<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, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number
001-14502
________________________
HOME SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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 15, 2000: 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, March 31,
---------------------------------
NOTE 1999$ 2000$
-----------------------------------------
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents 2,976,240 445,880
Accounts receivable - related party 217,516 1,005,133
Accounts receivable - trade, net 3,190,633 3,693,086
Note receivable - FAI Insurance group 5 - 8,117,567
Inventories 2 6,974,109 6,417,781
Prepaid expenses and other current assets 1,508,016 2,415,507
---------------------------------
Total current assets 14,866,514 22,094,954
---------------------------------
Non-current assets
Investment in partnership 323,398 -
Investments in affiliated companies 5 7,874,928 -
Intangibles, net 23,014,184 22,505,121
Deferred income taxes 1,057,558 2,747,801
Subordinated loan - FAI Finance Corporation Pty Limited - 436,649
Other non-current assets 4,340,838 4,020,843
---------------------------------
Total non-current assets 36,610,906 29,710,414
---------------------------------
Total assets 51,477,420 51,805,368
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Note payable - FAI Insurance Group 1,313,400 2,449,200
Note payable - Integral Investments Limited 8,394,024 8,069,715
Borrowing - FAI Finance Corporation Pty Limited - 884,469
Accrued security callout 314,056 219,586
Other accrued liabilities 752,417 1,262,289
Income tax payable 1,355,696 93,106
Other current liabilities 5,720,404 5,697,934
---------------------------------
Total current liabilities 17,849,997 18,676,299
---------------------------------
Non-current liabilities
Note payable - FAI Insurance group 3,447,675 1,989,975
Borrowing - FAI Finance Corporation Pty Limited - 2,482,145
Lease liability 720,510 512,982
Other non-current liabilities 385,585 420,529
---------------------------------
Total non-current liabilities 4,553,770 5,405,631
---------------------------------
Total liabilities 22,403,767 24,081,930
---------------------------------
Stockholders' equity
Preferred stock $.001 value; 1,000,000 shares authorized, - -
none outstanding
Common stock $.001 value; 20,000,000 shares authorized and
5,828,278 shares issued and outstanding as of June 30, 1999
and March 31, 2000, respectively. 5,828 5,828
Additional paid-in capital 22,309,708 22,309,708
Warrants 504,000 1,064,000
Secured Note (2,375,000) (2,375,000)
Accumulated other comprehensive loss 3 (452,532) (1,273,346)
Retained earnings 9,081,649 7,992,248
---------------------------------
Total stockholders' equity 29,073,653 27,723,438
---------------------------------
Total liabilities and stockholders' equity 51,477,420 51,805,368
=================================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
NOTE March 31, March 31,
---------------------------------------------------------------------
1999$ 2000$ 1999$ 2000$
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 11,585,255 7,346,818 33,996,829 25,474,098
Cost of goods sold (5,569,643) (4,505,517) (17,278,794) (13,584,011)
---------------------------------------------------------------------
Gross profit 6,015,612 2,841,301 16,718,035 11,890,087
General and administrative expenses (3,128,655) (3,920,280) (8,376,401) (10,967,076)
Amortization and depreciation (524,132) (778,991) (1,252,501) (2,098,997)
Research and development expenses (211,086) (244,438) (401,307) (674,920)
---------------------------------------------------------------------
Income from operations 2,151,739 (2,102,408) 6,687,826 (1,850,906)
Non-operating income - 614,781 - 287,951
Interest income 5 90,631 74,493 313,051 209,203
Interest expenses - related party (81,909) (179,684) (251,416) (361,916)
- other (174,642) (172,588) (355,118) (512,443)
---------------------------------------------------------------------
Income (Loss) before taxes and equity in
income of affiliated companies and minority
interest 1,985,819 (1,765,406) 6,394,343 (2,228,111)
Income tax (expense) benefit (842,447) 840,448 (2,691,391) 1,081,495
---------------------------------------------------------------------
Income (Loss) before equity in income
of affiliated companies and minority
interest 1,143,372 (924,958) 3,702,952 (1,146,616)
Equity in income of affiliated companies 4 57,771 1,927 296,356 57,215
Minority interest (177,894) - (334,565) -
---------------------------------------------------------------------
Net income (loss) 1,023,249 (923,031) 3,664,743 (1,089,401)
=====================================================================
Net income per common share
Basic earnings per share $ 0.18 $ -0.16 $ 0.68 $ -0.19
Diluted earnings per share $ 0.18 $ -0.16 $ 0.68 $ -0.19
Weighted average number of shares
outstanding
Basic 5,550,500 5,828,278 5,417,167 5,828,278
Diluted 5,553,548 5,830,087 5,422,169 5,828,967
</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>
Nine months ended
March 31,
----------------------------------
1999$ 2000$
----------------------------------
<S> <C> <C>
----------------------------------
Net cash provided by/(used in) operating activities 3,238,667 (2,790,721)
----------------------------------
Cashflow from investing activities
Purchase of controlled entity, net of cash acquired (3,356,615) -
Short term loans (granted), repayments received (622,504) (619,622)
Additions to capital assets (1,109,145) (1,083,798)
Other cash inflows/(outflows) from investing activities 69,672 894
----------------------------------
Net cash used in investing activities (5,018,592) (1,702,526)
----------------------------------
Cashflow from financing activities
Net proceeds/(repayments) from/(of) borrowings (323,400) 2,129,964
Other cash outflows from financing activities (172,910) (6,438)
----------------------------------
Net cash used in financing activities (496,310) 2,123,526
----------------------------------
Net decrease in cash held (2,276,235) (2,369,721)
----------------------------------
Cash at the beginning of the financial period 7,006,183 2,976,240
Effect of exchange rate change on cash 7,453 (160,639)
----------------------------------
Cash at the end of the financial period 4,737,401 445,880
==================================
Supplemental disclosure of cashflow information:
Interest paid 309,267 364,424
Income taxes paid 3,067,917 1,951,612
</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") was recorded using the equity method until its sale effective March 31,
2000.
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)
NOTE 2: INVENTORIES June 30, March 31,
-------------------------------------
1999$ 2000$
-------------------------------------
Finished goods 3,527,596 2,982,895
Work in progress 288,382 797,221
Raw materials 3,158,131 2,637,665
-------------------------------------
6,974,109 6,417,781
=====================================
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 and nine-month periods ended March
31, 1999 and 2000 was as follows:
Three Months Ended
March 31,
------------------------------
1999$ 2000$
------------------------------
1,023,249 (923,031)
Net Income
Other comprehensive income (loss):
Foreign currency translation adjustment 256,880 (705,265)
-----------------------------
Total comprehensive income (loss) 1,280,129 (1,628,296)
=============================
Nine Months Ended
March 31,
-------------------------------
1999$ 2000$
-------------------------------
3,664,743 (1,089,401)
Net Income
Other comprehensive income (loss):
Foreign currency translation adjustment 274,625 (820,814)
-----------------------------
Total comprehensive income (loss) 3,939,368 (1,910,215)
=============================
6
<PAGE>
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. Effective March 31, 2000 the Company sold its 50 percent
interest in FFC back to FAI Insurances Limited for $8,117,567 (See Note 5).
Selected summarized financial information for FFC is presented below.
Three months ended
March 31,
----------------------------------
1999$ 2000$
----------------------------------
Net interest income 1,188,371 2,230,155
Net income 262,934 151,081
Nine months ended
March 31,
----------------------------------
1999$ 2000$
----------------------------------
Net interest income 4,629,754 6,574,740
Net income 1,022,794 566,651
Reconciliation of equity in income of affiliated companies for the three and
nine-month period ended March 31, 1999 and 2000 is shown below.
Three months ended
March 31,
----------------------------------
1999$ 2000$
----------------------------------
50 percent of Net income of affiliated
company - FFC 131,467 75,541
Amortization of goodwill - FFC (73,696) (73,614)
---------------------------------
Equity in income of affiliated companies 57,771 1,927
=================================
Nine months ended
March 31,
----------------------------------
1999$ 2000$
----------------------------------
50 percent of Net income of affiliated
company - FFC 511,397 283,326
Amortization of goodwill - FFC (215,041) (226,111)
---------------------------------
Equity in income of affiliated companies 296,356 57,215
=================================
7
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 5: SALE OF FAI FINANCE CORPORATION PTY LIMITED
Effective March 31, 2000, the Company, through its wholly- owned subsidiary
FAI Home Security Pty. Limited ("FHS"), sold its 50% interest in FFC to FAI
Insurances Limited ("FAI") for approximately $8,117,567 (the "Sale") realising a
gain of $614,781, recorded within Non-operating income. FAI, which owns
approximately 47% of the outstanding common stock of the Company, is a wholly
owned subsidiary of HIH Insurance Limited ("HIH").
In connection with FHS's purchase of FFC in Fiscal 1997, FAI provided FHS
with vendor financing, approximately $4,439,175 of which remains outstanding
(the "FAI Note"). Pursuant to the terms of the Sale, FAI has agreed to extend
the payment terms of the FAI Note which will be guaranteed by a security
interest in FHS's wholly owned subsidiary, Ness Security Products Pty Ltd. Upon
receipt of the proceeds of the Sale, the Company paid to Integrated Investments
Limited ("IIL") $8,200,000 in full settlement of the $8,298,000 due to IIL on
June 30, 2000 (the "IIL Payment"). The reduction in the amount paid versus that
owed as of June 30, 2000 reflects a discount for the time value of money, and
will be accounted for during the quarter ending June 30, 2000.
On or about April 7, 2000, FAI paid the Company through its subsidiary
$2,400,000. The remainder of the Sale price plus the shortfall required to
retire the IIL note in full (which was added to the FAI Note) was paid on or
about April 26, 2000. Pursuant to the terms of the Sale, the FAI Note will
accrue interest at the rate of 7.75% annually and require monthly payments of
principal and interest over sixty months.
In addition to the above described transactions, pursuant to the terms of
the Sale, FFC has agreed to increase the limit on its existing factoring
facility with FHS from approximately $3,061,500 to approximately $4,592,250.
The Company has filed a Report on Form-8K in relation to this sale
including unaudited Pro Forma financial statements.
Unaudited Pro Forma net income adjusted as though the Sale took place at
the beginning of the periods being reported on is shown below.
Nine Months Ended
March 31,
---------------------------------
1999 2000
$US $US
---------------------------------
(in thousands except per share data)
Pro forma net sales 33,997 25,474
Pro forma income from operations 6,689 (1,851)
Pro forma net income 4,355 (609)
Pro forma net income per common share
Basic earnings per share 0.80 -0.10
Diluted earnings per share 0.80 -0.10
Pro forma weighted average number of shares
outstanding
Basic 5,417 5,828
Diluted 5,422 5,829
8
<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, including the customers' and media's perception of the Company,
adverse media, 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, 1999 and expanded upon herein, and as detailed from
time to time in the Company's other filings made with the Securities and
Exchange Commission.
Additional Risk Factor
History of Decrease in Security Alarm Sales; Variability of Quarterly
Operating Results. The Company has experienced significant decreases in its
security alarm sales for the past four fiscal quarters. While the Company has
taken a number of measures to increase its revenues from the sale of security
alarms there can be no assurance that these measures will succeed or that the
Company will become profitable. Furthermore, as it is difficult to predict the
success of the Company's new sales strategy, which focuses on base monitoring
services, historical results should not be relied upon as an indication of
future performance. As the Company's current level of monthly unit sales is
insufficient to generate positive cashflow from operations the Company must
obtain additional external funding. There is no guarantee that the Company will
obtain additional external funding. The lack of such external funding could have
a material adverse effect on the Company's operations, liquidity and financial
position.
9
<PAGE>
Overview
Currently, the Company through the Distributor Network, sells, installs,
monitors and services a residential security alarm system marketed under the
trade name SecurityGuard, principally in Australia, with operations in Europe,
New Zealand, North America and South Africa. The SecurityGuard alarm and other
major components are manufactured exclusively by Ness Security Products Pty
Limited ("Ness"), a wholly owned subsidiary.
The Company's revenues from SecurityGuard System sales are currently
recorded upon shipment by the Company to Area Distributors and Distributors and
are net of any discounts. Revenues related to upgrade monitoring contracts are
collected and recognized monthly over the life of the monitoring contracts.
Revenues related to extended warranties are recognized over the life of the
warranty agreement with the customer, although payment is received in full at
the beginning of the agreement.
Recent Developments
On Line Monitoring Program - New Customers
During the last three quarters, the Company devoted substantial resources
and personnel to refine and introduce into its Distributor Network a new sales
strategy offering the customer the SecurityGuard System alarm for an affordable
monthly payment over a 60-month period (the "On-line Monitoring Program").
This new On-line Monitoring Program represents a dynamic change from the
Company's previous strategy of simply selling its alarm system at full price
with little opportunity for continued customer access or revenue generation
except for selling periodic upgrades. The On-line Monitoring Program is based on
a United States market model that has been adopted by many major security
companies whereby the equipment and the monitoring component are repaid through
a monthly interest free contract. Under this program connection and installation
are provided to the customer free of charge. The new On-line Monitoring Program
require the customer to make a small initial down payment for the alarm
equipment and the connection does not include an interest charge under the 60-
month monitoring commitment.
The On-line Monitoring Program currently results in the Company receiving
lower margins due to the Company providing for the cost of monitoring supplied
through a third party over the 60 month period. The initial cash inflow from the
On-line Monitoring Program is comparable to the Company's former sales program.
Over the life of the contract the Company will incur additional monthly cash
outflows equal to the cost of monitoring the lines. At the completion of the
initial contract, the Company will receive, for the remaining life of the
connection, cash inflows equal to the monthly recurring revenue paid by the
customer less the cost of monitoring the line.
The Company completed the conversion of Australia and New Zealand markets
to the new strategy in April 2000. The Company is continuing its development of
the On-line Monitoring Program in the United States and expects to finalize and
launch the program in the fourth quarter ending June 30, 2000. The Company
intends to begin testing the On-line Monitoring Program in the United Kingdom
and Netherlands markets in the fourth fiscal quarter ending June 30, 2000. It is
the Company's intention to launch a program in each market that provides a basic
security package consisting of an alarm and on-line monitoring services for five
years. The Company plans to expand its distributor network through a recruitment
program.
Upgrade Program - Existing Customers
10
<PAGE>
The Company has continued to contact its existing customer-base to offer
its 5-year on-line monitoring services package (the "Upgrade Program"). During
the three months ended March 31, 2000, the Company upgraded 2,034 alarm systems
with on-line monitoring services. These new connections represented a 161%
increase from the on-line monitoring connections made in the three months ended
March 31, 1999. As of March 31, 2000, more than 8,400 of the Company's existing
250,000 customers have entered into agreements to purchase the Company's on-line
monitoring services.
The Company will recognize on an installment basis the revenue from the
Upgrade Program over the period of each contract. All selling and installation
cost for the Upgrade Program have been capitalized and will be expensed over the
period of each contract. All setup and development expenses relating to the
Upgrade Program have been expensed as incurred.
The Upgrade Program generates an initial cash outflow consisting of
product, installation and sales commission costs. The Company completed an
initial funding facility to finance the initial cash deficiency and intends to
increase or replace this facility to ensure the Upgrade Program can be expanded.
There can be no guarantee the Company will be successful in increasing or
expanding this facility.
Results of Operations
Comparison of three months ended March 31, 2000 and March 31, 1999.
Net Sales: Net sales decreased by $4.3 million or 37% from $11.6 million
for the three months ended March 31, 1999 to $7.3 million for the three months
ended March 31, 2000. Distributor sales decreased by $2.9 million or 40% from
$7.3 million for three months ended March 31, 1999 to $4.4 million for the three
months ended March 31, 2000. The reduction in Distributor sales was primarily a
result of a 58% decline in total sales from 12,950 units for the three months
ended March 31, 1999 to 5,468 for the three months ended March 31, 2000. Direct
Retail Sales (sales of manufactured goods by Ness to third parties other than
the Company) increased by $0.7 million or 17% from $1.8 million for three months
ended March 31, 1999 to $2.1 million for the three months ended March 31, 2000.
Units sold in the Australian market decreased 63% from 9,550 units for the
three months ended March 31, 1999 to 3,486 units for the three months ended
March 31, 2000. Units sold in New Zealand decreased 71% from 1,556 units for the
three months ended March 31, 1999 to 448 units for the three months ended March
31, 2000.
The decline in number of units sold in Australia and New Zealand was
attributable to:
(i) A reduction in the number of Distributor offices currently selling in
the Australian and New Zealand market caused by poor sales results.
(ii) A reduction in the number of independent sales agents due to (i).
(iii) The delay in the introduction of the Online Monitoring Program (which
promotes the Company's new product SecurityGuard 3) into the
Distribution network.
Unit sales in the European market decreased 7% from 1,569 units for the
three months ended March 31, 1999 to 1,455 for the three months ended March 31,
2000. The reduction in unit sales was primarily attributable to the closure of
non-performing offices in the United Kingdom. The United Kingdom operation has
been centralized to one office from which the new On-line Monitoring Program can
be launched and the Distributor Network rebuilt.
11
<PAGE>
The reduction in unit sales was also caused by the Company's intentional
temporary suspension of sales in the South African market to concentrate the
resources of the Company on the Australian, New Zealand, USA and European
markets. The South African market has typically represented a low margin
business for the Company. The Company recorded 52 unit sales in South Africa
during the three months ended March 31, 2000 compared to 90 for the three months
ended March 31, 1999.
Cost of Goods Sold: Cost of goods sold decreased 20% from $5.6 million for
the three months ended March 31, 1999 to $4.5 million for the three months ended
March 31, 2000. As a percentage of net sales, cost of goods sold increased 13%
from 48% for the three months ended March 31, 1999 to 61% for the three months
ended March 31, 2000. The increase in cost of goods sold as a percentage of net
sales was primarily attributable to reduction in margin received by the Company
from the On-line Monitoring Program. The Company must provide for the cost of
monitoring supplied through a third party over the 60-month period.
General and Administrative Expenses: General and administrative expenses
were $3.9 million for the three months ended March 31, 2000, compared to $3.1
million for the three months ended March 31, 1999. Total general and
administrative expenses, as a percentage of net sales, increased 26% to 53% for
the three months ended March 31, 2000 compared to 27% for the three months ended
March 31, 1999.
The increase in general and administrative expenses as a percentage of net
sales was primarily attributable to:
(i) The fixed nature of the expenses relating to the administration and
provision of service to the distribution network.
(ii) Implementation costs associated with the launch of the new
SecurityGuard 3 product in both Australia and New Zealand.
(iii) Marketing and development costs relating to the Upgrade Program
resulting in 2,034 connections to on-line monitoring from the
Company's existing 250,000 home customer base.
(iv) Program development costs relating to the United States market and
the On-line Monitoring Program.
Amortization and depreciation: Amortization and depreciation increased from
$0.5 million for the three months ended March 31, 1999 to $0.8 million for the
three months ended March 31, 2000. This was primarily attributable to: (i) the
inclusion of $0.05 million of additional depreciation relating to the
capitalization of monitoring dialers which commenced July 1, 1999; (ii) the
write down of $0.1 million of fixed assets which were determined to be of
negligible value; and (iii) the inclusion of $0.02 million of additional
amortization relating to goodwill recorded upon the acquisition of the remaining
24.96% of Ness Security Products Pty Limited ("Ness acquisition"). The Ness
acquisition was effective April 9, 1999 and therefore the additional
amortization described in clause (iii) above did not apply for the three months
ended March 31, 1999.
Research and Development: Research and Development expense remained stable
at $0.2 million for the three months ended March 31, 2000 and 1999,
respectively. Research and Development expenses represents costs incurred by
Ness in relation to product approvals and the design and development of new
products.
12
<PAGE>
Income From Operations: Income from operations decreased 195% from $2.2
million for the three months ended March 31, 1999 to a loss of $2.1 million for
the three months ended March 31, 2000. The decrease in income from operations
reflects the reduction in unit sales in the three months ended March 31, 2000.
Non Operating Income - Other: Non Operating Income - Other for the three
months ended March 31, 2000 represents the $0.6 million profit on the sale of
the Company's 50% interest in FAI Finance Corporation Pty Limited to FAI
Insurances Limited, effective March 31, 2000.
Interest Income: Interest income remained constant at $0.1 million for the
three months ended March 31, 2000 and 1999.
Interest Expense-related party: Interest expense--related party increased
from $0.1 million for the three months ended March 31, 1999 to $0.2 million for
three months ended March 31, 2000. Interest expense-related party consists of
interest payments on: (a) the vendor-financed loan initiated as part of the FFC
Transaction on December 31, 1997; and (b) the funding facility initiated on
December 22, 1999 to finance the initial cash deficiency of the Upgrade Program.
The increase of $0.1 million was directly attributable to the introduction of
(b) for the three months ended March 31, 2000.
Interest Expense-other: Interest expense--other for the three months ended
March 31, 2000, and 1999 was $0.2 million. The interest charge for both the
three month periods ended March 31, 2000 and 1999 consisted of a non-cash
imputed interest charge of $0.2 million recorded in order to comply with the
U.S. GAAP purchase accounting principles. Pursuant to the Stock Purchase
Agreement through which the Company acquired 100% of the issued and outstanding
stock of Integrated International Home Security Limited ("IIHSL"), the Company
issued a non-interest bearing promissory note, secured by the IIHSL shares, in
the amount of $9,098,000. U.S. GAAP requires a discount to be recorded for debt
securities issued in connection with an acquisition with an interest rate fixed
materially below the effective rate or current yield of an otherwise comparable
security.
Income Tax (Expense) benefit: As the Company incurred a loss for the three
month period ended March 31, 2000, it derived a tax benefit and an effective tax
rate of 48%. This contrasted to the prior corresponding period when a profit was
derived and the effective tax rate was 42%. The effective rate of tax for the
three months ended March 31, 2000 was increased by the difference between
accounting and taxable profit on the sale of the Company's 50% interest in FFC
due to the effect of capital gains indexation and equity accounting adjustments.
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased from $58,000 for the three months ended March 31, 1999 to $2,000 for
the three months ended March 31, 2000. This was calculated by taking the
Company's 50% share of FFC's net income of $76,000 for the three months ended
March 31, 2000 and deducting amortization of goodwill for the same period of
$74,000. The decrease in FFC's net income during the three months ended March
31, 2000 as compared to the three months ended March 31, 1999 was primarily
attributable to the Company's reduction in unit sales.
Minority Interest: Minority interest for the three months ended March 31,
1999 represents an independent third party's ownership of 24.96% of Ness, and
the corresponding profit allocation for the three months ended March 31, 1999.
Effective April 9, 1999 the Company acquired the remaining 24.96% interest in
Ness, eliminating the minority interest.
Net Income (loss): Net income (loss) decreased from a profit of $1.0
million for the three months ended March 31, 1999 to a loss of $0.9 million for
the three months ended March 31, 2000. This was
13
<PAGE>
primarily attributable to the 58% decline in total sales from 12,950 units for
the three months ended March 31, 1999 to 5,468 for the three months ended March
31, 2000.
Comparison of nine months ended March 31, 2000 and March 31, 1999.
Net Sales: Net sales decreased by $8.5 million or 25% from $34.0 million
for the nine months ended March 31, 1999 to $25.5 million for the nine months
ended March 31, 2000. Distributor sales decreased by $10.8 million or 40% from
$26.7 million for nine months ended March 31, 1999 to $15.9 million for the nine
months ended March 31, 2000. The reduction in Distributor sales was primarily a
result of a 47% decline in total sales from 42,826 units for the nine months
ended March 31, 1999 to 22,749 for the nine months ended March 31, 2000. Direct
Retail Sales increased by $1.4 million or 24% from $5.8 million for nine months
ended March 31, 1999 to $7.2 million for the nine months ended March 31, 2000.
The increase in Direct Retail Sales was directly attributable to the inclusion
of an additional $2.6 million in Direct Retail Sales for the three months ended
September 30, 1999. The IIHSL acquisition was effective October 1, 1998 and
therefore the additional Direct Retail Sales did not apply for the three months
ended September 30, 1998.
Units sold in the Australian market decreased 49% from 32,117 units for the
nine months ended March 31, 1999 to 16,372 units for the nine months ended March
31, 2000. Units sold in New Zealand decreased 70% from 4,730 units for the nine
months ended March 31, 1999 to 1,429 units for the nine months ended March 31,
2000.
The decline in number of units sold in Australia and New Zealand is
attributable to:
(i) A reduction in the number of Distributor offices currently selling
in the Australian and New Zealand market caused by poor sales
results.
(ii) A reduction in the number of independent sales agents due to (i).
(iii) The delay in the introduction of the Online Monitoring Program into
the Distribution network.
Unit sales in Europe and the United Kingdom increased 3% from 4,432 units
for the nine months ended March 31, 1999 to 4,559 for the nine months ended
March 31, 2000. In particular, unit sales in the Netherlands increased 52% from
2,709 for the nine months ended March 31, 1999 to 4,131 for the nine months
ended March 31, 2000.
The Company has intentionally temporarily suspended selling in the South
African market to concentrate the resources of the Company on the Australian,
New Zealand, USA and European markets. The South African market recorded 142
unit sales during the nine months ended March 31, 2000 compared to 957 for the
nine months ended March 31, 1999.
Cost of Goods Sold: Cost of goods sold decreased 21% from $17.3 million for
the nine months ended March 31, 1999 to $13.6 million for the nine months ended
March 31, 2000. As a percentage of net sales, cost of goods sold increased 2%
from 51% for the nine months ended March 31, 1999 to 53% for the nine months
ended March 31, 2000. The increase in cost of goods sold as a percentage of net
sales is primarily attributable to reduction in margin received by the Company
from the introduction of the On-line Monitoring Program in the third quarter.
The Company must provide for the cost of monitoring supplied through a third
party over the 60-month period.
14
<PAGE>
General and Administrative Expenses: General and administrative expenses
were $11.0 million for the nine months ended March 31, 2000, compared to $8.4
million for the nine months ended March 31, 1999. Total general and
administrative expenses, as a percentage of net sales, increased 18% to 43% for
the nine months ended March 31, 2000 compared to 25% for the nine months ended
March 31, 1999. The increase in general and administrative expenses as a
percentage of net sales was primarily attributable to:
(i) The fixed nature of the expenses relating to the administration and
provision of service to the distribution network.
(ii) Market research, consulting and travel expenses incurred by the
Company in Australia and New Zealand relating to the Task Force
program formed by the Company in June 1999. This program involved a
comprehensive survey of 8,000 customers as well as focus groups
throughout the Australia and New Zealand market, creation of new
marketing techniques and ultimately the creation of the new online
monitoring program. All expenses have been recognized as they were
incurred.
(iii) Implementation costs associated with the launch of the new
SecurityGuard 3 product in both Australia and New Zealand.
(iv) Marketing and development costs relating to Upgrade Program
resulting in the 2,818 connections to on-line monitoring from the
Company's existing 250,000 home customer base.
(v) Program development costs relating to the United States market and
the On-line Monitoring Program.
(vi) The inclusion of $0.8 million of additional expenses relating to
IIHSL. The IIHSL acquisition was effective October 1, 1998 and
therefore the additional expenses did not apply for the three months
ended September 30, 1998.
Amortization and depreciation: Amortization and depreciation increased by
62% from $1.3 million for the nine months ended March 31, 1999 to $2.1 million
for the nine months ended March 31, 2000. This was directly attributable to: (i)
the write off of goodwill relating to the South African market of $52,000; (ii)
the inclusion of $54,000 million of additional depreciation relating to the
capitalization of monitoring dialers which commenced July 1, 1999; (iii) the
write down of $0.1 million of fixed assets which were determined to be of
negligible value; (iv) increase in amortization and depreciation of capital and
leased assets of $0.2 million; (v) the inclusion of $0.2 million of additional
depreciation and amortization of capital assets relating to Ness and; (vi) the
inclusion of $0.2 million of additional amortization relating to goodwill
recorded upon the acquisition of IIHSL. The IIHSL acquisition was effective
October 1, 1998 and therefore the additional depreciation and amortization
described in clause (v) and (vi) above did not apply for the three months ended
September 30, 1998.
Research and Development: Research and Development expense was $0.7 million
for the nine months ended March 31, 1999 compared to $0.4 million for the three
months ended December 31, 1998. The $0.3 million increase is attributable to the
exclusion of $0.2 million of Research and Development expenses relating to Ness
for the three months ended September 30, 1998. Research and Development expenses
represent costs incurred by Ness in relation to product approvals and the design
and development of new products.
15
<PAGE>
Income From Operations: Income from operations decreased 128% from $6.7
million for the nine months ended March 31, 1999 to a loss of $1.9 million for
the nine months ended March 31, 2000. The decrease in income from operations
reflects the reduction in unit sales in the nine months ended March 31, 2000.
Non Operating Income - Other: Non Operating Income - Other represents;
(i) The $0.3 million write-off of the Company's 49% interest in the
Bayside Partnership purchased June 30, 1998, which had entered into
an agreement with Prime Life Corporation to acquire a retirement
village in Melbourne, Australia. The Company had been unable to
reach an agreement as to the appropriate management fee to be
charged for the administration of this passive investment. The
Company has terminated this relationship to focus its resources on
its core business.
The investment in the partnership provided the Company with a
permanent difference for tax purposes of $1.5 million (approximately
$0.5 million after tax) for the fiscal year ended June 30, 1998. Due
to changes in tax laws this benefit was reversed for fiscal year
ended June 30, 1999 and has subsequently been reinstated as a result
of the write-off of the interest in the partnership.
(ii) The $0.6 million profit on the sale of the Company's 50% interest in
FFC to FAI Insurances Limited, effective March 31, 2000.
Interest Income: Income from operations decreased 33% from $0.3 million for
the nine months ended March 31, 1999 to $0.2 million for the nine months ended
March 31, 2000. The decrease in interest income is directly attributable to the
reduction in the Company's Cash and Cash Equivalents from $4.7 million as at
March 31, 1999 to $0.4 million as at March 31, 2000.
Interest Expense-related party: Interest expense--related party increased
from $0.3 million for the nine months ended March 31, 1999 to $0.4 million for
nine months ended March 31, 2000. Interest expense-related party consists of
interest payments on: (a) the vendor-financed loan initiated as part of the FFC
Transaction on December 31, 1997; and (b) the funding facility initiated on
December 22, 1999 to finance the initial cash deficiency of the Upgrade Program.
The increase of $0.1 million was directly attributable to the introduction of
(b) for the three months ended March 31, 2000.
Interest Expense--other: Interest expense--other for the nine months ended
March 31, 2000, and 1999 was $0.5 million and $0.4 million respectively. The
interest charge for both the nine month periods ended March 31, 2000 and 1999
consisted of a non-cash imputed interest charge recorded in order to comply with
the 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
discount to be recorded for debt securities issued in connection with an
acquisition with an interest rate fixed materially below the effective rate or
current yield of an otherwise comparable security. The interest charge was not
reflected in the three months ended September 30, 1998 since IIHSL was acquired
in October 1998.
Income Tax (Expense) Benefit: As the Company incurred a loss for the nine
month period ended March 31, 2000, it derived a tax benefit and an effective tax
rate of 49%. This contrasted to the prior corresponding period when a profit was
derived and the effective tax rate was 42%. The effective rate of tax for the
nine months ended March 31, 2000 was increased by; (i) the difference between
accounting and taxable profit on the sale of the Company's 50% interest in FFC
due to the effect of capital gains
16
<PAGE>
indexation and equity accounting adjustments; and (ii) the re-instatement of the
permanent difference for tax purposes of $1.5 million (approximately $0.5
million after tax) derived from the investment in the Bayside Partnership which
was written off as at December 31, 1999.
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased from $296,000 for the nine months ended March 31, 1999 to $57,000 for
the nine months ended March 31, 2000. This was calculated by taking the
Company's 50% share of FFC's net income of $283,000 for the nine months ended
March 31, 2000 and deducting amortization of goodwill for the same period of
$226,000. The decrease in FFC's net income during the nine months ended March
31, 2000 as compared to the nine months ended March 31, 1999 was primarily
attributable to the Company's reduction in unit sales.
Minority Interest: Minority interest for the nine months ended March
31,1999 represents an independent third party's ownership of 24.96% of Ness, and
the corresponding profit allocation for the nine months ended March 31, 1999.
Effective April 9, 1999 the Company acquired the remaining 24.96% interest in
Ness, eliminating the minority interest.
Net Income (loss): Net income (loss) decreased from a profit of $3.7
million for the nine months ended March 31, 1999 to a loss of $1.1 million for
the nine months ended March 31, 2000. This was primarily attributable to the 47%
decline in total sales from 42,826 units for the nine months ended March 31,
1999 to 22,749 for the nine months ended March 31, 2000.
Liquidity and Capital Resources
Cashflow from operations declined $6.0 million from a cash-inflow of $3.2
million for the nine months ended March 31, 1999 to a cash-outflow of $2.8
million for the nine months ended March 31, 2000. The principal source of the
Company's liquidity historically has been cashflow from operations. As at March
31, 2000 the Company has $0.6 million available on its $0.7 million credit
facility with Westpac Banking Corporation. The Company's cashflow from
operations is currently negative and unless it is able to secure additional
credit facilities or raise further debt or equity there can be no assurance that
internally generated cashflow will be adequate to support current business
operations over the next three months. The lack of an additional credit facility
will have a material adverse effect on the Company's operations, liquidity and
financial position.
The decline in cashflow from operations was primarily due to (i) the $4.8
million decline of net income from a profit of $3.7 million for the nine months
ended March 31, 1999 to a net loss of $1.1 million for the nine months ended
March 31, 2000 and (ii) provisional income tax payments of $1.7 million relating
to the fiscal year ended June 30, 1999.
Net cash used in investing activities decreased from $5.0 million for the
nine months ended March 31, 1999 to $1.7 million for the nine months ended March
31, 2000. Net cash used in investing activities for the nine months ended March
31, 1999 primarily consisted of; (i) consideration paid and costs associated
with the acquisition of IIHSL; (ii) a short term loan of $0.6 million granted to
FAI Home Distributors Pty Limited; and (iii) the purchase of capital assets by
Ness. Net cash used in investing activities for the nine months ended March 31,
2000 primarily consisted of (i) capitalized monitoring dialers of $0.6 million;
(ii) $0.4 million for the purchase of capital assets; and (iii) a short term
loan of $0.6 million granted to FAI Home Distributors Pty Limited.
Net cash generated from financing activities increased from a deficit of
$0.5 million for the nine months ended March 31, 1999 to a surplus of $2.1
million for the nine months ended March 31, 2000. The
17
<PAGE>
surplus consisted of; (i) cash received of $3.1 for the sale of upgrade
monitoring receivables to FFC pursuant to the Receivables Purchase Agreement
("RPA") less collections remitted to FFC of $0.2 million; and (ii) Ness Note
installment payments of $400,000 paid on July 7, 1999, and $100,000 paid on
February 15, 2000 and $300,000 paid on February 21, 2000.
FFC-Receivables Purchase Agreement
- ----------------------------------
On December 22, 1999, the Company entered into the Receivables Purchase
Agreement ("RPA") with FAI Finance Corporation Pty Limited ("FFC"). Under this
agreement, the Company has the right to sell eligible upgrade monitoring
receivables to FFC and undertakes to continue to service the receivables in
exchange for an upfront cash payment equal to the sum of the total receivable
less 15% retained as sub-ordinated debt. This facility specifically relates to
the Company's Upgrade Program offering five-year monitoring contracts to its
existing 250,000 residential customers. Previously, the Company has funded this
program from cash flow from operations.
Under the RPA, the Company must maintain a sub-ordinated loan with FFC
equal to 15% of the outstanding receivable sold. The sub-ordinated loan as at
March 31, 2000 was $0.4 million.
The Company has not recognized the sales of receivables under the agreement
as a sale for financial reporting purposes. The sales proceeds received from FFC
have been recognized as secured borrowing, and interest and line fees under the
FFC facility have been recognized as interest expense. Under the agreement the
Company pays interest to FFC at 12.5% per annum on the used portion of the
facility plus a line fee of 2.0%. As at March 31, 2000 the limit of the facility
provided by FFC, being $3,061,500, was fully drawn. The facility has
subsequently been extended to $4,592,250 pursuant to the terms of the Sale of
FFC. As at April 10, 2000 the extension of the facility was fully drawn.
The Company intends to seek a larger facility to facilitate the expansion
of this program with either FFC or other financial institution. There is no
guarantee the Company will be successful in increasing or replacing this
facility.
Sale of FFC
- -----------
Effective March 31, 2000, the Company, through its wholly-owned subsidiary
FAI Home Security Pty. Limited ("FHS"), sold its 50% interest in FFC to FAI
Insurances Limited ("FAI") for approximately $8,117,567 (the "Sale"). On April
7, 2000, FAI paid FHS $2,400,000, the remainder of the Sale price was paid on or
around April 26, 2000. FAI, which owns approximately 47% of the common stock
of the Company, is a wholly owned subsidiary of HIH Insurance Limited ("HIH").
In connection with FHS's purchase of FFC in Fiscal 1997, FAI provided FHS
with vendor financing, approximately $4,439,175 of which remains outstanding
(the "FAI Note"). Pursuant to the terms of the Sale, FAI agreed to extend the
payment terms of the FAI Note, which will be guaranteed by a security interest
in Ness Security Products Pty. Ltd. ("Ness"). Upon receipt of the proceeds of
the Sale, the Company paid to Integrated Investments Limited ("IIL") $8,200,000
in full settlement of the $8,298,000 due to IIL as of June 30, 2000 (the "IIL
Payment"). The decrease in the amount paid versus that owed as of June 30, 2000
reflects a discount for the time value of money. To the extent that the proceeds
from the Sale were insufficient to pay IIL in full, FAI lent the shortfall to
FHS and added that amount to the FAI Note which will accrue annual interest at
the rate of 7.75% and requires monthly payments of principal and interest over
sixty months.
18
<PAGE>
In addition to the above described transactions, pursuant to the terms of
the Sale, FFC has agreed to increase the limit on its existing factoring
facility with FHS from approximately $3,061,500 to approximately $4,592,250.
Sutter Securities, Inc. issued a fairness opinion stating that the Sale was
in the best interest of the public shareholders of HSI and a reasonable third-
party transaction.
As of October 1, 1999, and January 1, 2000 the Company has issued five year
convertible warrants to purchase 400,000 shares of Common Stock at an exercise
price of $13.00 per share to Integral Investments Limited ("IIL") pursuant to
the terms originating from the acquisition of IIHSL.
The Company is currently evaluating the carrying value of: (i) goodwill of
$8.6 million originating from the reorganization immediately preceding the
Company's Initial Public Offering; (ii) the Distributor Association loan of $1.0
million; (iii) tax benefits of $0.2 million relating to the Company's Canadian
operation; and (iv) Distributor receivable balances of $1.3 million., to
determine the appropriateness of potential charges / write-offs against such
balances, and where required, intends to make such adjustments in the fourth
quarter of Fiscal 2000.
The Company's strategy for growth is based on the successful roll-out of
the new On-line Monitoring Program through its Distributor Network into existing
and new markets and the sale of five-year on-line monitoring contracts through
its Upgrade Program to its existing 250,000 residential customers. As the
Company's current level of monthly unit sales is insufficient to generate
positive cashflow from operations the Company must obtain additional external
funding until a breakeven level of sales is achieved. There is no guarantee that
the Company will achieve a breakeven level of unit sales or will be successful
in obtaining additional external funding. The lack of such capital could have a
material adverse effect on the Company's operations, liquidity and financial
position.
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 reduced in value relative to the U.S. dollar from .6280 on March 31, 1999 to
.6123 on March 31, 2000. Although the Company is not in the business of currency
hedging, it may from time to time engage in hedge arrangements. Nevertheless,
there can be no assurance that the Company will be successful in limiting risks
related to currency fluctuations and that changes in exchange rates will not
have a material adverse effect on the Company or its results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part III, Item 7, Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for
the year ended June 30, 1999.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
19
<PAGE>
No material changes have occurred that would effect the information
presented in the Company's 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
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) On April 14, 2000 the registrant filed a report on Form 8K to file the
requisite financial information and related exhibits associated with
the sale of it's 50% interest in FFC.
HOME SECURITY INTERNATIONAL, INC.
SIGNATURES
20
<PAGE>
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/ Chris MacDonnell
-----------------------------------
Chris MacDonnell
Chief Operating Officer
(Principal Operating Officer)
By: /s/ Mark Whitaker
-----------------------------------
Mark Whitaker
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)
Dated: May 15, 2000
21
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 445,880
<SECURITIES> 0
<RECEIVABLES> 4,698,219
<ALLOWANCES> 0
<INVENTORY> 6,417,781
<CURRENT-ASSETS> 22,094,954
<PP&E> 4,020,843
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,805,368
<CURRENT-LIABILITIES> 18,676,299
<BONDS> 0
0
0
<COMMON> 5,828
<OTHER-SE> 27,717,613
<TOTAL-LIABILITY-AND-EQUITY> 51,805,368
<SALES> 7,346,818
<TOTAL-REVENUES> 8,036,092
<CGS> 4,505,517
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,943,709
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<INTEREST-EXPENSE> 352,272
<INCOME-PRETAX> (1,765,406)
<INCOME-TAX> 840,448
<INCOME-CONTINUING> (924,958)
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