $0 as a result of the sale of the company's 50% shareholding in FFC effective March 31, 2000. Net Loss: Net Loss increased from $0.2 million for the six months ended December 31, 1999 to $4.5 million for the six months ended December 31, 2000. Liquidity and capital resources Net Cash used in operations declined $1.4 million from a cash-outflow of $0.4 million for the six months ended December 31, 1999 to a cash-outflow of $1.8 million for the six months ended December 31, 2000. The decline in cash flow from operations for the six months ended December 31, 2000 was primarily due to: (i) The Company's net loss for the six months ended December 31, 2000 of $4.5 million; (ii) The reduction in Trade Payables of $2.2 million. The reduction in the Company's net income and Trade Payables was partially offset by: (i) A reduction in inventory of $1.2 million; (ii) The receipt of a $1.5 million payment from FFC for final settlement of the Retail Support Deed, whereby FFC agreed to pay a lump sum payment to cover an interest rate discount agreed upon in relation to the factoring of the Company's monitoring contracts for the period of July 1, 2000 to September 30, 2001. The Company has included $0.3 million of the discount in Net sales for the December 2000 quarter and has taken the remaining $1.2 million to the balance sheet as unearned revenue to be recognized over the nine months to September 2000; (iii) Deferral of monitoring revenues of $1.2 million; (iv) Other non-cash items of approximately $1.0 million. In December 1998, the FAI Home Distributors Pty. Limited ("the Association"), with the unanimous consent of the Company's distributors in Australia, agreed to pay the Company for bad debts accumulated by the Company for inventory advances made to individual distributors from time to time (the "Company Receivable"). At the same time, Mr. Cooper entered into a deed guaranteeing the repayment of the Company Receivable and any future bad debts of the Association and it's distributors ("Deed of Guarantee"). On December 13, 2000, Mr. Cooper paid the Company $0.3 million (AUD$595,000) in consideration for being released from the Deed of Guarantee. In December 2000, the Company received $0.3 million as final settlement of debts owed to it by the Association. The Company had previously provided fully against these debts due to the uncertainty of their recoverability as a result of the impact of declining unit sales on the working capital of the Association. Net cash (used in) provided by investing activities increased from a deficit of $1.0 million for the six months ended December 31, 1999 to a surplus of $9.4 million for the six months ended December 31, 2000. The increase is a result of (i) the $9.8 million proceeds received as a result of the Ness Sale, and (ii) reduced expenditure on capital assets and a reduction in working capital funding to FAI Home Distributors Pty. Limited. On December 22, 2000, the Company, through its wholly-owned subsidiary FAI Home Security Pty. Limited completed the sale of 49% of its shareholding in Ness for cash consideration of $9.8 million ($AUD17.5 million) to HIH ("the Ness Sale"). A deposit of approximately $2.5 million ($AUD4.5 million) was paid by HIH to the Company on September 29, 2000 in relation to the Ness Sale. The Company used the remainder of the sales proceeds to repay $7.3 million ($AUD13 million) to HIH in relation to (i) FAI Insurance Limited note representing vendor financing for the Company's purchase of FFC in December 1997; and (ii) short term finance provided by HIH in May and August, 2000. Furthermore, in connection with the sale, HIH agreed to provide the Company with additional funds of $1.4 million ($AUD2.5 million) by June 30, 2001. The Company received the additional funds from HIH on January 12, 2001. The Company believes the $2.5 million cash raised in the Ness sale, the $1.5 million cash received from FFC for the settlement of the Retail Support Deed, and the additional loan funds of $1.4 million will provide the Company with sufficient liquidity to fund the cash flow deficit from operating activities that the company expects in the first three quarters of 2001. The Company expects its business plan to produce positive cash flow from operations by the December quarter of 2001 provided sales targets are achieved in order to provide the Company with sufficient liquidity thereafter in fiscal 2001 and 2002. Net cash generated from financing activities decreased from a surplus of $0.7 million for the six months ended December 31, 1999 to a deficit of $6.3 million for the three months ended December 31, 2000. The increase consisted of: (i) Receipt of short term debt financing provided to the Company by HIH on August 3, 2000 and August 17, 2000 of approximately, $0.5 million and $1.5 million, respectively, and the subsequent repayment of these debts as part of the Ness Sale; (ii) Repayment in full of short term debt financing provided to the Company by HIH on May 29, 2000 of approximately $2.9 million; (iii) Receipt of additional unsecured external funding of $0.5 million provided by International Home Security Investments Limited on August 4, 2000, and the subsequent repayment on November 30, 2000. Paul Brown, a director of the Company, is also a director and sole shareholder of International Home Security Investments Limited; (iv) Repayment of $2.6 million against the FAI Insurance Limited ("FAI") note representing vendor financing for the Company's purchase of FFC in December 1997; (v) Collections of $0.5 million remitted to FFC pursuant to the FFC- Receivables Purchase Agreement; (vi) Reduction of the Company's overdraft facility by $145,000; (vii) Finance lease payments of $120,000. The Company has access to an overdraft facility of approximately $560,000, of which $233,000 remained undrawn as of December 31, 2000. On January 12, 2001 the Company through its wholly-owned subsidiary FAI Home Security Pty. Limited entered into a Deed of Termination (the "Deed"). Under the Deed the Company agreed to relinquish its rights under the Trade Mark License Agreement dated June 20, 1997 (the "License Agreement") for a termination fee of approximately $2.7 million ($AUD4,804,000). The effective date of the termination is December 31, 2003. In accordance with the Deed, the Company directed FAI to retain $1.4 million of the termination fee as full payment of all money owing by the Company to FAI under the Refinancing Agreement between the Company and FAI dated April 26, 2000, and received $1.1 million ($AUD1,950,000) which was paid by FAI to the Company on January 12, 2001. A further payment of approximately $0.2 million ($AUD350,000) is due upon termination on December 31, 2003. The Company's strategy for growth is based on the successful roll-out of the new On-line Monitoring Program through its Distributor Network into existing and new markets and the sale of five-year on-line monitoring contracts through an Upgrade Program to its existing 268,000 residential customers. As the Company's current level of monthly unit sales is insufficient to generate positive cash flow from operations the Company must obtain additional external funding until a breakeven level of sales is achieved. There is no guarantee that the Company will achieve a breakeven level of unit sales or will be successful in obtaining additional external funding or that if funding is available that it will be on terms favorable to the Company. The lack of such capital could have a material adverse effect on the Company's operations, liquidity and financial position. FFC-Receivables Purchase Agreement. On December 22, 1999, the Company entered into the Receivables Purchase Agreement ("RPA") with FFC. 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 268,000 residential customers. Previously, the Company has funded this program from cash flow from operations. 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, 2000 was $0.5 million. 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%. As of December 31, 2000 the $4.2 million limit of the facility provided by FFC was drawn down to $3.4 million. 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 decreased in value relative to the U.S. dollar from .6507 on December 31, 1999 to .5599 on December 31, 2000. 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, 2000. Part II - OTHER INFORMATION ITEM 1: Legal Proceedings The Company has had no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the year ended June 30, 2000. 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 Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 10 Deed of Termination (b)(i) On January 3, 2001 the registrant filed a report on Form 8K to report that the relationship between it and its then independent auditor, Arthur Andersen, had ceased. (b)(ii) On January 5, 2001 the registrant filed a report on Form 8K to announce that it had completed the sale of 49% of its subsidiary, Ness Security Products Pty Limited to HIH Insurance. (b)(iii) On January 23, 2001 the registrant filed a report on Form 8K to announce that Brad Cooper, chief executive officer of the Company filed a Schedule 13D/A to announce his purchase of a controlling interest of the Company's outstanding shares of common stock. (b)(iv) On February 9, 2001 the registrant filed a report on Form 8K/A to file the pro forma financials related to the previously reported sale of its subsidiary, Ness Security Products Pty Limited to HIH Insurance. 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/ Terry Youngman --------------------------------------- Terry Youngman President and Deputy Chief Executive Dated: February 12, 2001 EX-10 2 0002.txt DEED OF TERMINATION EXHIBIT 10 ---------- DEED OF TERMINATION THIS DEED is made on 12 January 2001 PARTIES: 1. FAI INSURANCES LIMITED (ACN 004 304 545) of Level 42, 50 Bridge Street, Sydney, New South Wales ("FAI"); and 2. FAI HOME SECURITY PTY LIMITED (ACN 050 064 214), of Unit 3, 167 Prospect Highway, Seven Hills, New South Wales ("FHS"). RECITALS: A. FAI and FHS are parties to a Trade Mark License Agreement dated 20 June 1997 (as amended by a Deed of Variation dated 18 August 1998) (the "License Agreement") which evidences and records the grant by FAI to FHS the right to use FAI's name and logo in conjunction with the words "Home Security". B. The parties have agreed that FHS will relinquish its rights under the License Agreement and that the License Agreement will be terminated in accordance with the terms and conditions of this deed. OPERATIVE PART: 1. DEFINITIONS AND INTERPRETATION 1.1 Definitions In this deed, unless the context otherwise requires, the following words and phrases shall have the following meaning: "Chubb Group" means Chubb Australia Limited (ACN 000 096 122) and its related bodies corporate (as the term is defined in the Corporations Law). [/1/] "Effective Date" means 31 December 2003. "HSI Dealer" has the same meaning as set out in the License Agreement. "HSI Group Company" has the same meaning as set out in the License Agreement. "Merger Date" means the date on which a Merger occurs or is completed. ______________ /1/ Confidential treatment requested - the redacted information has been filed with the Securities and Exchange Commission. "Merger" means a combination of all or part of the business carried on by FHS with all or part of the business carried on by any member or all of the members of the Chubb Group by any means including by takeover, scheme of arrangement, share sale, asset sale, merger or joint venture or any combination. "Termination Amount" means the sum of A$2,500,000. "Trade Mark" has the same meaning as set out in the License Agreement. 1.2 Interpretation In this deed, unless the context otherwise requires: (a) a reference to this deed is a reference to this deed as amended, varied, novated or substituted from time to time; (b) a reference to any legislation includes: (i) all legislation, regulations and instruments issued under that legislation; and (ii) any modification, consolidation, amendment, re-enactment or replacement of that legislation; (c) a word importing; (i) the singular includes the plural and vice versa; and (ii) a gender includes each other gender; (d) where a word or phrase is given a defined meaning, any other part of speech or other grammatical form in respect of that word or phrase has a corresponding meaning; (e) a reference to a Clause or Schedule is a reference to a Clause or Schedule of this deed; (f) any heading used in this deed is for convenience only and does not affect the interpretation of this deed; (g) the Schedules of, and Recitals to, this deed form part of this deed; (h) words and expression importing natural persons shall include any company, corporation or other body corporate or other person, firm, joint venture, partnership, trust or other entity or any government authority and vice versa; (i) references to any of the parties hereto shall, where relevant, be deemed to be references to or include, as appropriate, its successors or permitted assigns; 2 (j) reference to time is a reference to time in Sydney, Australia; and (k) a reference to an agreement includes a representation, undertaking, deed, agreement or legally enforceable arrangement or understanding whether or not in writing. 2. TERMINATION The License Agreement will terminate on and from the Effective Date and, in consideration of the covenants on the part of FAI under this deed, FHS relinquishes all and any rights that it has under or in relation to the License Agreement on and from the Effective Date. 3. DISCHARGE 3.1 Discharge Subject to Clause 3.3: (a) [/2/] (b) FAI and FHS will forever free, release and discharge the other on the Effective Date from all and any future and ongoing obligations on and from that date that they may have or may have had under or in relation to the License Agreement. 3.2 [/3/] 3.3 Ongoing Obligations (a) On the Effective Date FHS must: (i) immediately cease using and have no further right to use, including on any signs or promotional material: (A) the Trade Mark; or (B) any trade mark that is substantially identical with or confusingly similar to the Trade Mark; (ii) remove all signs bearing the Trade Mark; (iii) destroy all other material bearing the Trade Mark in its possession or control; ______________ /2/ Confidential treatment requested - the redacted information has been filed with the Securities and Exchange Commission. /3/ Confidential treatment requested - the redacted information has been filed with the Securities and Exchange Commission. 3 (iv) provide all assistance required by FAI to cancel any registration of FHS as a registered user of the Trade Mark; and (v) use its best efforts to ensure that each HSI Group Company and HSI Dealer ceases using and is aware that it has no further right to use, including on any signs or promotional material, the Trade Mark. (b) Termination of the License Agreement on the Effective Date will not affect any rights of any party accrued to that Effective Date. 4. WARRANTY FHS warrants that as the date of this deed it is not in breach of the terms of the License Agreement and undertakes to comply with those terms until the Effective Date. 5. PAYMENTS 5.1 FAI Payments In consideration of the covenants on the part of FHS under this deed, FAI will, (a) [/4/] (b) on the Effective Date, pay to FHS, but only if the Merger has not occurred by the Effective Date, a sum of A$350,000. 5.2 FHS Payment In consideration of the covenants on the part of FAI under this deed, FHS will, on the Merger Date, pay to FAI the sum of A$1,000,000. 5.3 FHS Direction FHS hereby irrevocably directs FAI to retain the Termination Amount in payment of all money owing by FHS to FAI under a Refinancing Agreement between FAI and FHS dated 26 April 2000. FHS acknowledges and agrees that FAI's compliance with this direction will satisfy in full FAI's obligations to pay the Termination Amount to FHS under this deed. 6. MISCELLANEOUS PROVISIONS 6.1 Further Assurances Each of the Parties agrees and covenants that it shall without limitation execute and deliver all such documents and do all such things as are necessary in order to give effect to this deed and any transaction contemplated herein. ______________ /4/ Confidential treatment requested - the redacted information has been filed with the Securities and Exchange Commission. 4 6.2 Governing Law This deed shall be governed by and construed in accordance with the laws for the time being of the State of New South Wales and each Party hereby submits to the non-exclusive jurisdiction of the courts of that State. 6.3 Amendments No amendment, variation, modification, addition or substitution to or for this deed shall be of any force or effect unless and until such amendment, variation, modification, addition or substitution is reduced to writing and executed by or on behalf of each Party. 6.4 Counterparts This deed may be executed in one or more counterparts each of which shall be deemed to be an original and those counterparts taken together shall constitute one and the same instrument. 6.5 Acknowledgement The Parties acknowledge that they enter into this deed fully and voluntarily upon their own information and investigations. 6.6 Costs Each Party shall bear its own costs in respect of the preparation, negotiation and execution of this deed and all things to be done under this deed. 5 EXECUTION Executed unconditionally as a Deed on the day specified above. EXECUTED by ) FAI HOME SECURITY PTY ) LIMITED in accordance with Section ) 127 of the Corporations Law ) /s/ T. Youngman /s/ Stephen J. Pomeroy Authorized Signatory Authorized Signatory Terry Youngman /s/ Stephen J. Pomeroy. Print Name Print Name Director Secretary Capacity Capacity EXECUTED for and on behalf of ) FAI INSURANCES LIMITED ) by its duly authorized attorney: ) /s/ William Howard Signature of attorney /s/ William Howard Print Name 6 -----END PRIVACY-ENHANCED MESSAGE-----