<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number
------------------------------
HOME SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0169495
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
Level 7, 77 Pacific Highway 2060
North Sydney, NSW Australia (Zip Code)
(Address of principal executive offices)
(011) (612) 9936-2424
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Number of Shares of Common Stock Outstanding on May 07, 1998: 5,150,500
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 March 31
------------------------
1997 1998
NOTE $US $US
-----------------------------------
ASSETS (Audited) (Unaudited)
- ------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents 118 5,803,023
Accounts receivable - related party 2,025,455 0
Accounts receivable - trade, net 3 615,560 1,246,001
Inventories 4 1,277,104 2,791,109
Prepaid expenses and other current assets 449,458 1,225,606
-------------------------
Total current assets 4,367,695 11,065,739
-------------------------
Non-current assets
Investment in affiliated companies 8 0 7,774,860
Plant and equipment, net 6 869,571 1,060,114
Intangibles, net 7 10,142,077 9,736,962
Deferred income taxes 549,393 685,324
Other non-current assets 3,748 3,492
Receivable - related party 24,366 0
-------------------------
Total non-current assets 11,589,155 19,260,752
-------------------------
Total assets 15,956,850 30,326,491
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft 31,795 0
Note payable - FAI Insurances group 8 0 694,117
Payables - trade 4,018,147 4,424,199
Accrued liabilities 1,105,612 944,042
Lease liability 19,068 6,413
Income tax payable 467,961 1,449,553
Deferred income 479,307 647,359
-------------------------
Total current liabilities 6,121,890 8,165,683
=========================
Non-current liabilities
Note payable - FAI Insurance group 8 0 5,032,346
Lease liability 44,877 10,165
Accrued liabilities 0 114,885
Deferred income 0 205,646
-------------------------
Total non-current liabilities 44,877 5,363,042
-------------------------
Total liabilities 6,166,767 13,528,725
=========================
Shareholders' equity
Preferred stock $.001 value; 1,000,000 shares
authorized, none outstanding
Common stock $.001 value; 20,000,000 shares
authorized; 1998: 4,500 5,150
5,150,500 March 31, 1998 (1997: 4,500,000)
shares outstanding
Additional paid-in capital 10,238,691 16,111,311
Secured Note 5 0 (2,375,000)
Foreign currency translation reserve (406,534) (470,442)
Related earnings (accumulated losses) (46,574) 3,526,747
-------------------------
Total shareholders' equity 9,790,083 16,797,766
-------------------------
Total liabilities and shareholders' equity 15,956,850 30,326,491
=========================
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-----------------------------------------------------------
1997 1998 1997 1998
NOTE $US $US $US $US
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 2 8,062,383 10,339,646 23,232,294 32,157,807
Cost of goods sold
- related party (894,232) - (2,668,985) -
- other (4,943,223) (5,879,396) (14,109,950) (18,864,997)
------------------------------------------------------------
Gross profit 2,224,927 4,460,250 6,453,359 13,292,811
Management fees received - related parties 32,148 - 461,305 -
General and administrative expenses (1,583,776) (2,956,244) (4,507,240) (8,083,449)
------------------------------------------------------------
Income from operations 673,299 1,504,006 2,407,424 5,209,362
Interest income - related party 208,968 - 491,051 -
- other 5,196 99,997 63,951 333,839
Interest expenses - related party - (111,425) - (111,425)
- other 6,043 (3,719) - (6,951)
------------------------------------------------------------
Income before taxes and equity in income
of affiliated companies 893,506 1,488,860 2,962,425 5,424,826
Income tax expense (354,565) (546,800) (1,124,066) (1,948,779)
------------------------------------------------------------
Income before equity in income of
affiliated companies 538,942 942,060 1,838,359 3,476,046
Equity in income of affiliated companies 8 - 97,274 - 97,274
------------------------------------------------------------
Net income 538,942 1,039,335 1,838,359 3,573,321
============================================================
Net income per common share
Earnings per common share $ 0.12 $ 0.20 $ 0.41 $ 0.70
Earnings per common share - $ 0.12 $ 0.20 $ 0.41 $ 0.69
assuming dilution
Weighted average number of shares
outstanding
Primary 4,500,000 5,150,500 4,500,000 5,117,141
Fully diluted 4,500,000 5,182,210 4,500,000 5,150,567
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------------------
1997 $US 1998 $US
---------------------------------------------
<S> <C> <C>
Cashflow from operating activities
Net income 1,838,359 3,573,321
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 33,422 143,407
Amortization of goodwill 273,685 494,844
Deferred taxes and income tax payable 322,492 840,079
Provision for losses on accounts receivable 23,895 305,036
(Increase) in operating assets:
Accounts receivable - trade (14,959) (977,673)
Inventories (259,667) (1,590,001)
Prepaid expenses and other assets (201,814) (848,757)
Increase in operating liabilities:
Accounts payable 933,636 681,494
Accrued liabilities 396,959 407,995
--------------------------------------
Net cash provided by operating activities 3,346,008 3,029,745
--------------------------------------
Cashflow from investing activities
Investment in affiliated companies 0 (2,130,285)
Short term loans, repayments received 2,559 23,107
Additions to plant and equipment (762,408) (391,245)
Receipt/(payments) from/(to) related parties (2,722,800) 1,802,920
--------------------------------------
Net cash (used in) investing activities (3,482,649) (695,503)
--------------------------------------
Cashflow from financing activities
Capital subscribed - 3,934,678
Share issue costs - (436,409)
Increase in bank overdraft - (29,615)
--------------------------------------
Net cash provided by financing activities - 3,468,654
--------------------------------------
Net increase/(decrease) in cash held (136,641) 5,802,896
--------------------------------------
Cash at the beginning of the financial period 369,837 118
Effect of exchange rate change on cash held 3,289 9
--------------------------------------
Cash at the end of the financial period 236,485 5,803,023
======================================
Supplemental disclosure of cash flow information:
Interest paid 314,915 118,376
Income taxes paid 595,981 796,153
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
HOME SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Capital Stock Issued Foreign
------------------------ Additional Currency Retained Total
Paid-in Secured Translation Earnings Shareholders'
Shares Amount Capital Note Reserve Unappropriated Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 4,500,000 4,500 10,238,691 0 (406,634) (48,574) 8,790,083
Foreign currency
translation adjustment 3,921 3,921
Additional paid-in capital 400,500 400 4,804,600 4,805,000
Issue of shares to Bradley
D. Cooper 250,000 250 2,499,750 (2,375,000) 125,000
-------------------------------------------------------------------------------------------------------
Less share issue costs (631,730) (631,730)
-------------------------------------------------------------------------------------------------------
Net Income July 1 -
September 30 1,435,441 1,435,441
------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 5,150,500 5,150 16,111,311 (2,375,000) (402,613) 1,368,867 14,727,715
Foreign currency
translation adjustment (177,576) (177,576)
Net income October 1 -
December 31, 1997 1,898,545 1,898,545
BALANCE, DECEMBER 31, 1997 5,150,590 5,150 16,111,311 (2,375,000) (580,189) 2,487,412 15,648,684
Foreign currency
translation adjustment 109,747 109,747
Net income January 1 -
March 31,1998 1,039,335 1,039,335
BALANCE, MARCH 31, 1998 5,150,590 5,150 16,111,311 (2,375,000) (470,442) 3,526,747 16,797,766
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 : SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation and Basis of Preparation -
The consolidated financial statements have been prepared by the Company, without
audit, with the exception of the June 30, 1997 consolidated balance sheet. The
financial statements include consolidated balance sheets, consolidated
statements of income, consolidated statement of changes in shareholders' equity,
and consolidated statements of cash flows. In the opinion of management, all
adjustments, which consist of normal recurring adjustments, necessary to present
fairly the financial position, results of operations and cash flows for all
periods have been made.
The financial statements should be read in conjunction with the consolidated
financial statements as of and for the fiscal year ended June 30, 1997 and the
footnotes thereto included in the Company's Annual Report on Form 10-K.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP").
The consolidated statements of income for the three and nine month periods
ended March 31, 1997 include the financial statements of the Company and FAI
Home Security (NZ) Limited and FAI Home Security (NZ) Trust as those entities
were under common control. It does not include the financial statements of the
Cooper International Group which was acquired on March 31, 1997.
All intercompany accounts and transactions have been eliminated.
b) Net income per Common Share -
For the periods ended March 31, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In accordance with
the requirements of SFAS No. 128, Earnings per common share for 1998 has been
calculated by dividing net income by the weighted average number of common
shares outstanding in the quarter. Earnings per share assuming dilution has been
computed based on the assumption that all stock options have been exercised.
Weighted average number of shares outstanding for the three months ended:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
<S> <C> <C>
Primary 4,500,000 5,150,500
Fully diluted 4,500,000 5,182,210
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 1 : SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Weighted average number of shares outstanding for the nine months ended:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1998
<S> <C> <C>
Primary 4,500,000 5,117,141
Fully diluted 4,500,000 5,150,567
</TABLE>
Net income per common share for 1997 has been calculated by dividing net income
by the number of shares outstanding following the reorganization in 1997.
Stock Option plan -
The Company accounts for its stock option plans (the "Option Plans") in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees. As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. FASB Statement No. 123, which
became effective in 1996, allows entities to continue to apply the provisions of
APB Opinion No.25 and require pro forma net earnings and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in FASB Statement No. 123 had been
applied. The Company has determined that the net income per common share would
not be materially affected by the provision of FASB Statement No. 123.
The accompanying notes are an integral part of these financial statements
7
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -(Continued)
(Unaudited)
<TABLE>
<CAPTION>
NOTE 2: NET SALES Three Months Ended March 31,
---------------------------------
1997 1998
---------------------------------
$US $US
<S> <C> <C>
Distributor sales 7,964,553 10,090,646
Other 150,097 344,107
---------------------------------
Gross sales 8,114,650 10,434,753
Less: returns and rebates (52,267) (95,107)
---------------------------------
Net sales 8,062,383 10,339,646
Nine Months Ended March 31,
---------------------------------
1997 1998
---------------------------------
$US $US
Distributor sales 23,019,224 31,563,680
Other 340,363 838,161
----------------------------------
Gross sales 23,359,587 32,401,841
Less: returns and rebates (127,293) (244,033)
----------------------------------
Net sales 23,232,294 32,157,807
NOTE 3: ACCOUNTS RECEIVABLE June 30, 1997 March 31, 1998
----------------------------------
$US $US
Accounts Receivable 745,280 1,679,571
Less: allowances for doubtful debt (129,720) (433,570)
----------------------------------
615,560 1,246,001
NOTE 4: INVENTORIES June 30, 1997 March 31, 1998
----------------------------------
$US $US
Wholesale stock 879,476 2,452,409
Sales aids 397,628 338,700
----------------------------------
1,277,104 2,791,109
</TABLE>
NOTE 5: SECURED NOTE
The Company has issued 250,000 shares at par value $0.001 to Bradley D.
Cooper in exchange for cash of $125,000 and the issue of a 5 year 7.0% semi-
annual interest bearing note secured by the shares issued to the value of
$2,375,000.
The accompanying notes are an integral part of these financial statements
8
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
NOTE 6: PLANT AND EQUIPMENT June 30, 1997 March 31, 1998
------------------------------
$US $US
------------------------------
<S> <C> <C>
Furniture and fixtures 168,457 225,073
Office equipment 157,051 224,478
Plant 47,607 3,871
Motor vehicles 164,884 273,266
Computer equipment 255,764 390,312
Leasehold improvements 114,140 161,745
Less: Accumulated depreciation (38,332) (218,631)
----------------------------
869,571 1,060,114
NOTE 7: INTANGIBLES June 30, 1997 March 31, 1998
------------------------------
$US $US
------------------------------
Initial goodwill 2,086,864 2,086,864
Increment of goodwill 8,716,208 8,716,208
Amortization of goodwill (660,995) (1,066,110)
----------------------------
10,142,077 9,736,962
</TABLE>
NOTE 8: FAI FINANCE CORPORATION 50% ACQUISITION
On December 31, 1997 the Company acquired 50 percent of FAI Finance
Corporation (FFC) from FAI Insurances, Ltd. FFC is a leading consumer finance
company in both Australia and New Zealand and finances more than 80% of all
customer accounts serviced by the Company's distributorship network in Australia
and New Zealand.
The purchase price of $7,016,525 is being vendor financed over a period of
five years at a fixed interest rate of 7.75% per annum payable monthly in
arrears ("FFC Note"). The first installment of $1,631,750 was paid on January 2,
1998 and no further principal installments are due during the three month period
ended March 31, 1998. Interest in the amount of $111,000 was paid on the FFC
Note for the three month period ended March 31, 1998. The Agreement also granted
the Company an option (the "Option") at no additional cost, exercisable over
four years from the date of the Agreement, to purchase the remaining 50%
interest in FFC, from FAI, for the same consideration plus 50% of FFC's retained
earnings at the time the Option is exercised. The total purchase price for the
remaining shares in FFC will be financed by FAI over four years from the date
the Option is exercised.
Further, in the event the Company, or any of its subsidiaries, receives funds
from any private or public issue of any debt or equity instruments, up to 40% of
the proceeds from such issue must be used to pay down the then outstanding
balance of the FAI Insurance Group Note.
The Company has filed a Form-8K in relation to this acquisition.
Reconciliation of equity in income of affiliated companies for the three
months ended March 31, 1998 is shown below.
<TABLE>
<CAPTION>
Three months ended March 31, 1998 $US
--------------------------------------
<S> <C>
50 percent of Net income of affiliated company - FFC 180,096
Amortization of goodwill - FFC (82,822)
--------------------------------------
Equity in income of affiliated companies 97,274
</TABLE>
The accompanying notes are an integral part of these financial statements
9
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 9: STOCK OPTION PLANS
The Company has two stock option plans.
1997 Stock Option Plan. The Company has adopted the 1997 Stock Option Plan
(the "1997 Plan"), under which the Compensation Committee may grant options to
purchase up to an aggregate of 750,000 shares of Common Stock to management,
employees and advisers of the Company. The 1997 Plan provides for the grant of
stock options ("Options"), including incentive stock options within the meaning
of Section 422 of the United States Internal Revenue Code of 1986, as amended
(the "Code"), and non-statutory stock options that do not qualify as stock
options under Section 422 of the Code ("Non-Statutory Options"). On July 15,
1997, the Company issued 250,000 Options to Bradley D. Cooper, exercisable at a
rate of 20% per year commencing on the first anniversary date of the IPO, at an
exercise price of $10.00 per share. In addition, on July 15, 1997, the Company
issued an additional 250,000 Options to key employees of the Company, other than
Bradley D. Cooper, which are exercisable at a rate of 20% per year commencing on
the first anniversary date of the effective date of the Company's IPO, at an
exercise price of $10.00 per share.
1997 Non-Employee Director Stock Option Plan. The Company has adopted the
1997 Non-Employee Director Stock Option Plan (the "Director Plan"), under which
50,000 shares of Common Stock have been authorized for issuance. Upon the
closing of the Company's IPO, all non-employee directors received options to
purchase 5,000 shares of Common Stock at $10.00 per share under the Director
Plan. On the day after each annual meeting of the shareholders of the Company,
provided that he or she continues to serve as a member of the Board of
Directors, all non-employee directors will receive options to purchase an
additional 2,500 shares of Common Stock at an exercise price equivalent to the
market price of the stock on the date of such grant. All such grants will be
Non-Statutory Options. On July 15, 1997, 20,000 options were issued to non-
executive directors. The Options granted under the Director Plan are
exercisable beginning six months from the date of grant.
The accompanying notes are an integral part of these financial statements
10
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997.
REVENUE: Total revenue increased by $2.3 million or 28% from $8.1 million for
the three months ended March 31, 1997 to $10.3 million for the three months
ended March 31, 1998. The increase in revenues is primarily due to two factors.
Sales revenue in the Australian market have increased by 40% from $5.3 million
for the three months ended March 31, 1997 to $7.4 million for the three months
ended March 31, 1998. This increase in revenue was attributable to an increase
in unit sales of 40% from 9,458 units for the three months ended March 31, 1997
to 13,262 units for the three months ended March 31, 1998. This included an
increase in international sales of 65% from 636 to 1,790. Additionally, revenues
of $1.3 million from the European, North American and South African markets,
which were not part of the Company in the three months ended March 31, 1997, are
included in the three months ended March 31, 1998.
COSTS OF GOODS SOLD: Cost of goods sold increased by $0.1 million from $5.8
million to $5.9 million. This represented a decrease in the percentage of total
revenue by approximately 15% from 72% to 57% for the three months ended March
31, 1997 and 1998, respectively. This decrease, however, was partly due to a
royalty fee charged for the FAI brand name by a related party, which is no
longer applicable. As adjusted to exclude this related party royalty charge of
$0.9 million, cost of goods for the three months ended March 31, 1997, was $4.9
million. As a percentage of total revenue, this represents a decrease of 4.0%
from 61% to 57% as compared to the three months ended March 31, 1998. The re-
classification of the Chief Executive Officer's compensation package resulted in
a decrease of $0.3 for the three months ended March 31, 1998 as compared to the
three months ended March 31, 1997.
MANAGEMENT FEES RECEIVED - RELATED PARTY: Management fees received - related
party for the three months ended March 31, 1997 comprises management fee income
totaling $0.03 million derived from the European and North American operations,
which for the three months ended March 31, 1998, is eliminated as an
intercompany transaction.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$3.0 million for the three months ended March 31, 1998, compared to $1.6 million
for the three months ended March 31, 1997. General and administrative expenses
for the three months ended March 31, 1998, however, include $0.7 million of
expenses relating to the European, North American and South African operations,
which were not part of the Company in the three months ended March 31, 1997.
Included in the $0.7 million is a provision of $0.1 million taken up in relation
to the Belgium market due to delays in the product approval process.
Additionally a $0.15 million charge was expensed in relation to the
establishment of the U.S. market. As adjusted to exclude management fee income
derived from the European and North American operations of $0.03 million, total
general and administrative expenses, as a percentage of revenue, increased 9% to
29% in the three months ended March 31, 1998 compared to 20% for the three
months ended March 31, 1997. The re-classification of the Chief Executive
Officer's compensation package resulted in an increase of $0.3 million or 3% as
a percentage of revenue, for the three months ended March 31, 1998 as compared
to the three months ended March 31, 1997.
11
<PAGE>
INCOME FROM OPERATIONS: Net income from operations increased from $0.7 million
for the three months ended March 31, 1997 to $1.5 million for the three months
ended March 31, 1998. As compared to the three months ended March 31, 1998, net
income from operations for the three months ended March 31, 1997 (as adjusted to
exclude both the related party royalty payments for the use of the FAI brand
name and management fee income derived from the European and North American
operations) remained steady at $1.5 million.
INTEREST INCOME: Interest income decreased from $220,000 for the three months
ended March 31, 1997 to $100,000 for the three months ended March 31, 1998.
However, the three months ended March 31, 1997 included related party interest
income of $209,000. Excluding interest income received from related parties for
the three months ended March 31, 1997, interest income increased from $11,000 to
$100,000 for the three months ended March 31, 1997 and 1998 respectively.
INTEREST EXPENSE: Interest expense for the three months ended March 31, 1998 is
$115,000. This includes interest payments of $111,000 to FAI Insurances Limited
with regards to the vendor financed loan initiated as part of the FAI Finance
Corporation acquisition. For the three months ended March 31, 1997 there was no
interest expense for the Company.
INCOME TAX EXPENSE: The effective rate of tax decreased from 40% for the three
months ended March 31, 1997 to 37% for the three months ended March 31, 1998.
This is attributable to the introduction of income earned in the United Kingdom,
South Africa and Canada which all have lower tax rates than Australia.
EQUITY IN INCOME OF AFFILIATED COMPANIES: Equity in income of affiliates for the
three months ended March 31, 1998 was $0.1 million. This was calculated by
taking the Company's 50 percent share of FAI Finance Corporation's net income of
$0.18 million for the three months ended March 31, 1998 and deducting
amortization of goodwill for the same period of $0.08 million. Equity in income
of affiliates was zero for the three months ended March 31, 1997 as the 50
percent acquisition of FFC took place on December 31, 1997.
NET INCOME: Net income increased from $0.54 million for the three months ended
March 31, 1997 to $1.04 million for the three months ended March 31, 1998.
However, this includes a related party royalty charge of $0.9 million, interest
income of $0.2 million and management fee income of $0.03 million. As adjusted
to exclude these related party charges, net income for the three months ended
March 31, 1997 was $0.96 million. As compared to net income of $1.04 million for
the three months ended March 31, 1998, this represents an increase of 8%.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997.
REVENUE: Total revenue increased by $8.9 million or 38% from $23.2 million for
the nine months ended March 31, 1997 to $32.2 million for the nine months ended
March 31, 1998. The increase in revenues is due to two factors.
Sales Revenue in the Australia/New Zealand market have increased by 30% from
$23.2 million for the nine months ended March 31, 1997 to $28.7 million for the
nine months ended March 31, 1998. This increase in revenue was attributable to
an increase in unit sales of 44% from 28,430 units for the nine months ended
March 31, 1997 to 40,899 units for the nine months ended March 31, 1998. This
included an increase in international sales of 210% from 1,618 to 5,008.
Additionally, revenues of $3.5 million from the European, North American and
South African markets, which were not part of the Company in the nine months
ended March 31, 1997, are included in the nine months ended March 31, 1998.
12
<PAGE>
COST OF GOODS SOLD: Cost of goods sold increased by $2.1 million from $16.8
million to $18.9 million. This represented a decrease in the percentage of total
revenue by approximately 13% from 72% to 59% for the nine months ended March 31,
1997 and 1998, respectively. This decrease, however, was partly due to a royalty
fee charged for the FAI brand name by a related party, which is no longer
applicable. As adjusted to exclude this related party royalty charge of $2.7
million, cost of goods for the nine months ended March 31, 1997, was $14.1
million. As a percentage of total revenue, this represents a decrease of 2.0%
from 61% to 59% as compared to the nine months ended March 31, 1998. This 2.0%
reduction was due primarily to a change in the Chief Executive Officer's
compensation package, from a commission basis (recorded in cost of goods sold)
for the nine months ended March 31, 1997, to a base salary plus 10% of net
profit after tax (recorded in general and administrative expenses) for the nine
months ended March 31, 1998. This resulted in a decrease in commissions of 2.8%,
as a percentage of revenue, for the nine months ended March 31, 1998.
MANAGEMENT FEES RECEIVED - RELATED PARTY: Management fees received - related
party for the nine months ended March 31, 1997 comprises management fee income
totaling $0.5 million derived from the European and North American operations,
which for the nine months ended March 31, 1998, is eliminated as an intercompany
transaction.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses were
$8.1 million for the nine months ended March 31, 1998, compared to $4.0 million
for the nine months ended March 31, 1997. General and administrative expenses
for the nine months ended March 31, 1998, however, include $2.0 million of
expenses relating to the European, North American and South African operations,
which were not part of the Company in the nine months ended March 31, 1997.
Included in the $2.0 million is a provision of $0.2 million taken up in relation
to the Belgium market due to delays in the product approval process.
Additionally a $0.15 million charge was expensed in relation to the
establishment of the U.S. market. As adjusted to exclude management fee income
derived from the European and North American operations of $0.5 million, total
general and administrative expenses, as a percentage of revenue, increased 5.6%
to 25% in the nine months ended March 31, 1998 compared to 19.4% for the nine
months ended March 31, 1997. The re-classification of the Chief Executive
Officer's compensation package resulted in an increase of $0.9 million or 3% as
a percentage of revenue for the nine months ended March 31, 1998 as compared to
the nine months ended March 31, 1997.
INCOME FROM OPERATIONS: Net income from operations increased from $2.4 million
for the nine months ended March 31, 1997 to $5.2 million for the nine months
ended March 31, 1998. As compared to the nine months ended March 31, 1998, net
income from operations for the nine months ended March 31, 1997 (as adjusted to
exclude both the related party royalty payments for the use of the FAI brand
name and management fee income derived from the European and North American
operations) increased $0.6 million from $4.6 million compared to $5.2 million.
INTEREST INCOME: Interest income decreased from $555,000 for the nine months
ended March 31, 1997 to $334,000 for the three months ended March 31, 1998.
However, the nine months ended March 31, 1997 included related party interest
income of $491,000. Excluding interest income received from related parties for
the nine months ended March 31, 1997, interest income increased from $64,000 to
$334,000 for the nine months ended March 31, 1997 and 1998 respectively.
INTEREST EXPENSE: Interest expense for the nine months ended March 31, 1998 is
$118,000. This includes interest payments of $111,000 to FAI Insurances Limited
with regards to the vendor financed loan initiated as part of the FAI Finance
Corporation acquisition. For the nine months ended March 31, 1997 there was no
interest expense for the Company.
13
<PAGE>
INCOME TAX EXPENSE: The effective rate of tax decreased from 38% for the nine
months ended March 31, 1997 to 36% for the nine months ended March 31, 1998.
This is attributable to the introduction of income earned in the United Kingdom,
South Africa and Canada which all have lower tax rates than Australia.
EQUITY IN INCOME OF AFFILIATED COMPANIES: Equity in income of affiliates for the
nine months ended March 31, 1998 was $0.1 million. This was calculated by taking
the Company's 50 percent share of FAI Finance Corporation's net income of $0.18
million for the three months ended March 31, 1998 and deducting amortization of
goodwill for the same period of $0.08 million. Equity in income of affiliates
was zero for the six months ended December 31, 1997 and the nine months ended
March 31, 1997 as the 50 percent acquisition of FFC took place on December 31,
1997.
NET INCOME: Net income increased from $1.8 million for the nine months ended
March 31, 1997 to $3.6 million for the nine months ended March 31, 1998.
However, this includes a related party royalty charge of $2.7 million, interest
income of $0.5 million and management fee income of $0.5 million. As adjusted to
exclude these related party charges, net income for the nine months ended March
31, 1997 was $2.9 million. As compared to net income of $3.6 million for the
nine months ended March 31, 1998, this represents an increase of 21%.
LIQUIDITY AND CAPITAL RESOURCES: On July 15, 1997 the Company and FAI Insurances
Ltd., an affiliate of the Company sold a total of 2,750,500 shares (including
350,500 shares pursuant to an over-allotment option) in the Company's initial
public offering ("IPO"). Specifically, the Company sold a total of 450,500
shares of Common Stock (including 150,500 shares pursuant to an over-allotment
option) at an issue price of $10.00. In addition, prior to the IPO, 250,000
shares of Common Stock of the Company were sold to Bradley D. Cooper at the IPO
price for cash of $125,000 and a secured note of $2,375,000.
The principal source of the Company's liquidity historically has been, and in
the future is expected to be, cashflow from operations.
Cashflow from operations decreased from $3.3 million for the nine months ended
March 31, 1997 to $3.0 million for the nine months ended March 31, 1998. The
reduction in cash flow provided by operations reflects the current expansion of
the Company's international operations. The increase in inventories during the
nine months ended March 31, 1998 reflects increased sales in the international
operations and the need to carry increased inventories to meet these sales.
Furthermore, the transition from air to sea freight required the accumulation of
buffer stock in New Zealand, Europe and South Africa. Additional inventory was
also required in Europe to ensure sufficient levels of stock were available for
the opening of the German operation.
Accounts receivable increased during the nine months ended March 31, 1998 as a
result of the continued expansion of the Distributor Network in the nine months
ended March 31, 1998.
Net cash used in investing activity increased from a deficit of $3.5 million
during the nine months ended March 31, 1997 to a deficit of $0.7 million during
the quarter ended March 31, 1998. This was a result of the settlement of related
party balances.
14
<PAGE>
Net cash generated from financing activities increased from a deficit of $0.1
million during the nine months ended March 31, 1997 to a surplus of $3.5
million. This increase was a result of the completion of the initial public
offering of July 15, 1997 less float expenses incurred (excluding prepaid float
expenses).
The Company entered into an AUD2.5 million dollar collar hedge on October 1,
1997 with an expiry date of June 30, 1998. The contract was taken out to secure
a foreign currency translation rate within a band of 0.7200 and 0.7461 for AUD
conversion to USD. Additionally, on December 4, 1997 the Company entered into a
forward contract selling AUD1.0 million for USD at 0.6800. These contracts have
been marked to market as at March 31, 1998.
Investment in affiliated companies represents the acquisition by the Company of
50 percent of FAI Finance Corporation (FFC) from FAI Insurances (ASX: FAI). FFC
is a leading consumer finance company in both Australia and New Zealand and
finances more than 80% of all customer accounts serviced by the Company's
distributorship network in Australia and New Zealand. The purchase price of
$7,016,525 is being vendor financed over a period of five years at a fixed
interest rate of 7.75% per annum payable monthly in arrears ("FFC Note"). The
first installment of $1,631,750 was paid on January 2, 1998 and no further
principal installments are due during the three month period ended March 31,
1998. Interest in the amount of $111,000 was paid on the FFC Note for the three
months ended March 31, 1998. The Agreement also granted the option (the
"Option") at no additional cost, exercisable over four years from the date of
the Agreement, to purchase the remaining 50% interest in FFC, from FAI, for the
same consideration plus 50% of FFC's retained earnings at the time the Option is
exercised. The total purchase price for the remaining shares in FFC will be
financed by FAI over four years from the date the Option is exercised.
The Company currently has no credit facility with a bank or other financial
institution, although it believes appropriate facilities would be available on
reasonable terms if needed. The Company believes that internally generated
cashflows will be adequate to support currently planned business operations over
the next twelve months. The Company's strategy for growth is based on the
expansion of its Distribution Network into existing and new markets, with the
costs of such expansion largely borne by the distributor. It is expected excess
cashflows generated by the Company will be used to fund the expansion of FFC's
operations.
Notwithstanding that the Company's costs in expanding its Distribution Network
are expected to be minimal, the Company may be required to obtain additional
capital to fund growth outside of its existing operations if the cashflow
generated by the Australian and New Zealand operations is insufficient to meet
the cash requirements of developing the international operations. Potential
sources of such capital may include proceeds from bank financing or additional
offerings of the equity or debt securities of the Company. There can be no
assurance that such capital will be available on acceptable terms from these or
other potential sources. The lack of such capital could have a material adverse
effect on the Company's operations.
ITEM 3 : QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
15
<PAGE>
Part II - OTHER INFORMATION
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(a) The Company's Certificate of Incorporation,
incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-26399), as
amended, filed with the SEC July 14, 1997.
3(b) The Company's By-laws, incorporated by reference to the
Company's Registration Statement on Form S-1
(Registration No. 333-26399), as amended, filed with
the SEC July 14, 1997.
27. Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
(i) On January 15, 1998, the Registrant filed a report to disclose
the purchase of 50% of the shares of FAI Finance Corporation Pty.
Ltd. from FAI Insurances Limited, a 41.1% shareholder in the
Registrant. In accordance with Item 7 (a) (4) and 7(b) of Form 8-
K, the financial statements called for by Item 8-K and Rule 3-05
of Regulation S-X, and the pro forma financial statements called
for by Item 7(b) of Form 8-K and Article XI of Regulation S-X,
were filed on March 15, 1998.
16
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME SECURITIES INTERNATIONAL, INC.
(Registrant)
By:
_________________________________________
Bradley D. Cooper
Chairman and Chief Executive Officer
(Principal Executive Officer)
By:
__________________________________________
_ Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: May ___, 1998
17
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