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 August 31, 1999.
OR
[X] 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
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
37 North Avenue, Norwalk, Connecticut 06851
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 203-750-1000
24 Richmond Hill Avenue, Stamford, Connecticut 06901
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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: 10,711,609 shares of
Common Stock, par value $.10 per share, as of October 1, 1999.
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Sirco International Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
Aug. 31, 1999 Nov. 30, 1998
------------- -------------
(Unaudited) (See note)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 183,627 $ 352,489
Accounts receivable 1,733,864 1,565,727
Inventories 1,486,376 4,397,635
Prepaid expenses 175,115 199,805
Other current assets 196,314 36,791
Recoverable income taxes 18,034 149,902
------------ ------------
Total current assets 3,793,330 6,702,349
------------ ------------
Property and equipment at cost 1,010,565 1,906,326
Less accumulated depreciation 384,685 1,070,852
------------ ------------
Net property and equipment 625,880 835,474
------------ ------------
Other assets 77,872 172,254
Investment in and advances to subsidiary 439,605 464,573
Investment in Access One Communications Corp. 1,211,461 1,476,434
Investment in RiderPoint, Inc. 412,500 --
Investment in SkyClub Communications Holding Corp. 170,816 --
Goodwill 1,414,208 1,377,958
------------ ------------
Total assets $ 8,145,672 $ 11,029,042
============ ============
Liabilities and stockholders' equity Current liabilities:
Current maturities of long-term debt $ 1,747,875 $ 3,193,344
Due to related parties 247,498 519,596
Accounts payable 1,831,500 993,779
Accrued expenses and other current liabilities 1,792,404 1,661,420
------------ ------------
Total current liabilities 5,619,277 6,368,139
------------ ------------
Long-term debt, less current maturities -- 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, 190 issued (1999), 700 issued (1998) 19 70
Common stock, $.10 par value; 20,000,000 shares authorized,
10,611,609 issued (1999), 6,343,316 issued (1998) 1,061,161 634,331
Capital in excess of par value 17,569,040 12,851,015
Retained earnings (deficit) (15,283,658) (8,864,535)
Treasury stock at cost (27,500) (27,500)
Treasury stock held by equity investee (792,667) (159,396)
Accumulated foreign translation adjustment -- (679,905)
------------ ------------
Total stockholders' equity 2,526,395 3,754,080
------------ ------------
Total liabilities and stockholders' equity $ 8,145,672 $ 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.
<PAGE>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
Aug.31,1999 Aug. 31,1998 Aug. 31,1999 Aug. 31,1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 2,696,745 $ 905,977 $ 1,029,455 $ 372,308
Cost of Goods Sold 1,845,654 529,990 713,846 200,857
----------- ----------- ----------- ----------
Gross Profit 851,091 375,987 315,609 171,451
Selling, warehouse, general and
administrative expenses 1,815,210 639,072 758,340 260,625
Loss from operations (964,119) (263,085) (442,731) (89,174)
Other (income) expense:
Interest expense 11,476 - 8,394 -
Miscellaneous income, net (173) - - -
Equity in loss of investee 1,463,472 618,168 419,122 348,096
Loss from continuing operations (2,438,894) (881,253) (870,247) (437,270)
Discontinued operations (Note 4)
Loss from discontinued operations (3,259,999) (1,539,769) (1,614,579) (484,808)
Loss on disposal of discontinued operations
(720,230) - (720,230) -
----------- ============ ----------- ==========
Net loss
($6,419,123) ($2,421,022) ($3,205,056) ($922,078)
=========== =========== =========== ==========
Basic and diluted loss per share from continuing operations
Basis and diluted loss per share from ($0.28) ($0.18) ($0.09) ($0.08)
------
Discontinued operations
Basic and diluted loss per share ($0.45) ($0.31) ($0.22) ($0.09)
------- ------- ------- -------
Weighted average number of common ($0.73) ($0.49) ($0.31) ($0.17)
======= ======= ======= =======
shares outstanding
8,740,979 4,942,134 10,209,134 5,553,270
========= ========= ========== =========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
Sirco International Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
Aug. 31, 1999 Aug. 31,1998
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<S> <C> <C>
Cash flows from operating activities
Net loss from continuing operations ($2,438,894) ($ 881,253)
----------- -----------
Adjustment to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 222,906 70,649
Translation adjustment 662,912
Provision for losses in accounts receivable 108,984 37,458
Loss on disposal of fixed assets 232,540
Equity in loss of investee 1,463,472 618,168
Changes in operating assets and liabilities:
Accounts receivable (277,121) 894,156
Inventories 3,007,578 2,621,761
Prepaid expenses 24,690 35,719
Other current assets 148,595 25,012
Other assets 104,001 63,498
Accounts payable and accrued expenses 968,735 (693,722)
----------- -----------
Net cash provided by continuing operations 4,228,398 2,791,446
----------- -----------
Net cash used in discontinued operations (3,980,229) (1,539,769)
----------- -----------
Net cash provided by operating activities: 248,169 1,251,677
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (68,896) (152,263)
Proceeds from sale of property and equipment 6,000 -
Cash inflow from agreement to sell subsidiary 24,968 34,727
----------- -----------
Net cash used in investing activities (37,928) (117,536)
----------- -----------
Cash flow from financing activities:
Decrease in loans payable to financial institutions
and short-term loans payable-other (1,284,814) (2,035,377)
Proceeds from exercise of stock options 291,000 18,187
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 196,000 658,000
----------- -----------
Net cash used in financing activities (433,714) (795,940)
----------- -----------
Effect of exchange rate changes on cash 54,611 58,241
----------- -----------
(Decrease) increase in cash and cash equivalents (168,862) 396,442
Cash and cash equivalents at beginning of period 352,489 114,190
----------- -----------
Cash and cash equivalents at end of period $ 183,627 $ 510,632
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest
Continuing operations $ 11,476 $ 467
----------- -----------
Discontinued operations $232,521 $385,156
Income taxes $ - $ -
See item 2., Changes in Securities, for noncash financing
activities during the nine month period ended Aug. 31, 1999.
</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 nine month period ended August 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. The Company had a total comprehensive (loss) of approximately
($2,542,000) and ($922,000) for the three months ended August 31, 1999 and 1998,
respectively. The Company had a total comprehensive (loss) of ($5,756,000) and
($2,421,000) for the nine months ended August 31, 1999 and 1998, respectively.
The difference between the Company's net (loss) and total comprehensive (loss)
of approximately ($663,000) during the Company's fiscal quarter ended August 31,
1999 relates to the reclassification adjustment required for the cumulative
foreign currency translation losses associated with foreign subsidiaries that
adopted liquidation plans during such quarter.
Note 2-Financing Arrangements
- -----------------------------
On December 17, 1996, the Company entered into a financing agreement with Coast
Business Credit, a division of Southern Pacific Bank ("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 of the Board. The Company has
granted Coast a security interest in substantially all of the Company's assets
of its US luggage operations. 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.
<PAGE>
The agreement also requires the Company to maintain a minimum tangible net worth
of $1,400,000. As of August 31, 1999, the Company was in default of the
agreement. The Company has not asked for a waiver as the loan is secured by the
remaining assets from its discontinued luggage segment and is scheduled to be
repaid before its maturity on December 31, 1999 from the collection of the trade
accounts receivable. As of August 31, 1999, the Company owed Coast approximately
$1,315,000 and had no outstanding letters of credit. At August 31, 1999, the
prime rate was 8.25%
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 August 31, 1999, the principal amount of the mortgage loan
was approximately $298,000.
On March 3, 1999, the Company's subsidiary, Essex Communications, Inc.,
("Essex") entered into a Receivable Sales Agreement (the "Sale Agreement") with
Receivables Funding Corporation ("RFC"). The Sale 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 August 31, 1999, approximately $128,000 was outstanding under the
Sale Agreement. The Sale 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 Sale Agreement at approximately
five percentage points above the prime rate. The Sale Agreement has a
termination date of the earlier of (a) March 3, 2001; (b) the occurrence of a
termination event (as defined); (c) the occurrence of an event of seller default
(as defined); or (d) 90 days following the Company's delivery of written notice
to RFC setting forth the Company's desire to terminate the Sale Agreement and
the payment of a termination fee (as defined).
Note 3-Acquisitions and Investments
- -----------------------------------
On February 27, 1998, the Company acquired all the outstanding shares of common
stock of 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 provided for the issuance of up
to 600,000 additional shares of the Company's common stock if certain
performance conditions were met before August 31, 1999. 325,000 of such shares
were 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 issuable. 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.
<PAGE>
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. This investment is carried at cost.
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. This investment is carried at cost.
Note 4-Discontinued Operations
On August 11, 1999, the Company sold certain assets and assigned certain
licenses of its domestic luggage division to Interbrand L.L.C., a non-related
accessories company, and announced that it would discontinue the operations of
its wholesale luggage segment. In addition to purchasing inventory, equipment
and other assets, Interbrand also hired certain employees, including the
Company's current Chairman of the Board, Joel Dupre. Upon being hired by
Interbrand, Mr. Dupre resigned his position with the Company as Chief Executive
Officer, and is no longer employed by the Company.
The operating results of the wholesale luggage segment have been accounted for
as a discontinued operation and the results of operations have been excluded
from continuing operations in the condensed consolidated statements of
operations for all periods presented, including the prior period financial
statements in which the Company has restated the operating results of its
wholesale luggage segment as a discontinued operation. Interest expense relating
to borrowings by the wholesale luggage segment is included as operating expenses
of such discontinued segment. A cumulative loss on foreign currency translation
adjustment of approximately $663,000, which formerly was presented as a separate
component of shareholder's equity, is now reflected as an operating expense in
the month of August 1999 because such loss related solely to the discontinued
segment. Operating results of the discontinued operation for the three and nine
months ended August 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended August 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $2,360,489 $4,001,255
Cost of Sales 2,139,178 3,142,185
Operating expenses 1,835,890 1,343,878
--------- ---------
Loss from discontinued operations ($1,614,579) ($484,808)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended August 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $6,267,355 $12,497,580
Cost of Sales 5,618,226 9,972,286
Operating expenses 3,909,128 4,065,063
--------- ---------
Loss from discontinued operations ($3,259,999) ($1,539,769)
</TABLE>
The remaining assets and liabilities of the discontinued segment are not
segregated on the Company's Balance Sheet at August 31, 1999. Such assets and
liabilities consist of approximately $1,318,000 in trade accounts receivable,
$918,000 in inventory, $330,000 in other current assets, $433,000 in property
and equipment, $1,612,000 in loans payable to financial institutions and
$2,802,000 in accounts payable and accrued expenses. The Company intends to seek
substantial discounts from suppliers and vendors in order to liquidate the
remaining liabilities of the discontinued segment.
<PAGE>
Item 2. Management's Analysis and Discussion of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
Information Regarding Forward-Looking Statements
- ------------------------------------------------
The statements contained in this report that are not historical facts are
"forward-looking statements" that 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 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 that 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 from 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 Nine Months Ended August 31, 1999 vs. August 31, 1998
Continuing operations
Net sales for the three and nine months ended August 31, 1999 increased by
approximately $651,000 and $1,791,000, respectively, to approximately $1,029,000
for the three months ended August 31, 1999 and approximately $2,697,000 for the
nine months ended August 31, 1999, as compared to approximately $372,000 and
$906,000, respectively, reported for the comparable periods in 1998. The
following tables present the Company's net sales by industry segment for the
three and nine months ended August 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended August 31,
Industry segment 1999 1998 Increase
- ---------------- ---- ---- --------
<S> <C> <C> <C>
Retail sales $497,000 $279,000 $218,000
Telecommunications 532,000 93,000 439,000
------- ------ -------
Total $1,029,000 $372,000 $651,000
========== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended August 31,
Industry segment 1999 1998 Increase
- ---------------- ---- ---- --------
<S> <C> <C> <C>
Retail sales $1,365,000 $813,000 $552,000
Telecommunications 1,332,000 93,000 1,239,000
--------- ------ ---------
Total $2,697,000 $906,000 $1,791,000
========== ======== ==========
</TABLE>
Net sales of the Company's telecommunications division, consisting of the
operations of Essex and WebQuill, increased by approximately $439,000 and
$1,239,000, respectively, for the three and nine months ended August 31, 1999.
This increase was attributable to the rapid growth in the number of installed
access lines provisioned by Essex during the third quarter of fiscal 1999. 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 October 1, 1999, Essex had approximately 6,000 installed lines. WebQuill
provides dial-up and dedicated Internet access, Web design, Web hosting and
E-commerce development to small and medium-sized businesses.
Net sales of the Company's retail division, consisting of the operations of
Airline Venture, Inc. ("AVI"), increased by approximately $218,000 and $552,000,
respectively, for the three and nine months ended August 31, 1999 from amounts
reported in the comparable periods of fiscal 1998. The increase was 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.
The Company's gross profit increased by approximately $144,000 and $475,000,
respectively, and the gross profit percentage decreased to 31.0% from 46.1% and
to 32.0% from 41.5%, respectively, for the three and nine months ended August
31, 1999 from amounts reported in the comparable periods in fiscal 1998. The
decrease in gross profit percentage is primarily attributable to the increase in
sales of the Company's telecommunications division, which has lower margins than
the Company's retail sales division. Gross profit percentages amounted to 36%
and 41% for the retail division and 25% and 21% for the telecommunications
division, respectively, for the three and nine months ended August 31, 1999.
Management expects the retail division's gross margin to continue at its current
level and the telecommunication division's gross margin to continue to increase
throughout the year as Essex converts its customer base to a "leased facilities"
product that is now being offered by Bell Atlantic Corporation in New York
State. This product should allow the Company to obtain gross margins on local
telephone service of more than 30%. Such conversion commenced during the
Company's third fiscal quarter of 1999.
Selling, warehouse and general and administrative expenses increased by
approximately $498,000 and $1,176,000, respectively, for the three and nine
months ended August 31, 1999 from amounts reported in the comparable periods in
fiscal 1998. A major portion of the increase was directly attributable to
expenses incurred by the Company's telecommunications division, which had no
significant operating expenses in the prior fiscal periods.
<PAGE>
Interest expense from continuing operations amounted to approximately $8,000 and
$11,000 for the three and nine months ended August 31, 1999. There was no
interest expense from the Company's continuing operations during the same
periods in fiscal 1998.
At August 31, 1999, the Company was the largest shareholder of Access One
Communications Corp. ("Access One"), owning approximately 39% 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 nine months ended August 31, 1999, the Company has recorded a loss of
approximately $419,000 and $1,463,000, respectively, relating to its investment
in Access One. Condensed consolidated financial information for the three and
nine months ended July 31, 1999 for Access One is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, 1999 July 31, 1999
------------- -------------
<S> <C> <C>
Net Sales $5,056,509 $10,432,705
Cost of Sales 3,710,322 8,409,916
Gross Profit 1,346,187 2,022,789
Net Operating Income (Loss) 71,650 (1,488,909)
Other Expenses 934,802 1,475,664
Net (Loss) (863,153) (2,964,573)
</TABLE>
Discontinued operations
- -----------------------
See Note 4 - Discontinued operations
Liquidity and Capital Resources
- -------------------------------
At August 31, 1999, the Company had cash and cash equivalents of approximately
$184,000 and negative working capital of approximately $1,826,000.
Net cash provided by operating activities aggregated approximately $248,000 and
$1,252,000 in the nine-month periods ended August 31, 1999 and 1998,
respectively. The decrease in net cash provided by operating activities
primarily reflects the increase in the net loss for the nine-months ended August
31, 1999 as compared to the prior year period.
Net cash used in investing activities aggregated approximately $38,000 and
$118,000 in the nine-month periods ended August 31, 1999 and 1998, respectively.
The principal use of cash from investing activities in the nine-month periods
ended August 31, 1999 and 1998 was the purchase of equipment. The principal
source of cash provided by investing activities in the nine-month periods ended
August 31, 1999 and 1998 was the proceeds of a note receivable from the 1992
sale of a subsidiary.
<PAGE>
Net cash used in financing activities aggregated approximately $434,000 and
$796,000 in the nine-month periods ended August 31, 1999 and 1998, respectively.
In the fiscal period ended August 31, 1999, net cash used in financing
activities resulted from a decrease in short-term debt of approximately
$1,284,000, which was partially offset by the proceeds from the exercise of
stock options of approximately $291,000, 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 nine-month period ended
August 31, 1998, net cash used in financing activities resulted from a decrease
in short-term debt of approximately $2,035,000, partially offset from the
proceeds of stock options of approximately $18,000, the proceeds of warrants of
approximately $488,000, the proceeds of a private placement of common stock of
approximately $75,000 and the proceeds of a private placement of preferred stock
of approximately $658,000.
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 August 31, 1999, the Company was indebted to Coast in the
principal amount of approximately $1,315,000 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. As of August 31, 1999, the
Company was in default of the agreement. As the Company anticipates paying the
debt before its maturity by liquidating its remaining inventory and collecting
its trade accounts receivable, the Company has not requested a waiver of the
violation from Coast. Coast granted the Company written permission to divest its
wholesale luggage division and such debt relates to the assets of the
discontinued division.
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 August 31, 1999, the principal
amount of the mortgage loan was approximately $298,000. 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") that 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 August 31, 1999, Essex was indebted to RFC for the principal amount of
approximately $128,000. Essex borrows from RFC at approximately five percentage
points above the prime rate.
For the nine-month period ended August 31, 1999, the Company had approximately
$69,000 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 such expenditures will
be significant.
<PAGE>
As of August 31, 1999, the Company owned approximately 39% 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. 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% of any income
or loss that is incurred by Access One. Although the Company has recorded a loss
on its investment for each quarter through August 31, 1999, Access One recorded
earnings before interest and depreciation in its most recent quarter, due to the
implementation of a leased facilities program with its largest supplier,
BellSouth Corporation, effective June 2, 1999.
On August 11, 1999, the Company announced the discontinuance of its wholesale
luggage segment, which had generated operating losses of approximately
$3,260,000 during fiscal 1999 and approximately $2,663,000 and $2,763,000 in
fiscal years 1998 and 1997, respectively. This discontinuance included the
immediate sale of certain assets, the assignment of certain licenses and leases
and the termination of certain employees. The Company did not sell this
segment's trade accounts receivable and plans to collect such receivables and
liquidate the remaining assets of this business segment and use such proceeds to
retire its luggage related liabilities. Although the Company cannot be assured
of the ultimate price it will receive from the liquidation of the remaining
assets, management believes that it will be able to satisfy the remaining
obligations attributable to the wholesale luggage segment, including, in certain
cases, by negotiating substantial discounts on certain of the liabilities.
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 12 months. This division operated
profitably in the first three quarters of fiscal 1999. The Company is currently
raising capital of up to $1.6 million in a private placement to meet the cash
requirements for the next 12 months of its telecommunications division, as
contemplated by the business plan for that division. Subsequent to August 31,
1999, approximately $1 million has been received in conjunction with such
private placement. 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.
<PAGE>
SIRCO INTERNATIONAL CORP.
PART II-OTHER INFORMATION
Item 2. Changes in Securities
- ------- ---------------------
On August 13, 1999, a holder of 667 shares of the Company's Series A Preferred
Stock, par value $.10, per share, converted the preferred stock into 340,654
shares of common stock. Such securities were exempt from the Securities Act of
1933, as amended, pursuant to Section 3(9) thereof.
Item 5. Other Information
- ------- -----------------
The Company intends to hold an Annual Meeting of Shareholders during the month
of May, 2000. Proposals of shareholders intended for presentation at the 2000
Annual Meeting of Shareholders and intended to be included in the Company's
Proxy Statement and form of proxy relating to that meeting must be received at
the offices of the Company by February 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits.
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the third quarter of fiscal 1999, the Company filed a Current Report on
Form 8-K reporting the sale of certain assets of its former luggage division
pursuant to the Asset Purchase Agreement between the Company and Interbrand
L.L.C. At the time of the filing it was impracticable for the Company to provide
the required pro forma financial information with respect to the transaction
disclosed therein. The Company intends to file such information by amendment to
the Form 8-K as soon as practicable, but in any event within 60 days of the
filing of the initial Form 8-K.
<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.
October 15, 1999 By: /s/ Paul H. Riss
- -------------------------------------- -----------------
Date Paul H. Riss
Chief Executive Officer
(Principal Financial and
Accounting Officer)
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<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> AUG-31-1999
<CASH> 183,627
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<RECEIVABLES> 2,239,070
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<OTHER-SE> 1,465,215
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<TOTAL-REVENUES> 2,696,918
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