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 May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-4465
Sirco International Corp.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-2511270
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification No.)
24 Richmond Hill Avenue, Stamford Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 203-359-4100
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
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. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 1,309,700 shares of
Common Stock, par value $.10 per share, as of July 1, 1996.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
May 31, 1996 Nov. 30, 1995
(Unaudited) (See note)
----------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................... $ 231,475 $ 176,241
Accounts receivable .......................... 2,703,644 2,184,468
Inventories .................................. 5,193,947 5,762,828
Prepaid expenses ............................. 494,896 257,809
Other current assets ......................... 75,298 276,815
------------ ------------
Total current assets ........................... 8,699,260 8,658,161
Property and equipment at cost ................. 1,569,513 1,777,894
Less accumulated depreciation .................. 921,785 1,128,045
------------ ------------
Net property and equipment ..................... 647,728 649,849
------------ ------------
Other assets ................................... 241,116 154,233
Investment in and advances to subsidiary ....... 540,497 540,497
------------ ------------
Total assets ................................... $ 10,128,601 $ 10,002,740
============ ============
Liabilities and stockholders' equity
Current liabilities:
Loans payable to financial institutions ...... $ 1,800,000 $ 2,323,279
Short-term loans payable-other ............... 429,277 571,205
Current maturities of long-term debt ......... 149,162 222,119
Accounts payable ............................. 3,241,739 2,866,658
Accrued expenses ............................. 1,518,003 1,532,253
------------ ------------
Total current liabilities ...................... 7,138,181 7,515,514
<PAGE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
May 31, 1996 Nov. 30, 1995
(Unaudited) (See note)
----------- ----------
<S> <C> <C>
Long-term debt, less current maturities ........ 405,711 590,298
Stockholders' equity:
Common stock, $.10 par value;
10,000,000 share authorized, 1,315,000
issued (1996), 1,215,000 issued (1995) ....... 131,520 121,520
Preferred stock, $.10 par value;
1,000,000 authorized, none issued
Capital in excess of par value ............... 4,267,534 4,027,534
Retained earnings (deficit) .................. (1,197,850) (1,641,603)
Treasury stock at cost ....................... (27,500) (27,500)
Accumulated foreign translation adjustment ... (588,995) (583,023)
------------ ------------
Total stockholders' equity ..................... 2,584,709 1,896,928
------------ ------------
Total liabilities and stockholders' equity ..... $ 10,128,601 $ 10,002,740
============ ============
</TABLE>
See notes to the condensed consolidated financial statements.
Note: The balance sheet at November 30, 1995 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles.
<PAGE>
<TABLE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Operation
(Unaudited)
For the Six Months Ended For the Three Months Ended
---------------------------- -----------------------------
May 31, 1996 May 31, 1995 May 31, 1996 May 31, 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ........................... $ 14,216,211 $ 10,106,586 $ 7,638,164 $5,681,094
Cost of goods sold .................. 10,358,190 7,659,887 5,651,974 3,837,546
------------ ------------ ------------ ------------
Gross profit ........................ 3,858,021 2,446,699 1,956,190 1,443,548
Selling, warehouse, general and
administrative expenses ........... 2,984,770 3,094,663 1,517,219 1,477,247
Loss on sale of handbag division .... 0 423,716 0 423,716
------------ ------------ ------------ ------------
2,984,770 3,518,379 1,517,219 1,900,963
------------ ------------ ------------ ------------
873,251 (1,071,680) 438,971 (457,415)
Other (income) expense:
Interest expense .................... 385,571 442,800 190,627 222,294
Interest income ..................... (31,482) (45,009) (7,379) (23,324)
Miscellaneous income, net ........... (98,347) (28,075) (49,693) (4,121)
------------ ------------ ------------ ------------
255,742 369,716 133,555 194,849
------------ ------------ ------------ ------------
Net income (loss) before income taxes 617,509 (1,441,396) 305,416 (652,264)
Provision for income taxes .......... 173,756 0 122,478 0
------------ ------------ ------------ ------------
Net income (loss) ................... $443,753 ($ 1,441,396) $182,938 ($652,264)
============ ============ ============ ==========
Net income (loss) per share of common
stock:
Primary ........................... $0.34 ($1.19) $0.13 ($0.54)
============ ============ ============ ==========
Fully diluted ..................... $0.34 ($1.19) $0.13 ($0.54)
============ ============ ============ ==========
Weighted average number of shares of
common stock outstanding-primary
and fully diluted ................. 1,273,088 1,209,700 1,309,700 1,209,700
============ ============ ============ ==========
</TABLE>
See notes to the condensed consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
May 31, 1996 May 31, 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ 443,753 ($1,441,396)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ................. 44,864 74,554
Provision for losses in accounts receivable ... 10,479 26,054
Gain on sale of property and equipment ........ (313) (35,234)
Restrictive covenant .......................... 0 7,777
Changes in operating assets and liabilities:
Accounts receivable .......................... (540,111) 515,097
Inventories .................................. 562,294 1,338,465
Prepaid expenses ............................. (237,394) (63,575)
Other current assets ......................... 201,517 7,511
Other assets ................................. (86,883) (131,122)
Accounts payable and accrued expenses ........ 366,321 (168,083)
----------- -----------
Net cash provided by operating activities ........ 764,527 130,048
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment ..... 3,000 35,234
Purchase of property and equipment ............... (47,925) (8,996)
----------- -----------
Net cash (used in) provided by investing
activities ...................................... (44,925) 26,238
----------- -----------
<PAGE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
May 31, 1996 May 31, 1995
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
(Decrease) in loans payable to financial
institutions and short-term loan
payable-other .................................. (735,151) (732,211)
Proceeds from issuance of common stock ........... 250,000 0
Other non-current accrued expenses ............... 0 300,000
Repayment of long-term debt ...................... (181,052) (44,185)
----------- -----------
Net cash used in financing activities ............ (666,203) (476,396)
----------- -----------
Effect of exchange rate changes on cash .......... 1,835 (7,530)
----------- -----------
Increase (decrease) in cash and cash
equivalents .................................... 55,234 (327,640)
Cash and cash equivalents at beginning of
period ......................................... 176,241 955,869
----------- -----------
Cash and cash equivalents at the end of
period ......................................... $ 231,475 $ 628,229
=========== ===========
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Interest ...................................... $ 360,689 $ 308,705
Income taxes .................................. $ 0 $ 0
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
SIRCO INTERNATIONAL CORP.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 1-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended May 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended November 30, 1995.
Note 2-Financing Arrangements
The Company has an agreement with a factor pursuant to which the Company sells
its accounts receivable to the factor on a pre-approved non-recourse basis.
Under the terms of the agreement, the factor advances funds to the Company on
the basis of invoice amounts. Interest on such advances is 1.75% per annum above
the prime rate. Additionally, the factor provides inventory financing to the
Company based on an advance rate of up to 40% of the inventory value. At May 31,
1996, the factor had advanced the Company approximately $1,800,000 for inventory
financing. Interest on such advances is 1.75% per annum above the prime rate. As
of May 31, 1996, the prime rate was 8.25%. The Company also pays a factoring
commission of .75% of each invoice amount, subject to a minimum of $96,000 per
annum.
On May 28, 1996, the Company's Canadian subsidiary renegotiated its financing
agreement with a Canadian bank. The agreement provides for a revolving loan in
the amount of approximately $876,000, with interest payable monthly at 1.25%
above the Canadian prime rate. The proceeds of this loan are utilized by the
Canadian subsidiary for purchasing inventory and financing day-to-day
operations. As of May 31, 1996, there were no borrowings under this facility and
the Canadian subsidiary had outstanding letters of credit totalling
approximately $402,000. Under the renegotiated financing agreement, the bank
also has outstanding two term loans to the Canadian subsidiary in amounts of
approximately $353,000 and $12,000 at May 31, 1996, with interest payable
monthly at 2.00% and 1.50%, respectively, above the Canadian prime rate. As of
May 31, 1996, the Canadian prime rate was 6.50%. Substantially all of the assets
of the Canadian subsidiary have been pledged as security for the revolving line
of credit and the term loans. Additionally, the Company has agreed to
subordinate its loan to its Canadian subsidiary to the amounts payable to the
bank. However, subject to on-going compliance with all other covenants of the
agreement, the subordinated loan may be repaid at $22,000 per month starting in
July 1996. At May 31, 1996, the subordinated loan amounted to approximately
$227,000.
In March 1995, the Company entered into an agreement with Yashiro Co., Inc.
("Yashiro"), pursuant to which Yashiro agreed to issue or cause to be issued,
until March 20, 1997, unsecured trade letters of credit in an aggregate amount
of up to the lesser of $1,200,000 or 35% of the book value of the Company's
<PAGE>
inventory. Yashiro charges the Company a handling fee of 3% for each letter of
credit that is opened. Interest is payable to Yashiro monthly at 2% above the
prime rate. At May 31, 1996, the Company had direct borrowings under the
facility of approximately $421,000 and outstanding letters of credit amounting
to approximately $352,000.
Note 3-Net Income (Loss) per Share
Net income (loss) per share of common stock is computed on the basis of the
weighted average number of shares outstanding plus the dilutive effect of stock
options.
Item 2. Management's Analysis and Discussion Of
Financial Condition and Results Of Operations
Three and Six Months Ended May 31, 1996 vs May 31, 1995
Results of Operations
Net sales for the three and six months ended May 31, 1996 increased by
approximately $2,357,000 and $4,109,000, respectively, to approximately
$7,638,000 for the three months ended May 31, 1996 and $14,216,000 for the six
months ended May 31, 1996, as compared to approximately $5,281,000 and
$10,107,000, respectively, reported for the comparable periods in 1995. Net
sales for the Company's Luggage and Backpack Divisions increased by
approximately $1,973,000 and $3,921,000 for the three and six months ended May
31, 1996, primarily due to significant increases in the net sales of FILA
products as discussed below. Net sales for the Company's Canadian subsidiary
increased by approximately $772,000 and $1,624,000 for the three and six months
ended May 31, 1996, due primarily to the continued strong sales of its Atlantic
luggage line. Included in the Company's net sales for the three and six months
ended May 31, 1995 were approximately $388,000 and $1,436,000 in net sales
attributable to the Company's former Handbag Division, which was sold in March
1995. The Company's overall gross profit for the three and six months ended May
31, 1996 increased to approximately $1,956,000 and $3,858,000, respectively,
from approximately $1,444,000 and $2,447,000, respectively, reported for the
comparable periods of 1995. The gross profit for the Company's Luggage and
Backpack Divisions and Canadian subsidiary increased to approximately $1,956,000
and $3,858,000, respectively, from approximately $1,334,000 and $2,260,000,
respectively, reported for the comparable periods of 1995. Gross profit
increases resulted primarily from the increased net sales of the Company
licensed products, which generally have higher profit margins than the Company's
other product lines. Included in the Company's gross profit for the three and
six months ended May 31, 1995 was approximately $109,000 and $186,000
attributable to the Company's former Handbag Division.
After extensive negotiations with FILA Sport S.P.A. ("FILA") in February 1996,
the Company and FILA entered into an agreement pursuant to which the Company
ceased shipping FILA product under the FILA license on June 30, 1996, subject to
certain rights with respect to liquidating the remaining inventory. Net sales of
the FILA product for the three and six months ended May 31, 1996 were
approximately $3,056,000 and $5,734,000, respectively, as compared to
approximately $729,000 and $1,219,000, respectively, reported for the comparable
periods of 1995. The Company shipped approximately $6,700,000 of FILA product in
fiscal 1996 prior to the June 30, 1996 cut off date. The Company believes
<PAGE>
that the loss of the FILA trademark may have an adverse effect on the Company's
results of operations for the fiscal quarter ended August 31, 1996. However, the
Company expects that a significant portion of the net sales of FILA products
that would have been realized by the Company during the remaining term of the
FILA license will be replaced by sales of other licensed products incorporating
the recently-licensed "Perry Ellis", "Skechers", "Gold's Gym", and "Generra"
names, symbols and logos. Future net sales could be negatively impacted if sales
from new licenses or increases in sales under existing licenses do not replace
the sales of FILA products.
Selling, warehouse, and general and administrative expenses increased
approximately $40,000, to approximately $1,517,000 for the three months ended
May 31, 1996 from approximately $1,477,000 for the three months ended May
31,1995 and decreased approximately $110,000, to approximately $2,985,000 for
the six months ended May 31, 1996 from approximately $3,095,000 for the six
months ended May 31, 1995. Selling, warehouse, and general and administrative
expenses for the Company's Luggage and Backpack Divisions and Canadian
subsidiary increased approximately $155,000 and $575,000, respectively, for the
three and six months ended May 31, 1996. These increases in expenses are due
primarily to the corresponding increases in the Company's sales for these
periods. The major components of the increases are: 1) increased commission
expenses, 2) increased warehousing costs, 3) increased salary expense, and 4)
increased advertising costs. Included in the Company's expenses reported for the
three and six months ended May 31, 1995 were approximately $115,000 and
$685,000, respectively, of expenses attributable to the Company's former Handbag
Division.
Included in the Company's operating results for the three and six months ended
May 31, 1995 was a one-time charge of approximately $424,000 attributable to the
loss on the sale of the Company's former Handbag Division in March 1995 to Bueno
of California, Inc., an affiliate of the Yashiro Company, Inc., the Company's
former parent.
Interest expense decreased for the three and six months ended May 31, 1996 by
approximately $32,000 and $57,000, respectively, from the comparable periods in
1995. This decrease is attributable to lower borrowings and lower interest
rates.
Liquidity and Capital Resources
The Company had cash and cash equivalents of approximately $231,000, and working
capital of approximately $1,561,000, at May 31, 1996. During the first half of
1996, the Company's operating activities provided approximately $765,000 in cash
flow as compared to $130,000 in cash flow provided in the comparable
period of the prior year.
Investing activities in the six months ended May 31, 1996, and May 31, 1995 did
not significantly impact the Company's cash flows. In 1996, investing activities
used approximately $45,000 of net cash for the purchase of property and
equipment. In 1995, investing activities provided approximately $26,000 of net
cash from the sale of property and equipment.
Financing activities for the six months ended May 31, 1996 used approximately
$666,000 of cash. Approximately $735,000 of cash was used to repay short-term
debt, and approximately $181,000 of cash was used to repay long-term debt.
During the six months ended May 31, 1996, the Company received $250,000 of
proceeds from the issuance of common stock. Financing activities in the six
months ended May 31, 1995 used approximately $476,000 of cash. Approximately
$732,000 was used to repay short-term debt, and approximately $44,000 was used
<PAGE>
to repay long-term debt. Other financing activities during the six months ended
May 31, 1995, included a $300,000 accrual of non-current expenses.
The Company has an agreement with a factor pursuant to which the Company sells
its accounts receivable to the factor on a pre-approved non-recourse basis.
Under the terms of the agreement, the factor advances funds to the Company on
the basis of invoice amounts. Interest on such advances is 1.75% per annum above
the prime rate. Additionally, the factor provides inventory financing to the
Company based on an advance rate of up to 40% of the inventory value. At May 31,
1996, the factor had advanced the Company approximately $1,800,000 for inventory
financing. Interest on such advances is 1.75% per annum above the prime rate. As
of May 31, 1996, the prime rate was 8.25%. The Company also pays a factoring
commission of .75% of each invoice amount, subject to a minimum of $96,000 per
annum.
On May 28, 1996, the Company's Canadian subsidiary renegotiated its financing
agreement with a Canadian bank. The agreement provides for a revolving loan in
the amount of approximately $876,000, with interest payable monthly at 1.25%
above the Canadian prime rate. The proceeds of this loan are utilized by the
Canadian subsidiary for purchasing inventory and financing day-to-day
operations. As of May 31, 1996, their were no borrowings under this facility and
the Canadian subsidiary had outstanding letters of credit totalling
approximately $402,000. Under the renegotiated financing agreement, the bank
also has outstanding two term loans to the Canadian subsidiary in amounts of
approximately $353,000 and $12,000 at May 31, 1996, with interest payable
monthly at 2.00% and 1.50%, respectively, above the Canadian prime rate. As of
May 31, 1996, the Canadian prime rate was 6.50%. Substantially all of the assets
of the Canadian subsidiary have been pledged as security for the revolving line
of credit and the term loans. Additionally, the Company has agreed to
subordinate its loan to its Canadian subsidiary to the amounts payable to the
bank. However, subject to on-going compliance with all other covenants of the
agreement, the subordinated loan may be repaid at $22,000 per month starting in
July 1996. At May 31, 1996, the subordinated loan amounted to approximately
$227,000.
In March 1995, the Company entered into an agreement with Yashiro Co., Inc.
("Yashiro"), pursuant to which Yashiro agreed to issue or cause to be issued,
until March 20, 1997, unsecured trade letters of credit in an aggregate amount
of up to the lesser of $1,200,000 or 35% of the book value of the Company's
inventory. Yashiro charges the Company a handling fee of 3% for each letter of
credit that is opened. Interest is payable to Yashiro monthly at 2% above the
prime rate. At May 31, 1996, the Company had direct borrowings under the
facility of approximately $421,000 and outstanding letters of credit amounting
to approximately $352,000.
There were approximately $48,000 in capital expenditures during the first six
months of 1996. The Company presently anticipates that it will expend an
additional $200,000 for capital improvements during fiscal 1996. A substantial
portion of capital expenditures are related to the Company's new showroom in New
York City.
Management believes that its cash and cash equivalents, lines of credit,
factoring of accounts receivable and cash flows generated from operations will
be sufficient to meet its liquidity and capital requirements for the next twelve
months.
<PAGE>
SIRCO INTERNATIONAL CORP.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1-- Credit Agreement.
Credit agreement dated May 28, 1996 between Sirco
International (Canada) Limited and the National Bank
of Canada.
27-- Financial Data Schedule.
(b) Reports on Form 8-K
None.
<PAGE>
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 hereunto duly authorized.
Sirco International Corp.
July 11, 1996 By: /s/ Joel Dupre
- ------------- -------------------------
Date Joel Dupre
Chairman of the Board and
Chief Executive Officer
July 11, 1996 By: /s/ Gandolfo J. Verra
- ------------- -------------------------
Date Gandolfo J. Verra
Controller and Assistant
Secretary
(Chief Accounting Officer)
(Company Logo)
NATIONAL BANK OF CANADA
350 Burnhamthorpe Road West, Suite 216, Mississauga, Ontario L5B3J1
Telephone: (905) 276-9464
Fax: (905) 276-1750
Commercial Banking Centre
May 28, 1996
Sirco International (Canada) Ltd.
1321 Blundell Road
Mississauga, Ontario
L4Y 1M6
ATTENTION: Mr. Doug Turner, President
Dear Sirs:
We are pleased to inform you that the National Bank of Canada (hereinafter
called the "Bank") agrees to make available to Sirco International (Canada) Ltd.
(hereinafter called the "Borrower") the following credit facilities subject to
the ensuing terms and conditions:
AMOUNT:
A. $1,200,000 by way of an Operating Loan on a revolving demand loan
agreement and/or Letters of Credit.
B. $26,293 by way of a non-revolving demand loan.
C. $483,447 by way of a non-revolving term loan.
D. $150,000 by way of a Foreign Exchange Limit with net risk of 10%
i.e. at any time, the total foreign exchange contracts outstanding
may not exceed the Canadian equivalent of $1,500,000.
PURPOSE:
A. To finance day to day operations.
B&C. To payout and consolidate an existing commercial mortgage with
Royal Trust, and a term loan with the CIBC.
D. To purchase United States dollar foreign exchange contracts. The
equivalent of Canadian $25,000 is required to obtain an exchange
contract. Applicable term will be from a minimum of 1 day to a
maximum of 1 year.
<PAGE>
INTEREST RATE:
A. Prime Rate of National Bank of Canada plus 1.25%, that is 7.75% as
at May 28, 1996, calculated daily and paid monthly in arrears. Prime
Rate is defined as the rate as established from time to time by the
Bank for Canadian dollar loans in Canada.
B. Prime rate of National Bank of Canada plus 1.50%, that is 8.00% as
at May 28, 1996, calculated daily and paid monthly in arrears. Prime
Rate is defined as the rate as established from time to time by the
Bank for Canadian dollar loans in Canada.
C. The Bank's cost of funds for fixed rate term loans +2.00%, that is
10.25% for the current 5 year term ending in July 2000.
D. As quoted by International Dept., National Bank of Canada at date
of booking.
REPAYMENT: On Demand
A. To revolve in multiples of $50,000
B. Monthly principal payments of $10,000 plus interest, 3 payments
remaining.
C. Monthly blended payments of $4,810; 240 month amortization, 230
payments remaining.
D. According to the specified maturity date.
DEMAND NATURE OF
THE FACILITIES:
The Borrower and the Guarantors acknowledge and agree that notwith-
standing anything contained herein to the contrary these facilities
constitute Demand Loans and as such, are due and payable at any time
at the sole discretion of the Bank.
MARGIN AVAILABILITY:
Operating advances and Letters of Credit outstanding shall be limited
to the lesser of $1,200,000 or the aggregrate of the following:
a. 85% of good quality Canadian accounts receivable for "Major
Retailers" (as approved by the Bank, see below), plus 65% of good
quality Canadian accounts receivable for those Bank approved
customers offered Future dating terms (see approved list below), plus
60% of all other good quality Canadian accounts receivable, excluding
contra accounts and intercompany accounts, doubtful accounts, and
those aged 60 days and over, plus
b. 50% of all Letters of Credit outstanding and all current seasons
finished goods inventory, plus 25% of all finished goods inventory
for the prior 2 seasons excluding handbags, combined capped at an
overall maximum of $450,000: less;
c. all claims which rank prior to the Bank's security (i.e.
deductions sources, GST, etc.).
<PAGE>
Major retailers: Bay, Costco, Eaton's, Sears, Zellers.
Acceptable Future dating customers: Jovin, Pelle Imports, Access
Leather and all major retailers.
SECURITY:
All legal and other documentation to be in a form and content
satisfactory to the Bank and its solicitors and is to be supported by
all usual representations and opinions to confirm its enforceability.
To include but not limited to:
1. General Assignment of Book Debts, registered in Ontario and all
other applicable jurisdictions, providing a first charge over
accounts and other receivables.
2. Pledge of Inventory under Section 427 of the Bank Act providing a
first charge over inventory.
3. Assignment of sufficient fire insurance to protect the Bank's
interest.
4. General Security Agreement providing a first floating and fixed
charge over all assets of the Borrower.
5. Subordination and Postponement of Claim to the Bank of all loans,
advances and accrued interest payable to shareholder(s).
6. A first fixed and floating charge Debenture in the amount of
$1,500,000 over the real property located at 1321 Blundell Road,
Mississauga accompanied by appropriate pledge agreement.
7. General Assignment of Rents and Leases.
8. Licensing agreement with Airway Industries, together with side
agreement between Airway and the Bank.
FINANCIAL COVENANTS:
1. Current Ratio: The ratio of Current Assets to Current Liabilities
will not be less than 1.50 at anytime. Current Assets shall exclude
any intercompany advances,deferred costs, or any other assets of
doubtful or intangible nature.
2. Debt to Equity Ratio: The ratio of Debt to Equity will not be more
than 1.50 at any time. Debt shall be defined as total liabilities
less any shareholder loans postponed to the Bank, less deferred
income taxes. Equity shall be defined as Share Captial plus year end
Retained Earnings plus year to date net income after tax plus any
shareholders' loans postponed to the Bank, less any deferred
expenditures, loans to officers, directors, or shareholders, or
intercompany advances and any other assets of doubtful value.
3. Debt Service Coverage: The ratio of Net Cash Flow to Debt Service
shall be a minimum of 1.20. Net Cash flow shall be defined as the
Income After Tax plus deferred taxes, depreciation, any other
non-cash expenditures not funded by debt. Debt Service shall be
defined as all debt principal payments plus all shareholder loan
payments plus all cash interest expense.
<PAGE>
4. Parent renumeration, whether a repayment of the parent company
advance or a bonus/dividend, is prohibited without the prior written
consent of the Bank. Notwithstanding, beginning July 31, 1996, but
subject to ongoing compliance with all other covenants, the postponed
shareholder loans may be repaid $30,000 per month.
REPORTING CONDITIONS:
1. Within 25 days of each month-end, the Borrower shall provide the
following information on Bank documents, signed by the appropriate
authorized officer of the Borrower:
a. monthly accounts receivable listing classified according to age;
b. inventory declaration;
c. borrowing base certificate;
d. open order summary;
e. internally prepared income statement and balance sheet as compared
against last year actual and current year to date budget.
2. The Borrower agrees to submit to the Bank its annual audited
financial statements within 90 days of the end of its fiscal year.
3. The Borrower agrees to submit to the Bank its annual budget
including budgeted monthly balance sheet, income statement, and cash
flow within 90 days of its fiscal year end.
OTHER CONDITIONS:
1. All legal and registration fees incurred to prepare, execute and
maintain legal documents will be assumed by the Borrower.
2. The cost of all appraisals and environmental reports requested by
the Bank are the responsibility of the Borrower.
3. The Bank reserves the right to request appropriate annual
financial statements or quarterly financial statements at any time
and whenever it deems it appropriate. This information may be
required on a continuous basis or for a specific period or periods
and must always be to the Bank's satisfaction.
4. The ownership structure of the company shall not be altered
without the Bank's prior written consent which shall not be
unreasonably withheld.
5. The nature of the Borrower's business shall not be substantially
changed without the Bank's prior written consent which shall not be
unreasonably withheld.
6. The renewed licensing agreement with Airway Industries is to be
submitted to the Bank no later than August 31, 1996 so that it may be
reviewed and deemed satisfactory by the Bank's legal counsel. In
addition, Airway Industries Inc. will agree in writing to:
(i) provide the Bank notice in the event the agreement is to be
terminated; and
(ii) enable the Bank to dispose of the inventory in the event it
chooses to realize on its security.
<PAGE>
FEES:
1. Review fee of $3,500 which is payable upon acceptance of this
Offer Letter.
2. $75 monthly management fee to review the monthly reporting
package; margin the account and process note rollovers.
ENVIRONMENTAL
MATTERS:
1. The Borrower and the Guarantors represent and warrant that the
owner of the subject property has complied and is complying in all
respects with all applicable laws relating to the environment, that
no contaminants, pollutants or other hazardous substances (including,
without limitation, asbestos, products containing urea formaldehyde
or polychlorinated biphenyl or any radioactive substances) have been
or are now stored or located at the subject property, that no order,
approval, direction or other government or regulatory notice relating
to the environment has been threatened against, is pending or has
been issued with respect to the subject property or the operations of
the business being conducted at the subject property, and that none
of them is aware of any pending or threatened action, suit or
proceedings relating to any actual or alleged environmental violation
from or at the subject property.
2. The Borrower and Guarantors shall permit the Lender to conduct, at
the Borrower's expense, such test, inspections and environmental
audits as may be required by the Lender including without limitation,
the right to take soil samples from the subject property and the
right to review and photocopy all records relating to the subject
property or the business or operations now or herinbefore conducted
at the subject property in order to attempt to corroborate the
veracity of the aforementioned representations and warranties.
3. The Borrower and Guarantors agree to pay the cost of all
environmental audits which may be deemed necessary by the Bank.
4. The Borrower and Guarantors agree to deliver to the Bank documents
guaranteeing compliance and showing that the land and buildings are
not contaminated by hazardous materials.
5. The Borrower and Guarantors certify that past and present owners
have not violated environmental law and regulations and that, to the
best of their knowledge, no proceedings have been or are being
instituted to make him comply with environmental laws and
regulations.
6. The Borrower and Guarantors agree to comply with and respect any
and all environmental laws and regulations.
7. The Borrower and Guarantors agree to maintain a system or
mechanism through which the emission or release of contaminants can
be controlled in compliance with laws and regulations.
<PAGE>
8. The Borrower and Guarantors agree to periodically provide the Bank
with a summary report stating the Borrower's status with regard to
environmental laws and regulations, such as confirmation of the
renewal of permits, certificates of compliance and the proper
applicaton of control procedures.
9. The Borrower and Guarantors agree to indemnify the Bank for all
decontamination costs or for damages incurred by the Bank or its
agents as a result of such contamination.
10. The loan shall be disbursed upon performance and/or completion of
the above conditions to the Bank's satisfaction.
11. In the event any environmental report shows that a
decontamination is required the Borrower and Guarantors undertake to
carry out decontamination at their own expense should this be
required or requested. However, the undertaking of such
decontamination shall not guarantee that the Bank will make any
disbursements. All the other conditions stipulated in this Offer of
Finance shall be performed to the Bank's satisfaction.
ACKNOWLEDGEMENT
ON NON MERGER:
The terms and conditions contained in this Offer to Finance shall not
merge upon the execution and delivery of the security documentation
referred to herein but shall at all times remain in full force and
effect. The events of default as stated herein (if applicable), shall
be in addition to and not restrict in any way whatsoever the events
of default as stated in the security documents.
ANNUAL REVIEW:
To be reviewed at least annually, and in any event not later than
Marh 31, 1997.
OTHER:
The Borrower agrees to keep the contents of this Letter strictly
confidential.
If these conditions are acceptable to you, please indicate your acceptance
thereof by signing and returning a copy of this letter to the Bank before June
7, 1996, after which time this offer is null and void.
Yours truly,
/s/ W. WYSOCZANKSKYJ /s/ R. A. GARRARD
W. Wysoczanskyj R.A. Garrard
Account Manager Senior Manager
ACCEPTANCE:
WE ACCEPT THE TERMS AND CONDITIONS OUTLINED HEREIN THIS 4TH DAY OF JUNE, 1996.
SIRCO INTERNATIONAL (CANADA) LIMITED.
Per: Per:
/s/ DOUG TURNER /s/ MARIE WEICHEL
Doug Turner Marie Weichel
President Office Manager
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Income Statement and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 231,475
<SECURITIES> 0
<RECEIVABLES> 3,672,983
<ALLOWANCES> 969,339
<INVENTORY> 5,193,947
<CURRENT-ASSETS> 8,699,260
<PP&E> 1,569,513
<DEPRECIATION> 921,785
<TOTAL-ASSETS> 10,128,601
<CURRENT-LIABILITIES> 7,138,181
<BONDS> 405,711
0
0
<COMMON> 131,520
<OTHER-SE> 2,453,189
<TOTAL-LIABILITY-AND-EQUITY> 10,128,601
<SALES> 14,216,211
<TOTAL-REVENUES> 14,314,558
<CGS> 10,358,190
<TOTAL-COSTS> 2,984,770
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385,571
<INCOME-PRETAX> 617,509
<INCOME-TAX> 173,756
<INCOME-CONTINUING> 443,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443,753
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
