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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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Commission file number 0-4465
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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: 10,130,955 shares of
Common Stock, par value $.10 per share, as of July 1, 1999.
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31, 1999 Nov. 30, 1998
------------ ------------
(Unaudited) (See note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 375,754 $ 352,489
Accounts receivable 1,314,485 1,565,727
Inventories 3,735,311 4,397,635
Prepaid expenses 281,647 199,805
Other current assets 155,345 36,791
Recoverable income taxes 18,255 149,902
------------ ------------
Total current assets 5,880,797 6,702,349
------------ ------------
Property and equipment at cost 1,501,511 1,906,326
Less accumulated depreciation 837,125 1,070,852
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Net property and equipment 664,386 835,474
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Other assets 73,050 172,254
Investment in and advances to subsidiary 464,573 464,573
Investment in Access One Communications Corp. 1,505,470 1,476,434
Investment in RiderPoint, Inc. 412,500 --
Investment in SkyClub Communications Holding Corp. 170,816 --
Goodwill 1,475,844 1,377,958
------------ ------------
Total assets $10,647,436 $ 11,029,042
============ ============
Liabilities and stockholders' equity Current liabilities:
Current maturities of long-term debt $ 2,365,443 $ 3,193,344
Due to related parties 340,524 519,596
Accounts payable 1,242,570 993,779
Accrued expenses and other current liabilities 1,806,215 1,661,420
------------ ------------
Total current liabilities 5,754,752 6,368,139
------------ ------------
Long-term debt, less current maturities 307,071 290,994
------------ ------------
Due to related parties and accounts payable refinanced -- 615,829
------------ ------------
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares authorized Series A and B, 863 issued
(1999), 700 issued (1998) 86 70
Common stock, $.10 par value; 20,000,000 shares authorized, 10,080,955 issued (1999),
6,343,316 issued (1998) 1,008,095 634,331
Capital in excess of par value 17,253,235 12,851,015
Retained earnings (deficit) (12,078,599) (8,864,535)
Treasury stock at cost (27,500) (27,500)
Treasury stock held by equity investee (917,780) (159,396)
Accumulated foreign translation adjustment (651,924) (679,905)
------------ ------------
Total stockholders' equity 4,585,613 3,754,080
------------ ------------
Total liabilities and stockholders' equity $ 10,647,436 $ 11,029,042
============= ============
</TABLE>
See notes to the condensed consolidated financial statements
Note: The balance sheet at November 30, 1998 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
2
<PAGE>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 5,574,156 $ 9,029,994 $ 3,086,796 $5,197,823
Cost of Goods Sold 4,610,856 7,159,234 2,541,848 4,178,524
----------- ----------- ----------- ----------
Gross Profit 963,300 1,870,760 544,948 1,019,299
Selling, warehouse, general and
administrative expenses 3,042,804 2,891,282 1,581,413 1,572,026
----------- ----------- ----------- ----------
Loss from operations (2,079,504) (1,020,522) (1,036,465) (552,727)
Other (income) expense:
Interest expense 159,630 297,252 78,581 148,471
Interest income (15,563) (31,276) (7,677) (29,153)
Miscellaneous income, net (53,854) (57,626) (30,924) (17,491)
Equity in loss of investee 1,044,350 270,072 619,649 170,737
----------- ----------- ----------- ----------
Net loss $ (3,214,067) $(1,498,944) $(1,696,094) $(825,291)
============ ============ ============ ==========
Basic and diluted loss per share $ (0.40) $(0.32) $(0.18) $(0.17)
======= ======= ======= =======
Weighted average number of common 7,998,835 4,633,208 9,428,410 4,946,824
Shares outstanding
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
May 31, 1999 May 31, 1998
<S> <C> <C>
Cash flows from operating activities ($3,214,067) ($1,498,944)
Net loss
Adjustment to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 149,999 49,969
Provision for losses in accounts receivable 70,916 5,590
Loss on disposal of fixed assets 167,547
Equity in loss of investee 1,044,350 270,072
Changes in operating assets and liabilities:
Accounts receivable 180,326 1,045,298
Inventories 568,324 2,627,868
Prepaid expenses (81,842) 57,896
Other current assets 13,093 (61,964)
Other assets 99,204 38,396
Accounts payable and accrued expenses 393,586 (722,540)
----------- -----------
Net cash (used in) provided by operating activities: (608,564) 1,811,641
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (53,087) (32,176)
Proceeds from sale of property and equipment 6,000 -
Cash inflow from agreement to sell subsidiary - 19,536
----------- -----------
Net cash (used in) investing activities (47,087) (12,640)
----------- -----------
Cash flow from financing activities:
Increase (decrease) in loans payable to financial institutions
and short-term loans payable-other 114,172 (1,342,722)
Proceeds from exercise of stock options 32,625 6,000
Proceeds from exercise of warrants - 488,250
Proceeds from private placement of common stock 364,100 75,000
Proceeds from private placement of preferred stock 196,000 -
----------- -----------
Net cash provided by (used in) financing activities 706,897 (773,472)
----------- -----------
Effect of exchange rate changes on cash (27,981) 28,313
----------- -----------
Increase in cash and cash equivalents 23,265 1,053,842
Cash and cash equivalents at beginning of period 352,489 114,190
----------- -----------
Cash and cash equivalents at end of period $ 375,754 $1,168,032
=========== ===========
Supplemental disclosures of cash flow information Cash paid during
the period for:
Interest $ 159,630 $ 284,754
Income taxes - -
</TABLE>
See item 2., Changes in Securities, for noncash financing activities during the
the six month period ended May 31, 1999.
See notes to the condensed consolidated financial statements.
4
<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, 1999 are
not necessarily indicative of the results that may be expected for the year
ended November 30, 1999. 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, 1998.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard 130, "Reporting Comprehensive Income" ("Statement 130").
Statement 130 establishes standards for reporting and display of comprehensive
income and its components in financial statements. Comprehensive income, as
defined, is the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-business sources. The
provisions of Statement 130 are effective for periods beginning after December
15, 1997. For the six months ended May 31, 1999, there were no significant
non-owner sources of income. Accordingly, a separate statement of comprehensive
income has not been presented herein.
Note 2-Financing Arrangements
- -----------------------------
On December 17, 1996, the Company entered into 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, 1999, 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 May 31, 1999, the Company owed Coast
approximately $2,278,000 and had no outstanding letters of credit. At May 31,
1999, the prime rate was 7.75%.
5
<PAGE>
The Company's Canadian subsidiary, Sirco International (Canada) Ltd. ("Sirco
Canada"), has a term loan agreement with National Bank of Canada, to provide the
real property mortgage loan on Sirco Canada's office and warehouse facility. The
mortgage loan is payable in monthly installments of approximately $3,500,
including interest at 10.25%, with a balloon payment of approximately $291,000
in the year 2000. At May 31, 1999, the principal amount of the mortgage loan was
approximately $306,000.
On March 3, 1999, the Company's subsidiary, Essex Communications, Inc.,
("Essex") entered into a Receivable Sales Agreement ("the Agreement") with
Receivables Funding Corporation ("RFC"). The Agreement provides for Essex to
sell up to $500,000 of its eligible receivables (as defined) to RFC on a
periodic basis and to grant RFC a security interest in the receivables purchased
by RFC. As of May 31, 1999, approximately $80,000 was outstanding under the
Agreement. The Agreement, in substance, does not transfer the risk of loss to
RFC, and has been treated as a financing for financial statement purposes. In
substance, Essex borrows under the Agreement at approximately five percentage
points above the prime rate. The Agreement has a termination date of the earlier
of (a) March 3, 2001; (b) a termination event as defined in the Agreement; (c)
the occurrence of an event of seller default as defined in the Agreement; or (d)
ninety days following the Company's delivery of written notice to RFC setting
forth the Company's desire to terminate the Agreement and the payment of a
termination fee (as defined).
6
<PAGE>
Note 3-Investment in Subsidiary
- -------------------------------
On February 27, 1998, the Company acquired all 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 had vested immediately and warrants to purchase 150,000 shares will 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 performance conditions are met. As of May 31, 1999, 225,000 of
such shares had been issued. Essex is a telecommunications provider that is
certified to resell local telephone services and value-added products in the
states of Connecticut, Massachusetts, New Jersey, New York and Virginia and is
seeking certification in the states of Florida, Kentucky and Maryland. The
acquisition has been accounted for as a purchase.
On August 14, 1998, the Company acquired all the outstanding membership interest
of WebQuill Internet Services LLC ("WebQuill") and American Telecom, LLC
("American Telecom") in exchange for 375,000 shares of the Company's common
stock. The purchase agreement also provides that 150,000 additional shares of
the Company's common stock be held in escrow and issued if certain performance
objectives are achieved. 100,000 of such shares are currently pending issuance.
WebQuill provides dial-up and dedicated Internet access, Web design, web hosting
and E-commerce development to small and medium-sized businesses. The acquisition
has been accounted for as a purchase.
On January 8, 1999, the Company issued to the then shareholders of Tag Air,
Inc.(Tag Air"), 149,210 shares of the Company's common stock in conjunction with
the purchase of certain assets of Tag Air. Tag Air sells travel products
primarily to American Airlines employees through its Web site, catalog and two
retail locations. The acquisition has been accounted for as a purchase.
On April 6, 1999, the Company issued 250,000 shares of its common stock in
exchange for a 19% interest in RiderPoint, Inc. ("RiderPoint"). RiderPoint is a
developer, marketer and administrator of insurance and financial service
programs.
On May 25, 1999, the Company issued 120,149 shares of its common stock in
exchange for a 19% interest in SkyClub Communications Holding Corp. ("SkyClub").
SkyClub provides digital satellite systems for the reception of direct
television and high speed Internet services.
7
<PAGE>
Item 2. Management's Analysis and Discussion of Financial Condition and Results
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of Operations
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Information Regarding Forward-Looking Statements
- ------------------------------------------------
The statements contained in this report that are not historical facts are
"forward-looking statements" which can be identified by the use of
forward-looking terminology, such as "estimates", "projects", "plans",
"believes", "expects", "anticipates", "intends", or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader of the forward-looking
statements, such as the Company's plans to increase the gross profit margin of
its telecommunications division, to divest its luggage operations, to take
advantage of the market opportunity presented by the Company's target markets
and to further develop the Company's telecommunications, Internet and retail
airline business, in addition to other statements contained in this Report
regarding matters that are not historical facts, that these statements are only
estimates or predications. No assurances can be given regarding the achievement
of future results, as actual results may differ materially as a result of risks
facing the Company, and actual events may differ from assumptions underlying
statements which have been made regarding anticipated events. Such risks and
assumptions include, but are not limited to, availability of management;
availability, terms, and deployment of capital; the Company's ability to
successfully market its services to current and new customers, generate customer
demand for its product and services in geographical areas in which the Company
can operate, access new markets, negotiate and maintain suitable reseller and
interconnection agreements with incumbent local exchange carriers, and negotiate
and maintain suitable vendor relationships, all in a timely manner, at
reasonable cost and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to vary in
such forward-looking statements. All written and oral forward-looking statements
made in connection with this Report that are attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
Three and Six Months Ended May 31, 1999 vs. May 31, 1998
- --------------------------------------------------------
Net sales for the three and six months ended May 31, 1999 decreased by
approximately $2,111,000 and $3,456,000, respectively, to approximately
$3,087,000 for the three months ended May 31, 1999 and approximately $5,574,000
for the six months ended May 31, 1999, as compared to approximately $5,198,000
and $9,030,000, respectively, reported for the comparable periods in 1998. The
following tables present the Company's net sales by industry segment for the
three and six months ended May 31, 1999 and 1998:
Three Months Ended
------------------
<TABLE>
<CAPTION>
Increase
Industry segment May 31, 1999 May 31, 1998 (Decrease)
---------- ---------- ------------
<S> <C> <C> <C>
Wholesale luggage $2,134,000 $4,900,000 ($2,766,000)
Retail sales 516,000 298,000 218,000
Telecommunications 437,000 - 437,000
---------- ---------- -----------
Total $3,087,000 $5,198,000 ($2,111,000)
========== ========== ===========
</TABLE>
8
<PAGE>
Six Months Ended
----------------
<TABLE>
<CAPTION>
Increase
Industry segment May 31, 1999 May 31, 1998 (Decrease)
---------- ---------- ------------
<S> <C> <C> <C>
Wholesale luggage $3,907,000 $8,496,000 ($4,589,000)
Retail sales 868,000 534,000 334,000
Telecommunications 799,000 - 799,000
---------- ---------- ------------
Total $5,574,000 $9,030,000 ($3,456,000)
========== ========== ============
</TABLE>
Net sales for the Company's wholesale luggage division decreased by
approximately $2,766,000 and $4,589,000 for the three and six months ended May
31, 1999 from amounts reported in the comparable periods in fiscal 1998. The
decrease in net sales in fiscal 1999 is primarily a result of the overall
decrease in both the Company's private label and licensed product sales caused
by a decrease in orders from the Company's two largest customers, who buy both
private label and licensed product.
Net sales of the Company's retail division, consisting of the operations of
Airline Venture, Inc. ("AVI"), increased by approximately $218,000 and $334,000,
respectively, for the three and six months ended May 31, 1999 from amounts
reported in the comparable periods of fiscal 1998. The increase is partially
attributable to the acquisition in January 1999 of Tag Air. AVI operates three
retail stores in Texas for professional airline flight crew members and sells
pilot uniforms, study guides and travel products. Its products are sold on the
E-commerce sites, www.avishop.com and www.800bags.com and on the Web site,
www.tagintl.com.
Net sales of the Company's telecommunications division, consisting of the
operations of Essex and WebQuill, were $437,000 and $799,000, respectively, for
the three and six months ended May 31, 1999. The Company's telecommunications
division had no net sales for the same comparable periods in fiscal 1998. Essex
is certified to resell local telephone service and value-added products in the
states of Connecticut, Massachusetts, New Jersey, New York and Virginia and is
currently seeking certification in the states of Florida, Kentucky and Maryland.
At July 1, 1999, Essex had approximately 2,200 installed lines. WebQuill
provides dial-up and dedicated Internet access, Web design, hosting and
E-commerce development to small and medium-sized businesses.
The Company's gross profit decreased by approximately $474,000 and $907,000,
respectively, and the gross profit percentage decreased to 17.7% from 19.6% and
to 17.3% from 20.7%, respectively, for the three and six months ended May 31,
1999 from amounts reported in the comparable periods in fiscal 1998. The
decrease in gross profit percentage is primarily attributable to unfavorable mix
of lower margin products in the luggage division, which reported a gross profit
percentage of 10% and 11%, respectively, for the three and six months ended May
31, 1999, as compared to a gross profit percentage of 18% and 19%, respectively,
for the three and six month periods ended May 31, 1998. Gross profit percentages
amounted to 46% and 45% for the retail division and 25% and 19% for the
telecommunications division, respectively, for the three and six months ended
May 31, 1999. Management expects the retail division's gross margin to continue
at its current level and the telecommunication division's gross margin to
increase throughout the year as Essex converts its customer base to a "leased
facilities" product
9
<PAGE>
that is now being offered by Bell Atlantic Corporation in New York State. This
product, when implemented, should allow the Company to obtain gross margins on
local telephone service of approximately 30%. Such conversion should commence
during the Company's third fiscal quarter.
Selling, warehouse and general and administrative expenses increased by
approximately $9,000 and $152,000, respectively, for the three and six months
ended May 31, 1999 from amounts reported in the comparable periods in fiscal
1998. A major portion of the increase is a direct result of expenses incurred by
the Company's telecommunications division, which were not in operation in the
prior fiscal periods. Such increases were partially offset by a decrease in
expenses in the wholesale luggage business during the three months ended May 31,
1999.
Interest expense for the three and six months ended May 31, 1999 decreased by
approximately $70,000 and $138,000, respectively, from the amounts reported in
the same periods in fiscal 1998 due to lower average borrowings.
Miscellaneous income increased by approximately $13,000 and decreased by
approximately $4,000, respectively, for the three and six months ended May 31,
1999 from amounts reported in the comparable periods in fiscal 1999. The decline
in the Company's commission income generated from sales arranged by the Company
between overseas suppliers and certain customers was offset by an increase in
rental income reported by Sirco Canada.
At May 31, 1999, the Company was the largest shareholder of Access One
Communications Corp. ("Access One"), owning approximately 39.1% of Access One's
capital stock. As the Company's investment in Access One is accounted for under
the equity method of accounting, the Company is required to include its portion
of Access One's net loss in the Company's results of operations. For the three
and six months ended May 31, 1999, the Company has recorded a loss of
approximately $620,000 and $1,044,000, respectively, relating to its investment
in Access One.
Liquidity and Capital Resources
- -------------------------------
At May 31, 1999, the Company had cash and cash equivalents of approximately
$376,000 and working capital of approximately $126,000.
Net cash (used in) provided by operating activities aggregated approximately
($609,000) and $1,812,000 in the six month periods ended May 31, 1999 and May
31, 1998, respectively. The decrease in net cash provided by operating
activities primarily reflects the increase in the net loss in the first half of
fiscal 1999 as compared to the year-ago period.
Net cash used in investing activities aggregated approximately $47,000 and
$13,000 in the six month periods ended May 31, 1999 and May 31, 1998,
respectively. The principal uses of cash from investing activities in the six
month periods ended May 31, 1999 and 1998 was for the purchase of equipment. The
principal source of cash provided by investing activities in 1998 was the
proceeds of a note receivable from a 1992 sale of a subsidiary.
Net cash provided by (used in) financing activities aggregated approximately
$707,000 and ($773,000) in the six month periods ended May 31, 1999 and May 31,
1998, respectively. In the fiscal period ended May 31, 1999, net cash provided
by financing activities resulted from an
10
<PAGE>
increase in short-term debt of approximately $114,000, the proceeds from the
exercise of stock options of approximately $33,000, the proceeds of a private
placement of common stock of approximately $364,000 and the proceeds of a
private placement of preferred stock of approximately $196,000. In the fiscal
period ended May 31, 1998, net cash used in financing activities resulted from a
decrease in short-term debt of approximately $1,343,000, partially offset by
approximately $6,000 from the proceeds of stock options, by approximately
$488,000 from the proceeds of warrants and by approximately $75,000 from the
proceeds of a private placement of common stock.
On December 17, 1996, the Company entered into a 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 May 31, 1999, the Company was indebted to Coast in the
principal amount of approximately $2,278,000 and had no outstanding letters of
credit. This loan matures on December 31, 1999 and therefore the entire
indebtedness is classified as a current liability. The Company anticipates
paying the debt before its maturity, as the debt relates to the wholesale
luggage division, which the Company anticipates divesting before the loan
maturity date.
The National Bank of Canada provides a real property mortgage loan on Sirco
Canada's office and warehouse facility. See Note 2 to Notes to Condensed
Consolidated Financial Statements (Unaudited). At May 31, 1999, the principal
amount of the mortgage loan was approximately $306,000. Sirco Canada does not
currently utilize a working capital lender.
On March 3, 1999, the Company's subsidiary, Essex, entered into a Receivable
Sale Agreement with Receivables Funding Corp. ("RFC") which provides for Essex
to sell up to $500,000 of its eligible receivables to RFC on a periodic basis
and to grant RFC a security interest in the receivables purchased by RFC. The
Receivable Sale Agreement does not transfer the risk of loss to RFC, and has
been treated by the Company as a financing for financial statement purposes. As
of May 31, 1999, Essex was indebted to RFC for the principal amount of
approximately $80,000. Essex borrows from RFC at approximately five percentage
points above the prime rate.
For the six month period ended May 31, 1999, the Company had approximately
$53,000 in capital expenditures. The Company expects to make additional capital
expenditures over the next twelve months to purchase equipment for its
telecommunications division, but does not anticipate that these expenditures
will be significant. During the second quarter of fiscal 1999, the Company
closed in New York City showroom, resulting in a loss on the disposal of fixed
assets of approximately $168,000.
As of May 31, 1999, the Company owned approximately 39.1% of its affiliate,
Access One. Although Access One 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. Gross revenues of
Access One for the three and six months ended May 31, 1999 increased by
approximately $2,740,000 and $3,896,000, respectively, to approximately
$4,185,000 for the three months ended May 31, 1999 and approximately $6,512,000
for the six months ended May 31, 1999, as compared to approximately $1,445,000
and $2,616,000, respectively, reported for the comparable periods in 1998. The
Company does not record the revenues of Access One on its financial statements,
as the investment in Access One is recorded on the Company's books by the equity
method of accounting. Under this method, the Company currently records 39.1% of
11
<PAGE>
any income or loss that is incurred by Access One. Although the Company has
recorded a loss on its investment for each quarter through May 31, 1999, Access
One's management believes that the implementation of a leased facilities program
with its largest supplier, BellSouth Corporation, effective June 2, 1999, should
result in operating profits for Access One for the month of June 1999 and the
fourth quarter of fiscal 1999.
The report of the independent auditors on the Company's financial statements for
the year ended November 30, 1998, indicates that there is substantial doubt
about the Company's ability to continue as a going concern. The Company
continues to incur significant operating losses, primarily from its luggage
division, and is having difficulty meeting its obligations when they become due.
The Board of Directors has announced that it intends to sell the wholesale
luggage division and the Company has signed a letter of intent and is currently
negotiating a definitive purchase agreement with a potential buyer. However,
there can be no assurances that such divestiture will occur, and if the Company
is unable to divest itself of its luggage division, and the depressed levels of
sales of the luggage division continue to generate operating losses and require
operating cash, the Company will experience temporary cash shortages, which will
have an adverse effect on the financial condition and results of operations of
both the retail division and the telecommunications division.
Management believes that the retail division's working capital and cash flow
from operations will be sufficient to meet the cash and capital requirements for
the Company's retail division for the next twelve months. This division operated
profitably in the first half of fiscal 1999 and anticipates being able to
continue its current rate of growth for the next several quarters. Management
anticipates that it will need to raise up to $2 million to meet the cash
requirements for its telecommunications division contemplated by the business
plan for that division for the next twelve months. 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. The
inability to carry out this plan may result in the continuance of unprofitable
operations, which would adversely affect the financial condition and results of
operations of the Company.
12
<PAGE>
SIRCO INTERNATIONAL CORP.
-------------------------
PART II-OTHER INFORMATION
-------------------------
Item 2. Changes in Securities
- ------- ---------------------
On May 25, 1999, the Company issued to SkyClub Communications
Holding Corp. ("SkyClub"), 120,419 shares of Common Stock of
the Company in conjunction with the purchase of a minority
interest in SkyClub. Such transaction was effected pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
On May 21, 1999, the Company sold an aggregate of 354,500
shares of Common Stock of the Company in a private placement
offering to ten individuals. Such transactions were effected
pursuant to Section 4(2) of the Securities Act of 1933, as
amended.
On May 14, 1999, a holder of 33 shares of the Company's
Series A Preferred Stock, par value $.10, converted each share
of preferred stock into 1,000 shares of common stock for a
total of 33,000 shares. Such securities were exempt from the
Securities Act of 1933, as amended, pursuant to Section 3(9)
thereof.
On April 6, 1999, the Company issued to RiderPoint, Inc.
("RiderPoint"), 250,000 shares of Common Stock of the Company
in conjunction with the purchase of a minority interest in
RiderPoint. Such transaction was effected pursuant to Section
4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits.
(3) Articles of Incorporation and By-laws
(a) Certificate of Incorporation, as amended,
incorporated by reference to the Company's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on August 27,
1969 under Registration Number 2-34436.
(b) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to the
Company's definitive proxy statement filed with
the Securities and Exchange commission in
connection with the Company's Annual Meeting of
Shareholders held in May, 1984.
(c) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to
Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended November 30, 1988.
(d) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to
Exhibit 3(e) to the Company's Annual
13
<PAGE>
Report on Form 10-K for the year ended
November 30, 1994, as amended.
(e) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to
Exhibit 3 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended August 30, 1995.
(f) Certificate of Amendment of Certificate of
Incorporation filed February 17, 1999.
(g) By-laws, amended and restated as of December,
1996, incorporated by reference to Exhibit 3(e)
to the Company's Annual Report on Form 10-K for
the year ended November 30, 1996.
(10) Material Contracts
(a) Stock Purchase Agreement dated February 27, 1998
between the Company and the shareholders of Essex
Communications, Inc., incorporated by reference
to Exhibit 10(a) to the Company's Annual Report
on Form 10-K dated November 30, 1997.
(b) Lease Agreement dated February 14, 1990 between
Oro-May-Broward Investment Company and the
Company for property located in La Mirada,
California, incorporated by reference to Exhibit
10(j) to the Company's Annual Report on Form 10-K
for the year ended November 30, 1989, as amended.
(c) Sirco International Corp. 1995 Stock Option Plan,
incorporated by reference to Exhibit 10(I) to the
Company's Annual Report on Form 10-K for the year
ended November 30, 1995, as amended.
(d) Sirco International Corp. 1996 Restricted Stock
Award Plan, incorporated by reference to Exhibit
A to the Company's Proxy Statement dated October
24, 1996.
(e) Employment Agreement, dated November 5, 1996
between the Company and Paul Riss, incorporated
by reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended
November 30, 1996.
(f) Loan and Security Agreement, dated December 16,
1996, between the Company and Coast Business
Credit, a division of Southern Pacific Thrift &
Loan Association, incorporated by reference to
Exhibit 10(g) to the Company's Annual Report on
Form 10-K for the year ended November 30, 1996.
(g) Promissory Note, dated December 17, 1998, between
the Company and Joel Dupre, Chairman and Chief
Executive Officer.
(h) Promissory Note, dated January 29, 1999, between
the Company and Joel Dupre, Chairman and Chief
Executive Officer.
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
14
<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 15, 1999 By: /s/ Joel Dupre
---------------------- --------------------------
Date Joel Dupre
Chairman of the Board and
Chief Executive Officer
July 15, 1999 By: /s/ Paul Riss
---------------------- --------------------------
Date Paul Riss
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
No. Description Page No.
- --- ----------- --------
27 Financial Data Schedule.
16
<PAGE>
Sirco International Corp.
<TABLE>
<CAPTION>
Item No. Item Description May 31, 1999
- -------- ----------------- ------------
<S> <C> <C>
5-02(1) Cash and cash items $ 375,754
5-02(2) Marketable securities 0
5-02(3)(a)(1) Notes and accounts receivable-trade 1,896,257
5-02(4) Allowances for doubtful accounts 581,772
5-02(6) Inventory 3,735,311
5-02(9) Total current assets 5,880,797
5-02(13) Property, plant and equipment 1,501,511
5-02(14) Accumulated depreciation 837,125
5-02(18) Total assets 10,647,436
5-02(21) Total current liabilities 5,754,752
5-02(22) Bonds, mortgages and similar debt 307,071
5-02(28) Preferred stock-mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 86
5-02(30) Common stock 1,008,095
5-02(31) Other stockholder's equity 3,577,432
5-02(32) Total liabilities and stockholder's equity 10,647,436
5-03(b)1(a) Net sales of tangible products 5,574,156
5-03(b)1 Total revenue 5,628,010
5-03(b)2(a) Cost of tangible goods sold 4,610,856
5-03(b)2 Total costs and expenses applicable to sales and revenue 2,875,257
5-03(b)3 Other costs and expenses 167,547
5-03(b)5 Provision for doubtful accounts and notes 0
5-03(b)(8) Interest and amortization of debt discount 159,630
5-03(b)(10) Income/loss before taxes and other items. (3,214,067)
5-03(b)(11) Income tax expense 0
5-03(b)(14) Income/loss continuing operations (3,214,067)
5-03(b)(15) Discontinued operations 0
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect-change in accounting principles 0
5-03(b)(19) Net income or loss (3,214,067)
5-03(b)(20) Earnings per share-basic (.40)
5-03(b)(20) Earnings per share-diluted (.40)
</TABLE>
"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."
17
