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 February 28, 1998.
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.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-2511270
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
24 Richmond Hill Avenue, Stamford, Connecticut 06901
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 203-359-4100
------------
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(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: 4,950,400 shares of
Common Stock, par value $.10 per share, as of April 1, 1998.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
Feb. 28, 1998 Nov. 30, 1997
Assets (Unaudited) (See note)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 216,141 $ 114,190
Accounts receivable ...................................... 2,306,063 3,166,804
Inventories .............................................. 6,145,701 7,707,631
Prepaid expenses ......................................... 242,860 253,225
Other current assets ..................................... 42,021 44,231
Recoverable income taxes ................................. 119,683 125,517
------------ ------------
Total current assets ......................................... 9,072,469 11,411,598
Property and equipment at cost ............................... 1,762,729 1,762,533
Less accumulated depreciation ................................ 957,590 935,220
------------ ------------
Net property and equipment ................................... 805,139 827,313
------------ ------------
Other assets ................................................. 187,795 207,940
Investment in and advances to subsidiary ..................... 514,289 514,797
Investment in affiliate ...................................... 1,520,665 1,080,000
Goodwill ..................................................... 500,000
------------ ------------
Total assets ................................................. $ 12,600,357 $ 14,041,648
============ ============
Liabilities and stockholders' equity Current liabilities:
Loans payable to financial institutions .................. $ 4,775,089
Current maturities of long-term debt ..................... 7,246 $ 1,522,060
Due to related parties ................................... 1,038,119 974,046
Accounts payable ......................................... 1,683,171 2,489,259
Accrued expenses ......................................... 1,189,271 1,318,863
------------ ------------
Total current liabilities .................................... 8,692,896 6,304,228
------------ ------------
Long-term debt, less current maturities ...................... 321,023 4,521,795
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(continued)
Feb. 28, 1998 Nov. 30, 1997
(Unaudited) (See note)
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<S> <C> <C>
Stockholders' equity:
Common stock, $.10 par value; 10,000,000 share authorized,
4,600,400 issued (1998), 4,300,400 issued (1997) ......... 460,040 430,040
Preferred stock, $.10 par value; 1,000,000 authorized,
none issued
Capital in excess of par value ........................... 8,343,368 7,753,368
Retained earnings (deficit) .............................. (4,561,185) (3,887,532)
Treasury stock at cost ................................... (27,500) (27,500)
Treasury stock held by equity investee ....................... (420,000)
Accumulated foreign translation adjustment ............... (628,285) (632,751)
------------ ------------
Total stockholders' equity ................................... 3,586,438 3,215,625
------------ ------------
Total liabilities and stockholders' equity ................... $ 12,600,357 $ 14,041,648
============ ============
</TABLE>
See notes to the condensed consolidated financial statements.
Note:The balance sheet at November 30, 1997 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 Operations
(Unaudited)
For the Three Months Ended
Feb. 28, 1998 Feb. 28, 1997
----------- -----------
<S> <C> <C>
Net sales .................................. $ 3,832,171 $ 3,066,144
Cost of goods sold ......................... 2,980,710 2,372,389
----------- -----------
Gross profit ............................... 851,461 693,755
Selling, warehouse, and general and
administrative expenses ................ 1,319,256 1,100,205
----------- -----------
Loss from operations ....................... (467,795) (406,450)
----------- -----------
Other (income) expense:
Interest expense ........................... 148,781 124,479
Interest income ............................ (2,123) (9,186)
Miscellaneous income, net .................. (40,135) (94,661)
Equity in loss of investee ................. 99,335 --
----------- -----------
205,858 20,632
----------- -----------
Net loss ................................... ($ 673,653) ($ 427,082)
=========== ===========
Basic loss per share ....................... ($ 0.16) ($ 0.16)
=========== ===========
Diluted loss per share ..................... ($ 0.16) ($ 0.16)
=========== ===========
Shares used in computing loss per share:
Basic and diluted ...................... 4,312,622 2,628,466
=========== ===========
</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 Three Months Ended
Feb. 28, 1998 Feb. 28, 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. ($ 673,653) ($ 427,082)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization ........................ 22,371 24,815
Provision for losses in accounts receivable .......... 1,805
Loss in sale of property and equipment ............... 7,104
Loss in equity of investee ........................ 99,335
Changes in operating assets and liabilities:
Accounts receivable ................................. 866,137 (118,198)
Inventories ......................................... 1,582,416 (154,197)
Prepaid expenses .................................... 21,673 (193,072)
Other current assets ................................ 2,210 69,062
Other assets ........................................ 20,145 (63,073)
Accounts payable and accrued expenses ............... (873,296) (1,662,933)
----------- -----------
Net cash provided by (used in) operating activities: ...... 1,067,338 (2,515,769)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ........................ (20,013)
Proceeds from sale of property and equipment .............. 3,655
Proceeds from agreement to sell subsidiary ................ 508 7,556
----------- -----------
Net cash provided by (used in) investing activities ....... 508 (8,802)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in loans payable to
financial institutions and short-term
and long-term payable to related party ............... (954,637) 2,752,818
Proceeds from exercise of stock options ............... 16,000
----------- -----------
Net cash (used in) provided by financing activities ....... (954,637) 2,768,818
----------- -----------
Effect of exchange rate changes on cash ................... (11,258) (4,042)
----------- -----------
Increase in cash and cash equivalents ..................... 101,951 240,205
Cash and cash equivalents at beginning of period .......... 114,190 390,043
----------- -----------
Cash and cash equivalents at the end of period ............ $ 216,141 $ 630,248
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest .............................................. $ 144,007 $ 127,938
Income taxes .......................................... $ $ 300,015
</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 three month period ended February 28,
1998 are not necessarily indicative of the results that may be expected for the
year ended November 30, 1998. 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, 1997.
Note 2-Financing Arrangements
On December 17, 1996, the Company's factoring agreement with Rosenthal &
Rosenthal Inc. was terminated and replaced with a financing agreement with Coast
Business Credit, a division of Southern Pacific Thrift and Loan Association
("Coast"), that provides for revolving loans and letter of credit financing in
the amount of the lesser of $7,000,000 or the sum of (a) 80% of eligible
accounts receivable (as defined) and (b) 50% of eligible inventory (as defined)
up to a maximum inventory loan of $3,000,000 less 50% of letter of credit
financing outstanding. The amount of the facility available for letter of credit
financing is limited to $2,500,000. The loan bears interest at 2% above the
prime rate, matures on December 31, 1998, and is guaranteed by the Company's
Chairman and Chief Executive Officer. The Company has granted Coast a security
interest in substantially all of the Company's assets. The agreement with Coast
contains various restrictive covenants, including among others, a restriction on
the payment or declaration of any cash dividends, a restriction on the
acquisition of any assets other than in the ordinary course of business in
excess of $100,000, restrictions related to mergers, borrowing and debt
guarantees, and a $100,000 annual limitation on the acquisition or retirement of
the Company's common and preferred stock, which acquisitions or retirements are
limited to transactions with employees, directors and consultants pursuant to
the terms of employment, consulting or other stock restriction agreements with
such persons. The agreement also requires the Company to maintain a minimum
tangible net worth of $1,400,000. As of February 28, 1998, the Company owed
Coast $4,775,089 and had no outstanding letters of credit. At February 28, 1998,
the prime rate was 8.50%.
In January 1997, the Company's Canadian subsidiary, Sirco International (Canada)
Ltd. ("Sirco Canada"), was advised by its bank, National Bank of Canada, that it
would no longer provide Sirco Canada a revolving line of credit but would
continue to provide the real property mortgage. The mortgage is payable in
monthly installments of approximately $3,500, including interest at 10.25%, with
a balloon payment of approximately $325,000 in the year 2000. At February 28,
1998, the mortgage was approximately $328,000.
<PAGE>
SIRCO INTERNATIONAL CORP.
Notes To Condensed Consolidated Financial Statements (Unaudited)
Note 3. Investment in subsidiary
On February 27, 1998, the Company acquired all of the outstanding shares of
common stock of Essex Communications, Inc. ("Essex") in exchange for 250,000
shares of the Company's common stock and warrants to purchase up to 225,000
shares of the Company's common stock at $2.75 per share, of which warrants to
purchase 75,000 shares vested immediately and warrants to purchase 150,000
shares vest if certain performance conditions are met. The purchase agreement
also provides for the issuance of up to 600,000 additional shares of the
Company's common stock if certain other performance conditions are met. Essex is
a start-up telecommunications provider that is qualified in New York and New
Jersey to resell local telephone services. This acquisition is accounted for as
a purchase.
<PAGE>
Item 2. Management's Analysis and Discussion of Financial Condition and Results
of Operations
The following discussion and analysis contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, among others, general economic and
business conditions; industry trends; the loss of major customers; dependence on
foreign sources of supply; the loss of licenses; availability of management;
availability, terms and deployment of capital; the seasonal nature of the
Company's business; and changes in state and federal regulations of the
telecommunications industry.
Three Months Ended February 28, 1998 vs. February 28, 1997
Net sales for the three months ended February 28, 1998 increased by
approximately $766,000 to approximately $3,832,000 as compared to approximately
$3,066,000 reported in the prior fiscal period. Net sales for the Company's
United States operations increased by approximately $1,156,000. This increase in
net sales was attributable to (1) increases in sales of licensed product,
especially Dunlop and Perry Ellis, (2) sales of certain discontinued and
slow-moving licensed product and product lines and (3) sales of products to
American Airlines employees by the Company's recently formed subsidiary, which
was not in operation in the prior fiscal period. This increase in net sales was
partially offset by a decrease in net sales of the Company's unlicensed
products. Net sales for the Company's Canadian operation decreased by
approximately $390,000. This decrease is primarily attributable to the loss by
Sirco Canada , in fiscal 1997, of the license from Airway Industries Inc.
("Airway") to sell Atlantic luggage (see below). The sale of Airway products
accounted for approximately $472,000 in net sales for the first three months of
fiscal 1997 prior to the December 31, 1996 termination date. This decrease in
net sales was partially offset by increases in net sales in Canada for the Perry
Ellis and Hedgren lines.
The Company's gross profit for the three months ended February 28, 1998
increased by approximately $157,000 to approximately $851,000 from approximately
$694,000 reported in the prior fiscal period, and the gross profit percentage
decreased to 22.2% from 22.6% reported in the prior fiscal period. The decrease
in gross profit percentage was primarily attributable to the sale of certain
discontinued and slow-moving licensed products and product lines at margins
below what the Company normally sells similar product.
During fiscal 1996, Airway notified the Company that it would not renew its
license agreement with the Company, pursuant to which Sirco Canada was granted
an exclusive license to sell in Canada, luggage and luggage related products
under the trade names "Atlantic" and "Oleg Cassini" through December 31, 1996.
In November 1996, the Company entered into an Asset Purchase Agreement with
Airway, whereby Airway agreed, among other things, to purchase any remaining
Atlantic inventory owned by Sirco Canada on December 31, 1996, to purchase
certain fixed assets and to enter into a two year lease for a substantial
portion of the premises owned by Sirco Canada at fair market value. Sirco Canada
sold approximately $472,000 of Airway product in the first quarter of fiscal
1997 prior to the December 31, 1996 termination date. The loss of the Airway
license had an adverse effect on the Company's results of operations for the
fiscal quarter ended February 28, 1998 and will have an adverse effect on the
Company's results of operations for the remainder of fiscal year ended November
30, 1998. However, the Company expects to recoup a portion of Airway sales from
sales in Canada of its other licensed products.
<PAGE>
Selling, warehouse, and general and administrative expenses increased for the
three months ended February 28, 1998 by approximately $219,000 to approximately
$1,319,000 from approximately $1,100,000 reported in prior fiscal period. A
major portion of this increase was attributable to employee costs and rental
expense associated with the Company's recently-formed subsidiary that sells to
American Airlines employees.
Interest expense for the three months ended February 28, 1998 increased by
approximately $24,000 from the amount reported in the three months ended
February 28, 1997 due to higher average borrowings.
Miscellaneous income for the three months ended February 28, 1998 decreased by
approximately $55,000 over the amounts reported in the prior fiscal period. The
decline of approximately $63,000 in the Company's commission income generated
from sales arranged by the Company between the Company's suppliers and certain
customers was offset by an increase in rental income of approximately $8,000
reported by the Company's Canadian subsidiary.
At February 28, 1998, the Company was the largest shareholder of CLEC Holding
Corp. ("CHC"), owning approximately 28% of CHC's capital stock. As the
investment is accounted for under the equity method of accounting, the Company
has reported its proportionate share of CHC's net loss of approximately $99,000
in the Company's results of operations for the three months ended February 28,
1998.
Liquidity and Capital Resources
At February 28, 1998, the Company had cash and cash equivalents of approximately
$216,000, and working capital of approximately $379,000.
Net cash provided by (used in) operating activities aggregated approximately
$1,067,000 and ($2,516,000) in fiscal quarters ended February 28, 1998 and
February 28, 1997, respectively.
Net cash provided by (used in) investing activities aggregated approximately
$500 and ($9,000) in fiscal quarters ended February 28, 1998 and February 28,
1998, respectively. The principal source of cash from investing activities in
fiscal 1998 was the proceeds from the 1992 sale of a subsidiary. The principal
source of cash provided from investing activities for the quarter ended February
28, 1997 was the proceeds of the sale of equipment and the proceeds of a note
receivable from the 1992 sale of a subsidiary, offset by the use of net cash for
the purchase of equipment.
Net cash (used in) provided by financing activities aggregated approximately
($955,000) and $2,769,000 in fiscal quarters ended February 28, 1998 and
February 28, 1997, respectively. In the first fiscal quarter of 1998, net cash
used in financing activities resulted from the decrease in short-term debt. In
the first fiscal quarter of 1997, approximately $2,754,000 of net cash was
provided by short-term debt and $16,000 was provided from the proceeds of the
exercise of stock options.
On December 17, 1996, the Company's entered into an financing agreement with
Coast Business Credit, a division of Southern Pacific Thrift & Loan Association
("Coast"). See Note 2 to Notes to Condensed Consolidated Financial Statements
(Unaudited). As of February 28, 1998, the Company was indebted to Coast in the
amount of $4,775,089 and had no outstanding letters of credit. This loan matures
<PAGE>
on December 31, 1998 and therefore the entire indebtedness is classified as a
current liability, whereas a significant portion of the indebtedness was
considered a long-term liability at the Company's most recent fiscal year-end of
November 30, 1997. The reclassification in debt from long-term to current has a
significant impact on the Company's working capital position. However,
management believes it can successfully refinance this working capital line in a
manner that will not be disruptive to operations.
In January 1997, Sirco Canada was advised by its bank, National Bank of Canada,
that it would no longer provide Sirco Canada a revolving line of credit but
would continue to provide the real property mortgage. See Note 2 to Notes to
Condensed Consolidated Financial Statements (Unaudited). At February 28, 1998,
the mortgage was approximately $328,000. The Company is currently using the
Coast line of credit to provide letter of credit financing that was formerly
provided by National Bank of Canada.
For the quarter ended February 28, 1998, the Company had no capital
expenditures. The Company does not plan to make significant capital expenditures
in fiscal 1998.
As of April 1, 1998, the Company owned approximately 3,200,000 shares, or
approximately 28% of CHC, a Florida based competitive local exchange carrier.
Although CHC has approximately 750 shareholders, it is not publicly traded,
there is no readily ascertainable market for the stock, and the shares held by
the Company bear a restrictive legend stating that the shares have not been
registered under the Securities Act of 1933. The investment in CHC is recorded
on the Company's books by the equity method.
Management believes that the Company's present sources of financing, combined
with its present working capital and cash flow from operations, will be
sufficient to meet the cash and capital requirements for the Company's travel
division for the next twelve months. However, if the depressed levels of sales
do not increase or the Company is unable to improve its cash position by raising
additional capital, the Company may experience temporary cash shortages. Such
cash shortages may negatively impact the Company's ability to purchase inventory
in a timely manner, which could negatively impact the Company's results of
operations.
The Company anticipates that it will need to raise up to $2 million to meet the
cash requirements for its telecommunications division contemplated by the fiscal
1998 business plan for that division. There can be no assurances that the
Company will be able to obtain such funding when needed, or that such funding,
if available, will be obtainable on terms acceptable to the Company. The failure
by the Company to raise the necessary funds to finance its telecommunications
operations will have an adverse effect on the ability of the Company to carry
out its business plan for its telecommunications division.
<PAGE>
SIRCO INTERNATIONAL CORP.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
On January 23, 1998 the Company acquired, in a transaction
with a private individual, 200,000 shares of common stock, par
value $.001 per share, of CHC, in consideration of the
issuance by the Company of 50,000 shares of Common Stock of
the Company. Such transaction was effected pursuant to
Sections 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
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.
April 10, 1998 By: /s/Joel Dupre
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Date Joel Dupre
Chairman of the Board and
Chief Executive Officer
April 10, 1998 By: /s/Paul Riss
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Date Paul Riss
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT INDEX
No. Description
--- -----------
27 Financial Data Schedule.
<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> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> FEB-28-1998
<CASH> 216,141
<SECURITIES> 0
<RECEIVABLES> 2,789,092
<ALLOWANCES> 483,029
<INVENTORY> 6,145,701
<CURRENT-ASSETS> 9,072,469
<PP&E> 1,762,729
<DEPRECIATION> 957,590
<TOTAL-ASSETS> 12,600,357
<CURRENT-LIABILITIES> 8,692,896
<BONDS> 321,023
0
0
<COMMON> 460,040
<OTHER-SE> 3,126,398
<TOTAL-LIABILITY-AND-EQUITY> 12,600,357
<SALES> 3,832,171
<TOTAL-REVENUES> 3,872,306
<CGS> 2,980,710
<TOTAL-COSTS> 1,319,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,781
<INCOME-PRETAX> (673,653)
<INCOME-TAX> 0
<INCOME-CONTINUING> (673,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (673,653)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
