<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, 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)
Delaware 98-0169495
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or 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 X, 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, September 30,
--------------------------------
NOTE 2000 2000
$US $US
-----------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 1,394,133 2,925,517
Accounts receivable - trade, net 2,317,748 2,389,548
Inventories 2 8,036,329 6,653,355
Prepaid expenses and other current assets 398,742 437,079
----------------------------
Total current assets 12,146,952 12,405,499
----------------------------
Non-current assets
Intangibles, net 20,499,355 20,200,367
Other non-current assets 9,487,310 8,316,753
----------------------------
Total non-current assets 29,986,665 28,517,120
----------------------------
Total assets 42,133,617 40,922,619
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Bank overdraft - -
Note payable - FAI Insurance Group 3,861,290 5,607,546
Borrowing - FAI Finance Corporation 1,563,268 1,031,755
Deposit Received in Advance - Sale of Ness 4 2,454,750
Deferred Income 1,447,994 977,082
Other current liabilities 7,149,091 5,704,854
-------------------------------
Total current liabilities 14,021,643 15,775,987
-------------------------------
Non-current liabilities
Note payable - FAI Insurance group 3,659,703 3,313,464
Borrowing - FAI Finance Corporation 3,619,976 3,033,738
Accrued security callout 113,506 144,436
Deferred Income 1,640,151 2,440,456
Other non-current liabilities 747,146 561,846
-------------------------------
Total non-current liabilities 9,780,482 9,493,940
-------------------------------
Total liabilities 23,802,125 25,269,927
-------------------------------
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 1,064,000 1,064,000
Secured Note (2,375,000) (2,375,000)
Accumulated other comprehensive loss 3 (644,814) (361,828)
Retained deficit (2,028,230) (4,990,016)
------------------------------
Total stockholders' equity 18,331,492 15,652,692
------------------------------
Total liabilities and stockholders' equity 42,133,617 40,922,619
==============================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 2000
NOTE $US $US
--------------------------------------------
<S> <C> <C> <C>
Net Sales 9,520,074 5,762,918
Cost of goods sold (4,772,977) (3,643,924)
-----------------------------
Gross profit 4,747,097 2,118,994
General and administrative expenses (3,256,959) (4,063,745)
Amortization and depreciation (623,199) (604,424)
Research and development expenses (207,014) (46,265)
-----------------------------
Income (loss) from operations 659,925 (2,595,440)
Interest income 67,720 33,374
Interest expenses - related party (91,385) (236,559)
- other (172,631) (16,141)
-----------------------------
Income (loss) before taxes and equity in income of
affiliated companies and minority interest 463,629 (2,814,767)
Income tax expense (206,789) (147,019)
-----------------------------
Income (loss) before equity in income of
affiliated companies and minority interest 256,840 (2,961,785)
Equity in income of affiliated companies 28,811 -
-----------------------------
Net income (loss) 285,651 (2,961,785)
=============================
Net income (loss) per common share
Basic earnings (loss) per share $ 0.05 $ (0.51)
Diluted earnings (loss) per share $ 0.05 $ (0.51)
Weighted average number of shares outstanding
Basic 5,828,278 5,828,278
Diluted 5,828,278 5,828,795
</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,
---------------------
1999 2000
$US $US
----------------------
<S> <C> <C>
Net cash utilized by operating activities (605,414) (2,531,624)
-----------------------
Cash flow from investing activities
Other cash outflows from investing activities (631,847) 2,398,714
-----------------------
Net cash used in investing activities (631,847) 2,398,714
-----------------------
Cash flow from financing activities
Other cash (outflow) inflow from financing (549,904) 1,829,121
activities
-----------------------
Net cash (utilized in) generated by
financing activities (549,904) 1,829,121
-----------------------
Net (decrease) increase in cash held (1,787,165) 1,696,211
-----------------------
Cash at the beginning of the financial period 2,976,240 1,394,133
Effect of exchange rate change on cash (30,854) (164,825)
-----------------------
Cash at the end of the financial period 1,158,221 2,925,517
=======================
Supplemental disclosure of cash flow information:
Interest paid 93,106 289,994
Income taxes paid 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,
2000 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.
<TABLE>
<CAPTION>
NOTE 2: INVENTORIES June 30, September 30,
-------------------------------
2000 2000
$US $US
-------------------------------
<S> <C> <C>
Finished goods 3,946,765 3,247,692
Work in progress 372,676 262,808
Raw materials 4,403,478 3,794,068
------------------------------
8,722,919 7,304,569
Less: Provision for Obsolescence (686,590) (651,214)
------------------------------
8,036,329 6,653,355
==============================
</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.
5
<PAGE>
HOME SECURITY INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
Total Comprehensive Income for the three-month periods ended September 30,
1999 and 2000 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
<S> <C> <C>
1999 2000
$US $US
-----------------------
Net Income (loss) 285,651 (2,961,785)
Other comprehensive (expense) income:
Foreign currency translation adjustment (82,439) 282,986
-----------------------
Total comprehensive income (loss) 203,212 (2,678,799)
======================
</TABLE>
NOTE 4: DEPOSIT RECEIVED IN ADVANCE -- SALE OF NESS
On September 29, 2000 the Company entered into an agreement to sell 49% of
its shareholding in Ness Security Products for cash consideration of $9.5
million ($AUD17.5 million) to HIH Insurance ("the Ness Sale"). A deposit of
approximately $2,454,750 ($AUD4.5 million) was paid by HIH Insurance to the
Company on 29 September 2000 in relation to the Ness Sale. From the remaining $7
million sales proceeds the Company has agreed to repay (i) $7 million ($AUD13
million) to HIH Insurance in relation to the FAI Note representing vendor
financing for the Company's purchase of FAI Finance Corporation Pty Limited in
1997; and (ii) short term finance provided by HIH in May, 2000. Furthermore, HIH
has agreed to provide additional funds of $1.4 million ($AUD2.5 million) by 30
June 2001. The final documents setting out the terms of the deal have not been
completed, however, it is anticipated that this transaction will be closed
within the next 30 days.
There is a risk that the Ness Sale may not be completed. In the event the
transaction is not completed, the Company's cash position will be reduced by
$2.4 million which will exasperate the events described in Note 5.
NOTE 5: NEW BUSINESS MODEL
The Company has prepared a business plan, which the management believes
will result in the generation of positive cash flows from its operating
activities. The business model takes the following approach.
1. Reduction in General and Administrative Expenses
During July and August 2000, the Company made 33 staff reductions as part of
cost control initiatives, reducing the total employees from 279 to 246. The
Company intends to further reduce the total number of employees during the
next six months through both natural attrition and redundancies. The expenses
associated with both marketing and service have also been reviewed. Through
the use of technology, expenses associated with service are expected to be
reduced and a number of marketing initiatives will be discontinued.
The management structure of the Company has been revised and the appropriate
cost reductions made in relation to the number of officers and executives
required for the Company's operating activities.
2. Closure of Unprofitable markets within the Company
The Company has reviewed each segment of its operating activities and has
identified a number of markets it intends to close or seek a joint venture
partner to fund market development. These markets are expected to close or
have joint venture partners prior to December 2000.
3. Increase Unit Sales
a) Recruitment
The Company intends in the three months from November 2000 to January 2001 to
launch a major campaign in all its remaining markets to recruit an increased
number of independent sales agents to significantly increase its sales force.
b) Center of Excellence
The Company intends to establish a number of centers of excellence or
training facilities operated by the Distributor Network, or by the Company
itself, whereby each individual distributor office and independent sales
agents can be retrained on an ongoing and regular basis. The Company intends
to focus its resources on establishing these centers of excellence as hubs
for motivation and training which will reduce the Company's costs associated
with sales staff attending individual offices on a regular basis.
c) Revised Distributor Plan
On September 1, 2000, the Company launched a revised Distributor program
whereby individuals within the sales hierarchy can be redefined within the
hierarchy upon the failure to achieve pre-determined sales levels. This
reduction in status within the network has been implemented to provide all
levels of the sales hierarchy the opportunity of re-training upon the non-
achievement of pre-determined Company benchmarks.
The Company expects the requirement to reach pre-determined sales levels on a
monthly basis to remain in place. This will ensure that each Distributor
office has sufficient motivation and training to continue to produce unit
sales levels required by the Company and more importantly result in a more
financially viable Distribution Network.
4. Increased Margins
The Company intends to pursue all opportunities to produce improved margins
to the group.
5. Reduction in Finance Costs
The Ness Sale will result in a reduction in finance costs associated with the
FFC Note and the Company's other short term debt funding, The Company will
seek to reduce all finance costs associated with the rollout of its
monitoring plan.
6. Going Concern
There is substantial uncertainty about the Company's ability to continue as a
going concern. To continue as a going concern it must achieve the
improvements in operating performance outlined in points 1-5 above. The
achievement of this improvement in operating performance is uncertain.
Management believes that the cash received from the Ness Sale (see Note 4) in
conjunction with the new business model, will be sufficient to achieve the
improvement in operating performance required for the Company to continue as
a going concern.
There is substantial uncertainty about the Company's ability to continue as a
going concern.
The Company has been advised by its independent public accountants that
should the situation remain unresolved at year-end, the auditors report on
those financial statements may be modified as a result of going concern
uncertainty.
6
<PAGE>
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, 2000 and expanded upon herein, and as
detailed from time to time in the Company's other filings made with the
Securities and Exchange Commission.
Continuing Losses; Revenue Recognition Policy
As reflected in the Company's financial statements, the Company has
suffered a significant reduction in revenue during the three months ended
September 30, 2000, resulting in a net operating loss of $2,837,776 for such
quarter. Such losses have been accompanied by a change in the Company's business
model from a direct seller of security systems which recognized receivables and
margins at the point of sale, to a seller of monitoring services with revenue
recognition occurring over the life of the monitoring contract. On September 30,
2000 the Company entered into a transaction to sell 49% of Ness (the Company's
manufacturing operation). The future success of the Company is dependent on it
utilizing the proceeds received from this sale to achieve increased sales
volumes and a reduction in expenses. While the Company believes the cash raised
from the sale of Ness will be sufficient to finance the changes needed to
achieve the sales targets forecasted and therefore continue as a going concern,
there is no certainty as to whether (i) the proceeds of the Ness sale will be
sufficient to fund current operations; (ii) the predicted level of sales
activity under the new business model will be achieved; or (iii) that the
necessary cost reductions under the new business model will be achieved. The
unproven success of the new business model raises substantial uncertainty about
the Company's ability to continue as a going concern. See Notes 4 and 5 to
Consolidated Financial Statement.
Recent Developments - Revenue Recognition
Prior to the introduction of on-line monitoring the Company sold security
equipment directly to its distribution network and immediately recognized its
revenues and margin at the point of sale. The distribution network contracted
directly with the consumer as an "authorized distributor" of the Company. The
Company under this agreement retained the right to the customer base.
As of 1 July 2000 the Company changed the nature of its sales transactions
with its distribution network, whereby the Company began to sell the Bundled
Security Package directly to the consumer, with all customers entering into a
monitoring agreement with the company at the point of sale. Despite selling
directly to the consumer, the Company still defers a portion of the revenues
over the period of the monitoring services are supplied, again typically sixty
months. The "authorized distributor" is paid an installation and connection
commission directly by the Company for each customer connected to monitoring.
7
<PAGE>
Comparison of three months ended September 30, 1999 and September 30, 2000.
Net Sales: Net sales decreased by $3.7 million or 30% from $9.5 million for
the three months ended September 30, 1999 to $5.8 million for the three months
ended September 30, 2000. The reduction in net sales was primarily a result of a
59% decline in total unit sales from 8,903 units for the three months ended
September 30, 1999 to 3,633 units for the three months ended September 30, 2000.
Revenues did not decrease in proportion to unit sales due to the change in
business model, whereby the Company began to sell the Bundled Security Package
directly to the consumer. For the three months ended September 30, 2000 the
company recognized on its Australian standard package sales approximately $1,027
per unit (net of factoring charges) and deferred an amount of approximately $267
relating to monitoring services for the compared to approximately $782 per unit
relating to equipment sales to distribution network for the three months ended
September 30, 1999. No deferral of monitoring services was applicable in the
three months to September 30,1999.
Monitoring revenues of $0.7 million relating to the supply of monitoring
services were deferred for the three months ended September 30, 2000 and will be
recognized over the period the services are supplied, being predominately sixty
months.
Sales of manufactured goods not sold through the distributor network
("Direct Retail Sales") decreased by $0.1 million or 4% from $2.6 million for
the three months ended September 30, 1999 to $2.5 million for the fiscal year
ended June 30, 2000.
Units sold in the Australian market decreased 63% from 6,795 units for the
three months ended September 30, 1999 to 2,506 units three months ended
September 30, 2000. Units sold in New Zealand decreased 22% from 553 units for
the three months ended September 30, 1999 to 431 units for the three months
ended September 30, 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.
(ii) A reduction in the number of independent sales agents due to (i).
(iii) Increased competition.
Unit sales in Europe and the United Kingdom decreased 63% from 1,465 units
in the three months ended September 30, 1999 to 546 units for the three months
ended September 30, 2000. The reduction in unit sales was a result of the
closure of distribution outlets in both markets.
As at September 30, 2000 the Company had accumulated 19,487 monitored
accounts compared to approximately 4,000 monitored accounts as at September 30,
1999.
Cost of Goods Sold--other: Cost of goods sold decreased from $4.8 million
for the three months ended September 30, 1999 to $3.6 million for the three
months ended September 30, 2000. As a percentage of net sales, cost of goods
sold increased 13% from 50% for the three months ended September 30, 1999 to 63%
for the three months ended September 30, 2000. The increase in cost of goods as
a percentage of net sales is attributable to the change in the business model,
whereby the Company sells the Bundled Security Package directly to the consumer,
the "authorized distributor" is paid on installation and connection commission
directly by the Company for each customer connected to monitoring.
As a result of the change in business model, a reduction in margin in the
Australian market of approximately $72 per unit was introduced to facilitate a
lower purchase price to consumers with the introduction of on-line monitoring.
This reduction in margin was a result of increased competitive forces within the
Company's target market.
General and Administrative Expenses: General and administrative expenses
were $4.1 million for the three months ended September 30, 2000, compared to
$3.3 million for the three months ended September 30, 1999. Total general and
administrative expenses, as a percentage of net sales, increased 36% to 70% for
the three months
8
<PAGE>
ended September 30, 2000 compared to 34% for the three months ended September
30, 1999.
The increase in General and Administrative expenses for the three months
ended September 30, 2000 compared to for the three months ended September 30,
1999 is attributable to the following:
(i) The fixed nature of the expenses relating to the provision of service to
the customer base and the administration of the distribution network.
(ii) Increased service cost of $0.1 million.
(iii) Re-classification of Service parts of $0.1 million charged to General and
Administrative expenses.
(iv) Employee redundancy payments and salaries of $0.2 million relating to the
reduction of staff numbers by 33 employees within the company's
operations.
(v) Legal fees relating to the Class Action of $0.1 million.
(vi) Provision of $0.2 million for doubtful debts relating to FAI Home
Distributors Pty Limited.
The company has embarked on a further overhead reduction program whereby by
December 2000 all head office operations will be integrated into the
manufacturing facility in Sydney and the Corporate office closed.
Amortization and depreciation: Amortization and depreciation remained
unchanged at $0.6 million for the three months ended September 30, 1999 to $0.6
million for the three months ended September 30, 2000.
Research and Development: Research and Development expenses reduced
$0.1million from $0.2 million for the three months ended September 30, 1999 to
$0.1 million three months ended September 30, 2000. This decreased was
attributable to the launch of the "SecurityGuard 3" product in the three months
ended September 30, 1999.
Income (Loss) From Operations: Income from operations changed from $0.7
million for the three months ended September 30, 1999 to a loss of $2.6 million
for the three months ended September 30, 2000. The decrease in income from
operations reflects the reduction in unit sales experienced in the three months
ended September 30, 2000 and the no commensurate decrease in general and
administrative costs for the three months ended September 30, 2000.
Interest Income: Interest income remained stable at $0.1 million for the
three months ended September 30, 1999 and 2000, respectively.
Interest Expense--related party: Interest expense--related party increased
from $0.1million for the three months ended September 30, 1999 to $2.6 million.
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
amended as at March 31, 2000; and (b) the funding facility initiated on December
22, 1999 to finance the initial cash deficiency of the internally financed
Upgrade Program.
Interest Expense--other: Interest expense--other $16,141 compared to
$172,631 for the three months ended September 30, 1999. The interest charge for
the three months ended September 30, 1999 consisted of a non-cash imputed
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 note was settled March
31, 2000 and not reflected for the three months ended September 30, 2000.
Income Tax Expense: As the Company has incurred continuing net operating
losses for the three months ended September 30, 2000, it has recognized tax
benefits of $0.6 million. However, valuation reserves of the same amount have
been established as the recovery of such assets is uncertain.
9
<PAGE>
Realization of deferred tax benefits associated with net operating losses
("NOL") and credit carryforwards is dependent upon generating sufficient taxable
income prior to their expiration. Management believes that there is a risk that
certain of these NOL and credit carryforwards may expire unused and,
accordingly, has established a valuation allowance against them of $2.4 million
as of June 30, 2000. Although realization is not assured for the remaining
deferred tax assets, management believes it is more likely than not that they
will be realize through future taxable earnings or alternative tax strategies.
However, the net deferred tax assets could be reduced in the near term if
management's estimates of taxable income during the carryforward period are
significantly reduced or alternative tax strategies are no longer viable.
However, due to the agreement to sell 49% of the company's 100%
shareholding in Ness Security Products ("Ness Sale - refer Note 4") the Company
does not expect to group income with Ness for tax purposes. As a result the
company has taken the appropriate tax expenses of $0.1m in relation to the Ness
operations as a separate entity within the group. This compared to income tax
expense of $0.2m for the three months ended September 30, 1999.
Equity in Income of Affiliated Companies: Equity in income of affiliates
decreased from $29,000 to $0 as a result of the sale of the company's 50%
shareholding in FAI Finance Corporation on April 7, 2000.
Net (Loss) Income: Net income decreased from $0.3 million for the three
months ended September 30, 1999 to $3.0 million for the three months ended
September 30, 2000.
Liquidity and capital resources
Net Cash used in operations declined $1.9 million from a cash-outflow $0.6
million for the three months ended September 30, 1999 to a cash-outflow of $2.5
million for the three months ended September 30, 2000.
The decline in cash flow from operations for the three months ended September
30, 2000 was primarily due to:
(i) the decline in the Company's net income after non cash items;
(ii) reduction in Trade Payables of $1.5 million
The reduction in Trade Payables was partially offset by
(iii) A reduction in inventory of $1.4 million
Net cash generated by investing activities increased from a deficit of $0.6
million for the three months ended September 30, 1999 to a surplus of $2.4
million for the three months ended September 30, 2000. This reduction is a
result of reduced expenditure on capital assets and a reduction in working
capital funding to FAI Home Distributors Pty Limited.
On September 29, 2000 the Company agreed to sell 49% of its shareholding in
Ness Security Products for cash consideration of $9.5 million ($AUD17.5 million)
to HIH Insurances ("the Ness Sale"). A deposit of $2.5 million was paid by HIH
Insurances to the Company on 29 September 2000 in relation to the Ness Sale.
From the remaining $7 million sales proceeds the Company has agreed to repay $7
million ($AUD13 million) to HIH Insurances in relation to the (i) FAI Note
representing vendor financing for the Company's purchase of FAI Finance
Corporation Pty Limited in 1997; and (ii) short term finance provided by HIH in
May, 2000. Furthermore, HIH has agreed to provide additional funds of $1.4
million ($AUD2.5 million) by 30 June 2001. The formal documents setting out the
terms of the deal have not been executed, however, it is anticipated that this
transaction will close within the next 30 days.
The Company believes the $2.5 million cash raised in the Ness sale and the
additional availability of loan funds of $1.4 million will provide the Company
with sufficient liquidity to fund the cash flow deficit from operating
activities that the company expects in the first three quarters of fiscal 2001.
The Company expects its business plan to produce positive cash flow from
operations in the last quarter of fiscal 2001 provided sales targets are
achieved in order to provide the Company with sufficient liquidity thereafter
in fiscal 2001 and 2002.
Net cash generated from financing activities increased from a deficit of
$0.5 million for the three months ended September 30, 1999 to a surplus of $1.8
million for the fiscal year ended June 30, 2000. The increase consisted of:
On August 3, 2000 and August 17, 2000 HIH Insurances provided the Company
with approximately $0.5 million and $1.5 million, respectively, in short term
debt financing, at a rate of 7.75 % per annum, with principal and interest
payable at call (on demand). The short term financing is secured by a second
priority security interest over Ness Security Products Pty. Limited.
On August 4, 2000 the Company received $0.5 million of additional unsecured
external funding from International Home Security Investments Limited, at a rate
of 10% per annum, with interest payable weekly in arrears, and the balance
payable upon successful completion of any capital or equity raising or from
proceeds from the sale of assets. Paul Brown, a director of the Company, is also
a director and sole shareholder of International Home Security Investments
Limited.
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The Company has further access to an overdraft facility of approximately
$570,000.
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
an Upgrade Program to its existing 264,000 residential customers. As the
Company's current level of monthly unit sales is insufficient to generate
positive cash flow 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.
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 264,000 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
September 30, 2000 was $0.5 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 September 30, 2000 the limit of the
facility provided by FFC, being $4.4 million, was drawn to $4.0 million.
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 decreased in value relative to the U.S. dollar from .6522 on
September 30, 1999 to .5455 on September 30, 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.
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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, 2000.
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, 2000.
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
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/ Terry Youngman
---------------------------------------
Terry Youngman
President and Deputy Chief Executive
Dated: November 14, 2000
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