<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
AMENDMENT NO. 2 TO CURRENT REPORT ON FORM 8-K
Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): December 31, 1997
------------------
Home Security International, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-26399 98-0169495
- ---------------------------- ----------- -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File number) Identification No.)
Level 7, 77 Pacific Highway
North Sydney, NSW Australia 2060
- -------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (011) (612) 9936-2424
---------------------
_____________________________________________________
Former name or former address, if changed since last report
<PAGE>
AMENDMENT NO. 2
The undersigned registrant hereby amends the following portion of its
Current Report on Form 8-K dated December 31, 1997 and filed January 15, 1998 as
set forth below:
1. Add Item 7(a) as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Business Acquired.
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30 December 31
---------- ----------------
1997 1997
NOTE $US $US
(Unaudited)
---- ---------- ----------------
<S> <C> <C> <C>
Interest income - related party....... - -
- other............... 6,399,516 4,068,408
Interest expenses - related party..... 11 (755,741) (627,313)
- other............. (1,170,662) (566,196)
---------- ----------
Net interest income................... 4,473,113 2,874,899
Management fee income - related party. 11 61,675 22,349
---------- ----------
Operating revenues.................... 4,534,788 2,897,248
General and administrative expenses... 4 (2,042,788) (1,496,974)
Bad debts and allowance for losses.... 2 (807,800) (462,528)
---------- ----------
Income before taxes................... 1,684,200 937,746
Income tax expense.................... 10 (580,205) (335,587)
---------- ----------
Net income............................ 1,103,995 602,159
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1997 1997
NOTE $US $US
---------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
- ------
Cash and cash equivalents........................ 5 211,096 273,276
Receivables 2
Consumer loans................................. 34,488,681 36,909,168
Business finance loans......................... 1,020,528 770,091
---------- ----------
Total receivables.......................... 35,509,209 37,679,259
Less: Allowance for losses of receivables...... 2 550,974 648,994
---------- ----------
Net receivables............................ 34,958,235 37,030,265
Prepaid expenses and other current assets........ 6 684,198 385,916
Restricted Deposits.............................. 7,14 893,588 928,246
Plant and equipment, net......................... 8 343,050 465,109
Deferred income taxes............................ 10 208,814 249,346
Intangibles...................................... 9 296,440 252,295
---------- ----------
Total assets............................... 37,595,421 39,584,453
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank overdraft................................. 1,541,953 -
Borrowing - Westpac Banking Corporation........ 14 16,348,950 15,571,194
Payables - trade............................... 84,793 203,039
Accrued liabilities............................ 43,141 52,957
Income tax payable............................. 1,063 378,186
Payables - related party....................... 11 17,445,050 20,987,040
---------- ----------
Total liabilities........................... 35,464,951 37,192,417
========== ==========
Shareholders' equity
Common stock ($A1.00 value; 100,000 shares
authorised; 50,002 shares outstanding)........ 36,976 36,976
Additional paid in capital..................... 335,592 335,592
Foreign currency translation reserve........... (64,101) (404,694)
Retained earnings.............................. 1,822,003 2,424,162
---------- ----------
Total shareholders' equity.................. 2,130,470 2,392,036
---------- ----------
Total liabilities and shareholders' equity.. 37,595,421 39,584,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30 December 31
----------- ----------------
1997 1997
$US $US
(Unaudited)
----------- ----------------
<S> <C> <C>
Cashflow from operating activities
Net income......................................... 1,103,995 602,159
Adjustments to reconcile net income to net cash
from Operating activities:
Depreciation....................................... 55,318 54,785
Amortization of goodwill........................... 35,020 44,145
Deferred taxes and income tax payable.............. (613,974) 336,591
Provision for losses on term loans receivable...... 279,192 98,020
(Increase)/decrease in operating assets:
Prepaid expenses and other assets.................. (450,320) 298,282
Increase/(decrease) in operating liabilities:
Accounts payable................................... 7,443 118,246
Accrued liabilities................................ 12,306 9,816
----------- -----------
Net cash provided by operating activities............ 428,980 1,562,044
----------- -----------
Cashflow from investing activities
Additions to plant and equipment................... (258,225) (176,844)
Term loans funded.................................. (38,119,265) (19,073,438)
Collection of principal............................ 23,706,843 16,903,388
----------- -----------
Net cash provided by/(used in) investing activities.. (14,670,647) (2,346,894)
----------- -----------
Cashflow from financing activities
Net proceeds from (repayment of) borrowings........ 4,286,914 (777,756)
Increase/(decrease) in restricted deposits......... (104,988) (34,658)
Receipts/(payments) from/(to) related parties...... 8,679,306 3,201,397
Increase/(decrease) in bank overdraft.............. 1,530,134 (1,541,953)
----------- -----------
Net cash provided by financing activities............ 14,391,366 847,030
----------- -----------
Net increase/(decrease) in cash held................. 149,699 62,180
----------- -----------
Cash at the beginning of the financial period........ 61,397 211,096
Effect of exchange rate change on cash held.......... - -
----------- -----------
Cash at the end of the financial period.............. 211,096 273,276
=========== ===========
Supplemental disclosure of cashflow information
Interest paid........................................ 755,742 627,313
Income taxes paid.................................... 1,200,788 -
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FAI FINANCE CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Capital Stock Issued
---------------------
($1 Australian dollar Foreign
par value) Additional Currency Retained Total
--------------------- Paid-in Translation Earnings Shareholders'
Shares Amount Capital Reserve Unappropriated Equity
$US $US $US $US $US
--------------- ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 50,002 36,976 335,592 0 718,008 1,090,577
Foreign currency translation
adjustment (64,101) (64,101)
Net income 1997 1,103,995 1,103,995
------ ------ ------- -------- --------- ---------
BALANCE, JUNE 30, 1997 50,002 36,976 335,592 (64,101) 1,822,003 2,130,470
Foreign currency translation
Adjustment (340,593) (340,593)
Net income July 1 -
December 31, 1997 602,159 602,159
------ ------ ------- -------- --------- ---------
BALANCE, DECEMBER 31, 1997 50,002 36,976 335,592 (404,694) 2,424,162 2,392,036
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business -
FAI Finance Corporation Pty Ltd was incorporated in New South Wales,
Australia on October 15, 1991 and FAI Finance Corporation (NZ) Ltd was
incorporated in Auckland, New Zealand on May 23, 1996.
FAI Finance Corporation Pty Ltd and FAI Finance Corporation (NZ) Ltd,
collectively "the Company" or "FAI Finance Corporation" is a consumer and
business finance company operating in Australia and New Zealand. The main
business activity of the Company is the sale and management of consumer,
commercial and business finance products. Currently more than 80 percent of all
consumer loans rise from Home Security International, Inc's ("HSI") distributor
network in Australia and New Zealand.
b) Principles of Consolidation and Basis of Preparation -
The consolidated financial statements comprise the accounts of FAI Finance
Corporation Pty Limited and its controlled entity FAI Finance Corporation (NZ)
Ltd and have been prepared in accordance with generally accepted accounting
principles in the United States of America ("US GAAP").
All intercompany accounts and transactions have been eliminated.
The financial statements should be read in conjunction with the Form-8K for
Home Security International, Inc filed on January 15, 1998.
c) Cash and Cash Equivalents -
Cash equivalents consist of short-term investments with maturities of three
months or less and are stated at cost, which approximates market.
d) Foreign Currencies -
The consolidated financial statements of the Company are translated into US
dollars to reflect the reporting currency of HSI. The assets and liabilities of
the Company are translated at the balance sheet date exchange rate. The profit
and loss items of the Company have been translated at the average exchange rates
throughout each period. The resulting translation effects are reflected in
shareholders' equity.
The functional currency of FAI Finance Corporation Pty Limited is
Australian dollars and the functional currency of FAI Finance Corporation (NZ)
Ltd is New Zealand dollars.
e) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
f) Income Taxes -
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS No. 109 "Accounting for Income Taxes") which requires
an asset and liability method of accounting for income taxes. Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
g) Receivables -
Receivables are presented net of unearned interest. Unearned interest is
amortized to interest income using the effective interest method over the life
of the related loan or commitment period.
h) Allowance for Losses -
The allowance for losses of receivables is established through direct
charges to income. The allowance for losses is determined by management after
analysis of the current trend in the loan portfolio including charge offs, loan
arrears and recoveries. The Company has adopted the policy of charging off
receivables for which no loan installment has been received in the last six
months.
i) Plant and Equipment -
Plant and equipment are recorded at cost. Maintenance and repairs are
expenses in the period to which they relate. Depreciation on plant and equipment
is calculated using the straight-line method over the following estimated useful
lives of the assets:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Office equipment....................... 7.7
Plant.................................. 6
Motor vehicles......................... 6.5
Computer equipment..................... 4
Leasehold improvements................. 6
</TABLE>
j) Research and Development -
The Company has no significant research and development activities.
k) Pension and Other Benefit Plans -
The Company contributes to a pension plan on behalf of its employees. The
pension plan is an accumulation fund and the Company has no liability to members
under the plan. The Company has no other pension or other employment benefit
plans.
l) Derivative Financial Instruments
The Company uses derivatives as part of its asset/liability management to
reduce its overall level of financial risk arising from normal business
operations. The Company currently uses interest rate options to cap its interest
expense on part of its external borrowings. The Company is not a trader in
derivatives, and it has not used speculative derivative products for the
purpose of generating earnings from changes in market conditions.
NOTE 2: LENDING ASSETS
Lending assets include receivables.
a) Diversification of Credit Risk -
The Company predominantly lends to consumers. There are no individual loans
which exceed 5% of the lending assets at June 30, 1997 and December 31, 1997.
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
b) Contractual Maturity of Loan Receivables -
The contractual maturities of the Company's receivables at December 31,
1997, are due as follows:
<TABLE>
<CAPTION>
After
1998 1999 2000 Total
---- ---- ----- -----
<S> <C> <C> <C> <C>
Consumer loans............... 18,383,785 14,820,307 3,705,076 36,909,168
Business finance Loans....... 539,064 231,027 - 770,091
---------- ---------- --------- ----------
Business finance Loans.. 18,922,849 15,051,334 3,705,076 37,679,259
</TABLE>
The average yield on the Company's receivables at December 31, 1997 was
22.46%pa.
c) Allowance for Losses -
The change in the allowance for losses of receivables were as follows:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
---------- (Unaudited)
1997 1997
$US $US
---------- ----------------
<S> <C> <C>
Balance at the beginning of the year.. 271,782 550,974
Provision for losses.................. 279,192 98,020
------- -------
Balance at the end of the year........ 550,974 648,994
</TABLE>
The Company maintains an allowance for losses of receivables based upon
management's best estimate of future possible losses in the portfolio of
receivables. Management's estimate is based upon current economic conditions,
previous loss history, and knowledge of clients' financial position. Changes in
these estimates could result in an increase in the reserves maintained.
d) Bad Debts and Allowance for Losses -
Bad debts and allowance for losses comprises:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
---------- (Unaudited)
1997 1997
$US $US
---------- ----------------
<S> <C> <C>
Increase in allowance for losses.. 279,192 98,020
Bad debts charged off............. 528,608 364,508
------- -------
Total............................. 807,800 462,528
</TABLE>
NOTE 3: LEGAL PROCEEDINGS
The Company is party to a number of legal proceedings as plaintiff and
defendant, all arising in the ordinary course of its business. Although the
ultimate amount for which the Company may be held liable, if any, is not
ascertainable, the Company believes that the amounts, if any, which may
ultimately be funded or paid with respect to these matters will not have a
material adverse effect on the financial condition or results of operations of
the Company.
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 4: GENERAL AND ADMINISTRATIVE EXPENSES
The following table sets forth a summary of the major components of general
and administrative expenses:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
---------- ----------------
(Audited) (Unaudited)
1997 1997
$US $US
---------- ----------------
<S> <C> <C>
Employee salaries..................... 836,372 617,389
Communications........................ 315,020 253,350
Space costs........................... 104,812 107,320
Legal fees............................ 81,337 51,372
Research information.................. 99,591 68,043
Office expenses....................... 175,695 132,568
Bank charges.......................... 72,081 59,599
Other................................. 357,880 207,332
--------- ---------
Total........................... 2,042,788 1,496,974
</TABLE>
NOTE 5: CASH
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Cash on hand.............................. 373 646
Cash at bank.............................. 210,723 272,629
------- -------
211,096 273,276
</TABLE>
NOTE 6: PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Prepayments................................ 46,628 21,811
Sundry Debtors............................. 637,570 364,105
------- -------
684,198 385,916
</TABLE>
NOTE 7: RESTRICTED DEPOSITS
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Deposits - Westpac Banking Corporation.... 893,588 928,246
------- -------
893,588 928,246
</TABLE>
Access to the funds in this account is restricted in accordance with the
Receivable Purchase Agreement entered into with Westpac Banking Corporation.
Refer to Note 14.
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 8: PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Office equipment.......................... 104,574 177,450
Plant..................................... 29,318 25,679
Motor Vehicles............................ 47,210 79,261
Computer equipment........................ 177,738 239,079
Leasehold improvements.................... 68,582 82,797
Less: Accumulated depreciation............ (84,371) (139,156)
------- --------
343,050 465,109
</TABLE>
NOTE 9: INTANGIBLES
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Initial goodwill on investment............ 335,592 293,936
Amortization of goodwill.................. (39,152) (41,641)
------- -------
296,440 252,295
</TABLE>
Goodwill represents the excess of the purchase price paid by the ultimate parent
entity, FAI Insurances Limited, over the fair value of assets acquired
when FAI General Insurance Company Limited acquired the shares in Secure Home
Finance Pty Limited (later FAI Finance Corporation Pty Limited) from FAI Home
Security Holdings Pty Limited on March 1, 1995. The goodwill associated with
this acquisition has been pushed down to the Company and is being amortized over
20 years.
NOTE 10: INCOME TAX
The actual income tax expense attributable to net income differed from the
amounts computed by applying local federal tax rate to net income before taxes
as a result of the following:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
---------- ----------------
(Audited) (Unaudited)
1997 1997
$US $US
---------- ----------------
<S> <C> <C>
Expected income tax expense at statutory rates..... 591,684 324,949
Tax effect of permanent and other differences:
Over provision for income tax in prior years.. (42,152) -
Non-deductible expenses and other items....... 24,336 7,782
Amortisation of goodwill...................... 6,337 2,856
------- -------
580,205 335,587
The tax expense is split between:
Current............................................ 710,273 408,317
Deferred........................................... (130,068) (72,730)
</TABLE>
Tax losses have been purchased by the Company at June 30, 1997 from FAI
Insurances Limited for $671,751. These were utilized during the financial year.
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
June 30, December 31,
-------- (Unaudited)
1997 1997
$US $US
-------- ------------
<S> <C> <C>
Deferred tax assets are comprised of timing differences on:
Provisions not currently deductible for tax purposes for:
Doubtful debts.......................................... 198,351 232,466
Leave................................................... 15,530 18,911
Other................................................... 4,389 14,636
------- -------
Prepayments.................................................. (9,456) (16,667)
------- -------
Net deferred tax asset.......................................... 208,814 249,346
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
FAI Home Security (NZ) Trust, FAI Home Security (NZ) Limited and FAI General
Insurance Company Limited are related by the 50% holding of their ultimate
parent entity, FAI Insurances Limited, in FAI Finance Corporation Pty Limited as
at December 31, 1997.
Management fees charged to related parties are an allocation of overhead costs
incurred by the relevant related entity. FAI Finance Corporation (NZ) Limited
incurred costs to administer the FAI Home Security (NZ) Limited's New Zealand
customer loans book.
<TABLE>
<CAPTION>
June 30, December 31,
---------- (Unaudited)
1997 1997
$US $US
---------- ------------
<S> <C> <C>
Amounts due to related party:
Non Current Liabilities
FAI Insurances Limited....................................... - 10,317,100
FAI General Insurance Company Limited........................ 7,511,515 10,343,791
FAI Home Security (NZ) Trust................................. 9,546,227 -
FAI Home Security (NZ) Ltd................................... 387,309 326,149
---------- ----------
17,445,050 20,987,040
</TABLE>
The above loans are unsecured, bear interest at the Westpac Bank indicator
rate and are repayable on demand, with the exception of the FAI Insurances
Limited and FAI General Insurance Company Limited loans which are non-interest
bearing and repayable on demand as at December 31, 1997. As from January 1, 1998
these two loans bear interest at the Westpac Bank indicator rate.
<TABLE>
<CAPTION>
June 30, December 31,
---------- (Unaudited)
1997 1997
$US $US
---------- ------------
<S> <C> <C>
Net income is stated after the following items:
Interest on loans paid by FAI Finance Corporation (NZ) Limited to:
FAI Home Security (NZ) Trust.................................... 714,176 462,572
FAI Home Security (NZ) Limited.................................. 41,565 34,502
Interest on loans paid by FAI Finance Corporation Pty Limited to:
FAI Home Security (NZ) Trust.................................... - 130,239
Management fees received by FAI Finance Corporation (NZ) Limited
From:
FAI Home Security (NZ) Limited.................................. 61,676 22,349
Office rentals paid by FAI Finance Corporation Pty Limited to:
FAI General Insurance Company Limited.............................. 51,535 49,673
</TABLE>
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 12: FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
for certain financial instruments, for which it is practicable to estimate that
value. Since there is no well established market for many of the Company's
assets, fair values are estimated using present value and other valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. These
assumptions are inherently judgmental and changes in such assumptions could
significantly affect fair value calculations. The derived fair value estimates
may not be substantiated by comparison to independent markets and may not be
realized in immediate liquidation of the instrument.
For variable rate borrowings that reprice frequently, fair values were
assumed to equal carrying values. The loans from FAI General Insurance Companies
Limited and FAI General Insurances Limited were renegotiated as part of HSI's
acquisition of a 50% interest in the Company. These loans bear interest from
January 1, 1998, and as a consequence their carrying values approximate fair
values.
For fixed rate consumer and business loans, the fair values were assumed to
equal carrying values as the market interest rates charged on the loans have not
changed significantly since the loans were granted.
Carrying values approximate fair values for all other financial
instruments.
NOTE 13: SEGMENT INFORMATION
The following table shows certain financial information by geographical
region for the periods ended June 30,1997 and December 31,1997.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, December 31,
---------- ----------------
(Audited) (Unaudited)
1997 1997
$US $US
---------- ----------------
<S> <C> <C>
Net interest income:
- Australia.................................. 3,496,927 2,006,436
- New Zealand................................ 976,186 868,463
--------- ---------
4,473,113 2,874,899
Operating revenues:
- Australia.................................. 3,496,927 2,006,436
- New Zealand................................ 1,037,861 890,812
--------- ---------
4,534,788 2,897,248
Bad debts and provision for doubtful debts:
- Australia.................................. 454,123 243,189
- New Zealand................................ 53,659 66,377
--------- -------
507,782 309,565
Net income:
- Australia.................................. 750,864 324,238
- New Zealand................................ 353,131 277,922
--------- -------
1,103,995 602,159
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
---------- (Unaudited)
1997 1997
$US $US
---------- ------------
<S> <C> <C>
Identifiable Assets
- Australia.................................. 27,251,057 27,967,276
- New Zealand................................ 10,344,364 11,617,178
---------- ----------
37,595,421 39,584,453
</TABLE>
<PAGE>
FAI FINANCE CORPORATION
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 14: FINANCE FACILITIES
On June 28, 1996, the Company entered into the Receivables Purchase
Agreement with Westpac Banking Corporation ("Westpac"). Under this agreement,
the Company has the right to sell eligible receivables to Westpac and undertakes
to continue to service the receivables in exchange for a management fee.
The Company also has the option to re-purchase the receivables at an amount
determined by Westpac which is to take into account the outstanding principal on
purchased loans and any outstanding obligations to Westpac under the agreement,
including unpaid interest and facility fees.
Under the Receivables Purchase Agreement, FAI General Insurance Company
Limited must maintain a sub-ordinated loan with Westpac equal to the greater of
$2,610,800 and 25% of the outstanding sold receivable in the first year or not
less than 20% in subsequent years. The right of FAI General Insurance Company
Limited to receive interest and principal repayments in respect of the loan are
subject to Westpac's prior ranking as agreed between the parties. FAI General
Insurance Company Limited has agreed to provide a sub-ordinated loan to Westpac
to a maximum of $13,054,000.
The Company is required to maintain a cash reserve account (restricted
deposit) with Westpac, the balance of which is not less than the greater of
$652,700 and 5% of the outstanding principal on sold receivables. Interest on
the cash reserve account is only paid after the interest obligations under the
Westpac loan and sub-ordinated loan have been met. The balance of the account is
only available to the Company after all outstanding obligations to Westpac and
the sub-ordinated loans have been met.
The Company has not recognized the sales of receivables under the agreement
as a sale for financial reporting purposes. The sales proceeds received from
Westpac have been recognized as secured borrowing, and interest, program and
line fees under the Westpac facility have been recognized as interest expense.
Under the agreement the Company pays interest to Westpac at the Australian Bank
Bill rate plus 2.0% pa. In addition, the Company pays program and line fees as
agreed between the parties.
The current limit of the facility provided by Westpac is $19,581,000
(utilized at December 31, 1997 - $15,571,194). The scheduled commitment
termination date for the Receivables Purchase Agreement is the third anniversary
of the date the agreement was entered into. This date may be extended at the
sole discretion of Westpac on the second or any subsequent anniversary of the
Agreement for a further period of one year. If the Company wants an extension of
the scheduled commitment termination date it must give a written request to
Westpac at least 60 days before the relevant anniversary. If Westpac agrees, it
must give written notice to the Company not later than the day of the relevant
anniversary.
FAI Insurances Limited and FAI General Insurance Company Limited have
agreed to each provide a loan of up to $10,000,000 to the Company to enable it
to fund its financing activities. This facility is secured by the Company's
shares.
NOTE 15: DERIVATIVES
The Company has entered an interest rate collar with Westpac. Under the
collar the Company has capped its interest payable on a notional borrowing of
$19,560,000 at 13.5% pa, until 14 August 2001. The company has also set a floor
on the same notional principal and maturity, at 6.03%pa.
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of FAI Finance Corporation Pty Limited:
We have audited the accompanying consolidated balance sheet of FAI Finance
Corporation Pty Limited as of June 30, 1997, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
in Australia, which are substantially similar to generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FAI Finance
Corporation Pty Limited as of June 30, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States of America.
The consolidated financial statements of FAI Finance Corporation Pty Limited as
of and for the six months ended December 31, 1997, which are presented solely
for comparative purposes, were not audited by Independent Public Accountants.
/s/ Arthur Andersen
- -------------------
Arthur Andersen
Sydney, Australia
September 12, 1997
<PAGE>
2. Add Item 7(b)(1)
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(b) Pro forma financial information.
HOME SECURITY INTERNATIONAL INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The unaudited proforma financial statements of Home Security International,
Inc. (HSI) comprising the proforma statements of income for the year ended June
30, 1997 and the six months ended December 31, 1997 have been prepared in
accordance with US generally accepted accounting principles (GAAP), based upon
the consolidated statements of income of HSI for the six months ended December
31, 1997 and the consolidated statements of income of HSI for the year ended
June 30, 1997. The unaudited proforma consolidated statements of income for the
year ended June 30, 1997 and the six months ended December 31, 1997 comprise the
consolidated statement of income of HSI after giving effect to the pro forma
adjustments described in the notes thereto as if the 50 percent acquisition of
FAI Finance Corporation Pty Ltd, which occurred on December 31, 1997 had been in
effect on July 1, 1996.
The unaudited proforma statements of income do not purport to represent
what the results of operations of HSI would actually have been if the events or
transactions described above had in fact been in effect throughout the entire
said periods or to project the results of operations of HSI for any future date
or period.
The unaudited proforma statements of income should be read in conjunction
with the historical financial statements of HSI as found in the June 30, 1997
Form-10K, including the notes thereto, and other financial information included
in Form S-1 filed for the Initial Public Offering.
<PAGE>
HOME SECURITY INTERNATIONAL INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited pro forma Statement of Income for six months ended December 31, 1997
<TABLE>
<CAPTION>
HSI
Consolidated Pro Forma Pro Forma
(Unaudited) Adjustments (Unaudited)
$US $US Note $US
------------- ----------- ---- -----------
<S> <C> <C> <C> <C>
Net sales 21,818,161 21,818,161
----------- -----------
Cost of sales - other (12,985,600) (12,985,600)
----------- -----------
Gross profit 8,832,561 8,832,561
General and administrative expenses -
third party (5,127,206) (5,127,206)
----------- -----------
Income from Operations 3,705,355 3,705,355
Interest & non-operating income, net 230,610 230,610
Interest & non-operating income -
related party, net (225,284) (1) (225,284)
----------- -----------
Income before income taxes and Equity in
income of affiliated companies 3,935,965 3,710,682
----------- -----------
Income tax expense (1,401,979) 81,102 (2) (1,320,877)
----------- -----------
Income before Equity in income of affiliated
companies 2,533,986 2,389,805
Equity in income of affiliated companies (38,454) (3) (38,454)
----------- ----------- -----------
Net income (loss) 2,533,986 (182,636) 2,351,351
Proforma Number of Common Shares
Outstanding 5,100,000
Pro Forma Net Income per Common Share $ 0.457
</TABLE>
- -------------------------
(1) The purchase of FFC has been financed by a loan from FAI Insurances Limited
of $7,016,525 which bears interest at a fixed rate of 7.75 percent per
annum. The first instalment on the loan of $1,631,750 was paid on January 2,
1998. This adjustment represents the interest expense of $225,284 for the
six months ended December 31, 1997, on the loan balance of $5,384,775 as if
the 50 percent acquisition of FFC by the Company had taken place on July 1,
1996.
(2) The tax effect of the interest expenses. The taxation benefit has been
calculated at the Australian rate of 36%.
(3) Represents equity in income of FFC for the six months ended December 31,
1997 as if the 50 percent acquisition of FFC by the Company had taken place
on July 1, 1996.
(Unaudited pro forma reconciliation of Equity in income of affiliated companies
for the six months ended December 31, 1997)
<TABLE>
<CAPTION>
FFC
Consolidated Pro Forma Pro Forma
(Unaudited) Adjustments (Unaudited)
$US $US $US
------------ ----------- ----------
<S> <C> <C> <C>
Income before taxes 937,746 (539,215) 398,531
Income tax expense (335,587) 194,118 (141,469)
-------- --------
Net Income 602,159 257,061
50 percent equity in income of FFC 128,530
Amortization of Goodwill (166,984)
--------
Equity in income of affiliated companies (38,454)
</TABLE>
The equity in income of FFC has been calculated on a proforma basis after
adjusting for the inclusion of an interest expense on the loan balances due from
FFC to FAI Insurances Limited and FAI General Insurance Company Limited. Prior
to January 1, 1997 these loans were non interest bearing. Pro forma interest has
been charged monthly in arrears at the historic Westpac Bank indicator rate.
Equity in income of affiliated companies is calculated after amortization
of goodwill of $6,186,490 arising from the acquisition of FFC on December 31,
1997. Goodwill has been amortized as if the acquisition of FFC had been in
effect on July 1, 1996, over a period of 20 years. Amortization charge for the
six months ended December 31, 1997 is $166,984.
<PAGE>
HOME SECURITY INTERNATIONAL INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited pro forma Statement of Income for year ended June 30, 1997
<TABLE>
<CAPTION>
International
HSI 9 months to Pro Forma Pro Forma
Consolidated March 30, 1997 Adjustments (Unaudited)
$US $US $US Note $US
------------ -------------- ----------- ---- ------------
<S> <C> <C> <C> <C> <C>
Net sales 33,464,595 1,397,997 0 (1) 34,862,592
----------- ------------ ----------- -----------
Cost of sales - related parties (3,647,376) 3,647,376 (2)
- others (20,626,411) (770,155) (21,396,566)
----------- ------------ ----------- -----------
Gross profit 9,190,808 627,842 3,647,376 13,466,026
General and administrative expenses --
third party (6,553,924) (1,140,054) (148,230) (3) (7,842,208)
General and administrative expenses --
related party 500,608 (560,172) 59,564 (5) 0
----------- ------------ ----------- -----------
Income from Operations 3,137,492 (1,072,384) 3,558,710 5,623,818
Interest & non-operating income, net 88,530 6,514 95,044
Interest & non-operating income -
related party, net 695,567 (290,997) (904,380) (4)(5)(6) (499,810)
----------- ------------ ----------- -----------
Income before income taxes and Equity
in income of affiliated companies 3,921,589 (1,356,867) 2,654,330 5,219,052
----------- ------------ ----------- -----------
Income tax expense (1,629,973) (702,501) (7) (2,332,474)
----------- ------------ ----------- -----------
Income before Equity in income of
affiliated companies 2,291,616 (1,356,867) 1,951,829 2,886,578
----------- ------------ ----------- -----------
Equity in income of affiliated companies 0 0 (63,110) (8) (63,110)
----------- ------------ ----------- -----------
Net income (loss) 2,291,616 (1,356,867) 1,888,719 2,823,468
Pro forma Number of Common Shares
Outstanding 5,150,000
Pro Forma Net Income per Common Share $ 0.548
</TABLE>
- --------------------
(1) The consolidated financial statements of HSI include only the 3 months
results of the Cooper International Group from April 1, 1997 to June 30,
1997. The remaining 9 months results (July 1, 1996 to March 31, 1997) of the
year are included in this Pro Forma as if the International Operations had
been acquired by HSI on July 1, 1996.
(2) Reversal of royalty expenses charged by the former parent, FAI Home Security
Holdings Pty Limited of $3,647,376 for use of FAI name, as FAI Insurances
Limited has agreed to provide the licence for no ongoing charge.
(3) Represents additional amortization of intangible assets of $148,230 to
arrive at a full year amortization of $540,154 on goodwill of $10,803,072
for the purchase of the Australian operations prior to 1997 and the purchase
of assets of the Cooper International Group using an amortization period
over 20 years. This amortization period is consistent with the period used
for similar assets acquired.
(4) Reversal of interest charge on loan with the former parent, FAI Home
Security Holdings Pty Limited for $290,997 as the loan was not assumed by
the company when it acquired the International Assets, as well as reversal
of $60,046 interest charge incurred by FAI Home Security (NZ) Trust from
FAI Finance Corporation (NZ) Limited. Similarly interest income, $755,613,
on HSI's loan within the FAI Group will no longer be received following the
Reorganization.
(5) Eliminate management fee paid by the Cooper International Group to the Group
and management fee paid to FAI. In future, there will be no management fee
paid to FAI and any management fees for the International Operations will be
internal to HSI and will be eliminated upon consolidation.
(6) The purchase of FFC has been financed by a loan from FAI Insurances Limited
of $7,016,525 which bears interest at a fixed rate of 7.75 percent per
annum. The first instalment on the loan of $1,631,750 was paid on January 2,
1998. This adjustment represents the interest expense of $499,810 for the
year ended June 30, 1997, on the loan balance of $5,384,775 as if the 50
percent acquisition of FFC by the Company had taken place on July 1, 1996.
(7) The tax effect on the royalty and interest income reversal from FAI Group
and the interest expense on the FAI Insurances Limited loan. The interest
charge reversal and amortization of intangible assets have no tax effect.
Taxation expense has been calculated at the Australian tax rate of 36%.
<PAGE>
HOME SECURITY INTERNATIONAL INC.
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
(8) Represents equity in income of FFC for the six months ended December 31,
1997 as if the 50 percent acquisition of FFC by the Company had taken place
on July 1, 1996.
(Unaudited pro forma reconciliation of Equity in income of affiliated companies
for the year ended June 30, 1997)
<TABLE>
<CAPTION>
FFC
Consolidated Pro Forma Pro Forma
(Unaudited) Adjustments (Unaudited)
$US $US $US
------------ ----------- ----------
<S> <C> <C> <C>
Income before taxes 1,684,200 (764,524) 919,676
Income tax expense (580,205) 275,229 (304,976)
--------- --------
Net Income 1,103,995 614,700
50 percent equity in income of FFC 307,350
Amortization of Goodwill (370,460)
--------
Equity in income of affiliated companies (63,110)
</TABLE>
The equity in income of affiliated companies has been calculated on a
proforma basis after adjusting for the inclusion of interest expense on the loan
balances due from FFC to FAI Insurances Limited and FAI General Insurance
Company Limited. Prior to January 1, 1997 these loans were non interest bearing.
Pro forma interest has been charged monthly in arrears at the historic Westpac
Bank indicator rate.
Equity in income of affiliated companies is calculated after amortization
of goodwill of $6,186,490 arising from the acquisition of FFC on December 31,
1997. Goodwill has been amortized as if the acquisition of FFC had been in
effect on July 1, 1996 over a period of 20 years. Amortization charge for the
period is $370,460.
<PAGE>
3. Add Item 7(b)(2) as follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(b) Pro forma financial information.
FAI FINANCE CORPORATION
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The unaudited proforma financial statements of the the Company comprising
proforma statement of income for the six months ended December 31, 1997 and year
ended June 30, 1997 have been prepared in accordance with US generally accepted
accounting principles (GAAP), based upon the Consolidated statements of income
of FAI Finance Corporation Pty Limited and FAI Finance Corporation (NZ) Ltd,
after giving effect to the pro forma adjustments described in the notes thereto
as if the 50 percent acquisition by Home Security International, Inc had been in
effect on July 1, 1996.
The unaudited proforma statements of income do not purport to represent
what the results of operations of the Company would actually have been if the
events or transactions described above had in fact been in effect throughout the
entire said periods or to project the results of operations of the Company for
any future date or period.
The unaudited proforma statements of income should be read in conjunction
with the historical consolidated financial statements of the Company, including
the notes thereto, and other financial information included elsewhere in Form-
8K.
<PAGE>
FAI FINANCE CORPORATION
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited proforma Statement of Income for the six months ended December 31,
1997
<TABLE>
<CAPTION>
Pro Forma
FFC Consolidated Adjustment Pro Forma
$US $US Notes $US
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income - related parties -
- others 4,068,408 4,068,408
Interest expense - related parties (627,313) (539,215) (1) (1,166,528)
- others (566,196) (566,196)
---------- ----------
Net interest income 2,874,899 2,335,684
Management fee income - related party 22,349 22,349
---------- ----------
Operating revenues 2,897,248 2,358,033
General and administrative expenses (1,649,937) (1,649,937)
Bad debts and allowances for losses (309,565) (309,565)
---------- ----------
Income before income taxes 937,746 398,531
Income tax expense (335,587) 194,118 (2) (141,469)
---------- ----------
Net Income 602,159 257,061
</TABLE>
- ----------------
(1) Represents interest charges on loan balances due to FAI Insurances Limited,
FAI General Insurance Company Limited and FAI Home Security Holdings Pty
Limited which will bear interest at the Westpac indicator rate as of
January 1, 1997. Prior to January 1, 1997 the above mentioned loans were
non-interest bearing. The proforma interest has been charged monthly in
arrears on loan balances at the historic Westpac Bank indicator rate.
(2) The tax effect of the interest charges. Taxation expense has been
calculated at the Australian tax rate of 36%.
<PAGE>
FAI FINANCE CORPORATION
PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited proforma Statement of Income for the year ended June 30 , 1997
<TABLE>
<CAPTION>
Pro Forma
FFC Consolidated Adjustment Pro Forma
$US $US Notes $US
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income - related parties -
- others 6,399,516 6,399,516
Interest expense - related parties (755,741) (764,524) (1) (1,520,265)
- others (1,170,661) (1,170,661)
---------- ----------
Net interest income 4,473,114 3,708,590
Management fee income - related party 61,675 61,675
---------- ----------
Operating revenues 4,534,789 3,770,265
General and administrative expenses (2,342,807) (2,342,807)
Bad debts and allowances for losses (507,782) (507,782)
---------- ----------
Income before income taxes 1,684,200 919,676
Income tax expense (580,205) 275,229 (2) (304,976)
---------- ----------
Net Income 1,103,995 614,700
- --------------
</TABLE>
(1) Represents interest charges on loan balances due to FAI Insurances
Limited, FAI General Insurance Company Limited and FAI Home Security Holdings
Pty Limited which will bear interest at the Westpac indicator rate as of January
1, 1997. Prior to January 1, 1997 the above mentioned loans were non-interest
bearing. The proforma interest has been charged monthly in arrears on loan
balances at the historic Westpac Bank indicator rate.
(2) The tax effect of the interest charges. Taxation expense has been
calculated at the Australian tax rate of 36%.
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this 8-K report 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
(Principal Executive Officer)
By: /s/ Mark Whitaker
----------------------------------------
Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: March 15, 1998
