<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 September 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number
001-14502
----------------------
HOME SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0169495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
Level 7, 77 Pacific Highway
North Sydney, NSW Australia 2060
(Address of principal executive offices) (Zip Code)
(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 November 5, 1999: 5,828,278
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
--------------------------------
NOTE 1999 1999
$US $US
-------------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 2,976,240 1,158,221
Accounts receivable - related party 217,516 568,831
Accounts receivable - trade, net 3,190,633 4,120,995
Inventories 2 6,974,109 6,495,126
Prepaid expenses and other current assets 1,508,016 1,757,205
------------------------------
Total current assets 14,866,514 14,100,378
------------------------------
Non-current assets
Investments in affiliated companies 7,874,928 7,850,084
Intangibles, net 23,014,184 22,663,023
Other non-current assets 5,721,794 5,590,618
------------------------------
Total non-current assets 36,610,906 36,103,725
------------------------------
Total assets 51,477,420 50,204,103
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Bank overdraft 150,938 -
Note payable - FAI Insurance Group 1,313,400 1,304,400
Note payable - Integral Investments Limited 8,394,024 8,132,668
Income tax payable 1,355,696 966,838
Other current liabilities 6,635,939 6,062,782
------------------------------
Total current liabilities 17,849,997 16,466,688
------------------------------
Non-current liabilities
Note payable - FAI Insurance group 3,447,675 3,424,050
Accrued security callout 147,564 110,430
Other non-current liabilities 958,531 926,071
------------------------------
Total non-current liabilities 4,553,770 4,460,551
------------------------------
Total liabilities 22,403,767 20,927,239
------------------------------
Stockholders' equity
Preferred stock $.001 value; 1,000,000 shares authorized,
none outstanding - -
Common stock $.001 value; 20,000,000 shares authorized and
5,828,278 shares issued and outstanding as of June 30,
1999 and September 30, 1999 Respectively. 5,828 5,828
Additional paid-in capital 22,309,708 22,309,708
Warrants 504,000 504,000
Secured Note (2,375,000) (2,375,000)
Accumulated other comprehensive loss 3 (452,532) (534,971)
Retained earnings 9,081,649 9,367,299
------------------------------
Total stockholders' equity 29,073,653 29,276,864
------------------------------
Total liabilities and stockholders' equity 51,477,420 50,204,103
------------------------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
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HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------------
1998 1999
NOTE $US $US
<S> <C> <C> <C>
Net Sales 10,226,238 9,520,074
Cost of goods sold (5,861,610) (4,772,977)
------------------------------------------
Gross profit 4,364,628 4,747,097
General and administrative expenses (1,733,622) (3,256,959)
Amortization and depreciation (173,491) (623,199)
Research and development expenses - (207,014)
------------------------------------------
Income from operations 2,457,515 659,925
Interest income 115,497 67,720
Interest expenses - related party (98,783) (91,385)
- other (1,204) (172,631)
------------------------------------------
Income before taxes and equity in income of
affiliated companies and minority interest 2,473,025 463,629
Income tax expense (916,864) (206,789)
------------------------------------------
Income before equity in income of
affiliated companies and minority interest 1,556,161 256,840
Equity in income of affiliated companies 4 48,452 28,811
------------------------------------------
Net income 1,604,613 285,651
==========================================
Net income per common share
Basic earnings per share $0.31 $0.05
Diluted earnings per share $0.31 $0.05
Weighted average number of shares outstanding
Basic 5,150,500 5,828,278
Diluted 5,162,457 5,828,278
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------
1998 1999
$US $US
------------------------------------
<S> <C> <C>
------------------------------------
Net cash provided by/(used in) operating activities 224,695 (605,414)
------------------------------------
Cashflow from investing activities
Other cash inflows from investing activities (610,855) (631,847)
------------------------------------
Net cash used in investing activities (610,855) (631,847)
------------------------------------
Cashflow from financing activities
Other cash outflows from financing activities - (549,904)
------------------------------------
Net cash provided by/(used in) financing activities - (549,904)
------------------------------------
Net decrease in cash held (389,160) (1,787,165)
------------------------------------
Cash at the beginning of the financial period 7,006,183 2,976,240
Effect of exchange rate change on cash (271,686) (30,854)
------------------------------------
Cash at the end of the financial period 6,348,337 1,158,221
====================================
Supplemental disclosure of cashflow information:
Interest paid 99,988 93,106
Income taxes paid 148,632 496,448
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation and Basis of Preparation -
The condensed consolidated financial statements presented herein and these
notes have been prepared by Home Security International, Inc. ("the Company"),
without audit. In the opinion of the registrants' management, the unaudited
condensed consolidated financial statements included in this filing on Form 10-Q
reflect all adjustments which consist of normal recurring adjustments necessary
to present fairly the financial information.
The financial statements should be read in conjunction with the consolidated
financial statements as of and for the fiscal year ended June 30, 1999 and the
footnotes thereto included in the Company's Annual Report on Form 10-K.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America (" U.S. GAAP "). The investment in FAI Finance Corporation Pty Limited
("FFC") and Bayside Partnership ("the Partnership") are recorded using the
equity method.
All inter-company accounts and transactions have been eliminated upon
consolidation.
5
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
<TABLE>
<CAPTION>
NOTE 2: INVENTORIES June 30, September 30,
--------------------------------------------
1999 1999
$US $US
--------------------------------------------
<S> <C> <C>
Finished goods 3,527,596 2,864,046
Work in progress 288,382 331,880
Raw materials 3,158,131 3,299,200
--------------------------------------------
6,974,109 6,495,126
============================================
</TABLE>
NOTE 3: COMPREHENSIVE INCOME
As of July 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distribution to owners, in a financial statement for
the period in which they are recognized. The Company has chosen to disclose
Comprehensive Income, which encompasses net income and foreign currency
translation adjustments, in the notes to the condensed consolidated financial
statements for interim reporting purposes.
Total Comprehensive Income for the three-month periods ended September 30,
1998 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1998 1999
$US $US
---------------------------------------
<S> <C> <C>
Net Income 1,604,613 285,651
Other comprehensive income:
Foreign currency translation adjustment (200,900) (82,439)
---------------------------------------
Total comprehensive income 1,403,713 203,212
=======================================
</TABLE>
6
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HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 4: EQUITY IN INCOME OF AFFILIATED COMPANIES
On December 31, 1997 the Company purchased 50 percent of the issued and
outstanding shares (the "FFC Shares") of FAI Finance Corporation Pty Limited and
its subsidiary FAI Finance Corporation (NZ) Limited ("FFC") from FAI Insurances
Limited (the "FFC Transaction"). FFC, a consumer finance company with operations
in Australia and New Zealand, finances a significant portion of the Company's
financed sales. Selected summarized financial information for FFC is presented
below.
<TABLE>
<CAPTION>
Three months Ended
September 30,
---------------------------------------
1998 1999
$US $US
---------------------------------------
<S> <C> <C>
Net interest income 2,102,711 2,272,051
Net income 236,234 210,576
</TABLE>
Reconciliation of equity in income of affiliated companies for the three-
month period ended September 30, 1998 and 1999 is shown below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1998 1999
$US $US
---------------------------------------
<S> <C> <C>
50 percent of Net income of affiliated company - FFC 118,117 105,288
Amortization of goodwill - FFC (69,665) (76,477)
---------------------------------------
Equity in income of affiliated companies 48,452 28,811
=======================================
</TABLE>
7
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This discussion and analysis of the Company's financial condition and
results of operations contains certain forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities exchange Act of
1934, as amended (the "Exchange Act"), that are based on beliefs of, and
information currently available to, the Company's management as well as
estimates and assumptions made by the Company's management. When used in this
filing, words such as "anticipate," "believe," "estimate," "expect," "future,"
"intend," "plan" and similar expressions as they relate to the Company or the
Company's management, identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to the
Company's operations and results of operations, competitive factors and pricing
pressures, shifts in market demand, the performance and needs of the residential
security alarm industry, the costs of product development, currency fluctuation
as identified more fully below and other risks and uncertainties including, in
addition to any uncertainties specifically identified in the text surrounding
such statements, uncertainties with respect to changes or developments in
social, economic, business, industry, market, legal and regulatory circumstances
and conditions and actions taken or omitted to be taken by third parties,
including the Company's stockholders, customers, suppliers, business partners,
competitors, and legislative, regulatory, judicial and other governmental
authorities and officials. Should one or more of these risks or uncertainties
materialize, or should the underlying estimates or assumptions prove incorrect,
actual results or outcomes may vary significantly from those anticipated,
believed, estimated, expected, intended or planned. Such factors include, but
are not limited to, the risks identified above and the risks detailed under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 and expanded upon herein, and as detailed from
time to time in the Company's other filings made with the Securities and
Exchange Commission.
Comparison of three months ended September 30, 1999 and September 30, 1998.
Net Sales: Net sales decreased by $0.7 million or 7% from $10.2 million for
the three months ended September 30, 1998 to $9.5 million for the three months
ended September 30, 1999. Included in net sales for the three months ended
September, 1999 was $2.6 million in net sales from IIHSL relating to Direct
Retail Sales of manufactured goods to third party customers other than the
Company ("Direct Retail Sales"). Because the Company acquired IIHSL in October
1998 there were no Direct Retail Sales for the three months ended September 30,
1998. Distributor sales decreased by $3.7 million or 37% from $9.9 million for
three months ended September 30, 1998 to $6.2 million for the three months ended
September 30, 1999. The reduction of Distributor sales was primarily a result of
a 40% decline in unit sales.
Units sold in the Australian market decreased 39% from 11,092 units for the
three months ended September 30, 1998 to 6,795 units for the three months ended
September 30, 1999. Units sold in New Zealand decreased 65% from 1,601 units for
the three months ended September 30, 1998 to 553 units for the three months
ended September 30, 1999. The decline in number of units sold in Australia and
New Zealand is attributable to a reduction in the number of Distributor offices
currently selling in the Australian and New Zealand markets. The number of units
sold in the South African market decreased 85% during the three months ended
September 30, 1999 to 90 as compared to 608 for the three months ended September
30, 1998. The decline in units sold in South Africa was attributable to
returning the focus in the South African operation to rural areas after test
selling in major city areas proved unsuccessful.
Unit sales in Europe and the United Kingdom increased 7% from 1,368 units
for the three months ended September 30, 1998 to 1,465 for the three months
ended September 30, 1999. The Company has begun allocating
8
<PAGE>
resources no longer required in Europe into the United States market to
establish a foundation from which to grow the U.S. distribution network.
The Company's online monitoring program is being rolled out in Australia
and New Zealand. The Company currently has in excess of 4,000 monitored lines,
1,790 of these being installed during the three months ended September 30, 1999.
The Company intends to expand its on-line monitoring program, including both
upgrade and point of sale, in the Australian and New Zealand operations in the
fourth quarter of Fiscal 1999. All setup and development expenses relating to
the on-line monitoring program have been expensed as incurred.
Cost of Goods Sold--other: Cost of goods sold decreased 19% from $5.9
million for the three months ended September 30, 1998 to $4.8 million for the
three months ended September 30, 1999. As a percentage of net sales, cost of
goods sold decreased 7% from 57% for the three months ended September 30, 1998
to 50% for the three months ended September 30, 1999. The reduction in cost of
goods as a percentage of net sales is attributable to the acquisition of IIHSL.
The acquisition of IIHSL enabled the Company (on a consolidated basis) to
capture the IIHSL gross margin reflected in the reduction of the Company's cost
of goods sold. As a result, the Company's gross margin as a percentage of sales
increased 7% from 43% for the three months ended September 30, 1998 to 50% for
the three months ended September 30, 1999.
General and Administrative Expenses: General and administrative expenses
were $3.3 million for the three months ended September 30, 1999, compared to
$1.7 million for the three months ended September 30, 1998. Total general and
administrative expenses, as a percentage of net sales, increased 17% to 34% for
the three months ended September 30, 1999 compared to 17% for the three months
ended September 30, 1998. The increase in general and administrative expenses as
a percentage of net sales was primarily attributable to (i) the inclusion of
expenses relating to IIHSL of $0.8 million; (ii) market research, consulting and
travel expenses incurred by the Company in Australia and New Zealand relating to
the Task Force program ("Task Force") implemented by the Company in June 1999.
The reinvented sales program developed by the Task Force is to be launched in
early November 1999. The Company expects the benefits of these expenses to be
realized over the next three quarters and thereafter; and (iii) The Company also
incurred additional expenses during the three months ended September 30, 1999
relating to the establishment of the on-line monitoring and start-up expenses
for the establishment of the United States market.
Amortization and depreciation: Amortization and depreciation increased 200%
from $0.2 million for the three months ended September 30, 1998 to $0.6 million
for the three months ended September 30, 1999. Amortization of goodwill
increased 143% from $0.14 million for the three months ended September 30, 1998
to $0.34 million for the three months ended September 30, 1999. The increase was
directly attributable to the inclusion of amortization relating to the goodwill
recorded upon the acquisition of IIHSL for the three months ended September 30,
1999.
Research and Development: Research and Development expenses for the three
months ended September 30, 1999 represents costs incurred by IIHSL in relation
to product approvals and the design and development of new products.
Income From Operations: Income from operations decreased 72% from $2.5
million for the three months ended September 30, 1998 to $0.7 million for the
three months ended September 30, 1999. The decrease in income from operations
reflects the reduction in unit sales experienced in the three months ended
September 30, 1999.
Interest Income: Interest income remained stable at $0.1 million for the
three months ended September 30, 1999 and 1998, respectively.
Interest Expense--related party: Interest expense--related party is derived
from the vendor financed loan initiated as part of the FFC Transaction on
December 31, 1997. Interest expense--related party remained stable at $0.1
million for the three months ended September 30, 1999 and 1998, respectively.
Interest Expense--other: Interest expense--other for the three months ended
September 30, 1999 was $0.2 million. The interest charge for the three months
ended September 30, 1999 consisted of a non-cash imputed
9
<PAGE>
interest charge $0.2 million recorded in order to comply with the United States
Generally Accepted Accounting Principles ("U.S. GAAP") purchase accounting
principles. Pursuant to the Stock Purchase Agreement through which the Company
acquired 100% of the issued and outstanding stock of IIHSL, the Company issued a
non-interest bearing promissory note, secured by the IIHSL shares, in the amount
of $9,098,000. U.S. GAAP requires a premium to be recorded for debt securities
issued with an interest rate fixed materially above or below the effective rate
or current yield of an otherwise comparable security. The interest charge is
only reflected in the three months ended September 30, 1999 since IIHSL was
acquired in October 1998.
Income Tax Expense: The effective rate of tax increased from 37.1% for the
three months ended September 30, 1998 to 44.6% for three months ended September
30, 1999. This increase is primarily attributable to the non-deductible
amortization of goodwill generated from the acquisition of IIHSL during the
three months ended September 30, 1999 of $0.15 million ($0.05 million tax
effect).
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased by 40% from $48,000 for the three months ended September 30, 1998 to
$29,000 for the three months ended September 30, 1999. This was calculated by
taking the Company's 50% share of FFC's net income of $105,000 for the three
months ended September 30, 1999 and deducting amortization of goodwill for the
same period of $76,000.
Net Income: Net income decreased 81% from $1.6 million for the three months
ended September 30, 1998 to $0.3 million for the three months ended September
30, 1999.
Liquidity and capital resources
The principal source of the Company's liquidity historically has been
cashflow from operations. The Company currently has a $0.7 million credit
facility with Westpac Banking Corporation. The Company is currently negotiating
an increase in its credit facility to up to $2.0 million. Furthermore, the
Company is investigating a securitization program for its on-line monitoring
program.
The Company has payment obligations of $400,000 on December 31, 1999 and
$8,298,000 on June 30, 2000 pursuant to the promissory note ("the Ness Note")
originating from the acquisition of Integrated International Home Security
Limited. The Company has experienced significant decline in cashflows from
operations in the last quarter of fiscal 1999 and the first quarter of fiscal
2000. As a result, the Company is exploring the possibility of either
restructuring the Ness Note with a mixture of new debt and equity or refinancing
the Ness Note.
Cashflow from operations declined $0.8 million from a cash-inflow $0.2
million for the three months ended September 30, 1998 to a cash-outflow of $0.6
million for the three months ended September 30, 1999.
In April, 1998 the Company entered into an agreement with AMA Finance
Corporation Pty Limited ("AMA") whereby AMA agreed to provide second line
consumer finance for the sale of the Company's SecurityGuard to customers
failing to meet the lending criteria of FFC. Although the Company's Distributors
receive no income from AMA financed sales ("AMA sales"), each AMA sale is
registered as a unit sale for commission and bonus calculations. Upon completion
of an AMA sale the Company records a receivable of A$700 ($460) due from AMA
which is repayable in twelve equal installments commencing eight months from
installation (the "Repayment Cycle"). The total receivable due from AMA (the
"AMA Receivable") increased $0.2 million for the three months ended September
30, 1999 from $1.1 as at June 30, 1999 to $1.3 million as at September 30, 1999.
The AMA Receivable balance of $1.3 million as at September 30, 1999 is not
expected to increase materially in the next fiscal year as the Repayment Cycle
has reached maturity and AMA sales are expected to remain constant. The AMA
Receivable is secured by a fixed and floating charge over AMA's finance
receivables generated from the Company's AMA sales.
The decline in cashflow from operation was primarily due to; (i) the $1.3
million decline of net income from $1.6 million for the three months ended
September 30, 1998 to $0.3 million for the three months ended September 30,
1999; and (ii) provisional income tax installment paid on September 1, 1999 of
$0.5 million relating to the fiscal year ended June 30, 1999.
10
<PAGE>
Net cash used in investing activities remained constant at a deficit of
$0.6 million for the three months ended September 30, 1998 and 1999. The deficit
in net cash used in investing activities was primarily due to the (i) $240,000
for the purchase of capital assets; and (ii) a short term loan granted of
$350,000 to FAI Home Distributors Pty Limited.
Net cash generated from financing activities decreased from zero for the
three months ended September 30, 1998 to a deficit of $550,000 for the three
months ended September 30, 1999. The deficit consisted of; (i) a $400,000 Ness
Note installment paid on July 7, 1999; and (ii) bank overdraft repayments of
$150,000.
Assuming a restructuring of the Ness Note on terms favorable to the
Company, 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
Distributor Network into existing and new markets, with the costs of such
expansion largely borne by the distributor and the introduction of point of sale
on-line monitoring. It is expected that excess cashflows generated by the
Company will be used to fund its upgrade on-line monitoring program and
international expansion. The Company may be required to obtain additional
capital to fund growth from other financing sources if the cashflow generated by
the Australian, New Zealand and European 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.
Year 2000 disclosure
The Company has been completed a Year 2000 compliance evaluation of its
information technology infrastructure. The Company has identified three areas of
exposure, each which can be further subdivided into two areas of implicit risk
classification.
(i) Software--"Mission Critical" & "Non-Mission Critical"
(ii) Hardware--"Mission Critical" & "Non-Mission Critical"
(iii) Remaining Infrastructure--"Mission Critical" & "Non-Mission Critical"
Mission critical software includes the Company's accounting package,
customer database, and operating systems, including Windows 95 and Windows NT.
The services of an external information technology firm were utilized to conduct
this review and provide an analysis of the Company's potential risks. The
results of this review indicate that 100% of the mission critical software have
been identified as being fully year 2000 compliant currently or following the
loading of software patches. The structured rollout of the required software
patches has been completed. The Company would need to invest approximately
$40,000 to make its current customer database Year 2000 compliant. In order to
benefit from advances in technology rather than making its current customer
database compliant, the Company is purchasing a replacement customer database to
be installed and fully operational prior to December 31, 1999 at an estimated
cost of $145,000. The Company has currently spent $25,000 on achieving year 2000
compliance and estimates that, excluding the purchase of the new customer
database, the total remaining cost to achieve year 2000 compliance will be
approximately $35,000. In addition, 100% of the Company's non-mission critical
software has been found to be year 2000 compliant following, in certain cases,
the loading of software patches.
Mission critical hardware encompasses the data communication infrastructure
and all server end hardware. The services of an external information technology
firm were utilized to conduct a review of these systems and provide an analysis
of the Company's potential risks. Such review has been completed and the
findings were conclusive. 100% of the mission critical hardware has been tested
and determined to be year 2000 compliant. Furthermore, only one non-mission
critical hardware product, a modem, has been found to be non-compliant. It has
been replaced.
The remaining infrastructure has been reviewed, and the rectification of
any exposures will be achieved by
11
<PAGE>
the end of October 1999. The Company has also adopted a policy requiring written
confirmation of Year 2000 compliance from any prospective vendor. Furthermore,
the Company has ensured all subsidiaries, including each of FFC and Ness,
implement the above strategies to address Year 2000 issues. FFC is currently
involved in a joint project with FAI General Insurance Company Limited ("FAI
General"), a subsidiary of FAI Insurances Limited, to identify, categorize and
if necessary, update, all software and hardware components to address Year 2000
issues.
FFC has obtained confirmation from the vendor of its financial database
package that such software is Year 2000 compliant. Ness has confirmed that by
year end there will be no Year 2000 exposures. Ness has addressed Year 2000
issues in all of its products, including the SecurityGuard System. Ness has also
received confirmation that its mission critical network, hardware and software
are Year 2000 compliant.
The Company does not expect that the cost, if any, to modify its
infrastructures, in order to achieve Year 2000 compliance, will have a material
impact on its financial condition or results of operations. This statement is a
Year 2000 Readiness Disclosure entitled to protection as provided in the Year
2000 Information and Readiness Disclosure Act.
Currency Fluctuations
Although the Company's principal operations are concentrated in Australia
and New Zealand, it conducts operations throughout the world. Accordingly, the
Company's financial performance could be adversely affected by fluctuations in
currency exchange rates as well as changes in duty rates. Furthermore, as the
Company reports its financial results in U.S. dollars, a significant movement in
the value of the U.S. dollar against certain international currencies,
particularly the Australian dollar ("AUD"), could have a material adverse effect
on the Company's reported financial position and results of operations. The AUD
has increased in value relative to the U.S. dollar from .5904 on September 30,
1998 to .6522 on September 30, 1999. Although the Company is not in the business
of currency hedging, it may from time to time engage in hedge arrangements.
Nevertheless, there can be no assurance that the Company will be successful in
limiting risks related to currency fluctuations and that changes in exchange
rates will not have a material adverse effect on the Company or its results of
operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
The Company has had no material changes to the disclosure on this matter
made in its Annual Report on Form 10-K for the year ended June 30, 1999.
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
12
<PAGE>
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 27.1 Financial Data Schedule
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOME SECURITIES INTERNATIONAL, INC.
(Registrant)
By: /s/ Bradley D. Cooper
______________________________________
Bradley D. Cooper
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark Whitaker
______________________________________
Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: November 5, 1999
13
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