<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): October 1, 1998
---------------
Home Security International, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 333-26399 98-0169495
- ------------------------------ ----------- ------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File number) Identification No.)
</TABLE>
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>
Item 5. Acquisition of Assets
As of September 30, 1998, Home Security International, Inc. (the "Company")
executed an amendment to the Stock Purchase Agreement, dated as of July 17,
1998, ("Purchase Agreement") through which the Company will acquire 100% of the
issued and outstanding stock of Integrated International Home Security Limited
("IIHSL"), a British Virgin Islands company that owns 75.04 % of the issued and
outstanding common stock of Ness Security Products Pty Ltd., a company organized
under the laws of Australia ("Ness"), a leading designer and manufacturer of
security alarm products in Australia and the Company's sole supplier of its
SecurityGuard alarm (the "Transaction"). A Report on Form 8-K with Exhibits was
filed on October 7, 1998 describing the Transaction and is hereby incorporated
by reference as though fully set forth herein. The Company continues to pursue
avenues by which to acquire the remaining 24.96% of Ness.
The Purchase Agreement, the five year convertible warrant, and the secured
promissory note, were filed as exhibits to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and are hereby incorporated by reference.
In addition, the combined financial statements of IIHSL are attached hereto as
Item 7(a) and the pro forma financial information of the Registrant and IIHSL is
attached hereto as Item 7(b).
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) IIHSL Financial Information
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Integrated International Home Security Limited
We have audited the consolidated balance sheet of Integrated International Home
Security Limited (the "Company") as of June 30, 1998 and the related
consolidated statements of income, cashflows and changes in shareholders' equity
for the year then ended (all expressed in United States dollars). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
the results of its operations, its cashflows and its changes in shareholders'
equity for the year then ended in accordance with generally accepted accounting
principles in the United States of America.
The consolidated balance sheet of the Company as of September 30, 1998 and the
consolidated statements of income, cashflows and changes in shareholders' equity
for the three month period ended September 30, 1998 were not audited by us and,
accordingly, we do not express an opinion on them.
/s/ Deloitte & Touche
November 27, 1998
British Virgin Islands
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months
Year Ended ended
June 30, September, 30
---------- -------------
1998 1998
Note $US $US
---- ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Net Sales.................................. 2 24,223,877 5,720,174
Cost of goods sold......................... (13,455,073) (3,561,727)
----------- ----------
Gross profit............................... 10,768,804 2,158,447
General and administrative expenses........ (5,705,936) (1,075,202)
Research and development expenses.......... (851,159) (175,822)
----------- ----------
Income from operations..................... 4,211,709 907,423
Interest income - other.................... 13,899 1,829
Interest expenses - other.................. (126,997) (15,439)
----------- ----------
Income before taxes and minority interest.. 4,098,611 893,813
Income tax expense......................... 12 (1,451,887) (403,365)
----------- ----------
Income before minority interest............ 2,646,724 490,448
Minority interest.......................... (781,785) (122,416)
----------- ----------
Net Income................................. 1,864,939 368,032
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, September 30,
---------- -------------
1998 1998
Note $US $US
---- ---------- -------------
ASSETS
- ------
(Unaudited)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents................... 458,355 28,263
Accounts receivable, net.................... 3 3,772,704 3,641,870
Inventories................................. 4 4,771,845 5,515,991
Prepaid expenses and other
current assets............................ 5 45,191 466,237
---------- -------------
Total current assets 9,048,095 9,652,361
Non - current assets
Plant and equipment, net.................... 6 1,536,605 1,588,336
Intangibles, net............................ 7 234,022 216,791
Deferred income taxes....................... 12 375,470 343,263
---------- -------------
Total non - current assets 2,146,097 2,148,390
---------- -------------
Total assets 11,194,192 11,800,751
========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft.............................. - 25,092
Payables - trade............................ 3,027,063 3,409,859
Accrued liabilities......................... 621,432 689,234
Lease liability............................. 10 219,367 158,791
Income tax payable.......................... 12 1,142,889 1,322,662
Current portion of long term borrowings..... 8 619,200 442,800
---------- -------------
Total current liabilities............. 5,629,951 6,048,438
Non - current liabilities
Lease liability............................. 10 476,719 454,546
Accrued liabilities......................... 53,212 -
Total non - current liabilities 529,931 454,546
---------- -------------
Total liabilities 6,159,882 6,502,984
Minority interest in subsidiary company....... 1,546,615 1,669,033
Shareholders' equity
Common stock $1.00 value; 52,557 shares
authorized issued and outstanding......... 52,557 52,557
Additional paid in capital.................. 470,610 470,610
Accumulated other comprehensive loss........ (622,745) (849,738)
Retained earnings........................... 3,587,273 3,955,30
---------- -------------
Total shareholders' equity............ 3,487,695 3,628,734
---------- -------------
Total liabilities and shareholders'
equity.............................. 11,194,192 11,800,751
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASHFLOWS
------------------------------------
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
June 30, September 30,
1998 1998
$US $US
---------- ------------
<S> <C> <C>
Cashflow from operating activities
Net income........................................................ 1,864,939 368,032
Adjustments to reconcile net income to net cash
from operating activities:
Minority interest................................................. 755,985 122,418
Depreciation...................................................... 186,778 86,192
Amortization of goodwill.......................................... 299,920 6,297
Amortization of leased assets..................................... 229,515 50,761
Profit on sale of property, plant and equipment................... 53,380 --
Finance lease costs............................................... 88,882 17,238
Deferred taxes and income tax payable............................. 315,778 247,675
Provision for losses on accounts receivable....................... 82,227 3,542
Provision for obsolescence........................................ 193,926 26,568
(Increase) decrease in operating assets:
Accounts receivable - trade....................................... (1,285,683) (48,183)
Inventories....................................................... (1,358,512) (992,661)
Prepaid expenses and other assets................................. 19,090 (309,580)
Increase (decrease) in operating liabilities:
Accounts payable.................................................. 564,113 111,711
Accrued liabilities............................................... 243,874 334,721
---------- ----------
Net cash provided by operating activities.............................. 2,254,212 24,731
---------- ----------
Cashflow from investing activities
Proceeds from sale of plant and equipment......................... 11,573 --
Acquisition of business assets.................................... -- --
Consideration for acquisition of subsidiary,
net of cash acquired............................................ (411,936) --
Additions to plant and equipment.................................. (465,427) (252,925)
---------- ----------
Net cash provided by/(used in) investing activities.................... (865,790) (252,923)
Cashflow from financing activities
Capital subscribed................................................ 522,167 --
Finance lease payments............................................ (294,389) (67,467)
Increase (decrease) in bank overdraft............................. -- 25,092
Receipts from related parties..................................... (493,564) --
Net proceeds from (repayments of) borrowings...................... (681,000) (147,600)
---------- ----------
Net cash (provided by) financing activities (946,786) (189,975)
Net increase/(decrease) in cash held (441,636) (418,167)
Cash at the beginning of the financial period 66,824 458,355
Effect of exchange rate change on cash (50,105) (11,925)
---------- ----------
Cash at the end of the financial period 458,355 28,263
Supplemental disclosure of cashflow information:
Interest paid 126,997 13,592
Income taxes paid 1,104,592 157,708
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Capital Stock Issued Additional Retained Other Total
-------------------- Paid-in Comprehensive Earnings Comprehensive Shareholders'
Shares Amount Capital Income Unappropriated Loss Equity
------ ------ ---------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 1,000 1,000 - 1,722,334 (48,303) 1,675,031
Comprehensive income
Net Income 1998 [1,864,939] 1,864,939 1,864,939
Other Comprehensive income, net of tax
Foreign currency translation
Adjustment (574,442)
----------
Other Comprehensive income (574,442) (574,442) (574,442)
Comprehensive income [1,290,497]
==========
Additional paid-in capital 51,557 51,557 470,610 522,167
------ ------ ------- --------- -------- ---------
BALANCE, JUNE 30, 1998 52,557 52,557 470,610 3,587,273 (622,745) 3,487,695
Comprehensive income
Net Income July 1 - September 30, 1998 [368,032] 368,032 368,032
Other Comprehensive income, net of tax
Foreign currency translation
Adjustment (226,993)
----------
Other Comprehensive income (226,993) (226,993) (226,993)
Comprehensive income [141,039]
==========
Additional paid-in capital -
------ ------ ------- --------- -------- ---------
BALANCE, SEPTEMBER 30, 1998 52,557 52,557 470,610 3,955,305 (849,738) 3,628,734
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 : NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a) Nature of Business -
Integrated International Home Security Limited (the "Company") was
incorporated in the British Virgin Islands on September 19, 1995 under the
International Business Companies Act and acts as an investment holding company.
On October 3, 1995 the Company acquired 51.84% of Ness Security Products Pty
Limited ("Ness"), incorporated in Sydney, Australia on June 22, 1995.
Subsequently the Company acquired a further 23.2% to bring its total holdings in
Ness to 75.04% as at June 30, 1998. On October 3, 1995 Ness acquired the
business of manufacture, assembly and sale of security alarms from Westinghouse
Break & Signal Company (Australia) Limited ("Westinghouse") a member of the BTR
Nylex Group for the fair value of net business assets, being $3,686,726. On July
29, 1997 Ness acquired 100% of Ness Security Products (Asia) Limited ("Ness
Asia"), formerly National Fire & Safety (S.E. Asia) Limited, incorporated in
Hong Kong on May 12, 1992. On September 3, 1997 Ness acquired a 50% holding in
Ness Security USA, Inc ("Ness USA"), incorporated in Florida on November 12,
1996. Ness acquired the remaining 50% of shares in Ness USA on March 3, 1998.
The Company acts as an investment holding company. Ness is the principal
trading entity. The main business activities of Ness are the design, manufacture
and sale of high quality security products. Ness is the exclusive supplier of
Home Security International, Inc.'s ("HSI") security alarm system,
"SecurityGuard". Currently more than 75 percent of all Ness sales are made to
subsidiary's of HSI.
b) Principles of Consolidation and Basis of Preparation -
The accompanying consolidated financial statements comprise the accounts of
the Company and its controlled entities, Ness, Ness USA and Ness Asia and have
been prepared in accordance with generally accepted accounting principles in the
United States of America ("US GAAP"). All intercompany accounts and transactions
have been eliminated on consolidation.
The minority interest represents the 24.96% separate public ownership of
Ness Security Products Pty Limited.
The acquisition of both Ness Asia and Ness USA as at September 30, 1998
were accounted for as 100% acquisitions.
The financial statements should be read in conjunction with the Form-8K for
Home Security International, Inc filed on October 7, 1998.
c) Cash and Cash Equivalents -
Cash and cash equivalents consist of cash and short-term investments with
maturities of three months or less from the date of purchase. Cash and cash
equivalents are stated at cost, which approximates market value.
d) Foreign Currencies -
The consolidated financial statements are translated into US dollars to
reflect the Company's reporting currency. The assets and liabilities are
translated at the balance sheet date exchange rate. The profit and loss items
have been translated at the average exchange rates throughout each period. The
resulting translation effects are accumulated as a separate component in
shareholders' equity.
The functional currency of each entity is as follows:
Integrated International Home Security Limited - US dollars
Ness - Australian dollars
Ness USA - US dollars
Ness Asia - Hong Kong dollars.
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
e) Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
f) Income Taxes -
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109 ("Accounting for Income Taxes") which
requires an asset and liability method of accounting for income taxes. Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
g) Revenue Recognition -
Revenue is recognized at the time of shipment of products and is shown net
of returns and rebates. Ness warrants its products against defects in design,
materials and workmanship for one year. A provision for estimated future costs
relating to warranty expenses is recorded when products are shipped.
h) Allowance for Doubtful Accounts -
Management reviews the collectability of accounts receivable on a regular
basis. Amounts, if any, which are determined to be uncollectable, are provided
for in the financial statements in the period such determination is made.
i) Inventories -
Inventories consist of work in progress, finished goods and raw materials.
Inventories are stated at the lower of cost (first-in, first-out method), or
market. The elements of cost include direct labour and materials, variable
overhead and the full absorption of fixed manufacturing overhead. Provision for
potentially obsolete or slow moving inventory is made based on managements'
analysis of inventory levels and future sales forecasts.
j) Capital Assets -
Capital assets are recorded at cost. Maintenance and repairs are expenses
in the period to which they relate. Depreciation on capital assets is calculated
using the straight-line method over the following estimated useful lives of the
assets:
Years
-----
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures.. 10.0
Office equipment........ 6.5
Plant and machinery..... 5.0
Motor vehicles.......... 6.5
</TABLE>
k) Leased Assets -
Leased assets classified as finance leases are capitalized as fixed assets.
The amount initially brought to account is the present value of minimum lease
payments. A finance lease is one, which effectively transfers from the lessor to
the lessee substantially all the risks and benefits incidental to ownership of
the leased property. Capitalized leased assets are amortized on a straight-line
basis over the estimated useful life of the asset. Finance lease payments are
allocated between interest expense and the reduction of lease liability over the
term of the lease. The interest expense is determined by applying the interest
rate implicit in the lease to the outstanding lease liability at the beginning
of each lease payment period.
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Operating lease payments are charged as an expense in the period in which
they are incurred.
l) Acquisition of assets -
Assets acquired are recorded at the cost of acquisition, being the purchase
consideration determined as at the date of acquisition, plus costs incidental to
the acquisition.
m) Research and Development -
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at discovery of new knowledge
which will be useful in developing new products or processes, or significantly
enhancing existing products or production processes, and the implementation of
such through design, testing of product alternatives or construction of
prototypes. Ness expenses all research and development costs as they are
incurred.
n) Pension and other Benefit Plans -
Ness contributes to a pension plan on behalf of its employees. The pension
plan is an accumulation fund and Ness has no liability to members under the
plan. Ness has no other pension or other employment benefit plans.
o) Intangible Assets -
Intangible assets represent the excess of cost over fair value of assets
acquired and are amortized using the straight- line method over ten years. The
carrying value of intangible assets is periodically reviewed by Ness based on
the expected future undiscounted operating cash flows of the related business
unit. Goodwill relating to Ness USA was fully amortized as at June 30, 1998,
based on management's assessment of the expected future undiscounted operating
cash flows of Ness USA. Based upon its most recent analysis and subsequent
adjustments, management believes that no material impairment of intangible
assets exists at September 30, 1998.
p) Derivative Financial Instruments -
Ness periodically enters into forward currency exchange contracts and
options to manage the risk of foreign currency fluctuations when purchasing raw
materials offshore. The change in fair value of the contracts is recognized
immediately and included in the determination of net income. Ness is not a
trader in derivative securities, and has not used speculative derivative
products for the purpose of generating earnings from changes in market
conditions.
q) New Accounting Pronouncements -
As of July 1, 1998 the company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses net income and foreign currency
translation adjustments, in the statement of changes in shareholders' equity.
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2: NET SALES
<TABLE>
<CAPTION>
Year Ended Three months ended
June 30, September 30,
1998 1998
---------- ------------------
(Unaudited)
$US $US
---------- ------------
<S> <C> <C>
Product sales............................ 24,473,427 5,616,674
Other.................................... 18,111 103,500
---------- ------------
Gross sales.............................. 24,491,538 5,720,174
Less: returns and rebates................ (267,661) -
---------- ------------
Net sales................................ 24,223,877 5,720,174
NOTE 3: ACCOUNTS RECEIVABLE-TRADE
June 30, September 30,
(Unaudited)
-------- -----------
1998 1998
$US $US
-------- -----------
Accounts Receivable...................... 3,883,837 3,752,490
Less: allowances for doubtful debts...... (111,133) (110,620)
--------- -----------
3,772,704 3,641,870
NOTE 4: INVENTORIES
June 30, September 30,
(Unaudited)
--------- ------------
1998 1998
$US $US
--------- ------------
Finished goods........................... 2,568,648 2,651,202
Work in progress......................... 367,872 548,140
Raw materials............................ 2,280,590 2,771,524
---------- ------------
5,217,110 5,970,866
Less: provision for obsolescence......... (445,265) (454,875)
--------- ------------
4,771,845 5,515,991
NOTE 5: PREPAID EXPENSES AND OTHER CURRENT ASSETS
June 30, September 30,
(Unaudited)
--------- ------------
1998 1998
$US $US
--------- ------------
Prepayments.............................. 9,077 302,240
Director's loan.......................... 4,672 95,375
Sundry debtors........................... 31,442 68,622
--------- ------------
45,191 466,237
</TABLE>
The Director's loan is unsecured, repayable on demand and bears interest at
commercial rates.
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6: CAPITAL ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
---------- -------------
1998 1998
$US $US
---------- -------------
<S> <C> <C>
Furniture and fixtures................................ 126,873 124,410
Office equipment...................................... 196,095 204,114
Plant................................................. 1,594,828 1,761,004
Motor vehicles........................................ 326,004 310,841
Less: Accumulated depreciation........................ (707,195) (812,033)
---------- ---------
1,536,605 1,588,336
</TABLE>
NOTE 7: INTANGIBLES
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
---------- -------------
1998 1998
$US $US
---------- -------------
<S> <C> <C>
Initial goodwill on Investment........................ 506,724 450,280
Amortization of goodwill.............................. (272,702) (233,489)
---------- ---------
234,022 216,791
</TABLE>
Goodwill represents the excess of the purchase price paid by the immediate
parent entity, Ness Security Products Pty Limited, over the fair value of assets
acquired when Ness purchased its 100% shareholding in Ness Asia on July 29,
1997, its 50% shareholding in Ness USA on September 3, 1997 and the remaining
50% shareholding in Ness USA on March 3, 1998. Goodwill relating to Ness Asia is
being amortized on the straight-line basis over a period of 10 years. Goodwill
relating to Ness USA was fully amortized as at June 30, 1998, based on
management's assessment of the expected future undiscounted operating cash flows
of Ness USA.
NOTE 8: LONG TERM BORROWINGS
On June 6, 1996 Ness entered into a $1,771,200 loan agreement with Westpac
Banking Corporation with a duration of 3 years maturing on March 31, 1999.
Interest is payable quarterly in advance at a rate of 10.2%. The loan is secured
by a registered mortgage debenture over all assets and uncalled capital of Ness
Security Products Pty Limited.
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
---------- -------------
1998 1998
$US $US
---------- -------------
<S> <C> <C>
Total long term borrowings........................... 619,200 442,800
Less: current portion of long term borrowing......... 619,200 442,800
---------- ---------
Long term borrowings - -
</TABLE>
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 9: FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information for certain financial instruments,
for which it is practicable to estimate that value. The carrying amounts
reflected in the combined balance sheets for cash equivalents, accounts
receivable and payable approximate their respective fair values due to short
maturities of those instruments.
NOTE 10: LEASE COMMITMENTS
Ness leases several production facilities and motor vehicles under
long-term leases and has the option to purchase the facilities for a normal cost
at the termination of the lease. Included in plant and equipment are the
following assets held under capital leases:
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
--------- -------------
1998 1998
$US $US
--------- -------------
<S> <C> <C>
Motor vehicles................................... 286,991 273,643
Office equipment................................. 32,829 29,520
Plant and machinery.............................. 721,748 688,179
--------- --------
1,041,568 991,342
Less: accumulated amortization................... (401,803) (433,625)
--------- --------
639,765 557,717
</TABLE>
The following is a schedule by year of future gross minimum rental payments
for all finance leases reconciled to the present value of net minimum finance
lease payments as of September 30, 1998.
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
--------- -------------
1998 1998
$US $US
--------- -------------
<S> <C> <C>
Payable not later than one year..................... 283,201 269,873
Payable later than one year but not later than two
years............................................. 339,860 310,194
Payable later than two years but not later than
three years....................................... 137,909 85,413
Payable later than three years but not later than
four years........................................ 31,572 30,092
Payable later than four years but not later than
five years........................................ 18,417 10,035
--------- --------
Minimum finance lease payments...................... 810,959 705,607
Less: amount representing interest.................. 114,873 92,270
--------- --------
Present value of net minimum finance lease payments 696,086 613,337
Less: current portion............................... 219,367 158,791
--------- --------
Long-term obligations under finance lease........... 476,719 454,546
</TABLE>
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The operating lease commitments of the Ness consist of property rentals used
as offices in Sydney, Melbourne, Brisbane and Perth.
<TABLE>
<CAPTION>
June 30, September 30,
(Unaudited)
-------- -------------
1998 1998
$US $US
-------- -------------
<S> <C> <C>
Payable not later than one year............................... 268,511 238,116
Payable later than one year but not later than two years...... 192,049 178,335
Payable later than two years but not later than three years... 173,659 165,582
Payable later than three years but not later than four years.. 166,229 154,955
Payable later than four years but not later than five years... 105,866 63,089
Payable later than five years................................. - -
-------- --------
906,314 800,077
</TABLE>
NOTE 11: SEGMENT INFORMATION
The Company's subsidiaries operate principally in one industry segment,
which includes the design, manufacture and sale of high quality security
products. Ness's area of current operations is principally in Australia, with
subsidiaries in the USA and Hong Kong. Information about the Company's
operations split by geographic location is shown below.
<TABLE>
<CAPTION>
Year Ended Three months ended
June 30, September 30,
1998 1998
---------- ------------------
(Unaudited)
$US $US
---------- ------------------
<S> <C> <C>
Net Sales:
Australia................................... 22,454,219 5,520,250
Hong Kong................................... 1,113,169 199,924
United States............................... 656,489 -
---------- ---------
24,223,877 5,720,174
Income (Loss) from Operations:
Australia................................... 3,999,244 1,004,704
Hong Kong................................... 4,298 (3,334)
United States............................... 208,167 (93,947)
---------- ---------
4,211,709 907,423
Depreciation:
Australia................................... 180,677 61,139
Hong Kong................................... 1,979 545
United States............................... 4,122 24,508
---------- ---------
186,778 86,192
Amortization:
Australia................................... 491,514 57,058
Hong Kong................................... 6,856 -
United States............................... 31,065 -
---------- ---------
529,435 57,058
Capital expenditure:
Australia................................... 458,368 258,830
Hong Kong................................... 1,998 1,808
United States............................... 5,061 -
---------- ---------
465,427 260,638
</TABLE>
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
September 30,
June 30, (Unaudited)
---------- ------------
1998 1998
$US $US
---------- ------------
<S> <C> <C>
Identifiable Assets
Australia....................................... 10,138,759 11,516,427
Hong Kong....................................... 347,028 256,061
United States................................... 250,050 --
---------- ------------
10,735,837 11,772,488
Corporate assets................................ 458,355 28,263
---------- ------------
11,194,192 11,800,751
</TABLE>
Identifiable assets are those assets that are identified with the operation
in each geographic area. Corporate assets are principally cash and short-term
deposits.
NOTE 12: INCOME TAX
The actual income tax expense attributable to net income differed from the
amounts computed by applying local federal tax rates to income before taxes as a
result of the following:
<TABLE>
<CAPTION>
Year Ended Three months ended
June 30, September 30,
1998 1998
------------------
---------- (Unaudited)
$US $US
---------- ------------------
<S> <C> <C>
Expected income tax expense at statutory rates... 1,475,884 399,963
Tax effect of permanent and other differences:
Non - deductible expenses and other items....... 27,967 3,266
Non - assessable expenses and other items....... (61,956) (2,131)
Amortization of goodwill........................ 96,788 2,267
Timing difference and tax losses not bought to
account as deferred tax assets................. (101,718) --
Other........................................... 14,922 --
Restatement of purchased future tax benefits.... -- --
---------- ------------------
1,451,887 403,365
The tax expense is split between:
Current......................................... 1,142,889 1,322,662
Deferred........................................ 308,998 (919,297)
---------- ------------------
1,451,887 403,365
</TABLE>
<PAGE>
INTEGRATED INTERNATIONAL HOME SECURITY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
September 30,
June 30, (Unaudited)
----------- -------------
1998 1998
$US $US
----------- -------------
<S> <C> <C>
Deferred tax assets are comprised of timing differences on:
Provisions not currently deductible for tax purposes for:
Doubtful debts.................................................... 19,347 19,722
Warranty.......................................................... 33,746 32,176
Stock obsolescence................................................ 86,226 91,780
Investment diminution............................................. 83,944 36,538
Employee entitlements............................................. 152,213 162,972
Other............................................................. (36,544) (35,819)
Sundry accruals....................................................... 46,310 43,455
Prepayments........................................................... (9,772) (7,561)
----------- -------------
Net deferred tax assets.................................................. 375,470 343,263
</TABLE>
<PAGE>
(b) Pro Forma Financial Information
PRO FORMA FINANCIAL STATEMENTS
Introduction
The accompanying unaudited pro forma statements of operations for the
fiscal year ended June 30, 1998 and the three months ended September 30, 1998
have been prepared after giving effect to the pro forma adjustments described in
the notes thereto as if the 50% acquisition of FAI Finance Corporation Pty
Limited ("FFC") and the 100% acquisition of Integrated International Home
Security Limited ("IIHSL") took place on July 1, 1997. The unaudited pro forma
balance sheet as of September 30, 1998 has been prepared as if the IIHSL
acquisition took place on September 30, 1998. Pro forma earnings per share
amounts have been included in the pro forma statements of operations assuming
the shares issued pursuant to the events included in the statements of
operations were outstanding during the period described therein.
The unaudited pro forma statements of operations do not purport to
represent what the results of operations or financial condition of the Company
would actually have been for the corresponding period if the respective events
or transactions described above had in fact been in effect throughout such
periods or to project the results of operations or financial condition of the
Company for any future date or period.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of IIHSL as found in this Form-8KA, and
the historical financial statements of Home Security International, Inc ("HSI")
and FFC, as found in the Annual Report on Form 10-K for the fiscal year ended
June 30, 1998, and the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
<PAGE>
Pro Forma Statement of Operations for three months ended September 30, 1998
<TABLE>
<CAPTION>
HSI IIHSL
Consolidated Consolidated Pro Forma
September 30, September 30, Pro Forma September 30,
1998 1998 (1) Adjustments Note 1998
------------- ------------- ----------- ---- -------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $10,226 $ 5,720 $(3,169) (2) $12,777
Cost of goods sold - other (5,862) (3,562) 3,169 (2) (6,255)
- inventory revaluation - - (66) (3) (66)
------- ------- -------
Gross profit 4,364 2,158 6,456
General and administrative expenses (1,907) (1,075) (158) (4) (3,140)
Research and development - (176) (176)
------- ------- -------
Income from operations 2,457 907 3,140
Interest income (expense), net 18 (14) (150) (5) (146)
------- ------- -------
Income before income taxes, equity in income
of affiliated companies and minority interest 2,475 893 2,994
Income tax expense (917) (403) 78 (6) (1,242)
------- ------- -------
Income before equity in income of affiliated
companies and minority interest 1,558 490 1,752
Equity in income of affiliated companies 48 - 48
Minority interest - (122) (122)
------- ------- -------
Net income (loss) $ 1,606 $ 368 $ 1,678
======= ======= =======
Diluted weighted average shares of Common Stock
outstanding 5,162 400 (7) 5,562
Diluted net income per share of Common Stock $ 0.31 $ 0.30
</TABLE>
- ----------------------
(1) The consolidated information reported for IIHSL reflects 100% of the
statement of operations data of Ness Security Products Pty Limited ("Ness"),
adjusted by the "Minority Interest" line entry to reflect IIHSL's historical
ownership of 75.04% of Ness.
(2) Represents elimination of all sales and purchases between Ness and HSI for
the three months ended September 30, 1998.
(3) Represents elimination of profit recognized by Ness on the net change in
inventory carried by HSI for the three months ended September 30, 1998.
(4) Represents the amortization charge for the period of $158,000 resulting from
the amortization of intangible assets of $12,664,000 arising from the
acquisition of IIHSL using an amortization period of 20 years.
(5) Represents the imputed interest expense on the promissory note balance
outstanding during the period, a non-cash item.
(6) Represents the tax effect of the adjustments referred to in Notes 3 and 5
listed above. The amortization of intangible assets has no tax effect.
Taxation expense has been calculated at the Australian effective tax rate
of 36%.
(7) Represents issuance of 400,000 shares of Common Stock in connection with the
IIHSL acquisition and the dilutive effect, if any, of all outstanding
options and warrants.
<PAGE>
Pro Forma Statement of Operations for fiscal year ended June 30, 1998
<TABLE>
<CAPTION>
HSI
Consolidated IIHSL Pro Forma
June 30, Consolidated (1) Pro Forma June 30,
1998 June 30, 1998 Adjustments Note 1998
------------ ---------------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Net sales $ 44,119 $ 24,224 $(18,802) (2) $ 49,541
Cost of goods sold - other (26,295) (13,455) 18,802 (2) (20,948)
- inventory revaluation - - (348) (3) (348)
-------- -------- ---------
Gross profit 17,824 10,769 28,245
General and administrative expenses (10,810) (5,706) (633) (4) (17,149)
Research and development - (851) (851)
-------- -------- ---------
Income from operations 7,014 4,212 10,245
Interest income (expense), net 226 (113) (622) (5) (509)
-------- -------- ---------
Income before income taxes, equity in income
of affiliated companies and minority interest 7,240 4,099 9,736
Income tax expense (2,111) (1,452) 349 (6) (3,214)
-------- -------- ---------
Income before equity in income of affiliated
companies and minority interest 5,129 2,647 6,522
Equity in income of affiliated companies 252 - (19) (7) 233
Minority interest - (782) 106 (8) (676)
-------- -------- ---------
Net income (loss) $ 5,381 $ 1,865 $ 6,079
======== ======== =========
Diluted weighted average shares of Common Stock
outstanding 5,182 456 (9) 5,638
Diluted net income per share of Common Stock $ 1.04 $ 1.08
- ----------------------
</TABLE>
(1) The consolidated information reported for IIHSL reflects 100% of the
statement of operations data of Ness, adjusted by the "Minority Interest"
line entry to reflect IIHSL's historical ownership of 71.04% of Ness, which
increased to 75.04% in June 1998. See Note 8 below.
(2) Represents elimination of all sales and purchases between Ness and HSI for
the fiscal year ended June 30, 1998.
(3) Represents elimination of profit recognized by Ness on the net change in
inventory carried by HSI for the fiscal year ended June 30, 1998.
(4) Represents the amortization charge for the period of $633,000 resulting from
the amortization of intangible assets of $12,664,000 arising from the
acquisition of IIHSL using an amortization period of 20 years.
(5) Represents the imputed interest expense on the promissory note balance
outstanding during the period, a non-cash item.
(6) Represents the tax effect of the adjustments referred to in Notes 3 and 5
listed above. The amortization of intangible assets has no tax effect.
Taxation expense has been calculated at the Australian effective tax rate of
36%.
<PAGE>
(7) Represents the Company's 50% equity in income (loss) of affiliated
companies for the six months ended December 31, 1997 as computed below.
(Pro Forma Reconciliation of Equity in Income (Loss)
Of Affiliated Companies for the six months ended December 31, 1997)
<TABLE>
<CAPTION>
FFC Pro Forma
Consolidated Adjustments Pro Forma
------------ ----------- ---------
<S> <C> <C> <C>
Income before taxes $ 938,000 (539,000) $ 399,000
Income tax expense (336,000) 194,000 (141,000)
------------ ---------
Net income $ 602,159 $ 258,000
============ =========
50 percent equity in income of FFC $ 129,000
Amortization of goodwill (148,000)
---------
Equity in loss of affiliated companies $ (19,000)
=========
</TABLE>
The equity in loss of FFC has been calculated on a pro forma basis after
adjusting for the inclusion of an interest expense on the loan balances due
from FFC to FAI Insurances Limited and FAI General Insurances Limited.
Prior to January 1, 1998 these loans were non interest bearing. Pro forma
interest has been charged monthly in arrears at the historic Westpac
Banking Corporation ("Westpac") indicator rate.
Equity in loss of affiliated companies is calculated after amortization of
goodwill of $5,891,000 arising from the acquisition of FFC on December 31,
1997. Goodwill has been amortized as if the acquisition of FFC had taken
place on July 1, 1997, over a period of 20 years, which result in an
amortization charge for the six month period ended December 31, 1997 of
$148,000.
(8) Represents the adjustment needed to reflect IIHSL's acquisition of an
additional 4% interest in Ness in June 1998.
(9) Represents issuance of 400,000 shares of Common Stock in connection with
the IIHSL acquisition and the dilutive effect, if any, of all outstanding
options and warrants.
<PAGE>
Pro Forma Balance Sheet as of September 30, 1998
<TABLE>
<CAPTION>
HSI IIHSL Pro
Consolidated Consolidated Forma
September 30, September 30, Pro Forma September 30,
1998 1998 Adjustments Note 1998
------------- ------------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
(in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 6,348 $ 28 $(2,500) (1) $ 3,876
Accounts receivable, net 1,624 3,642 (2,747) (2) 2,519
Inventories 2,145 5,516 7,661
Prepaid expenses and other current assets 1,780 466 (585) (3) 1,661
------- ------- ------- -------
Total current assets 11,897 9,652 (5,832) 15,717
------- ------- ------- -------
Non-current assets
Investment in partnership 289 - 289
Investment in affiliated companies 7,345 - 7,345
Plant and equipment, net 1,016 1,588 2,604
Intangibles, net 9,467 217 12,664 (5) 22,348
Deferred income taxes 966 344 1,310
Other non-current asset 4 - 4
------- ------- ------- -------
Total non-current assets 19,087 2,149 12,664 33,900
------- ------- ------- -------
Total assets $30,984 $11,801 $ 6,832 $44,617
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft $ - $ 25 $ - $ 25
Note payable--FAI Insurances Group 590 - 590
Note payable--Integral Investments Limited - - 378 (4) 378
Accounts payable--trade 2,945 3,410 (2,747) (2) 3,608
Accrued liabilities 744 689 1,433
Lease liability 26 158 184
Income taxes payable 2,262 1,323 3,585
Deferred income 683 - 683
Current portion of long term borrowings - 443 443
------- ------- ------- -------
Total current liabilities 7,250 6,048 (2,369) 10,929
------- ------- ------- -------
Non-current liabilities
Long term lease liability 29 455 484
Accrued liabilities 92 - 92
Deferred income 185 - 185
Note payable--FAI Insurances Group 3,926 - 3,926
Note payable--Integral Investments Limited - - 8,225 (4) 8,225
------- ------- ------- -------
Total non-current liabilities 4,232 455 8,225 12,912
------- ------- ------- -------
Total liabilities 11,482 6,503 5,856 23,841
------- ------- ------- -------
Minority interest 1,669 1,669
Shareholders' equity
Common stock 5 53 (52) (6) 6
Additional paid-in capital 16,111 471 4,133 (6) 20,715
Secured note issue (2,375) - (2,375)
Accumulated other comprehensive loss (1,178) (850) 850 (7) (1,178)
Retained earnings 6,939 3,955 (3,955) (7) 6,939
------- ------- ------- -------
Total shareholders' equity 19,502 3,629 976 24,107
------- ------- ------- -------
Total liabilities and shareholders' equity $30,984 $11,801 $ 6,832 $49,617
======= ======= ======= =======
</TABLE>
<PAGE>
(1) Represents the cash effect of the acquisition of IIHSL summarized as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment (reduced by $126,000 deposit paid concurrent
with the execution of the Purchase Agreement) $(2,300,000)
Non-refundable re-negotiation fee (200,000)
-----------
Cash reserves utilized $(2,500,000)
===========
</TABLE>
(2) Represents the elimination of Accounts receivable and Accounts payable
between HSI and IIHSL of $2,747,000.
(3) Represents prepaid acquisition expenses as of September 30, 1998.
(4) Represents the present value of a promissory note, secured by the IIHSL
Shares, discounted at a rate appropriate for a debt with similar terms and
credit ratings. Total nominal amount payable of $9,098,000, $400,000 of
which is due on June 30, 1999.
(5) Represents the goodwill generated from the Acquisition computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash payment $ 2,300,000
Initial deposit 126,000
Re-negotiation fee 200,000
Fair value of promissory note 8,603,000
Issuance of 400,000 shares in Common Stock at $10.25 per share 4,100,000
Issuance of 360,000 warrants (valued at $1.40 per share) 504,000
Acquisition expenses 460,000
Net identifiable assets IIHSL (3,629,000)
-----------
Purchase price in excess of tangible and other intangible
net assets $12,664,000
===========
</TABLE>
(6) Represents the impact of the Equity transactions of the Acquisition:
<TABLE>
<CAPTION>
<S> <C>
Issuance of 400,000 shares in Common Stock at $10.25 per share $4,100,000
Issuance of 360,000 warrants (valued at $1.40 per share) 504,000
Elimination of IIHSL Common Stock and Paid-in-Capital (523,000)
----------
Total $4,081,000
==========
</TABLE>
(7) Elimination of IIHSL accumulated other comprehensive loss and retained
earnings.
(c) Exhibits
23.1 Consent of Deloitte and Touche
<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/ Mark Whitaker
----------------------------
Mark Whitaker
Chief Financial Officer
Dated: December 13, 1998
<PAGE>
Exhibit 23.1
Deloitte & Touche
Omar Hodge Building
Wickhams Cay 1
P.O. Box 3083
Road Town, Tortola
British Virgin Islands
December 14, 1998
The Board of Directors
Home Security International, Inc.
Level 7/77 Pacific Highway
North Sydney, New South Wales 2060
Australia
Dear Sirs:
As independent accountants, we hereby consent to the use of our reports (and to
all references to our firm) included in or made as part of this Report on Form
8-K/A, and to the incorporation by reference in the registration statement on
Form S-8 of Home Security International, Inc.
Yours faithfully
/s/ Deloitte & Touche
