-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWeqWpbjsMd6hy3fPJPl0CAzLt7NfW4XbnI4r8sFPbDnTQHgPN3ttl7trOmbt0u1 qTHCO8a2sFB00GwJtQhPlQ== 0000950131-99-006078.txt : 19991109 0000950131-99-006078.hdr.sgml : 19991109 ACCESSION NUMBER: 0000950131-99-006078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0001038262 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 980169495 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14502 FILM NUMBER: 99742683 BUSINESS ADDRESS: STREET 1: LEVEL 7 77 PACIFIC HIGHWAY CITY: NORTH SYDNEY STATE: C3 ZIP: 00000 BUSINESS PHONE: 3125802354 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-14502 ---------------------- HOME SECURITY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 98-0169495 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation of organization) Level 7, 77 Pacific Highway North Sydney, NSW Australia 2060 (Address of principal executive offices) (Zip Code) (011) (612) 9936-2424 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]Yes [ ] No Number of Shares of Common Stock Outstanding on November 5, 1999: 5,828,278 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements HOME SECURITY INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, September 30, -------------------------------- NOTE 1999 1999 $US $US ------------------------------------------- ASSETS - ------ Current assets Cash and cash equivalents 2,976,240 1,158,221 Accounts receivable - related party 217,516 568,831 Accounts receivable - trade, net 3,190,633 4,120,995 Inventories 2 6,974,109 6,495,126 Prepaid expenses and other current assets 1,508,016 1,757,205 ------------------------------ Total current assets 14,866,514 14,100,378 ------------------------------ Non-current assets Investments in affiliated companies 7,874,928 7,850,084 Intangibles, net 23,014,184 22,663,023 Other non-current assets 5,721,794 5,590,618 ------------------------------ Total non-current assets 36,610,906 36,103,725 ------------------------------ Total assets 51,477,420 50,204,103 ============================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities Bank overdraft 150,938 - Note payable - FAI Insurance Group 1,313,400 1,304,400 Note payable - Integral Investments Limited 8,394,024 8,132,668 Income tax payable 1,355,696 966,838 Other current liabilities 6,635,939 6,062,782 ------------------------------ Total current liabilities 17,849,997 16,466,688 ------------------------------ Non-current liabilities Note payable - FAI Insurance group 3,447,675 3,424,050 Accrued security callout 147,564 110,430 Other non-current liabilities 958,531 926,071 ------------------------------ Total non-current liabilities 4,553,770 4,460,551 ------------------------------ Total liabilities 22,403,767 20,927,239 ------------------------------ Stockholders' equity Preferred stock $.001 value; 1,000,000 shares authorized, none outstanding - - Common stock $.001 value; 20,000,000 shares authorized and 5,828,278 shares issued and outstanding as of June 30, 1999 and September 30, 1999 Respectively. 5,828 5,828 Additional paid-in capital 22,309,708 22,309,708 Warrants 504,000 504,000 Secured Note (2,375,000) (2,375,000) Accumulated other comprehensive loss 3 (452,532) (534,971) Retained earnings 9,081,649 9,367,299 ------------------------------ Total stockholders' equity 29,073,653 29,276,864 ------------------------------ Total liabilities and stockholders' equity 51,477,420 50,204,103 ------------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 HOME SECURITY INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30, ------------------------------------------ 1998 1999 NOTE $US $US Net Sales 10,226,238 9,520,074 Cost of goods sold (5,861,610) (4,772,977) ------------------------------------------ Gross profit 4,364,628 4,747,097 General and administrative expenses (1,733,622) (3,256,959) Amortization and depreciation (173,491) (623,199) Research and development expenses - (207,014) ------------------------------------------ Income from operations 2,457,515 659,925 Interest income 115,497 67,720 Interest expenses - related party (98,783) (91,385) - other (1,204) (172,631) ------------------------------------------ Income before taxes and equity in income of affiliated companies and minority interest 2,473,025 463,629 Income tax expense (916,864) (206,789) ------------------------------------------ Income before equity in income of affiliated companies and minority interest 1,556,161 256,840 Equity in income of affiliated companies 4 48,452 28,811 ------------------------------------------ Net income 1,604,613 285,651 ========================================== Net income per common share Basic earnings per share $0.31 $0.05 Diluted earnings per share $0.31 $0.05 Weighted average number of shares outstanding Basic 5,150,500 5,828,278 Diluted 5,162,457 5,828,278
The accompanying notes are an integral part of these condensed consolidated financial statements 3 HOME SECURITY INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)
Three Months Ended September 30, ------------------------------------ 1998 1999 $US $US ------------------------------------ ------------------------------------ Net cash provided by/(used in) operating activities 224,695 (605,414) ------------------------------------ Cashflow from investing activities Other cash inflows from investing activities (610,855) (631,847) ------------------------------------ Net cash used in investing activities (610,855) (631,847) ------------------------------------ Cashflow from financing activities Other cash outflows from financing activities - (549,904) ------------------------------------ Net cash provided by/(used in) financing activities - (549,904) ------------------------------------ Net decrease in cash held (389,160) (1,787,165) ------------------------------------ Cash at the beginning of the financial period 7,006,183 2,976,240 Effect of exchange rate change on cash (271,686) (30,854) ------------------------------------ Cash at the end of the financial period 6,348,337 1,158,221 ==================================== Supplemental disclosure of cashflow information: Interest paid 99,988 93,106 Income taxes paid 148,632 496,448
The accompanying notes are an integral part of these condensed consolidated financial statements 4 HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: SIGNIFICANT ACCOUNTING POLICIES a) Principles of Consolidation and Basis of Preparation - The condensed consolidated financial statements presented herein and these notes have been prepared by Home Security International, Inc. ("the Company"), without audit. In the opinion of the registrants' management, the unaudited condensed consolidated financial statements included in this filing on Form 10-Q reflect all adjustments which consist of normal recurring adjustments necessary to present fairly the financial information. The financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal year ended June 30, 1999 and the footnotes thereto included in the Company's Annual Report on Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (" U.S. GAAP "). The investment in FAI Finance Corporation Pty Limited ("FFC") and Bayside Partnership ("the Partnership") are recorded using the equity method. All inter-company accounts and transactions have been eliminated upon consolidation. 5 HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (Unaudited)
NOTE 2: INVENTORIES June 30, September 30, -------------------------------------------- 1999 1999 $US $US -------------------------------------------- Finished goods 3,527,596 2,864,046 Work in progress 288,382 331,880 Raw materials 3,158,131 3,299,200 -------------------------------------------- 6,974,109 6,495,126 ============================================
NOTE 3: COMPREHENSIVE INCOME As of July 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has chosen to disclose Comprehensive Income, which encompasses net income and foreign currency translation adjustments, in the notes to the condensed consolidated financial statements for interim reporting purposes. Total Comprehensive Income for the three-month periods ended September 30, 1998 and 1999 was as follows:
Three Months Ended September 30, --------------------------------------- 1998 1999 $US $US --------------------------------------- Net Income 1,604,613 285,651 Other comprehensive income: Foreign currency translation adjustment (200,900) (82,439) --------------------------------------- Total comprehensive income 1,403,713 203,212 =======================================
6 HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) NOTE 4: EQUITY IN INCOME OF AFFILIATED COMPANIES On December 31, 1997 the Company purchased 50 percent of the issued and outstanding shares (the "FFC Shares") of FAI Finance Corporation Pty Limited and its subsidiary FAI Finance Corporation (NZ) Limited ("FFC") from FAI Insurances Limited (the "FFC Transaction"). FFC, a consumer finance company with operations in Australia and New Zealand, finances a significant portion of the Company's financed sales. Selected summarized financial information for FFC is presented below.
Three months Ended September 30, --------------------------------------- 1998 1999 $US $US --------------------------------------- Net interest income 2,102,711 2,272,051 Net income 236,234 210,576
Reconciliation of equity in income of affiliated companies for the three- month period ended September 30, 1998 and 1999 is shown below.
Three Months Ended September 30, --------------------------------------- 1998 1999 $US $US --------------------------------------- 50 percent of Net income of affiliated company - FFC 118,117 105,288 Amortization of goodwill - FFC (69,665) (76,477) --------------------------------------- Equity in income of affiliated companies 48,452 28,811 =======================================
7 HOME SECURITY INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 This discussion and analysis of the Company's financial condition and results of operations contains certain forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities exchange Act of 1934, as amended (the "Exchange Act"), that are based on beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by the Company's management. When used in this filing, words such as "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the residential security alarm industry, the costs of product development, currency fluctuation as identified more fully below and other risks and uncertainties including, in addition to any uncertainties specifically identified in the text surrounding such statements, uncertainties with respect to changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors, and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying estimates or assumptions prove incorrect, actual results or outcomes may vary significantly from those anticipated, believed, estimated, expected, intended or planned. Such factors include, but are not limited to, the risks identified above and the risks detailed under the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 and expanded upon herein, and as detailed from time to time in the Company's other filings made with the Securities and Exchange Commission. Comparison of three months ended September 30, 1999 and September 30, 1998. Net Sales: Net sales decreased by $0.7 million or 7% from $10.2 million for the three months ended September 30, 1998 to $9.5 million for the three months ended September 30, 1999. Included in net sales for the three months ended September, 1999 was $2.6 million in net sales from IIHSL relating to Direct Retail Sales of manufactured goods to third party customers other than the Company ("Direct Retail Sales"). Because the Company acquired IIHSL in October 1998 there were no Direct Retail Sales for the three months ended September 30, 1998. Distributor sales decreased by $3.7 million or 37% from $9.9 million for three months ended September 30, 1998 to $6.2 million for the three months ended September 30, 1999. The reduction of Distributor sales was primarily a result of a 40% decline in unit sales. Units sold in the Australian market decreased 39% from 11,092 units for the three months ended September 30, 1998 to 6,795 units for the three months ended September 30, 1999. Units sold in New Zealand decreased 65% from 1,601 units for the three months ended September 30, 1998 to 553 units for the three months ended September 30, 1999. The decline in number of units sold in Australia and New Zealand is attributable to a reduction in the number of Distributor offices currently selling in the Australian and New Zealand markets. The number of units sold in the South African market decreased 85% during the three months ended September 30, 1999 to 90 as compared to 608 for the three months ended September 30, 1998. The decline in units sold in South Africa was attributable to returning the focus in the South African operation to rural areas after test selling in major city areas proved unsuccessful. Unit sales in Europe and the United Kingdom increased 7% from 1,368 units for the three months ended September 30, 1998 to 1,465 for the three months ended September 30, 1999. The Company has begun allocating 8 resources no longer required in Europe into the United States market to establish a foundation from which to grow the U.S. distribution network. The Company's online monitoring program is being rolled out in Australia and New Zealand. The Company currently has in excess of 4,000 monitored lines, 1,790 of these being installed during the three months ended September 30, 1999. The Company intends to expand its on-line monitoring program, including both upgrade and point of sale, in the Australian and New Zealand operations in the fourth quarter of Fiscal 1999. All setup and development expenses relating to the on-line monitoring program have been expensed as incurred. Cost of Goods Sold--other: Cost of goods sold decreased 19% from $5.9 million for the three months ended September 30, 1998 to $4.8 million for the three months ended September 30, 1999. As a percentage of net sales, cost of goods sold decreased 7% from 57% for the three months ended September 30, 1998 to 50% for the three months ended September 30, 1999. The reduction in cost of goods as a percentage of net sales is attributable to the acquisition of IIHSL. The acquisition of IIHSL enabled the Company (on a consolidated basis) to capture the IIHSL gross margin reflected in the reduction of the Company's cost of goods sold. As a result, the Company's gross margin as a percentage of sales increased 7% from 43% for the three months ended September 30, 1998 to 50% for the three months ended September 30, 1999. General and Administrative Expenses: General and administrative expenses were $3.3 million for the three months ended September 30, 1999, compared to $1.7 million for the three months ended September 30, 1998. Total general and administrative expenses, as a percentage of net sales, increased 17% to 34% for the three months ended September 30, 1999 compared to 17% for the three months ended September 30, 1998. The increase in general and administrative expenses as a percentage of net sales was primarily attributable to (i) the inclusion of expenses relating to IIHSL of $0.8 million; (ii) market research, consulting and travel expenses incurred by the Company in Australia and New Zealand relating to the Task Force program ("Task Force") implemented by the Company in June 1999. The reinvented sales program developed by the Task Force is to be launched in early November 1999. The Company expects the benefits of these expenses to be realized over the next three quarters and thereafter; and (iii) The Company also incurred additional expenses during the three months ended September 30, 1999 relating to the establishment of the on-line monitoring and start-up expenses for the establishment of the United States market. Amortization and depreciation: Amortization and depreciation increased 200% from $0.2 million for the three months ended September 30, 1998 to $0.6 million for the three months ended September 30, 1999. Amortization of goodwill increased 143% from $0.14 million for the three months ended September 30, 1998 to $0.34 million for the three months ended September 30, 1999. The increase was directly attributable to the inclusion of amortization relating to the goodwill recorded upon the acquisition of IIHSL for the three months ended September 30, 1999. Research and Development: Research and Development expenses for the three months ended September 30, 1999 represents costs incurred by IIHSL in relation to product approvals and the design and development of new products. Income From Operations: Income from operations decreased 72% from $2.5 million for the three months ended September 30, 1998 to $0.7 million for the three months ended September 30, 1999. The decrease in income from operations reflects the reduction in unit sales experienced in the three months ended September 30, 1999. Interest Income: Interest income remained stable at $0.1 million for the three months ended September 30, 1999 and 1998, respectively. Interest Expense--related party: Interest expense--related party is derived from the vendor financed loan initiated as part of the FFC Transaction on December 31, 1997. Interest expense--related party remained stable at $0.1 million for the three months ended September 30, 1999 and 1998, respectively. Interest Expense--other: Interest expense--other for the three months ended September 30, 1999 was $0.2 million. The interest charge for the three months ended September 30, 1999 consisted of a non-cash imputed 9 interest charge $0.2 million recorded in order to comply with the United States Generally Accepted Accounting Principles ("U.S. GAAP") purchase accounting principles. Pursuant to the Stock Purchase Agreement through which the Company acquired 100% of the issued and outstanding stock of IIHSL, the Company issued a non-interest bearing promissory note, secured by the IIHSL shares, in the amount of $9,098,000. U.S. GAAP requires a premium to be recorded for debt securities issued with an interest rate fixed materially above or below the effective rate or current yield of an otherwise comparable security. The interest charge is only reflected in the three months ended September 30, 1999 since IIHSL was acquired in October 1998. Income Tax Expense: The effective rate of tax increased from 37.1% for the three months ended September 30, 1998 to 44.6% for three months ended September 30, 1999. This increase is primarily attributable to the non-deductible amortization of goodwill generated from the acquisition of IIHSL during the three months ended September 30, 1999 of $0.15 million ($0.05 million tax effect). Equity in Income of Affiliated Companies: Equity in income of affiliates decreased by 40% from $48,000 for the three months ended September 30, 1998 to $29,000 for the three months ended September 30, 1999. This was calculated by taking the Company's 50% share of FFC's net income of $105,000 for the three months ended September 30, 1999 and deducting amortization of goodwill for the same period of $76,000. Net Income: Net income decreased 81% from $1.6 million for the three months ended September 30, 1998 to $0.3 million for the three months ended September 30, 1999. Liquidity and capital resources The principal source of the Company's liquidity historically has been cashflow from operations. The Company currently has a $0.7 million credit facility with Westpac Banking Corporation. The Company is currently negotiating an increase in its credit facility to up to $2.0 million. Furthermore, the Company is investigating a securitization program for its on-line monitoring program. The Company has payment obligations of $400,000 on December 31, 1999 and $8,298,000 on June 30, 2000 pursuant to the promissory note ("the Ness Note") originating from the acquisition of Integrated International Home Security Limited. The Company has experienced significant decline in cashflows from operations in the last quarter of fiscal 1999 and the first quarter of fiscal 2000. As a result, the Company is exploring the possibility of either restructuring the Ness Note with a mixture of new debt and equity or refinancing the Ness Note. Cashflow from operations declined $0.8 million from a cash-inflow $0.2 million for the three months ended September 30, 1998 to a cash-outflow of $0.6 million for the three months ended September 30, 1999. In April, 1998 the Company entered into an agreement with AMA Finance Corporation Pty Limited ("AMA") whereby AMA agreed to provide second line consumer finance for the sale of the Company's SecurityGuard to customers failing to meet the lending criteria of FFC. Although the Company's Distributors receive no income from AMA financed sales ("AMA sales"), each AMA sale is registered as a unit sale for commission and bonus calculations. Upon completion of an AMA sale the Company records a receivable of A$700 ($460) due from AMA which is repayable in twelve equal installments commencing eight months from installation (the "Repayment Cycle"). The total receivable due from AMA (the "AMA Receivable") increased $0.2 million for the three months ended September 30, 1999 from $1.1 as at June 30, 1999 to $1.3 million as at September 30, 1999. The AMA Receivable balance of $1.3 million as at September 30, 1999 is not expected to increase materially in the next fiscal year as the Repayment Cycle has reached maturity and AMA sales are expected to remain constant. The AMA Receivable is secured by a fixed and floating charge over AMA's finance receivables generated from the Company's AMA sales. The decline in cashflow from operation was primarily due to; (i) the $1.3 million decline of net income from $1.6 million for the three months ended September 30, 1998 to $0.3 million for the three months ended September 30, 1999; and (ii) provisional income tax installment paid on September 1, 1999 of $0.5 million relating to the fiscal year ended June 30, 1999. 10 Net cash used in investing activities remained constant at a deficit of $0.6 million for the three months ended September 30, 1998 and 1999. The deficit in net cash used in investing activities was primarily due to the (i) $240,000 for the purchase of capital assets; and (ii) a short term loan granted of $350,000 to FAI Home Distributors Pty Limited. Net cash generated from financing activities decreased from zero for the three months ended September 30, 1998 to a deficit of $550,000 for the three months ended September 30, 1999. The deficit consisted of; (i) a $400,000 Ness Note installment paid on July 7, 1999; and (ii) bank overdraft repayments of $150,000. Assuming a restructuring of the Ness Note on terms favorable to the Company, the Company believes that internally generated cashflows will be adequate to support currently planned business operations over the next twelve months. The Company's strategy for growth is based on the expansion of its Distributor Network into existing and new markets, with the costs of such expansion largely borne by the distributor and the introduction of point of sale on-line monitoring. It is expected that excess cashflows generated by the Company will be used to fund its upgrade on-line monitoring program and international expansion. The Company may be required to obtain additional capital to fund growth from other financing sources if the cashflow generated by the Australian, New Zealand and European operations is insufficient to meet the cash requirements of developing the international operations. Potential sources of such capital may include proceeds from bank financing or additional offerings of the equity or debt securities of the Company. There can be no assurance that such capital will be available on acceptable terms from these or other potential sources. The lack of such capital could have a material adverse effect on the Company's operations. Year 2000 disclosure The Company has been completed a Year 2000 compliance evaluation of its information technology infrastructure. The Company has identified three areas of exposure, each which can be further subdivided into two areas of implicit risk classification. (i) Software--"Mission Critical" & "Non-Mission Critical" (ii) Hardware--"Mission Critical" & "Non-Mission Critical" (iii) Remaining Infrastructure--"Mission Critical" & "Non-Mission Critical" Mission critical software includes the Company's accounting package, customer database, and operating systems, including Windows 95 and Windows NT. The services of an external information technology firm were utilized to conduct this review and provide an analysis of the Company's potential risks. The results of this review indicate that 100% of the mission critical software have been identified as being fully year 2000 compliant currently or following the loading of software patches. The structured rollout of the required software patches has been completed. The Company would need to invest approximately $40,000 to make its current customer database Year 2000 compliant. In order to benefit from advances in technology rather than making its current customer database compliant, the Company is purchasing a replacement customer database to be installed and fully operational prior to December 31, 1999 at an estimated cost of $145,000. The Company has currently spent $25,000 on achieving year 2000 compliance and estimates that, excluding the purchase of the new customer database, the total remaining cost to achieve year 2000 compliance will be approximately $35,000. In addition, 100% of the Company's non-mission critical software has been found to be year 2000 compliant following, in certain cases, the loading of software patches. Mission critical hardware encompasses the data communication infrastructure and all server end hardware. The services of an external information technology firm were utilized to conduct a review of these systems and provide an analysis of the Company's potential risks. Such review has been completed and the findings were conclusive. 100% of the mission critical hardware has been tested and determined to be year 2000 compliant. Furthermore, only one non-mission critical hardware product, a modem, has been found to be non-compliant. It has been replaced. The remaining infrastructure has been reviewed, and the rectification of any exposures will be achieved by 11 the end of October 1999. The Company has also adopted a policy requiring written confirmation of Year 2000 compliance from any prospective vendor. Furthermore, the Company has ensured all subsidiaries, including each of FFC and Ness, implement the above strategies to address Year 2000 issues. FFC is currently involved in a joint project with FAI General Insurance Company Limited ("FAI General"), a subsidiary of FAI Insurances Limited, to identify, categorize and if necessary, update, all software and hardware components to address Year 2000 issues. FFC has obtained confirmation from the vendor of its financial database package that such software is Year 2000 compliant. Ness has confirmed that by year end there will be no Year 2000 exposures. Ness has addressed Year 2000 issues in all of its products, including the SecurityGuard System. Ness has also received confirmation that its mission critical network, hardware and software are Year 2000 compliant. The Company does not expect that the cost, if any, to modify its infrastructures, in order to achieve Year 2000 compliance, will have a material impact on its financial condition or results of operations. This statement is a Year 2000 Readiness Disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act. Currency Fluctuations Although the Company's principal operations are concentrated in Australia and New Zealand, it conducts operations throughout the world. Accordingly, the Company's financial performance could be adversely affected by fluctuations in currency exchange rates as well as changes in duty rates. Furthermore, as the Company reports its financial results in U.S. dollars, a significant movement in the value of the U.S. dollar against certain international currencies, particularly the Australian dollar ("AUD"), could have a material adverse effect on the Company's reported financial position and results of operations. The AUD has increased in value relative to the U.S. dollar from .5904 on September 30, 1998 to .6522 on September 30, 1999. Although the Company is not in the business of currency hedging, it may from time to time engage in hedge arrangements. Nevertheless, there can be no assurance that the Company will be successful in limiting risks related to currency fluctuations and that changes in exchange rates will not have a material adverse effect on the Company or its results of operations. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. Part II - OTHER INFORMATION ITEM 1: Legal Proceedings The Company has had no material changes to the disclosure on this matter made in its Annual Report on Form 10-K for the year ended June 30, 1999. ITEM 2. Changes in Securities and Use of Proceeds Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information 12 Not Applicable ITEM 6. Exhibits and Reports on Form 8-K Exhibit 27.1 Financial Data Schedule HOME SECURITY INTERNATIONAL, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOME SECURITIES INTERNATIONAL, INC. (Registrant) By: /s/ Bradley D. Cooper ______________________________________ Bradley D. Cooper Chairman and Chief Executive Officer (Principal Executive Officer) By: /s/ Mark Whitaker ______________________________________ Mark Whitaker Vice President of Finance and Treasurer (Principal Financial and Accounting Officer) Dated: November 5, 1999 13 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS SEP-30-1999 JUL-01-1999 SEP-30-1999 1,158,221 0 3,408,149 0 6,495,126 14,100,378 5,590,618 0 50,204,103 16,466,688 0 0 0 5,828 29,271,036 50,204,103 9,520,074 9,587,794 (4,772,977) 0 (3,256,959) 0 (264,016) 463,629 (206,789) 256,840 0 0 28,811 285,651 0.05 0.05
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