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 . ------------------- ------------------- Commission file number 0-4465 ------ Sirco International Corp. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) New York 13-2511270 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 24 Richmond Hill Avenue, Stamford Connecticut 06901 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code 203-359-4100 ------------ - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 10,130,955 shares of Common Stock, par value $.10 per share, as of July 1, 1999. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Sirco International Corp. and Subsidiaries Condensed Consolidated Balance Sheets May 31, 1999 Nov. 30, 1998 ------------ ------------ (Unaudited) (See note) 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 ------------ ------------ Net property and equipment 664,386 835,474 ------------ ------------ 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 ============= ============ 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 Sirco International Corp. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) For the Six Months Ended For the Three Months Ended May 31, 1999 May 31, 1998 May 31, 1999 May 31, 1998 ----------- ----------- ----------- ---------- 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 See notes to the condensed consolidated financial statements. 3 Sirco International Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended May 31, 1999 May 31, 1998 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 - - 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 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 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 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 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" 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 ------------------ Increase Industry segment May 31, 1999 May 31, 1998 (Decrease) ---------- ---------- ------------ 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) ========== ========== =========== 8 Six Months Ended ---------------- Increase Industry segment May 31, 1999 May 31, 1998 (Decrease) ---------- ---------- ------------ 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) ========== ========== ============ 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 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 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 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 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 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 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 EXHIBIT INDEX No. Description Page No. - --- ----------- -------- 27 Financial Data Schedule. 16 Sirco International Corp. Item No. Item Description May 31, 1999 - -------- ----------------- ------------ 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) "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