SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-4465
SIRCO INTERNATIONAL CORP.
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(Exact name of Registrant as specified in its charter)
New York 13-2511270
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(State or other jurisdiction of (IRS employer
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 .
Securities registered pursuant to Section 12(b) of the Act:
none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of February 17, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $10,270,400.
As of February 17, 1998, there were 4,300,400 shares outstanding of the
Registrant's Common Stock.
<PAGE>
Part I
Item 1. - Business
Sirco International Corp. (the "Company") designs, manufacturers and markets a
broad line of soft luggage, sports bags, backpacks, children's bags, tote bags
and related products. The Company's strategy is to produce a diverse line of
high quality, fashionable products at competitive prices. The Company believes
its ability to merchandise high quality products is facilitated by its creative
design, manufacturing and sourcing capabilities.
The Company sells its products under many trade names, including "Cross
Trainer," "JT Madison", "Mondo," and "Sirco Kids," all of which are registered.
In addition, the Company sells its products under certain trademarked names
licensed from others, including "Dunlop," "Generra," "Gold's Gym," "Hedgren,"
"Koosh," "Maui and Sons," and "Perry Ellis." See "License Agreements." The
Company also designs and manufactures soft luggage and sports bags on a contract
basis for unaffiliated retailers and sportswear companies, and sells luggage and
American Airlines logo products to American Airlines, Inc. employees.
Virtually all of the Company's products are manufactured by foreign suppliers in
accordance with the Company's design specifications. During the fiscal year
ended November 30, 1997, approximately 68% of the Company's products were
manufactured in the People's Republic of China. The primary markets for the
Company's products are the United States and Canada. Reference is hereby made to
Note 7 of the Notes to Consolidated Financial Statements for information with
respect to the amount of net sales, net income (loss) before provision for
income taxes and identifiable assets of the Company's foreign operations. During
the fiscal year ended November 30, 1997, the Company engaged in only one line of
business and does not consider such business to be divided into "industry
segments."
During the later part of fiscal 1997, the Company's Board of Directors began to
review proposals for increasing the value of the Company's common stock and
thereby increasing shareholder value by considering alternative business
opportunities, including several outside of the luggage industry. Based in part
on the significant growth opportunities in the telecommunications industry and
the relatively high valuations that have been placed on competitive local
exchange carriers ("CLECs") by the U.S. capital markets, in the fourth quarter
of fiscal 1997, the Board determined to diversify into two business segments,
one focusing on the travel business (luggage, sport bags and the American
Airlines employee stores), and the other focused on the telecommunications
industry, including primarily CLECs.
In furtherance of its diversification strategy, in October 1997, the Company
made an investment in CLEC Holding Corp. ("CHC") which owns 95% of the capital
stock of The Other Phone Company, Inc. ("OPC"), an integrated telecommunications
provider based in Florida. The Company has recorded its investment as an asset
on its balance sheet using the equity method of accounting. At February 28,
1998, the Company was the largest shareholder of CHC, owning approximately 28%
of CHC's capital stock. CHC has advised the Company that, at February 28, 1998,
OPC had approximately 9,000 local access lines, compared to approximately 2,500
access lines at September 9, 1997.
<PAGE>
The Company commenced operations in a new industry segment in fiscal 1998 by
acquiring on February 27 , 1998, Essex Communications, Inc. ("Essex"), a newly
formed CLEC. Essex intends to attract and retain a geographically concentrated
customer base in the metropolitan New York region, primarily through the resale
of products and services of incumbent and alternative facilities-based local
providers. In March 1998, Essex signed an agreement with Bell Atlantic - New
Jersey, Inc. ("New Jersey Bell") allowing Essex to resell local telephone
service in New Jersey, and has filed an application with New Jersey Bell for the
approval of the resale agreement by the State of New Jersey Board of Public
Utilities. Essex has also filed applications to resell local telephone service
with the New York State Public Service Commission and the Connecticut Department
of Public Utility Control. Essex intends to focus its marketing efforts
primarily on small and medium sized businesses with telecommunications usage of
less than $2,000 per month. Its customer service strategy will include being
more responsive and innovative in satisfying customers' needs, while providing a
product that is less expensive than the telephone service provided by the
regional Bell operating companies. In addition to local telephone line usage,
Essex plans to sell other enhanced and value added telecommunication services,
such as voice mail, paging, long-distance and teleconferencing. See "Recent
Developments."
The Company was incorporated in New York in 1964.
Markets and Customers
The Company sells its luggage, sport bag, backpack and related products
primarily to large national retail chain stores, including Target, Sears, Kmart
and Wal-Mart, and to regional discount store chains, such as ShopKo, Bradlees
and Caldor. The Company also sells to department stores and other specialty
stores, including Federated Stores (Bloomingdale's and Stern's), The May
Company, Innovation Luggage and Bentley's Luggage, and to apparel chain stores,
such as The Marmaxx Group and Ross Stores. The Company also sells such products
to sporting goods retailers, such as Gold's Gyms, and to warehouse clubs, such
as Price Costco. The loss by the Company of several of these customers would
have an adverse effect on the Company's operations. However, the Company
believes that these customers, if lost, could be partially, if not completely,
replaced by others.
During the fiscal years ended November 30, 1997, 1996 and 1995, sales to Target
represented approximately 27%, 19% and 25%, respectively, of net sales; sales to
Kmart represented approximately 17% and 11% of net sales in fiscal years 1997
and 1996, respectively; and sales to The Marmaxx Group represented approximately
14% of net sales in fiscal 1997. No other customer accounted for more than 10%
of net sales in any of such fiscal years.
The Company currently maintains showrooms in New York City and Ontario, Canada.
The Company solicits business directly from its customers, using the services of
both full-time sales persons and independent sales representatives. The
independent sales representatives represent a number of manufacturers or
wholesalers other than the Company, and are compensated on a commission basis,
typically pursuant to the terms of a non-exclusive sales representative
contract. The Company fills orders on the terms and conditions of standard
purchase orders it receives from customers.
<PAGE>
The Company's percentage of sales by fiscal quarter for the fiscal years ended
November 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
First Quarter 19.2% 23.7% 19.5%
Second Quarter 19.4 27.5 21.3
Third Quarter 37.1 27.7 31.9
Fourth Quarter 24.3 21.1 27.3
---- ---- ----
100.0% 100.0% 100.0%
</TABLE>
The Company typically experiences seasonality that yields stronger operating
results in the third and fourth quarters, and weaker operating results in the
first quarter. This trend occurred in fiscal 1997 but did not occur in fiscal
1996 because of new selling markets that the Company was able to pursue in the
first and second quarters in conjunction with the termination of a license
agreement with FILA Sport S.p.A. (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The sale of product to American Airlines, Inc. employees was not material in
fiscal 1997 and did not impact seasonality. Since the Company is selling travel
related products to pilots and flight attendants, there is little seasonality,
as the customers are using the products on a daily basis as part of their normal
work routine. The expansion of this business to additional airports or to other
airlines may eventually have the effect of decreasing the Company's overall
seasonality.
The Company anticipates that its acquisition of Essex and the development of its
CLEC business also will eventually impact the Company's overall seasonality
trends by making quarterly revenues less divergent.
Design and Merchandising
The Company's licensed and branded products feature dynamic and colorful new
styles that use innovative graphics and product designs and are constructed of
quality fabrics and other materials. In order to continue to provide
high-quality designs for both its licensed and non-licensed products, the
Company established a design development center employing creative and
merchandising professionals who work with state-of-the-art resources. In
addition, the Company actively solicits participation from key customers in the
development of specific products.
<PAGE>
The Company's design and merchandising department, which is based out of the
Company's headquarters, emphasizes creativity and responsiveness to consumer
preferences in the development of new products. The design and merchandising
department, together with the Company's marketing personnel, evaluates the
designs and fashion trends in the marketplace and applies these in its product
development. The Company's design and marketing personnel frequently visit
customers, suppliers and trade shows and conduct market research to identify
developing consumer trends and new product ideas.
License Agreements
The Company has licensing agreements which allow it to produce and sell luggage,
sport bags and related travel accessories bearing the trade names of Dunlop,
Generra, Gold's Gym, Hedgren, Koosh, Maui and Sons, and Perry Ellis. Sales by
the Company under trademarked names licensed from others accounted for
approximately 66%, 83% and 65% of the Company's net sales during the fiscal
years ended November 30, 1997, 1996 and 1995, respectively.
The Company's licenses generally entitle the Company to use the names, symbols
and logos of the licensors on an exclusive basis in the manufacture and sale of
the Company's products within a defined territory. All of the Company's licenses
call for a royalty to be paid to the licensor based on a percentage of net
sales, except for the license for Hedgren products, which is based on a
percentage of net purchases. Royalties vary by product and licensor and
generally range from 5.0% to 7.0% of net sales. Minimum payments are applied
against royalty fees either over the term of the contract or annually, depending
on the contract. In addition, the licenses generally require payments by the
Company to certain promotional programs sponsored by the licensor.
The Company's license agreements generally have terms of three years. The terms
of renewal options are negotiated and vary on a license-by-license basis. The
Company recently negotiated the termination of its license to sell luggage and
luggage related products bearing the Skechers name and logo. The Company's
license for Cherokee products expired on December 31, 1997 and was not renewed.
The Company believes that, in fiscal 1998, it can replace the sales of products
bearing the Cherokee name with sales of its Dunlop and Mondo products.
During fiscal 1996, the Company received notification from Airway Industries
Inc. ("Airway") that Airway would not renew its License Agreement with the
Company pursuant to which Sirco International (Canada) Limited, the Company's
Canadian subsidiary ("Sirco Canada"), was granted an exclusive license to sell
in Canada, luggage and luggage related products under the trade names "Atlantic"
and "Oleg Cassini" through December 31, 1996. During the fiscal years ended
November 30, 1997, 1996 and 1995, sales of Atlantic product approximated
$472,000, $5,782,000 and $3,571,000, respectively, which represented
approximately 2.9%, 20.8% and 14.3%, respectively, of the Company's total net
sales for those periods, and approximately 63.8%, 95.4% and 97.6%, respectively,
of the total net sales of Sirco Canada for those periods. Sirco Canada lost
approximately $167,000 in the fiscal year ended November 30, 1997 and earned
approximately $434,000 and $269,000 in fiscal years ended November 30, 1996 and
1995, respectively. In addition, following receipt of notification from Airway
and Douglas Turner, then the President of Sirco Canada and a Director of the
Company, that Airway and Mr. Turner had mutually agreed to Airway's future
employment of Mr. Turner in its efforts to distribute directly its products in
Canada, the Company terminated its employment of Mr. Turner in September 1996.
The loss of the Airway license had an adverse effect on the Company's results of
operations for the fiscal year ending November 30, 1997.
<PAGE>
After extensive negotiations with FILA Sport S.p.A. ("FILA"), in February 1996,
the Company and FILA entered into an agreement pursuant to which the Company
ceased shipping FILA product under a non-exclusive license with FILA during
fiscal 1996. Net sales of the FILA product for the fiscal years ended November
30, 1996 and 1995 were approximately $8,584,000 (including approximately
$482,000 sold to FILA) and $5,314,000, respectively, or 30.9% and 21.4%,
respectively, of the Company's total net sales. The loss of the ability to sell
product bearing the FILA trademark had an adverse effect on the Company's
results of operations through the fiscal year ending November 30, 1997. Although
the Company continuously explores the licensing of new trademarked names, future
net sales could be negatively impacted if sales from new licenses or increases
in sales under the existing licenses do not replace the sales of FILA product.
Trademarks
The Company sells products under proprietary trade names and logos, including
"Cross Trainer," "JT Madison," "Mondo," and "Sirco Kids," all of which are
registered in the United States. The Company considers its trademarks to be of
considerable value to its business and intends to protect them to the fullest
extent practicable. The Company takes all reasonable measures to assure that any
product bearing a Company-owned trademark or logo reflects the consistency and
quality associated with its products bearing licensed trademarks or logos.
Backlog
A substantial portion of net sales is based on orders for immediate delivery and
therefore, backlog is not necessarily indicative of future net sales.
Suppliers
The Company's luggage, sport bag, backpack and related products are primarily
produced by various manufacturers in Indonesia, the People's Republic of China,
the Philippines, Taiwan and Thailand. Although the simultaneous loss of several
of these manufacturers would temporarily adversely affect the Company's
business, the Company is of the opinion that generally these manufacturers could
be replaced by others. The Company's business could also be adversely affected
by a disadvantageous change in the exchange rate of the dollar with certain
foreign currencies, by changes in tariffs or import restrictions, as well as
political and economic conditions in the countries from which it imports.
<PAGE>
For the fiscal years ended November 30, 1997, 1996 and 1995, the Company's
products were manufactured in the following countries:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
China 67.81% 63.86% 80.85
Taiwan 14.52 17.47 6.87
Thailand 6.56 3.33 7.31
Philippines 6.26 7.28 3.62
Indonesia 4.64 0.00 0.00
Korea 0.21 2.91 0.78
Other 0.00 5.15 0.57
------ ------ -------
100.00% 100.00% 100.00%
======= ======= =======
</TABLE>
The Company purchases products for its American Airlines employee stores from
various domestic suppliers who have license agreements to sell product
displaying the American Airlines, Inc. logo or trade name. The Company also buys
non-logo product from a variety of domestic sources.
Competition
The Company experiences substantial competition in most of its luggage, sport
bag, backpack and related product categories from a number of well established
domestic and foreign distributors, some of which have greater financial
resources than the Company. The Company believes the principal competitive
factors affecting its business are styling, pricing and distribution. Increased
competition by existing and future competitors could result in reductions in
sales or prices of the Company's products that could materially impair the
Company's profitability. In addition, a substantial portion of the Company's
products are sold under non-exclusive licensing agreements. Although the Company
has been successful in obtaining and renewing such licenses, there can be no
assurance that existing competitors will not obtain competing licenses in the
future or that additional large, well-financed companies will not enter the
licensed luggage, sport bag or backpack business. Because the Company imports
its manufactured goods from overseas suppliers, delivery to its customers is
dependent upon the timing of overseas manufacturing and shipping schedules,
which may put the Company at a competitive disadvantage to domestic
manufacturers.
The Company expects that it will face significant competition in connection with
its proposed entry into the telecommunications industry. The Company expects to
experience significant competition for its proposed local telephone services,
including local exchange services, from incumbent local exchange carriers
("ILECs"), which currently dominate their local telecommunications markets, and
others, including other CLECs. ILECs have long-standing relationships with their
customers which may create significant competitive barriers. Furthermore, ILECs
may have the potential to subsidize competitive service from monopoly service
revenues. In addition, a continuing trend toward business combinations and
alliances in the telecommunications industry may create significant additional
<PAGE>
competitors. The Company will also face competition in its proposed markets and
in most other markets into which it may expand from one or more CLECs operating
fiber optic networks. Most of the Company's existing and potential competitors
in the telecommunications industry have financial, personnel and other resources
significantly greater than those of the Company.
Employees
At February 17, 1998, the Company employed 84 employees, of which 82 were
employed on a full-time basis and two were employed on a part-time basis, and
had approximately 23 independent sales representatives. At such date,
approximately 12 of the Company's employees were employed in the Company's
executive offices in Stamford, Connecticut; approximately 59 were employed in
the Company's warehouse in La Mirada, California; nine were employed in the
Company's American Airlines store in Dallas, Texas, one was employed in the
Company's showroom facility in New York, New York; and three were employed in
the Company's Canadian showroom and warehouse facilities in Ontario, Canada. The
Company is not subject to any collective bargaining agreement and believes that
its relationship with its employees is good.
Recent Developments
On February 27, 1998, the Company commenced operations in the telecommunications
industry by acquiring Essex, a startup CLEC that has filed in New Jersey, New
York and Connecticut to become a reseller of local telephone services. The
Company believes that Essex is positioning itself to take advantage of the
opportunities created by the Telecommunications Act of 1996 (the
"Telecommunications Act"), which requires the regional Bell operating companies
("RBOCs") to perform a number of duties, including allowing local telephone
service competition, in order to qualify for long distance entry in their local
service areas. Essex believes that it will be able to gain rapid market entry
because it is a non-facilities based provider and will therefore not incur the
significant costs and developmental delays that are inherent in constructing
network and transmission facilities. Furthermore, Essex intends to take
advantage of telecom relationships established by the Company's affiliate, CHC,
which has negotiated favorable long distance rates and voice mail rates from
third party providers, and will not incur extra time or expense having to
negotiate such agreements. Where possible, Essex will attempt to provide service
to CHC's multi-state customers that also have business locations in the New York
metropolitan area.
All of the telecommunications operations of Essex are subject to state and
federal regulations. Essex must obtain and maintain certificates of public
convenience and necessity from most states in which it plans to offer services.
Many comprehensive changes in the regulatory environment have already occurred
as a result of the Telecommunications Act, and Essex cannot predict how the
relevant provisions of the Telecommunications Act will evolve and be interpreted
by federal and state regulators, courts and the RBOCs. The timing and terms of
any resale agreement between Essex and a RBOC is at least partially controlled
by the individual RBOC, although the RBOCs have the duty to negotiate the resale
agreements on a good-faith basis. Essex has been negotiating with Bell Atlantic
Corporation and has executed a resale agreement for New Jersey, in addition to
various other operational agreements, such as on-line access to computer
facilities.
<PAGE>
Item 2. - Properties
The following table sets forth pertinent facts concerning the Company's material
properties at February 15, 1998, all of which are owned or leased by either the
Company or one of its subsidiaries:
<TABLE>
<CAPTION>
Property Owned:
Location Use Approximate Square Feet
- -------- --- -----------------------
<S> <C> <C>
1321 Blundell Road Showroom, Offices 35,000 (leases out 34,000 SF)
Mississauga
Ontario, Canada L4Y 1M6
<CAPTION>
Properties Leased:
Approximate Lease Annual
Location Use Square Feet Expires Rent(1)
- -------- --- ----------- ------- -------
<S> <C> <C> <C> <C>
366 Fifth Avenue Showroom 3,340 10/18/06 $ 96,000
New York, NY 10001
24 Richmond Hill Avenue Executive Offices 7,800 9/14/00 $137,000
Stamford, CT. 06901
16000 Heron Avenue Warehouse, Offices 116,000(2) 3/31/00 $456,000
La Mirada, CA. 90638
1930 W. Airfield Drive Warehouse 2,000 7/31/98 $ 12,048
DFW Airport, Texas 75261
Terminal 3E Retail 1,700 8/24/00 $ 55,200
DFW Airport, Texas 75261
24 Professional Centre Pkwy Office 1,016 10/31/98 $ 17,676
San Rafael, CA 94903
</TABLE>
(1) The Company is required to pay its proportionate share of any increase
during the term of the lease in real estate taxes and expenses of
maintaining the premises computed on the basis of the percentage of the
total square footage of the premises occupied by the Company.
(2) Approximately 38,000 square feet of warehouse and office space has been
subleased to Bueno of California, Inc., the purchaser of the Company's
former handbag division, through the end of the lease term at a rental
rate of $10,000 per month, increasing to $17,000 per month in the last
year of the lease term.
The Company's owned and leased space is fully utilized for the purposes set
forth in the table above under the caption "Use," and believes that its
properties are suitable and adequate for the business of the Company.
<PAGE>
Item 3. - Legal Proceedings
The Company is not involved in any pending legal proceeding other than
non-material ordinary routine litigation incidental to its business.
Part II
Item 5. - Market for the Company's Common Equity and Related Stockholder Matters
The Common Stock, $.10 par value (the "Common Stock"), of the Company is traded
in the over-the-counter market and is quoted on the NASDAQ inter-dealer
automated quotations system. The high and low bid quotations for each quarterly
period of the Company's last two fiscal years are listed below:
High Low
---- ---
Fiscal 1997
1st Quarter 3-1/2 1-3/4
2nd Quarter 7-3/8 3-1/2
3rd Quarter 7-3/4 5-7/8
4th Quarter 7-1/4 3-1/4
Fiscal 1996
1st Quarter 2-3/4 1-1/8
2nd Quarter 2-3/4 1-13/16
3rd Quarter 2-1/2 1-9/16
4th Quarter 2-1/4 1-5/16
(The quotations set forth in the table above reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.)
As of February 17, 1998, there were 163 holders of record of the Common Stock
and approximately 760 beneficial holders.
The Company has not declared any cash dividends during the past fiscal year with
respect to the Common Stock. The declaration by the Company of any cash
dividends in the future will depend upon the determination of the Company's
Board of Directors as to whether, in light of the Company's earnings, financial
position, cash requirements and other relevant factors existing at the time, it
appears advisable to do so. The Company's current financing arrangements contain
certain restrictions regarding the payment of dividends.
In April 1997, the Company raised $609,000, net of placement agent fees of
$91,000, through the issuance of 400,000 Units at $1.75 per Unit, each Unit
consisting of one share of Common Stock, one common stock Class A warrant
("Class A Warrants") exercisable at $2.06 per share for one year, and one common
stock Class B warrant ("Class B Warrants") exercisable at $2.56 per share for
one year. In connection with the transaction, an aggregate of 120,000 Class A
warrants were issued to the placement agent and a consulting firm. As of
November 30, 1997, 700,000 warrants had been exercised and 110,000 Class A
Warrants and 110,000 Class B Warrants remained outstanding. The Units were
offered and sold in a private placement effected pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
<PAGE>
On October 22, 1997, the Company acquired from CLEC 3,000,000 shares of common
stock, par value $.001 per share, of CLEC in consideration of the issuance by
the Company of 425,000 shares of Common Stock of the Company. Such transaction
was effected pursuant to Sections 4(2) of the Securities Act of 1933, as
amended.
<PAGE>
Item 6. - Selected Financial Data
The following selected financial information has been taken from the
consolidated financial statements of the Company. The information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and related notes included elsewhere in this report.
<TABLE>
<CAPTION>
Fiscal Years Ended November 30,
1997 1996 1995 1994 1993
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Earnings Statement:
Net Sales $ 16,008 $ 27,746 $ 24,812 $ 27,600 $ 27,746
Gross Profit 2,205 7,088 6,130 6,067 6,620
Income (Loss) Before
Provision for Income Taxes
and Extraordinary Items (2,994) 925 (996) (2,435) (948)
Net Income (Loss) (2,868) 622 (996) (2,435) (964)
Net Income (Loss) per
Common Share:
Primary (0.88) 0.23 (0.41) (1.01) (0.40)
Fully Diluted (0.88) 0.23 (0.41) (1.01) (0.40)
Cash Dividends - - - - -
Balance Sheet:
Working Capital $ 5,107 $ 1,553 $ 1,142 $ 1,362 $ 4,031
Property, Plant, Equipment 827 888 650 773 832
Total Assets 14,042 9,577 10,003 10,252 11,929
Long-Term Debt (Less Current
Maturities) 4,522 348 590 50 506
Stockholders' Equity 3,216 2,780 1,897 2,898 5,374
</TABLE>
<PAGE>
Item 7. - Management's Discussions and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, among others, general economic and
business conditions; industry trends; the loss of major customers; dependence on
foreign sources of supply; the loss of licenses; availability of management;
availability, terms and deployment of capital; the seasonal nature of the
Company's business; and changes in state and federal regulations of the
telecommunications industry.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net sales for fiscal year 1997 decreased by approximately $11,738,000 to
approximately $16,008,000 as compared to approximately $27,746,000 reported in
fiscal 1996. Net sales for the Company's United States and Canadian operations
decreased in fiscal 1997 by approximately $6,450,000 and $5,288,000,
respectively, from amounts reported in the prior fiscal year. This decline in
net sales is primarily attributable to three developments: the Company's loss of
the license to sell FILA product (see below) in the United States, effective in
June 1996; the Company's loss of the license to sell Airway product (see below)
in Canada, effective in December 1996; and a decrease in demand in the United
States for the Company's other mature brand names. This decline in sales was
partially offset by sales growth in new licenses that were signed in 1996 for
the Perry Ellis and Hedgren brand names. Net sales per brand name for the two
fiscal years were as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal Increase/
1997 1996 (Decrease)
----- ---- ----------
<S> <C> <C> <C>
Perry Ellis, Hedgren $3,443,000 $ 206,000 $ 3,237,000
FILA - 8,584,000 (8,584,000)
Airway 472,000 5,782,000 (5,310,000)
Other brand names 6,665,000 8,830,000 (2,165,000)
Total brand names 10,580,000 23,402,000 (12,822,000)
Unlicensed product 5,428,000 4,334,000 1,084,000
Total net sales $16,008,000 $27,746,000 $ (11,738,000)
</TABLE>
The Company's gross profit for fiscal 1997 decreased by approximately $4,883,000
to approximately $2,205,000 from approximately $7,088,000 in fiscal 1996, and
the gross profit percentage in fiscal 1997 decreased to 13.8% from 25.5% in
fiscal 1996. The decrease in gross profit percentage is attributable to the
discontinuance of certain products in fiscal 1997 for which the Company recorded
an inventory reserve of approximately $615,000, the lack of a sufficiently large
revenue base over which to spread fixed costs and to a change in product mix.
The change in product mix has two components. First, fiscal 1997 sales contained
a higher percentage of unlicensed products, which traditionally have a lower
gross profit margin, and second, fiscal 1997 sales contained the new brand names
of Perry Ellis and Hedgren, as compared to the more established brand names of
FILA and Atlantic in fiscal 1996. Established brand name products generally are
able to demand a higher gross margin than less established brand name products,
which are vying for shelf space with other new products from competitors.
<PAGE>
After extensive negotiations in February 1996, the Company and FILA entered into
an agreement pursuant to which the Company ceased shipping products under the
FILA license on June 30, 1996. The Company sold approximately $8,584,000 of FILA
product in fiscal 1996 compared to no sales of FILA product in fiscal 1997. The
loss of the FILA trademark had an adverse impact on the Company's results of
operations in the fiscal year ended November 30, 1997, and will have an adverse
impact on the Company's results of operations for the fiscal year ending
November 30, 1998.
During fiscal 1996, Airway notified the Company that it would not renew its
license agreement with the Company, pursuant to which Sirco Canada was granted
an exclusive license to sell in Canada luggage and luggage related products
under the trade names "Atlantic" and "Oleg Cassini" through December 31, 1996.
In November 1996, the Company entered into an Asset Purchase Agreement with
Airway, whereby Airway agreed, among other things, to purchase any remaining
Atlantic inventory owned by Sirco Canada on December 31, 1996, to purchase
certain fixed assets and to enter into a two year lease for a substantial
portion of the premises owned by Sirco Canada at fair market value. In November
1996, the Company restructured Sirco Canada, hired a new president to run the
operation and started to market the Company's other licensed products in Canada.
Sirco Canada sold approximately $472,000 of Airway product in the first quarter
of fiscal 1997 prior to the December 31, 1996 termination date. Sirco Canada
sold approximately $5,782,000 of Airway product in fiscal year 1996. The loss of
the Airway license had an adverse impact on the Company's results of operations
for fiscal 1997 and will have an adverse effect on the Company's results of
operations throughout the fiscal year ending November 30, 1998.
During fiscal 1997, the Company terminated its license for products bearing the
"Skechers" trade name or logo, which products had not generated the sales volume
that was anticipated. The Company anticipates that the Skechers sales volume in
fiscal 1997 will be replaced by new licenses (see below) that the Company
believes will have a greater level of acceptance in the marketplace.
On December 31, 1997, the Company's license for Cherokee products expired and
was not renewed. The Company believes that sales of Cherokee products will be
replaced by an increase in sales of the Company's Dunlop and Mondo products in
fiscal 1998.
The Company continuously evaluates potential licenses and seeks to determine the
value an individual trade name will add to its product mix. Licensed trade names
can help give the Company a marketing advantage with certain retailers over
similar products offered by competitors. The Company started shipping products
under the Perry Ellis and Hedgren trade names in fiscal 1996 and recorded
aggregate net sales for these products of approximately $3,443,000 in fiscal
1997, compared to aggregate net sales of approximately $206,000 in fiscal 1996.
The Company has recently introduced new products under the trade names of
"Koosh," which is for children's products, and "Maui and Sons," which is for
active young men's and children's products. The Company does not anticipate
losing any licenses in fiscal 1998, although the Company may elect to terminate
less successful licenses. The Company believes that, although a licensed name
can often help the Company sell a product, the excellent service and high
quality products provided by the Company to its customers, regardless of what
name is on the product, will result in most of the Company's customers
reordering products from the Company based primarily on quality and value, and,
to a lesser extent, on the trade name.
<PAGE>
Selling, warehouse and general and administrative expenses decreased by
approximately $738,000 to approximately $5,167,000 from approximately $5,905,000
in fiscal 1996. The reduction in expenses is attributable to lower selling
expenses as a result of the reduction in net sales, and lower warehousing and
general and administrative expenses as a result of the restructuring of the
Company's Canadian operation. Included in the selling, warehouse and general and
administrative expenses reported in fiscal 1996 was a one-time write-off of
restrictive covenants, with a book value of approximately $152,000, which
resulted from the pre-payment in fiscal 1996 of the Company's obligations to the
Company's former parent, Yashiro Company, Inc. ("Yashiro"), and the release of
any covenants not to compete between the Company and Yashiro, as provided for
under Non-Competition Agreements entered into between the Company and Yashiro in
March 1995 in connection with the sale by the Company of its former handbag
division.
Interest expense decreased in fiscal 1997 by approximately $199,000 to
approximately $574,000 from approximately $773,000 reported in fiscal 1996 due
to lower average borrowings and a new working capital lender in fiscal 1997 for
which the Company was able to pay down working capital loan advances with cash
collections in a more expedient manner than was possible under the working
capital facility employed in fiscal 1996.
Miscellaneous income increased in fiscal 1997 by approximately $21,000 to
approximately $478,000 from approximately $457,000 reported in fiscal 1996. The
decline of approximately $29,000 in the Company's commission income generated
from sales arranged by the Company between overseas suppliers and certain
domestic customers was offset by an increase of approximately $50,000 in rental
income reported by the Company's Canadian subsidiary as a result of a
restructuring of the Company's Canadian operations.
The income tax benefit in fiscal 1997 of approximately $126,000 is for the
recovery of Canadian income taxes paid in prior years. The provision for income
taxes in fiscal 1996 of approximately $303,000 primarily consisted of Canadian
corporate income taxes.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net sales for fiscal year 1996 increased by approximately $2,934,000 to
approximately $27,746,000 as compared to approximately $24,812,000 reported in
fiscal 1995. Net sales for the Company's luggage and backpack divisions
increased by approximately $1,974,000 during fiscal 1996. Net sales reported for
the Company's discontinued FILA product line (see above) increased by
approximately $3,270,000 to approximately $8,584,000 as compared to
approximately $5,314,000 reported in fiscal 1995 while sales for the Company's
non-FILA products decreased by approximately $1,296,000 during the same period.
Included in the sales increase for FILA was approximately $482,000 of FILA
product sold to FILA, of which approximately $320,000 was sold at the Company's
cost. The decrease in non-FILA sales is primarily attributable to increases in a
direct buy program to certain customers who purchased approximately $3,495,000
worth of the Company's products directly from the Company's suppliers in the Far
East. This amount was approximately $1,760,000 higher than the $1,735,000
purchased in fiscal 1995 by these customers. The Company receives commissions on
these sales and records these "direct buy" transactions as commission income. If
these sales had been made from product imported by the Company and then sold to
its customers, the net sales of non-FILA product would have increased by
approximately $464,000 during fiscal 1996. Net sales for the Company's Canadian
<PAGE>
subsidiary increased by approximately $2,402,000 during fiscal 1996 due to
strong sales for its discontinued Atlantic luggage line (see above). Included in
the Company's net sales for fiscal 1995 were approximately $1,423,000 in net
sales attributable to the Company's former handbag division, which was sold on
March 20, 1995. The Company's gross profit for fiscal 1996 increased by
approximately $958,000 to approximately $7,088,000 from approximately $6,130,000
reported in fiscal 1995 and the gross profit percentage in fiscal 1996 increased
to 25.5% from 24.7% reported in fiscal 1995. Included in the Company's gross
profit for fiscal 1995 was approximately $81,000 attributable to the Company's
former handbag division.
Selling, warehouse, and general and administrative expenses decreased by
approximately $371,000 to approximately $5,905,000 from approximately $6,276,000
reported in fiscal 1995. Included in the Company's expenses for fiscal 1995 were
approximately $840,000 in expenses directly related to the Company's former
handbag division. Selling, warehouse, and general and administrative expenses
increased in fiscal 1996 for the Company's luggage and backpack divisions and
Canadian operation by approximately $469,000. Included in this increase was the
one-time write-off of restrictive covenants, with a book value of approximately
$152,000, which resulted from the pre-payment of the Company's obligations to
the Company's former parent, Yashiro, under the Non-Competition Agreements
entered into between the Company and Yashiro in March 1995 in connection with
the sale of its former handbag division. Additionally, the other major
components of this increase in expenses were approximately $150,000 in increased
warehouse costs and approximately $120,000 in increased selling expenses.
Included in the Company's operating results for fiscal 1995 was a one-time
charge of approximately $425,000 attributable to the loss on the sale of the
Company's former handbag division in March 1995 to Bueno of California, Inc., an
affiliate of Yashiro.
Interest expense decreased by approximately $94,000 in fiscal 1996 due to lower
average borrowings.
Miscellaneous income increased by approximately $127,000 in fiscal 1996 as a
result of increases in the Company's "direct buy" business as discussed above.
The income tax provision increased in fiscal 1996 by approximately $303,000,
primarily due to profits reported by the Company's Canadian subsidiary.
Liquidity and Capital Resources
At November 30, 1997, the Company had cash and cash equivalents of approximately
$114,000, and working capital of approximately $5,107,000, a decrease of
approximately $276,000 and an increase of $3,554,000, respectively, over amounts
reported at the end of the prior fiscal year.
Net cash provided by (used in) operating activities aggregated approximately
($6,627,000), $2,044,000 and ($1,505,000) in fiscal years 1997, 1996 and 1995,
respectively. The increase of approximately $8,671,000 in net cash used in
operating activities in fiscal 1997, as compared to fiscal 1996, primarily
reflects the poor operating results for fiscal 1997 as compared to fiscal 1996
and the need to maintain higher inventory levels than normal to generate sales.
The increase of approximately $3,549,000 in net cash provided by operating
results in 1996 as compared to 1995, reflects improved operating results between
the two years and a lower level of inventory being required to generate sales.
<PAGE>
Net cash provided by (used in) investing activities aggregated approximately
($58,000), ($332,000) and $32,000 in fiscal years 1997, 1996 and 1995,
respectively. The principal uses of cash from investing activities in fiscal
1997 and 1996 was for the purchase of fixed assets, which included renovation of
the Company's New York showroom in fiscal 1996. In fiscal 1995, the principal
source of net cash from investing activities was proceeds from the sale of a
subsidiary.
Net cash provided by (used in) financing activities aggregated approximately
$6,391,000, ($1,503,000) and $697,000 in fiscal years 1997, 1996 and 1995,
respectively. In fiscal 1997, repayments of short-term debt of approximately
$1,601,000 were offset by an increase of approximately $5,714,000 in net cash
provided by a revolving credit line facility. This increase is the result of a
new working capital agreement in fiscal 1997 (see below) under which the Company
may borrow up to 80% of the dollar amount of its eligible accounts receivable
plus 50% of its eligible inventory. In fiscal 1996, the Company sold its
accounts receivable to a factor and recorded the money advanced from the factor
as a reduction in accounts receivable. During fiscal 1997, the Company also
received approximately $166,000 in proceeds from the exercise of stock options;
approximately $609,000 in proceeds from a private equity placement; and
approximately $1,509,000 in proceeds from the exercise of stock warrants.
Approximately $7,000 of net cash was used to pay long-term debt in fiscal 1997.
In fiscal 1996, approximately $1,258,000 of net cash was used to repay
short-term debt and approximately $460,000 was used to repay long-term debt. In
fiscal 1996, the Company received $250,000 in proceeds from the exercise of
stock options. In fiscal 1995, the Company's primary sources of net cash from
financing activities were from the proceeds of short-term and long-term
borrowings in excess of debt repayments.
On December 17, 1996, the Company entered into a financing agreement with Coast
Business Credit ("Coast"), a division of Southern Pacific Thrift & Loan
Association, pursuant to which Coast makes available to the Company a line of
credit of $7,000,000 with advances based on 80% of the Company's eligible
accounts receivable and 50% of the Company's eligible inventory. Under the terms
of the agreement, inventory financing is not to exceed $3,000,000, including
letters of credit. Interest on the loan is 2% per annum above the prime rate. As
of November 30, 1997, the Company was indebted to Coast in the principal amount
of approximately $5,714,000 and had no outstanding letters of credit. At
November 30, 1997, the prime rate was 8.50%.
Sirco Canada has a bank mortgage on its real property in the amount of
approximately $350,000. The mortgage is payable in monthly installments of
approximately $3,500 which includes interest at the rate of 10.25% per annum,
with a balloon payment of approximately $325,000 in the year 2000. As of
November 30, 1997, Sirco Canada was in violation of certain loan covenants. The
bank has agreed to waive the defaults until December 1, 1998. Sirco Canada does
not have a working capital lender or a letter of credit facility. The Company
uses the letter of credit facility from its financing agreement with Coast to
open letters of credit for purchases made directly by Sirco Canada. Sirco Canada
reimburses the Company for all appropriate expenditures made on behalf of Sirco
Canada. Management believes that Sirco Canada has adequate working capital to
operate without a revolving line of credit; however, management is considering
the establishment of a working capital facility for Sirco Canada.
In fiscal 1997, the Company had approximately $87,000 in capital expenditures,
primarily for costs incurred in connection with computer equipment. Capital
expenditures are not expected to be significant in fiscal 1998.
<PAGE>
As of February 17, 1998, The Company owns approximately 3,200,000 shares, or
approximately 28%, of CLEC Holding Corp. ("CHC") a Florida based competitive
local exchange carrier. Although CHC has approximately 750 shareholders, it is
not publicly traded, there is no readily ascertainable market for the stock, and
the shares held by the Company bear a restrictive legend that notes that the
shares have not been registered under the Securities Act of 1933. The investment
in CHC is recorded on the Company's books by the equity method.
Management believes that the Company's present sources of financing, combined
with its present working capital and cash flow from operations, will be
sufficient to meet the cash and capital requirements for the Company's travel
division for the next twelve months. However, if the depressed levels of sales
do not increase or the Company is unable to improve its cash position by raising
additional capital, the Company may experience temporary cash shortages. Such
cash shortages may negatively impact the Company's ability to purchase inventory
in a timely manner, which could negatively impact the Company's results of
operations.
The Company anticipates that it will need to raise up to $2 million to meet the
cash requirements for its telecommunications division contemplated by the fiscal
1998 business plan for that division. There can be no assurances that the
Company will be able to obtain such funding when needed, or that such funding,
if available, will be obtainable on terms acceptable to the Company. The failure
by the Company to raise the necessary funds to finance its telecommunications
operations will have an adverse effect on the ability of the Company to carry
out its business plan for its telecommunications division.
Item 8. - Financial Statements and Supplementary Data
The financial statements and supplementary data to be provided pursuant to this
Item 8 are included under Item 14 of this Report.
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
Part III
Item 10. - Directors and Executive Officers of the Company
The following table contains certain information regarding directors and
executive officers of the Company as of February 17, 1998:
Name and Position Principal Occupation for Past 5 Years and
With the Company Age Current Public Directorships or Trusteeships
- ---------------- --- --------------------------------------------
Joel Dupre 44 Director since 1990; Chairman of the
Board and Chief Executive Officer of the
Company since March 1995; Executive Vice
President from November 1992 to March
1995 and a Vice President from 1989 to
1992.
Eric M. Hellige 43 Director since 1995 and Secretary of the
Company; Partner for more than five
years of Pryor, Cashman, Sherman &
Flynn, counsel to the Company.
Richard Pyles 41 Senior Vice President of the Company
since November 1996; Vice President of
Marketing and Sales from September 1992
to November 1996.
Paul H. Riss 42 Director since 1995, and Chief Financial
Officer and Treasurer of the Company
since November 1996; Chief Financial
Officer of Sequins International Inc., a
manufacturer of sequined fabrics and
trimmings from June 1992 to November
1996.
Barrie Sommerfield 68 Director since April 1997; Vice Chairman
of Gore, Sommerfield, Ditnes
International, Inc., a consultant for
trademark licenses, for more than five
years.
Eric Smith 53 Director since 1988; Vice President-
General Manager of West Coast
Distribution Center since 1983.
The term of office of the directors is one year, expiring on the date of the
next annual meeting and thereafter until their respective successors shall have
been elected and shall qualify, or until their death, resignation or removal.
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than ten percent (10%) of a registered class
of the Company's equity securities ("10% Stockholders"), to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of the Company. Officers, directors and 10% Stockholders are required
by Commission regulation to furnish the Company with copies of all Section 16(a)
forms they file.
<PAGE>
Item 11. - Executive compensation
Summary of Cash and Certain Other Compensation
The following table sets forth, for the last three fiscal years, all
compensation awarded to, earned by or paid to the chief executive officer
("CEO") of the Company (Mr. Joel Dupre, the Chairman of the Board and Chief
Executive Officer of the Company since March 20, 1995; Mr. Yutaka Yamaguchi, the
Chairman of the Board and Chief Executive Officer of the Company prior to March
20, 1995), and all other executive officers of the Company who received more
than $100,000 in compensation during fiscal 1997 (collectively referred to as
the "Named Executives"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
-------------------------------------- -----------------------
Other Annual (5)
Name and Compensation Options All Other
Principal Position Year Salary(s) Bonus(s) ($) (#) Compensation
------------------ ---- --------- -------- --- --- ------------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre (1) 1997 $240,000 None None 80,000 None
Chairman of the Board 1996 216,667 None None 80,000 None
& Chief Exec. Officer 1995 216,667 None None None None
Yutaka Yamaguchi (2) 1997 None None None None None
Former Chairman of the 1996 None None None None None
Board & Chief Exec 1995 None None None None None
Officer
Richard Pyles (3) 1997 100,000 None None 5,000 None
Senior Vice President 1996 98,341 $ 6,000 None 135,000 None
1995 95,025 None None 20,000 None
Paul H. Riss (4) 1997 125,000 None None 40,000 None
Chief Financial Officer 1996 12,354 None None 70,000 None
1995 None None None None None
</TABLE>
- ---------------------------
(1) Mr. Dupre held the title of Executive Vice President of the Company during
the fiscal year ended November 30, 1994. In March 1995, Mr. Dupre was
elected Chairman of the Board and Chief Executive Officer of the Company.
(2) Mr. Yamaguchi resigned as an officer and director of the Company effective
January 1, 1995.
(3) Mr. Pyles was elected Senior Vice President in November 1996. At all other
times, Mr. Pyles served as Vice President-Marketing and Sales of the
Company.
(4) Mr. Riss has been Chief Financial Officer of the Company since November
1996.
(5) Options have been adjusted to reflect a two-for-one stock split in May
1997.
Board of Directors Compensation
The Company does not currently compensate directors for service on the Board of
Directors.
<PAGE>
Option Grant Table
The following table sets forth information as to the options granted to the
Named Executives and all other employees during the fiscal year ended November
30, 1997.
<TABLE>
<CAPTION>
Individual Grants
Percent of
Total Potential Realizable
Number of Options/ Value at Assumed
Securities SARs Annual rates of Stock
Underlying Granted to Price Appreciation
Options/ Employees Exercise or for Option Term(3)
SARs in Fiscal Base Price Expiration
Name Granted(1) Year(2) ($/Share) Date 5% ($) 10% ($)
- ---- ---------- ------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre 80,000(4) 57.1% $2.13 02/24/02 $47,078 $104,031
Yutaka Yamaguchi -- -- -- -- -- --
Richard Pyles 5,000(4) 3.6 1.94 02/24/02 2,700 5,900
Paul H. Riss 20,000(4) 14.3 1.94 02/24/02 10,800 23,600
All Other
Employees 40,000(4) 25.0 1.94 02/24/02 21,600 47,200
</TABLE>
- ---------------
(1) No SAR's were granted by the Company in fiscal 1997.
(2) In fiscal 1997, the Company granted options on 140,000 shares, as adjusted
for a two-for-one stock split in May 1997, of the Common Stock to six
employees.
(3) The amounts shown in these two columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Commission's executive
compensation disclosure rules and are not intended to forecast the future
appreciation of the Common Stock.
(4) Options become exercisable on the first anniversary date of the option
grant date of February 24, 1997.
<PAGE>
Stock Option Exercises
The following table contains information relating to the exercise of the
Company's stock options by the Named Executives in fiscal 1997, as well as the
number and value of their unexercised options as of November 30, 1997.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value Fiscal Year-End(#)(1) at Fiscal Year End($)(2)
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre -- -- 20,000 140,000 $37,500 $217,500
Yutaka Yamaguchi -- -- -- -- -- --
Richard Pyles 20,000 $46,666 15,000 5,000 28,125 6,563
Paul H. Riss 5,000 25,000 50,000 55,000 97,188 89,688
</TABLE>
- -----------
(1) The sum of the numbers under the Exercisable and Unexercisable column of
this heading represents each Named Executives total outstanding options to
purchase Common Stock.
(2) The dollar amounts shown under the Exercisable and Unexercisable columns of
the heading represent the number of exercisable and unexercisable Company
options, respectively, which were "In-the-Money" on November 30, 1997,
multiplied by the difference between the closing price of the Common Stock
on November 30, 1997, which was $3.25 per share, and the exercise price of
the Company options. For purposes of these calculations, In-the-Money
options are those with an exercise price below $3.25 per share.
Employee Retirement Plan
In June 1995, the Board of Directors of the Company determined to discontinue
benefit accruals under the Company's tax qualified Employee Retirement Plan (the
"Retirement Plan"). Pursuant to action taken by the Board of Directors at such
time, benefits ceased to accrue for all active participants under the Retirement
Plan on June 30, 1995. The Retirement Plan is administered by the Board of
Directors.
Each of the Company's United States-based employees was eligible to participate
in the Retirement Plan. However, effective as of July 1, 1995 and in connection
with the Board's action, the Retirement Plan was amended to provide that no
additional eligible employees may participate in the Retirement Plan and accrue
benefits thereunder. The following table discloses estimated annual benefits
payable upon retirement in specified compensation and years of service
classification.
<PAGE>
<TABLE>
<CAPTION>
Projected Benefits at Retirement
Years of Service
- ------------------------------------------------------------------------------------------------
15 20 25 30 35
Salary(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
25,000 4,625 6,250 7,313 9,375 10,938
30,000 5,625 7,500 9,375 11,250 13,125
35,000 6,563 8,750 10,938 13,125 15,313
40,000 7,500 10,000 12,500 15,000 17,500
50,000 9,980 12,604 15,625 18,750 21,875
75,000 17,105 22,104 26,948 31,986 37,249
100,000 24,730 31,604 38,873 46,236 53,874
125,000 31,355 41,104 50,698 60,406 70,499
150,000(2) 38,480 50,004 62,573 74,736 87,124
175,000 45,605 60,104 74,448 88,986 103,749
200,000 52,730 69,604 86,323 103,236 120,374(3)
</TABLE>
(1) The annual benefits shown in the Table are integrated with Social Security
and there are no other offsets to benefits.
(2) In general, section 401(a)(17) of the Internal Revenue Code provides that
for 1994, compensation used for computing benefits under a tax-qualified
employee pension plan cannot exceed $150,000 (as adjusted).
(3) Under current law, the maximum annual benefit payable under the Retirement
Plan cannot exceed $120,000 (as adjusted).
The Retirement Plan is funded by the Company on an actuarial basis, and the
Company contributes annually the minimum amount required to cover the normal
cost for current service and to fund supplemental costs, if any, from the date
each supplemental cost was incurred. Contributions were intended to provide for
benefits attributed to service to date, and also for those expected to vest in
the future. Based on the assumption used in the actuarial valuation, the
Retirement Plan is fully funded.
The estimated credited years of service for each of the executive officers named
in the Summary Compensation Table is as follows: Joel Dupre (12 years), Yutaka
Yamaguchi (none) Richard Pyles (3 years) and Paul H. Riss (none). The frozen
accrued monthly benefit for Mr. Dupre and Mr. Pyles is $1,678 and $239,
respectively. $150,000 of Mr. Dupre's compensation shown in the Summary
Compensation Table was used to compute his projected benefit under the
Retirement Plan.
Benefits are computed on the basis of a straight-life annuity. Benefits under
the Retirement Plan are integrated with Social Security benefits.
The Retirement Plan will continue to comply with the applicable sections of the
Internal Revenue Code, the Employee Retirement Income Security Act, and
applicable Internal Revenue Services rules and regulations. In accordance with
the terms of the Retirement Plan, distributions will continue to be made to
retired and terminated employees who are participants in the Retirement Plan.
<PAGE>
Board of Directors Interlocks and Insider Participation in Compensation
Decisions
The following former and present members of the Board of Directors were officers
of the Company or a subsidiary of the Company during the fiscal year ended
November 30, 1997: Joel Dupre, Eric Smith, Eric M. Hellige, Paul H. Riss and
Barrie Sommerfield. Such members participated in deliberations of the Company's
Board of Directors concerning executive officer compensation during the fiscal
year ended November 30, 1997.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 17, 1998, the names, addresses
and number of shares of common stock beneficially owned by all persons known to
the management of t
he Company to be beneficial owners of more than 5% of the
outstanding shares of Common Stock, and the names and number of shares
beneficially owned by all directors of the Company and all executive officers
and directors of the Company as a group (except as indicated, each beneficial
owner listed exercises sole voting power and sole dispositive power over the
shares beneficially owned):
<TABLE>
<CAPTION>
Shares Percent of
Beneficially of Outstanding
Name and Address Owned Common Stock
---------------- ----- ------------
<S> <C> <C>
Joel Dupre(1) 1,486,000 33.6%
c/o Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901
Pacific Million Enterprise Ltd. (2)(3) 266,666 6.2%
The Gateway, Tower 2, Suite 1807
25 Canton Road
Tsimshatsui, Kowloon, Hong Kong
Joseph Takada(2)(3) 266,666 6.2%
c/o Pacific Million Enterprise Ltd.
The Gateway, Tower 2, Suite 1807
25 Canton Road
Tsimshatsui, Kowloon, Hong Kong
Cheng-Sen Wang(2) 177,778 4.1%
c/o Kao-Lien International Co., Ltd.
404 Jen-Air Road 6th Floor, Section 4
Taipei, Taiwan R.O.C.
Albert H. Cheng(2)(4) 88,888 2.1%
c/o Constellation Enterprises Co., Ltd.
199 Chung Ching North Road 11th Floor, Section 3
Taipei, Taiwan R.O.C.
<PAGE>
Shares Percent of
Beneficially of Outstanding
Name and Address Owned Common Stock
---------------- ----- ------------
<S> <C> <C>
Paul H. Riss(5) 75,000 1.7%
Richard Pyles (6) 20,000 less than 1%
Eric Smith(6) 20,000 less than 1%
Barrie Sommerfield(6) 20,200 less than 1%
Eric M. Hellige(7) 25,000 less than 1%
All directors and executive officers 1,621,200 35.6%
of the Company as a group (six individuals)
</TABLE>
(1) Includes 120,000 shares of Common Stock subject to options which are
presently exercisable and 533,332 shares for which Mr. Dupre has the right
to exercise sole voting control pursuant to a Voting Agreement dated as of
May 1, 1995 (the "Voting Agreement") under which Pacific, Mr. Wang and Mr.
Cheng granted Mr. Dupre the right to exercise sole voting control with
respect to 266,666; 177,778; and 88,888 shares, respectively, held of
record by them. Includes 25,000 shares for which Mr. Dupre has granted to
Mr. Hellige stock purchase options.
(2) As a result of the Voting Agreement, Mr. Dupre, Pacific (together with Mr.
Takada - see Note 3), Mr. Wang and Mr. Cheng may be deemed to be a "group"
within the meaning of Section 13d-3 of the Securities Exchange Act of 1934,
and, therefore, deemed to beneficially own an aggregate of 1,366,000 shares
of Common Stock.
(3) Pacific has granted to Mr. Dupre an option to purchase all of the 266,666
shares it owns of record. By virtue of his ownership of 95% of the issued
and outstanding shares of common stock of Pacific, Joseph Takada may be
deemed to be the beneficial owner of all the shares of Common Stock
beneficially owned by Pacific.
(4) Mr. Cheng has granted to Mr. Dupre an option to purchase all of the 88,888
shares he owns of record.
(5) Includes 70,000 shares of Common Stock subject to options which are
presently exercisable.
(6) Consists of 20,000 shares of Common Stock subject to options which are
presently exercisable
(7) Consists of 25,000 shares of Common Stock subject to options granted by Mr.
Dupre which are presently exercisable.
<PAGE>
Item 13. - Certain Relationships and Related Transactions
Mr. Joseph Takada, the beneficial owner of approximately 6.2% of the outstanding
shares of Common Stock, is the Managing Director of Ideal Pacific Ltd,
("Ideal"), the Company's manufacturing agent in Hong Kong. During the fiscal
year ended November 30, 1997, the Company paid aggregate commissions of
approximately $40,000 to Ideal. Mr. Cheng-Sen Wang, the beneficial owner of
approximately 4.1% of the outstanding shares of Common Stock, is the Managing
Director of Kao-Lien International Co., Ltd. ("Kao-Lien"), the Company's
manufacturing agent in Taiwan. During the fiscal year ended November 30, 1997,
the Company paid aggregate commissions of approximately $168,000 to Kao-Lien.
Mr. Albert Cheng, the beneficial owner of 2.1% of the outstanding shares of
Common Stock, is the President of Constellation Enterprise Co., Ltd.
("Constellation"). During the fiscal year ended November 30, 1997, the Company
purchased approximately $891,000 of luggage and backpack products from
Constellation.
At November 30, 1997, the Company owed Ideal, Kao-Lien and Constellation
approximately $305,000, $141,000 and $528,000, respectively.
Paul H. Riss, a director and the Chief Financial Officer of the Company, is a
member of the Board of Directors of CHC, an affiliate of the Company. Mr. Riss
owns options to purchase 100,000 shares of common stock of CHC. The Company's
Chairman and Chief Executive Officer, Joel Dupre, owns 306,000 shares of common
stock of CHC, or approximately 2.7% of the outstanding shares, and owns options
to purchase an additional 150,000 shares.
Eric M. Hellige, a director of the Company, is a member of Pryor, Cashman,
Sherman & Flynn, counsel to the Company ("Pryor, Cashman"). Fees paid by the
Company to Pryor, Cashman for legal services rendered during the fiscal year
ended November 30, 1997 did not exceed 5% of such firm's or the Company's
revenues. Mr. Hellige owns 25,000 shares of common stock of CHC, an affiliate of
the Company.
Barrie Sommerfield, a director of the Company, is a Vice Chairman of Licensing
of Gore, Sommerfield, Ditnes International, Inc. ("Gore Sommerfield"), a firm
which provides consulting services to the Company with regard to the licensing
of trademarked names. The Company paid fees to Gore Sommerfield in fiscal 1997
of approximately $4,000.
The Company believes that all purchases from or transactions with affiliated
parties were on terms and at prices substantially similar to those available
from unaffiliated third parties.
<PAGE>
PART IV
Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements.
2. Financial Statement schedules
3. Exhibits
(3) (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 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) 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.
(4) (a) Form of Class A Warrant Agreement dated April 17, 1997.
(b) form of Class B Warrant Agreement dated April 17, 1997.
(10)(a) Stock Purchase Agreement dated February 27, 1998 between
the Company and the shareholders of Essex Communications,
Inc.
(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.
<PAGE>
(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..
(22) Subsidiaries of Company - The significant subsidiaries of the
Company, all of which are wholly-owned by the Company and included
in its consolidated financial statements, are as follows:
Name Jurisdiction of Organization
---- ----------------------------
Airline Ventures, Inc. Texas
Essex Communications, Inc. New Jersey
Sirco Industries, Limited Hong Kong
Sirco International (Canada) Limited Canada
(23.1) Consent of Nussbaum Yates & Wolpow, P.C.
(23.2) Consent of Blackman Kallick Bartelstein, LLP
(23.3) Consent of Deloitte & Touche
(27) Financial Data Schedule
(b) Reports on Form 8-K.
During the fourth quarter of fiscal 1997, the Company filed a Current
Report on Form 8-K dated October 22, 1997, reporting the Company's
investment in CLEC Holding Corp.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized on
the 12th day of March, 1998.
SIRCO INTERNATIONAL CORP.
(Company)
By: /s/ Joel Dupre
--------------
Joel Dupre,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Joel Dupre Chairman and Chief Executive
-------------- March 12, 1998
Officer (Principal Executive Officer) March 12, 1998
Joel Dupre
/s/ Paul H. Riss Chief Financial Officer and
---------------- (Principal Financial and March 12, 1998
Director Accounting Officer)
Paul H. Riss
/s/ Eric M. Hellige Director March 12, 1998
-------------------
Eric M. Hellige
/s/ Barrie Sommerfield Director March 12, 1998
----------------------
Barrie Sommerfield
/s/ Eric Smith Director March 12, 1998
--------------
Eric Smith
<PAGE>
EXHIBITS
(a) 1. Financial Statements.
2. Financial Statement schedules
3. Exhibits
(3) (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 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) 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.
(4) (a) Form of Class A Warrant Agreement dated April 17, 1997.
(b) form of Class B Warrant Agreement dated April 17, 1997.
(10)(a) Stock Purchase Agreement dated February 27, 1998 between
the Company and the shareholders of Essex Communications,
Inc.
(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.
<PAGE>
(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..
(22) Subsidiaries of Company - The significant subsidiaries of the
Company, all of which are wholly-owned by the Company and included
in its consolidated financial statements, are as follows:
Name Jurisdiction of Organization
---- ----------------------------
Airline Ventures, Inc. Texas
Essex Communications, Inc. New Jersey
Sirco Industries, Limited Hong Kong
Sirco International (Canada) Limited Canada
(23.1) Consent of Nussbaum Yates & Wolpow, P.C.
(23.2) Consent of Blackman Kallick Bartelstein, LLP
(23.3) Consent of Deloitte & Touche
(27) Financial Data Schedule
<PAGE>
FORM 10-K
ITEM 14(a)(1) AND (2)
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Sirco International Corp. and
Subsidiaries are included in Item 8:
Consolidated Balance Sheets - November 30, 1997 and 1996 F-6
Consolidated Statements of Operations - Years ended November 30,
1997, 1996 and 1995 F-8
Consolidated Statements of Stockholders' Equity - Years ended
November 30, 1997, 1996 and 1995 F-9
Consolidated Statements of Cash Flows - Years ended November 30,
1997, 1996 and 1995 F-10
Notes to Consolidated Financial Statements - Years ended November
30, 1997, 1996 and 1995 F-12
The following consolidated financial statement schedules of Sirco International
Corp. and Subsidiaries are included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts - Years ended
November 30, 1997, 1996 and 1995 F-34
All other schedules are omitted because they are not required, are inapplicable,
or the information is included in the financial statements or notes thereto.
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Sirco International Corp.
We have audited the accompanying consolidated balance sheets of Sirco
International Corp. and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended November 30, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Sirco International
(Canada) Limited, a wholly-owned subsidiary of Sirco International Corp. as of
and for the years ended November 30, 1996 and 1995. We did not audit the
consolidated financial statements of CLEC Holding Corp. and subsidiaries, an
entity in which the Company had a 28% equity interest as of November 30, 1997,
accounted for under the equity method. In the aggregate, such statements reflect
total assets constituting 8% and 30% of the related consolidated assets as of
November 30, 1997 and 1996, and such statements constitute 22% of consolidated
revenues for the year ended November 30, 1996 and 15% of consolidated revenues
for the year ended November 30, 1995. Those financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to data included for Sirco International (Canada) Limited and CLEC
Holding Corp. and subsidiaries for the periods specified above, are based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
F-2
<PAGE>
The Board of Directors and Shareholders
Sirco International Corp.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sirco International
Corp. and its subsidiaries as of November 30, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years ended November 30, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles.
We have also audited Schedule II for the years ended November 30, 1997, 1996 and
1995. In our opinion, based on our audits and the reports of the other auditors,
these schedules present fairly, in all material respects, the information
required to be set forth therein.
/s/NUSSBAUM YATES & WOLPOW, P.C.
-----------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 4, 1998
(except for Note 15, as to which
the date is February 27, 1998)
F-3
<PAGE>
Independent Auditor's Report
The Board of Directors and Stockholders
CLEC Holding Corp. and Subsidiaries
Roseland, New Jersey
We have audited the accompanying consolidated balance sheet of CLEC Holding
Corp. and subsidiaries as of October 31, 1997, and the related consolidated
statements of operations and stockholders' equity, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CLEC Holding Corp.
and subsidiaries as of October 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/BLACKMAN KALLICK BARTELSTEIN, LLP
---------------------------------
BLACKMAN KALLICK BARTELSTEIN, LLP
Chicago, Illinois
February 18, 1998
F-4
<PAGE>
Auditor's Report
To the Shareholder
Sirco International (Canada) Limited
We have audited the balance sheets of Sirco International (Canada) Limited as at
November 30, 1996, and the statements of operations, and retained earnings and
changes in financial position for each of the years in the two-year period ended
November 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at November 30, 1996, and the
results of its operations and the changes in its financial position for each of
the years in the two-year period ended November 30, 1996 in accordance with
generally accepted accounting principles.
/s/Deloitte & Touche
- --------------------
Deloitte & Touche
Chartered Accountants
December 18, 1996
F-5
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................... $ 114,190 $ 390,043
Accounts receivable, trade - net of allowance
of $200,000 and $276,000 in 1997 and 1996
and including $1,244,000, net of advances,
due from factor in 1996, respectively ..... 3,166,804 2,825,764
Inventories .................................. 7,707,631 4,406,066
Prepaid expenses ............................. 253,225 256,134
Other current assets 44,231 .................. 123,245
Recoverable income taxes ..................... 125,517 --
----------- -----------
Total current assets .... 11,411,598 8,001,252
----------- -----------
Property, plant and equipment - at cost:
Land ......................................... 199,425 210,672
Building ..................................... 494,891 503,599
Machinery and equipment ...................... 748,085 841,455
Leasehold improvements ....................... 320,132 311,441
----------- -----------
1,762,533 1,867,167
Less accumulated depreciation and amortization 935,220 979,457
----------- -----------
827,313 887,710
----------- -----------
Other assets ..................................... 207,940 147,402
----------- -----------
Investment in and advances to subsidiary ......... 514,797 540,497
----------- -----------
Investment in affiliate .......................... 1,080,000 --
----------- -----------
Total assets ............ $14,041,648 $ 9,576,861
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
(Continued)
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
------------- ------------
<S> <C> <C>
Current liabilities:
Loan payable to financial institution ......................... $ 1,071,000
Short-term loan payable to former related parties ............. 529,821
Current maturities of long-term debt .......................... $ 1,522,060 6,735
Due to related parties ........................................ 974,046 260,188
Accounts payable .............................................. 2,489,259 2,659,323
Accrued expenses and taxes .................................... 1,318,863 1,920,897
------------ ------------
Total current liabilities ................ 6,304,228 6,447,964
------------ ------------
Long-term debt, less current maturities ........................... 4,521,795 348,401
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 10,000,000
shares authorized, 4,300,400 and 2,630,400
shares issued in 1997 and 1996 ............................. 430,040 263,040
Preferred stock, $.10 par value; 1,000,000 shares
authorized, none issued
Capital in excess of par value ................................ 7,753,368 4,136,014
Deficit ........................................................... (3,887,532) (1,019,367)
Treasury stock at cost, 11,000 shares ......................... (27,500) (27,500)
Treasury stock held by equity investee ........................ (420,000) --
Accumulated foreign currency translation
adjustment ................................................. (632,751) (571,691)
------------ ------------
Total stockholders' equity ............... 3,215,625 2,780,496
------------ ------------
Total liabilities and stockholders' equity $ 14,041,648 $ 9,576,861
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Net sales ............................................. $ 16,007,983 $ 27,745,955 $ 24,812,147
Cost of goods sold .................................... 13,802,712 20,657,633 18,682,304
------------ ------------ ------------
Gross profit .......................................... 2,205,271 7,088,322 6,129,843
Selling, warehouse, general and adminis-
trative expenses ................................... 5,166,849 5,905,152 6,276,379
------------ ------------ ----------
Income (loss) from operations ......................... (2,961,578) 1,183,170 (146,536)
------------ ------------ ----------
Other (income) expense:
Interest expense ................................... 573,544 772,812 866,597
Interest income .................................... (63,506) (58,214) (111,710)
Loss on sale of handbag division ................... -- -- 425,163
Commission and other income, net ................... (477,934) (456,873) (330,087)
------------ ------------ ----------
32,104 257,725 849,963
------------ ------------ ----------
Income (loss) before provision for income taxes ....... (2,993,682) 925,445 (996,499)
Provision for (recovery of) income taxes .............. (125,517) 303,209 --
------------ ------------ ------------
Net income (loss) ..................................... ($ 2,868,165) $ 622,236 ($ 996,499)
============ ============ ==========
Earnings (loss) per common and common equivalent share:
Primary ........................................ ($ .88) $ .23 ($ .41)
============ ============ ============
Assuming full dilution ......................... ($ .88) $ .23 ($ .41)
============ ============ ============
Shares used in computing earnings (loss) per
common and common equivalent share
Primary ........................................ 3,243,392 2,668,502 2,419,400
============ ============ ============
Assuming full dilution ......................... 3,243,392 2,678,314 2,419,400
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
Treasury Accumulated
Common Stock Capital Stock Held Currency
Number of In Excess of Treasury by Equity Translation
Shares Amount Par Value Deficit Stock Investee Adjustment
--------- ----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 30,
1994 as previously
reported ................ 1,215,200 $ 121,520 $ 4,027,534 ($ 645,104) ($ 27,500) ($ 578,403)
Two-for-one stock
split ............... 1,215,200 121,520 ($ 121,520) -- -- --
--------- ----------- -----------
Balances at November
30, 1994 as adjusted .... 2,430,400 243,040 3,906,014 -- -- --
Net loss .............. -- -- -- (996,499) -- --
Currency translation
adjustment .......... -- -- -- -- -- (4,620)
--------- ----------- ----------- ---------- ----------- -----------
Balance, November 30,
1995 2,430,400 243,040 3,906,014 (1,641,603) (27,500) (583,023)
Net income ............ -- -- -- 622,236 -- --
Exercise of stock
options ............. 200,000 20,000 230,000 -- -- --
Currency translation
adjustment .......... -- -- -- -- -- 11,332
--------- ----------- ----------- ---------- ----------- -----------
Balance, November 30,
1996 2,630,400 263,040 4,136,014 (1,019,367) (27,500) (571,691)
Net loss .............. -- -- -- (2,868,165) -- --
Exercise of stock
options ............. 145,000 14,500 151,750 -- -- --
Issuance of common
stock in private
placement ......... 400,000 40,000 569,000 -- -- --
Exercise of warrants
for common stock .... 700,000 70,000 1,439,104 -- -- --
Stock issued for equity
investment in CLEC
Holdings, Inc. .... 425,000 42,500 1,457,500 -- -- --
Treasury stock held by
equity investee ..... ($ 420,000)
Currency translation
adjustment .......... -- -- -- -- -- -- (61,060)
Balance, November 30,
1997 4,300,400 $ 430,040 $ 7,753,368 ($3,887,532) ($ 27,500) ($ 420,000) ($ 632,751)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .................................... ($2,868,165) $ 622,236 ($ 996,499)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................... 110,168 254,321 195,634
Loss on sale of handbag division ................ -- -- 425,163
Provision for losses on accounts receivable
and other assets .............................. 278,000 32,000 128,000
(Gain) loss on sale of property, plant and
equipment ..................................... 7,012 (1,601) 525
Changes in operating assets and liabilities:
Accounts receivable ........................... (594,077) (663,322) (477,148)
Inventories ................................... (3,325,876) 1,354,698 (2,432,693)
Prepaid expenses .............................. 12,926 1,643 62,525
Other current assets .......................... 79,014 1,134 157,707
Other assets .................................. (60,538) 6,967 74,800
Due to related parties ........................ 713,858 (56,722) --
Accounts payable and accrued expenses ......... (531,320) 178,393 1,357,217
Income taxes .................................. (448,240) 314,425 --
----------- ----------- -----------
Net cash provided by (used in) operating activities .. (6,627,238) 2,044,172 (1,504,769)
----------- ----------- -----------
Investing activities:
Purchases of property, plant and equipment ........ (87,045) (339,179) (30,195)
Proceeds from sale of property, plant and equipment 3,607 7,038 1,605
Cash inflow from agreement to sell subsidiary ..... 25,700 -- 60,296
----------- ----------- -----------
Net cash provided by (used in) investing activities .. (57,738) (332,141) 31,706
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
(Continued)
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities:
Repayment of loans payable to financial
institutions and short-term loans payable
to related parties, net ........................... ($1,600,821) ($1,258,197) ($1,761,501)
Proceeds from short-term borrowings ................. -- -- 2,506,995
Proceeds from revolving credit line, net ............ 5,714,056 -- --
Proceeds from long-term debt ........................ -- -- 357,455
Repayment of long-term debt ......................... (6,550) (460,301) (441,440)
Proceeds from (repayment of) officer loan ........... -- (35,000) 35,000
Proceeds from exercise of stock options ............. 166,250 250,000 --
Proceeds from private placement of common stock ..... 609,000 -- --
Proceeds from exercise of warrants .................. 1,509,104 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities .... 6,391,039 (1,503,498) 696,509
----------- ----------- -----------
Effect of exchange rate changes on cash ................ 18,084 5,269 (3,074)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ....... (275,853) 213,802 (779,628)
Cash and cash equivalents at beginning of year ......... 390,043 176,241 955,869
----------- ----------- -----------
Cash and cash equivalents at end of year ............... $ 114,190 $ 390,043 $ 176,241
=========== =========== ===========
Cash paid during the year for:
Interest ............................................ $ 510,869 $ 675,006 $ 836,437
=========== =========== ===========
Income taxes ........................................ $ 300,015 $ -- $ --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Supplemental disclosure of non-cash investing and financing activities:
During 1997, the Company exchanged 425,000 shares of common stock for
3,000,000 common shares of CLEC Holding Corp. valued at $1,500,000 (see
Note 14).
On March 20, 1995, the Company sold inventory of its handbag division with
a book value of $1,889,368 for a sales price of $1,700,431 to Bueno of
California, Inc. Substantially all of the sales price was not received
in cash, but was offset by the Company against the repayment of
indebtedness of the Company to Bueno's parent company, Yashiro Co.,
Inc.
F-11
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1. Description of Business and Summary of Accounting Principles
Description of Business and Concentration of Credit Risk
The Company is a wholesaler of children's bags, tote bags, sport bags,
backpacks, soft luggage and related products generally under trademarked
names and licensed from others principally in the United States and
Canada (see Note 12). The principal markets for the Company's products
are the large national retail chain stores, department stores, specialty
stores and sporting goods retailers. Trade receivables potentially
subject the Company to credit risk. The Company extends credit to its
customers based upon an evaluation of the customer's financial condition
and credit history and generally does not require collateral.
On October 2, 1997, the Company acquired 28% of CLEC Holding Corp
("CLEC"), a reseller of Bell South services that provides local service
exclusively in the State of Florida, known as a competitive local
exchange carrier (see Note 14). On February 27, 1998, the Company
acquired a newly formed competitive local exchange carrier, Essex
Communications, Inc. (see Note 15). Prior to the sale of its handbag
division on March 20, 1995, the Company also was a wholesaler of handbags
(see Note 10).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of significant
intercompany balances and transactions. Investments in a 28%-owned
affiliate are accounted for on the equity method.
Revenue Recognition
Revenue is recognized upon the shipment of merchandise.
Inventories
Inventories, consisting primarily of finished goods purchased for resale,
are stated at the lower of cost (first-in, first-out and average) or
market.
F-12
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1. Description of Business and Summary of Accounting Principles (Continued)
Property, Plant and Equipment and Depreciation
Depreciation is computed primarily by use of accelerated methods over the
estimated useful lives of the assets. The estimated useful lives are 20
years for building, 5 to 10 years for machinery and equipment and the
life of lease for leasehold improvements.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and income and expenses are
translated at average exchange rates prevailing during the year with the
resulting adjustments accumulated in stockholders' equity.
Income Taxes
The Company accounts for income taxes on the liability method, as
provided by Statement of Financial Accounting Standards 109, Accounting
for Income Taxes.
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries, which amount to approximately $2,900,000 as of November 30,
1997 because the Company expects to reinvest these earnings in the
businesses of the subsidiaries.
Income (Loss) Per Share
Income (loss) per share is calculated based on the weighted average
number of common shares and in 1996, common equivalent shares,
outstanding. On May 5, 1997, a two-for-one stock split of the Company's
common stock was effected in the form of a 100 percent stock dividend.
All references to number of shares, except shares authorized, and to per
share information in the consolidated financial statements have been
adjusted to reflect the stock split on a retroactive basis.
F-13
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1. Description of Business and Summary of Accounting Principles (Continued)
Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents for purposes of
the consolidated statement of cash flows.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates are used in accounting for accounts
receivable allowances, inventory valuations, income taxes and investments
in and advances to its subsidiary.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of significant financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
Investments in and Advances to Subsidiary
The fair value of investments in and advances to subsidiary is estimated
based on discounted cash flow analyses using estimated interest rates and
an appropriate allowance for uncollectibility. The carrying amount
approximates its fair value.
F-14
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
1. Description of Business and Summary of Accounting Principles (Continued)
Fair Value of Financial Instruments (Continued)
Long-Term Debt
The fair value of the Company's long-term debt is estimated
based on current rates offered to the Company for debt of the
same remaining maturities and approximates the carrying
amount.
The Company has no instruments with significant off-balance-sheet risk.
Reclassifications
Certain reclassifications have been made to conform to the 1997
presentation.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", which will require companies to present basic earnings per share
(EPS) and diluted earnings per share, instead of the primary and fully
diluted EPS that is currently required. The new standard requires
additional information disclosures, and also makes certain modifications
to the currently applicable EPS calculations defined in Accounting
Principles Board No. 15. The new standard is required to be adopted by
all public companies for reporting periods ending after December 15, 1997
(the Company's first quarter of fiscal 1998), and will require
restatement of EPS for all prior periods reported.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting (SFAS) No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements, which are effective for fiscal
years beginning after December 15, 1997, expand or modify disclosures and
will have no impact on our consolidated financial position, statements of
operations or cash flows.
F-15
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
2. Loans Payable to Financial Institutions and Long-Term Debt
The Company had an agreement with a factor (see Note 8) whereby it could
borrow up to 40% (as amended) of the value of its finished goods
inventory. Interest was at prime plus 1.75% per annum (10% at November
30, 1996). Borrowings were collateralized by the inventory. The Company
had outstanding $1,071,000 as of November 30, 1996 under this agreement.
On December 17, 1996, the aforementioned factoring agreement was
terminated and replaced with a financing agreement with Coast Business
Credit, a division of Southern Pacific Thrift and Loan Association
("Coast"), that provides for revolving loans and letter of credit
financing in the amount of the lesser of $7,000,000 or the sum of (a) 80%
of eligible accounts receivable (as defined) and (b) 50% of eligible
inventory (as defined) up to a maximum inventory loan of $3,000,000 less
50% of letter of credit financing outstanding. The amount of the facility
available for letter of credit financing is limited to $2,500,000. The
loan bears interest at 2% above the prime rate (10.5% at November 30,
1997), matures on December 17, 1998, and is guaranteed by the Company's
Chairman and Chief Executive Officer. The Company has granted Coast a
security interest in substantially all of the Company's assets. The
agreement with Coast contains various restrictive covenants, including
among others, a restriction on the payment or declaration of any cash
dividends, a restriction on the acquisition of any assets other than in
the ordinary course of business in excess of $100,000, restrictions
related to mergers, borrowing and debt guarantees and a $100,000 annual
limitation (as defined) on the acquisition or retirement of the Company's
common and preferred stock. The agreement also requires the Company to
maintain a minimum tangible net worth of $1,400,000. The Company had
outstanding loans of $5,714,056 at November 30, 1997 under this
agreement. The Company anticipates that approximately $1,515,000 of this
loan will be repaid during fiscal 1998, and, accordingly, such amount has
been classified as a current liability as of November 30, 1997.
F-16
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
2. Loans Payable to Financial Institutions (Continued)
On August 1, 1995, the Company's Canadian subsidiary entered into a
financing agreement with a Canadian bank that provided for a revolving
loan and letter of credit financing in the amount of the lesser of
$525,000 or the sum of a percentage of accounts receivable (as defined),
50% of letters of credit outstanding, and 25% of eligible finished goods
inventory (as defined) with interest payable monthly at 1.25% above the
Canadian prime rate. In May 1996, the agreement was amended to increase
the revolving loan to approximately $876,000. As of November 30, 1996,
there was no balance outstanding under this agreement in direct
borrowings. As of November 30, 1996, there were outstanding letters of
credit in the amount of $46,000. In January 1997, the Company received
notification from the Canadian bank that the revolving loan agreement was
terminated. In August 1995, the bank also refinanced a real property
mortgage of approximately $368,000. The mortgage is payable in monthly
installments of approximately $3,500 including interest at 10.25% with a
balloon payment of approximately $325,000 in the year 2000. Substantially
all of the assets of the Canadian subsidiary have been pledged as
collateral for the above loans. The Canadian subsidiary has agreed to
certain financial covenants (current ratio, debt-to-equity ratio, debt
service coverage) and not to pay dividends to the parent. As of November
30, 1997, the Canadian subsidiary was in violation of certain loan
covenants. The bank has agreed to waive the defaults until December 1,
1998. Maturities of long-term debt (see below) give effect to this debt
becoming due on such date.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Loan payable to Coast Business Credit ........ $5,714,056
Subsidiary mortgage payable .................. 329,799 $ 355,136
---------- ----------
6,043,855 355,136
Less current maturities ...................... 1,522,060 6,735
---------- ----------
$4,521,795 $ 348,401
========== ==========
<CAPTION>
Principal payments are due as follows:
Year ended November 30,
1998 $1,522,060
1999 4,521,795
----------
$6,043,855
==========
</TABLE>
F-17
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
3. Income Taxes
At November 30, 1997, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $5,900,000 expiring in
the years 2001 through 2012. There is an annual limitation of
approximately $187,000 on the utilization of approximately $2,600,000 of
net operating loss carryforwards under the provisions of Internal Revenue
Code Section 382. A net operating loss of approximately $3,300,000 is
available in addition to the annual limitation.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities as of November 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......................... $ 2,440,000 $ 1,360,000
Allowance for doubtful accounts and accruals ............. 210,000 483,000
Inventory ................................................ 330,000 90,000
Depreciation ............................................. 110,000 110,000
----------- -----------
3,090,000 2,043,000
Deferred tax liabilities:
Installment sale of investment .......................... (50,000) (60,000)
----------- -----------
3,040,000 1,983,000
Valuation allowance ........................................ (3,040,000) (1,970,000)
----------- -----------
Net deferred tax assets .................................... $ -- $ 13,000
=========== ===========
</TABLE>
The valuation allowance at November 30, 1995 was $2,240,000
F-18
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
3. Income Taxes (Continued)
The following is a reconciliation of the tax provisions for the three
years ended November 30, 1997 with the statutory Federal income tax
rates:
<TABLE>
<CAPTION>
Percentage of Pre-Tax Income
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate (34.0%) 34.0% (34.0%)
State and local income taxes, net of Federal
income tax benefit .1 .2 -
Differences in foreign and U.S. tax rates - 11.6 -
Utilization of United States net operating
loss carryforwards - (7.1) -
Utilization of foreign tax loss carryforwards/
carryback (4.3) (6.8) (7.8)
Operating losses generating no current tax benefit:
United States 34.0 - 37.8
Foreign - - 1.6
Other items, net .1 .9 2.4
------ ------ -----
(4.1%) 32.8% -%
====== ===== =====
</TABLE>
4. Pension Plans
The Company has a defined benefit plan covering substantially all of its
domestic employees. The benefits provided are primarily based upon years
of service and compensation, as defined. The Company's funding policy is
to contribute annually the minimum amount required to cover the normal
cost and to fund supplemental costs, if any, from the date each
supplemental cost was incurred. Contributions were intended to provide
not only for benefits attributed to service to date, but also for those
expected to be earned in the future. Plan assets consist primarily of
investments in money market funds.
F-19
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
4. Pension Plans (Continued)
Effective June 30, 1995, the plan was frozen, ceasing all benefit
accruals and resulting in a plan curtailment. The Company recognized a
curtailment gain of approximately $112,500 in accordance with Statement
of Financial Accounting Standards No. 88 - "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits."
Net periodic pension cost (gain) (exclusive of the curtailment gain in
1995) included the following components:
<TABLE>
<CAPTION>
Year Ended November 30,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost - benefits earned in current year - - $ 39,355
Interest cost on projected benefit obligation $ 57,257 $ 53,707 54,221
Return on assets (66,110) (69,235) (71,434)
Net amortization and deferral (4,112) (6,199) (12,198)
--------- --------- ---------
($12,965) ($21,727) $ 9,944
========= ========= =========
</TABLE>
Following is a summary of significant actuarial assumptions used:
<TABLE>
<CAPTION>
November 30,
1997 1996 1995
<S> <C> <C> <C>
Weighted average discount rates 7.5% 7.5% 7.5%
Rates of increase in compensation levels 5.0% 5.0% 5.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
</TABLE>
F-20
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
4. Pension Plans (Continued)
The following table sets forth the Plan's funded status and amounts
recognized in the Company's statement of financial position at:
<TABLE>
<CAPTION>
November 30,
1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested
benefits of $813,095 and $758,758 at
November 30, 1997 and 1996, respectively .......... ($816,427) ($766,797)
========= =========
Projected benefit obligation for service rendered
to date ........................................... ($816,427) ($766,797)
Plan assets at fair value, primarily money market
funds ............................................. 834,747 830,636
--------- ---------
Plan assets in excess of projected benefit obligation 18,320 63,839
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions ............................ 45,599 (8,773)
Unrecognized net asset being amortized over
13 years from December 1, 1987 .................... (12,215) (16,327)
--------- ---------
Prepaid pension cost ................................ $ 51,704 $ 38,739
========= =========
</TABLE>
5. Commitments
The Company conducts a substantial portion of its operations utilizing
leased facilities. Rent expense, charged to operations, was $704,000,
$659,000 and $725,000 in 1997, 1996 and 1995, respectively. In addition
to the annual rent, the Company pays real estate taxes, insurance and
other occupancy costs on its leased facilities. A portion of one
warehouse facility is subleased to a subsidiary of Yashiro (see Note 6)
under a sublease which expires in May, 2000. Total minimum sublease
rentals to be received in the future amounted to $398,000 at November 30,
1997.
F-21
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
5. Commitments (Continued)
The minimum annual rental commitments exclusive of sublease rentals under
all operating leases that have remaining non-cancelable terms in excess
of one year are approximately as follows:
Year ended November 30,
1998 $744,000
1999 762,000
2000 488,000
2001 157,000
2002 84,000
Thereafter 320,000
----------
$2,555,000
==========
The Company has entered into various licensing agreements under which it
has obtained the right to market children's bags, tote bags and related
products with trade names. The terms of such agreements vary through June
1999. The agreements provide for royalties based upon net sales with
certain stated minimum annual amounts. The amount of future minimum
royalties aggregate approximately $820,000 at November 30, 1997. Royalty
expense amounted to $660,000, $1,160,000 and $937,000 in fiscal 1997,
1996 and 1995, respectively. As of November 30, 1997 and 1996,
approximately $506,000 and $471,000, respectively, had been accrued for
unpaid royalties.
During fiscal 1996, the Company modified its agreement with a licensor
whereby the Company ceased to ship its product under this license after
June 30, 1996. Sales of this licensed product amounted to approximately
29% and 21% of the Company's net sales in 1996 and 1995.
F-22
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
6. Related Party Transactions
On March 20, 1995, the Company entered into a Letter of Credit Agreement
with Yashiro Co. Inc. (together with its affiliates, "Yashiro"), which
prior to March 20, 1995, owned approximately 56% of the Company, to
provide for short-term financing for import purchases. Pursuant to this
agreement, Yashiro had agreed to issue, until March 20, 1997, unsecured
trade letters of credit in an aggregate amount of up to the lesser of
$1,200,000, or 35% of the Company's inventory. Amounts borrowed under
this agreement were repayable 100 days after delivery of the goods. On
August 28, 1996, the agreement was amended to, among other things, reduce
the aggregate amount of letters of credit to be issued to the lesser of
$1,000,000 or 35% of the Company's inventory. In addition to interest,
which was payable monthly at 2% above the prime rate, Yashiro was paid a
handling fee of 3% of the cost of the goods. The Company's liability to
Yashiro was approximately $530,000 at November 30, 1996 and the Company
had outstanding letters of credit of approximately $242,000 at November
30, 1996. In fiscal 1997, 1996 and 1995, interest and handling and other
fees paid to Yashiro amounted to approximately $18,000, $105,000 and
$417,000, respectively.
During the year ended November 30, 1995, the Company purchased
approximately $734,000 of handbags and accessories from an affiliate of
Yashiro.
During the years ended November 30, 1997, 1996 and 1995, the Company
purchased approximately $891,000, $355,000 and $193,000, respectively, of
luggage and backpack products from a company controlled by a stockholder.
During the years ended November 30, 1997, 1996 and 1995, the Company paid
approximately $208,000, $786,000 and $602,000, respectively, as buying
commissions to companies controlled by other stockholders. As of November
30, 1997 and 1996, there was outstanding $974,046 and $260,188 to such
related parties.
F-23
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
7. Segment Reporting
<TABLE>
<CAPTION>
United Hong
Consolidated States Canada Kong
------------ ------------ ------------ ------------
(See Note 12)
<S> <C> <C> <C> <C>
Year ended November 30, 1997:
Net sales ........................ $ 16,007,983 $ 15,233,619 $ 774,364 $ --
============ ============ ============ ============
Net loss and loss before provision
for (recovery of) income taxes . ($ 2,993,682) ($ 2,696,043) ($ 294,953) ($ 2,686)
============ ============ ============ ============
Identifiable assets .............. $ 14,041,648 $ 12,671,236 $ 1,369,967 $ 445
============ ============ ============ ============
Year ended November 30, 1996:
Net sales ........................ $ 27,745,955 $ 21,683,680 $ 6,062,275 $ --
============ ============ ============ ============
Net income (loss) and income
(loss) before provision for
income taxes ................ $ 925,445 $ 193,752 $ 735,747 ($ 4,054)
============ ============ ============ ============
Identifiable assets .............. $ 9,576,861 $ 6,724,377 $ 2,850,942 $ 1,542
============ ============ ============ ============
Year ended November 30, 1995:
Net sales ........................ $ 24,812,147 $ 21,132,714 $ 3,660,079 $ 19,354
============ ============ ============ ============
Net income (loss) and income
(loss) before provision for
income taxes ................ ($ 996,499) ($ 1,154,408) $ 269,488 ($ 111,579)
============ ============ ============ ============
Identifiable assets .............. $ 10,002,740 $ 7,780,427 $ 2,213,154 $ 9,159
============ ============ ============ ============
</TABLE>
8. Accounts Receivable and Major Customers
The Company had an agreement with a factor pursuant to which the Company
sold substantially all of its accounts receivable on a pre-approved
non-recourse basis. Under the terms of the agreement, the factor advanced
funds to the Company based on invoice amounts. Interest on such advances
was payable at 2% in excess of the prime rate through October 31, 1995
and 1.75% in excess of the prime rate thereafter. The Company also paid a
factoring commission of 1% (.75% after November 1, 1995) of the invoice
amount subject to a minimum of $96,000 per annum. As described in Note 2,
the agreement was terminated on December 17, 1996.
F-24
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
8. Accounts Receivable and Major Customers (Continued)
Sales to one customer amounted to 27%, 19%, and 25% of net sales in
fiscal 1997, 1996 and 1995, respectively. Sales to another customer
amounted to 17% and 11% of net sales in fiscal 1997 and 1996,
respectively. Sales to another customer amounted to 14% in fiscal 1997.
9. Investment In and Advances to Subsidiary
Effective July 15, 1992, the Company entered into an agreement to sell
all of the stock of its then wholly-owned subsidiary, Sirco Leatherwares
Limited (the "Subsidiary"). In exchange for the stock, the Company
received a non-interest bearing $650,000 note. The note is guaranteed by
an officer of the Subsidiary who is also an officer of the buyer and,
until December 1996, served on the Board of Directors of the Company. The
agreement also requires the Company to forgive a portion of the amounts
due to it from the Subsidiary. The Company's ability to collect the note
receivable and the balance of the receivable from the Subsidiary is
dependent upon cash flows from the Subsidiary's operations and/or the
buyer's ability to refinance the obligations. As the risks and other
incidents of ownership have not transferred to the buyer with sufficient
certainty, this transaction has not been accounted for as a sale for
accounting purposes.
The Company recorded a loss on this transaction in fiscal 1992, as the
present value of the amounts to be received under the note and the
revised accounts receivable were less than (i) the carrying value of the
Company's investment in the Subsidiary plus (ii) the amounts receivable
from the Subsidiary.
The non-interest bearing $650,000 note received in exchange for stock in
the Subsidiary ("the Stock Note") was due in thirty-two equal quarterly
installments of $20,213 beginning in August 1992. During fiscal 1996, the
parties agreed to a one year payment moratorium as to the Stock Note. On
February 6, 1997, the parties agreed to modify the remaining repayment
terms and to resume payments. The note, as modified, is to be repaid as
follows: $10,156 on February 7, 1997, $10,156 on March 10, 1997, four
quarterly payments of $10,156 commencing on May 1, 1997 and ending on
February 1, 1998, five quarterly payments of $20,313 commencing on May 1,
1998 and ending on May 1, 1999, and four quarterly payments of $50,781
commencing on August 1, 1999 and ending on May 1, 2000. Payments are
being received on a current basis.
F-25
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
9. Investment In and Advances to Subsidiary (Continued)
Also, pursuant to the agreement to sell the Company's investment in the
Subsidiary, the Subsidiary agreed to pay interest quarterly at 8.5% per
annum on a receivable of approximately $720,000. If the Subsidiary is not
in default on the payment of interest, the Company will forgive a portion
of the receivable, in amounts as defined, through May 1, 1998. An amount
of $40,000 was forgiven in each of 1997, 1996 and 1995. The total amount
forgiven will be $280,000. The remaining receivable of approximately
$400,000 is payable in ten equal quarterly installments commencing in
August 1998. Amounts outstanding after May 1, 1998 will bear interest at
the prime rate. Payments are being received on a current basis.
At November 30, 1997, the aggregate principal balance of $715,000 due on
the above notes has been reduced for imputed interest of approximately
$40,000 and an allowance of approximately $160,000 for uncollectibility.
10. Loss on Sale of Handbag Division
On March 20, 1995, the Company sold its handbag division to Bueno of
California, Inc. ("Bueno"), a subsidiary of Yashiro. The Company and
Bueno entered into an Asset Purchase Agreement pursuant to which the
Company sold to Bueno all of the inventory relating to the Company's
handbag division, and certain equipment relating to the Company's handbag
division for $1,785,666, of which $86,168 was paid in cash and $1,699,448
was applied by the Company to the repayment of indebtedness of the
Company to Yashiro. This sale resulted in a loss to the Company of
$425,163. Net sales of the Company's handbag division for the year ended
November 30, 1995 was $1,423,000, and related gross profit was $81,000.
In connection therewith, the Company had entered into six year
non-competition agreements covering North America with Yashiro, another
affiliate of Yashiro, Mr. Yutaka Yamaguchi and Mr. Takeshi Yamaguchi,
former stockholders and/or officers of the Company. Aggregate
consideration to these parties was $240,000 payable in three annual
installments of $80,000 including interest at 10% which commenced March
31, 1996. The present value of the restrictive covenant ($198,350) was
being amortized over the life of the agreement. During 1996, the Company
paid its non-competition agreement liability in full, the non-competition
agreement was terminated, and the Company wrote off the remaining balance
of the restrictive covenant asset.
F-26
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
10) Loss on Sale of Handbag Division (Continued)
In addition, the Company had agreed to pay severance pay to Mr. Takeshi
Yamaguchi in the amount of $200,000, payable in two annual installments
of $100,000 plus interest at 10% per annum which commenced March 31,
1996. This amount had been charged to operations in 1995. During 1996,
the Company paid its severance agreement liability in full.
11. Stockholders' Equity
The Company accounts for its stock option plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation
expense is recognized. In fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," (SFAS No. 123) for disclosure purposes; accordingly, no
compensation expense has been recognized in the results of operations for
its stock option plans as required by APB Opinion No. 25.
On August 17, 1995, the stockholders of the Company (i) approved an
increase in the number of authorized shares of common stock from
3,000,000 shares to 10,000,000 shares; (ii) authorized the Company to
issue 1,000,000 shares of preferred stock, par value $.10 per share, with
rights and privileges to be determined by the board of directors; and
(iii) approved the 1995 Stock Option Plan of the Company (the "Plan").
The Plan provides for the grant of incentive stock options, non-qualified
stock options, tandem stock appreciation rights, and stock appreciation
rights exercisable in conjunction with stock options to purchase a
specified number of shares of common stock. During fiscal 1997, the
stockholders of the Company approved an amendment to the Plan to increase
the number of shares of common stock that may be issued to 1,200,000
shares.
F-27
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
11. Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- --------- -----
<S> <C> <C> <C>
Outstanding, December 1, 1994 - - -
Granted during year ended
November 30, 1995 146,000 $1.00 $1.00
-------
Outstanding, November 30, 1995 146,000 $1.00 $1.00
Granted during year ended
November 30, 1996 437,000 $1.25 - $1.6875 $1.34
Exercised during year ended
November 30, 1996 (200,000) $1.25 $1.25
--------
Outstanding November 30, 1996 383,000 $1.00 - $1.6875 $1.26
Granted during year ended
November 30, 1997 160,000 $1.94 - $2.13 $2.04
Exercised/canceled during year
ended November 30, 1997 (148,000) $1.00 - $1.6875 $1.09
--------
Outstanding November 30, 1997 395,000 $1.00 - $2.13 $1.64
=======
Options exercisable, November
30, 1995 40,000 $1.00 $1.00
========
Options exercisable, November
30, 1996 183,500 $1.00 - $1.6875 $1.12
========
Options exercisable, November
30, 1997 140,000 $1.00 - $1.44 $1.33
========
</TABLE>
F-28
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
11. Stockholders' Equity (Continued)
The following table summarizes information about the options outstanding
at November 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
<S> <C> <C> <C> <C> <C>
$1.00 - $1.44 235,000 3.58 $1.36 140,000 $1.33
$1.94 - $2.14 160,000 4.24 $2.04 - -
</TABLE>
For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions used for stock
options granted in fiscal 1997 and 1996, respectively: annual dividends
of $0.00 for both years, expected volatility of 93% for 1996 and 88% for
1997, risk-free interest rate of 6.54% and 6.03%, and expected life of
five years for all grants. The weighted-average fair value of stock
options granted in 1997 and 1996 was $.91 and $.66, respectively.
Under the above model, the total value of stock options granted in 1997
and 1996 was $146,041 and $101,740, respectively, which would be
amortized ratably on a pro forma basis over the related vesting periods,
which range from five to ten years. Had the Company determined
compensation cost for these plans in accordance with SFAS No. 123, the
Company's pro forma net income (loss) would have been ($2,906,052) in
1997 and $620,904 in 1996, the Company's pro forma earnings (loss) per
share would be ($.90) for 1997 and would not change for 1996. The SFAS
No. 123 method of accounting does not apply to options granted prior to
January 1, 1995, and accordingly, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-29
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
11. Stockholders' Equity (Continued)
In April, 1997, the Company raised $609,000, net of placement agent fees,
through the private placement issuance of 400,000 units at $1.75 per
unit, consisting of one share of common stock, one common stock Class A
warrant exercisable at $2.06 per share for one year, and one common stock
Class B warrant exercisable at $2.56 per share for one year.
Additionally, 120,000 Class A warrants were granted to the placement
agent and a consulting firm in connection with the transaction. As of
November 30, 1997, 700,000 warrants had been exercised and 110,000 Class
A and 110,000 Class B warrants were outstanding.
On October 24, 1996, the shareholders of the Company adopted the Sirco
International Corp. 1996 Restricted Stock Award Plan (the "Restricted
Stock Award Plan"). An aggregate of 400,000 shares of common stock of the
Company has been reserved for issuance in connection with awards granted
under the Restricted Stock Award Plan. Such shares may be awarded from
either authorized and unissued shares or treasury shares. The maximum
number of shares that may be awarded under the Restricted Stock Award
Plan to any individual officer or key employee is 100,000. Approximately
five employees of the Company and its subsidiaries are currently eligible
to participate in the Restricted Stock Award Plan. No shares were awarded
during 1997 and 1996.
12. Canadian Operations
During fiscal 1996, the Company received notification from Airway
Industries Inc. ("Airway") that the licensing agreement with the
Company's Canadian subsidiary, Sirco International (Canada) Limited
("Sirco Canada"), would cease on December 31, 1996. On November 22, 1996,
Sirco Canada leased substantially all of its facility to Airway for a
two-year period commencing on January 1, 1997 for a rental of $65,000 per
annum. On December 31, 1996, Sirco Canada sold its then remaining
inventory, supplies, furniture and fixtures to Airway, and substantially
all of Sirco Canada's employees terminated their employment with Sirco
Canada and were then hired by Airway. Sirco Canada did not incur any
significant gain or loss on the sale of such assets to Airway.
F-30
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
12. Canadian Operations (Continued)
As the sales from the licensed products accounted for substantially all
of Sirco Canada's sales, its future viability will depend on its ability
to successfully introduce new products into the Canadian marketplace.
Management believes that the Canadian operations will continue to be
adversely affected through the next fiscal year.
See Note 7 to the consolidated financial statements for information with
respect to Sirco Canada's operations.
13. Fourth Quarter Adjustment
During the fourth quarter of the year ended November 30, 1997, the
Company recorded an adjustment of approximately $615,000 to write down
certain inventory.
14. Investment in Affiliate
On October 22, 1997, the Company acquired 3,000,000 common shares of CLEC
Holding Corp. ("CLEC"), in exchange for 375,000 shares of the Company's
common stock, subject to certain price protection adjustments which
required the Company to issue an additional 50,000 shares of common
stock. The Company's investment in CLEC represents approximately 28% of
CLEC's total shares outstanding and is carried on the equity method of
accounting. At November 30, 1997, the cost of the investment in CLEC of
$1,500,000 had been reduced by $420,000, attributable to 28% of the cost
of the 425,000 shares of the Company's common stock held by CLEC, with a
corresponding charge to treasury stock. Substantially all of the
investment represented goodwill of $1,080,000 which will be amortized
over 15 years. CLEC issues its financial statements based on a fiscal
year ending October 31. Accordingly, the Company has not recorded any
equity in the operations of CLEC for the Company's year ended November
30, 1997.
CLEC was formed in 1991 and was inactive until September 1997, when CLEC
acquired 95% of the capital stock of The Other Phone Company, Inc.
("OPC"), an integrated telecommunications provider based in Florida. OPC
is a reseller of Bell South services that currently provides local
service exclusively in the State of Florida.
F-31
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
14. Investment in Affiliate (Continued)
The results of operations for the period September 9, 1997 through
October 31, 1997 and financial position of CLEC as of October 31, 1997
are summarized below:
<TABLE>
<CAPTION>
Condensed Income Statement Information
<S> <C>
Revenue $479,516
Cost of service 347,683
Gross profit 131,833
Net loss (101,276)
<CAPTION>
Condensed Balance Sheet Information
<S> <C>
Current assets, including investment
in Sirco International Corp. common
shares carried at $1,500,000* $2,177,239
Non-current assets 117,884
Goodwill 1,953,623
Current liabilities 1,571,696
Non-current liabilities 410,229
Minority interest 113,446
Net worth 2,153,375
</TABLE>
* These shares were sold in January and February 1998 for $687,500.
F-32
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
14. Investment in Affiliate (Continued)
In September, 1997, the Company's Chief Executive Officer loaned CLEC
$150,000. On November 10, 1997, the loan, plus accrued interest of
$3,000, was converted into 306,000 shares of CLEC common stock
(approximately 3% of CLEC's outstanding shares).
In addition, CLEC granted options to purchase common shares of CLEC to
the Chief Executive Officer of the Company (150,000 shares at $1.20 per
share) and to another officer of the Company who serves on the Board of
Directors of CLEC (100,000 shares at $1.00 per share).
15. Subsequent Event
On February 27, 1998, the Company acquired all of the outstanding shares
of common stock of Essex Communications, Inc. ("Essex") in exchange for
250,000 shares of the Company's common stock and warrants to purchase up
to 225,000 shares of the Company stock at $2.75 per share. The warrants
vest at the rate of 75,000 immediately; if certain performance conditions
are met, the remaining warrants vest and up to 600,000 additional shares
may be issued. Essex is a start-up telecommunications provider that has
filed in New York, New Jersey and Connecticut to become a reseller of
local phone services. This acquisition will be accounted for as a
purchase.
F-33
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
Column A Column B Column C Column D Column E
- ------------------------------------------ -------- -------- -------- --------
Additions
Balance at Charged to Accounts Balance at
Beginning Costs and Written End of
Description of Period Expenses* Off Period
----------- --------- --------- --- ------
<S> <C> <C> <C> <C>
Year ended November 30, 1997:
Allowance for doubtful accounts $ 276,000 $ 278,000 $354,000 $ 200,000
Valuation allowance for deferred
tax asset $1,970,000 $1,070,000 - $3,040,000
Year ended November 30, 1996:
Allowance for doubtful accounts $ 286,000 $ 32,000 $ 42,000 $ 276,000
Valuation allowance for deferred
tax asset $2,240,000 ($ 270,000) - $1,970,000
Year ended November 30, 1995:
Allowance for doubtful accounts $ 322,000 $ 128,000 $164,000 $ 286,000
Valuation allowance for deferred
tax asset $2,840,000 ($ 600,000) - $2,240,000
</TABLE>
* Net of recoveries
F-34
EXHIBIT 4(a)
THIS CLASS A WARRANT IS PART OF A UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
THIS CLASS A WARRANT AND ONE CLASS B WARRANT. THIS CLASS A WARRANT MAY NOT BE
TRANSFERRED SEPARATELY FROM THE SHARE OF COMMON STOCK AND THE CLASS B WARRANT
COMPRISING THE UNIT OF WHICH THIS CLASS A WARRANT IS A PART BEFORE THE EFFECTIVE
DATE OF A REGISTRATION STATEMENT FILED IN CONNECTION WITH THE COMMON STOCK
INCLUDED IN THE UNIT OF WHICH THIS CLASS A WARRANT IS A PART, UNLESS SUCH
TRANSFER IS EARLIER CONSENTED TO IN WRITING BY THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IN ACCORDANCE WITH AN
EXEMPTION FROM REGISTRATION UNDER THAT ACT.
CLASS A WARRANT
SIRCO INTERNATIONAL CORP.
SHARES OF COMMON STOCK
This certifies that _______________ or any party to whom this Warrant is
assigned in accordance with its terms is entitled to subscribe for and purchase
_______ shares of the Common Stock of Sirco International Corp., a New York
corporation, on the terms and conditions of this Warrant.
1. Definitions. As used in this Warrant, the term:
1.1 "Business Day" means any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated to be closed by law or by executive order.
1.2 "Common Stock" means the Common Stock, par value $.10 per
share, of the Corporation.
1.3 "Corporation" means Sirco International Corp., a New York
corporation, or its successor.
1.4 "Expiration Date" means April 18, 1998.
1.5 "Holder" means _________________ or any party to whom this
Warrant is assigned in accordance with its terms.
1.6 "1933 Act" means the Securities Act of 1933, as amended.
1.7 "Warrant" means this Warrant and any warrants delivered in
substitution or exchange for this Warrant in accordance with the provisions of
this Warrant.
1.8 "Warrant Price" means $4.125 per share of Common Stock, as
such amount may be adjusted pursuant to Section 4 hereof.
2. Exercise of Warrant. At any time before the Expiration Date, the
Holder may exercise the purchase rights represented by this Warrant, in whole or
in part, by surrendering this Warrant (with a duly executed subscription in the
form attached) at the Corporation's principal office in Stamford, Connecticut,
and by paying the Corporation, by certified or cashier's check, the aggregate
Warrant Price for the shares of Common Stock being purchased.
<PAGE>
2.1 Delivery of Certificates. Within thirty (30) days after
each exercise of the purchase rights represented by this Warrant, the
Corporation shall deliver a certificate for the shares of Common Stock so
purchased to the Holder and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the balance of the shares of Common Stock
subject to this Warrant.
2.2 Effect of Exercise. The person entitled to receive the
shares of Common Stock issuable upon any exercise of the purchase rights
represented by this Warrant, shall be treated for all purposes as the holder of
such shares of record as of the close of business on the date of exercise.
2.3 Issue Taxes. The Corporation shall pay all issue and other
taxes that may be payable in respect of any issue or delivery to the Holder of
shares of Common Stock upon exercise of this Warrant.
3. Stock Fully Paid; Reservation of Shares. The Corporation covenants
and agrees that all securities that it may issue upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges. The Corporation further covenants
and agrees that, during the period within which the Holder may exercise the
rights represented by this Warrant, the Corporation shall at all times have
authorized and reserved for issuance enough shares of its Common Stock or other
securities for the full exercise of the rights represented by this Warrant. The
Corporation shall not, by an amendment to its Certificate of Incorporation or
through reorganization, consolidation, merger, dissolution, issue or sale of
securities, sale of assets or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant.
4. Adjustments. The Warrant Price and the number of shares of Common
Stock that the Corporation must issue upon exercise of this Warrant shall be
subject to adjustment in accordance with Sections 4.1 through 4.3.
4.1 Adjustment to Warrant Price for Combinations or
Subdivisions of Common Stock. If the Corporation at any time or from time to
time after the date hereof (1) declares or pays, without consideration, any
dividend on the Common Stock payable in Common Stock; (2) creates any right to
acquire Common Stock for no consideration; (3) subdivides the outstanding shares
of Common Stock (by stock split, reclassification or otherwise); or (4) combines
or consolidates the outstanding shares of Common Stock, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Corporation shall
proportionately increase or decrease the Warrant Price, as appropriate.
4.2 Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon exercise of this Warrant changes into shares of
any other class or classes of security or into any other property for any reason
other than a subdivision or combination of shares provided for in Section 4.1,
including without limitation any reorganization, reclassification, merger or
consolidation, the Corporation shall take all steps necessary to give the Holder
the right, by exercising this Warrant, to purchase the kind and amount of
securities or other property receivable upon any such change by the owner of the
number of shares of Common Stock subject to this Warrant immediately before the
change.
4.3 Spin Offs. If the Corporation spins off any subsidiary by
distributing to the Corporation's shareholders as a dividend or otherwise any
stock or other securities of the subsidiary, the Corporation shall reserve until
the Expiration Date enough of such shares or other securities for delivery to
<PAGE>
the Holders upon any exercise of the rights represented by this Warrant to the
same extent as if the Holders owned of record all Common Stock or other
securities subject to this Warrant on the record date for the distribution of
the subsidiary's shares or other securities.
4.4 Certificates as to Adjustments. Upon each adjustment or
readjustment required by this Section 4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with this
Section, cause independent public accountants selected by the Corporation to
verify such computation and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based.
5. Fractional Shares. The Corporation shall not issue any fractional
shares in connection with any exercise of this Warrant.
6. Dissolution or Liquidation. If the Corporation dissolves, liquidates
or winds up its business before the exercise or expiration of this Warrant, the
Holder shall be entitled, upon exercising this Warrant, to receive in lieu of
the shares of Common Stock or any other securities receivable upon such
exercise, the same kind and amount of assets as would have been issued,
distributed or paid to it upon any such dissolution, liquidation or winding up
with respect to such shares of Common Stock or other securities, had the Holder
been the holder of record on the record date for the determination of those
entitled to receive any such liquidating distribution or, if no record is taken,
upon the date of such liquidating distribution. If any such dissolution,
liquidation or winding up results in a cash distribution or distribution of
property which the Corporation's Board of Directors determines in good faith to
have a cash value in excess of the Warrant Price provided by this Warrant, then
the Holder may, at its option, exercise this Warrant without paying the
aggregate Warrant Price and, in such case, the Corporation shall, in making
settlement to Holder, deduct from the amount payable to Holder an amount equal
to such aggregate Warrant Price.
7. Redemption. The Corporation possesses no right to redeem any
unexercised Warrants.
8. Transfer and Exchange.
8.1 Transfer. Subject to Section 8.3, the Holder may transfer
all or part of this Warrant at any time on the books of the Corporation at its
principal office upon surrender of this Warrant, properly endorsed. Upon such
surrender, the Corporation shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any partial
transfer, the Corporation shall issue and deliver to the Holder a new Warrant or
Warrants with respect to the Warrants not so transferred.
8.2 Exchange. The Holder may exchange this Warrant at any time
at the principal office of the Corporation for Warrants in such denominations as
the Holder may designate in writing. No such exchanges will increase the total
number of shares of Common Stock or other securities that are subject to this
Warrant.
8.3 Securities Act of 1933. By accepting this Warrant, the
Holder agrees that this Warrant and the shares of the Common Stock issuable upon
exercise of this Warrant may not be offered or sold except in compliance with
the 1933 Act, and then only with the recipient's agreement to comply with this
Section 8 with respect to any resale or other disposition of such securities.
<PAGE>
The Corporation may make a notation on its records in order to implement such
restriction on transferability. In connection with any transfer of all or a part
of this Warrant, the Corporation may require that the Holder deliver to the
Corporation such certificates and opinions of counsel as the Corporation may
reasonably request to confirm compliance with the 1933 Act.
9. Loss or Mutilation. Upon the Corporation's receipt of reasonably
satisfactory evidence of the ownership and the loss, theft, destruction or
mutilation of this Warrant and (in the case of loss, theft or destruction) of a
reasonably satisfactory indemnity or (in the case of mutilation) upon surrender
and cancellation of this Warrant, the Corporation shall execute and deliver a
new Warrant to the Holder.
10. Successors. All the covenants and provisions of this Warrant shall
bind and inure to the benefit of the Holder and the Corporation and their
respective successors and assigns.
11. Notices. All notices and other communications given pursuant to this
Warrant shall be in writing and shall be deemed to have been given when
personally delivered or when mailed by prepaid registered, certified or express
mail, return receipt requested. Notices should be addressed as follows:
(a) If to Holder, then to:
(b) If to the Corporation, then to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901
With a copy (which shall not constitute notice) to:
Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, New York 10022
Attention: Eric M. Hellige, Esq.
Such addresses for notices may be changed by any party by notice to the other
party pursuant to this Section 11.
12. Amendment. This Warrant may be amended only by an instrument in
writing signed by the Corporation and Holder.
13. Construction of Warrant. This Warrant shall be construed as a whole
and in accordance with its fair meaning. A reference in this Warrant to any
section shall be deemed to include a reference to every section the number of
which begins with the number of the section to which reference is made. This
Warrant has been negotiated by both parties and its language shall not be
construed for or against any party.
14. Law Governing. This Warrant is executed, delivered and to be
performed in the State of New York and shall be construed and enforced in
accordance with and governed by New York law without regard to any conflicts of
law or choice of forum provisions.
Dated as of
SIRCO INTERNATIONAL CORP.
By:
Paul H. Riss
Chief Financial Officer
Attest:
Secretary
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant and agrees to purchase shares of Common Stock of Sirco
International Corp., all at the price and on the terms and conditions specified
in this Warrant.
Dated:
(Signature of Registered Holder)
(Street Address)
(City) (State) (Zip)
<PAGE>
ISSUE OF A NEW WARRANT
(To be executed only upon partial exercise,
exchange, or partial transfer of Warrant)
Please issue Warrants, each representing the right to purchase shares of
Common Stock of Sirco International Corp. to the registered holder.
Dated:
(Signature of Registered Holder)
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of this Warrant
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the Warrant, with respect to the number of shares of
Common Stock set forth below (the "Transfer"):
Name of Assignee Address No. of Shares
The undersigned irrevocably constitutes and appoints as the undersigned's
attorney-in-fact, with full power of substitution, to make the transfer on the
books of Sirco International Corp.
Dated:
(Signature)
<PAGE>
EXHIBIT 4(b)
THIS CLASS B WARRANT IS PART OF A UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
THIS CLASS B WARRANT AND ONE CLASS A WARRANT. THIS CLASS B WARRANT MAY NOT BE
TRANSFERRED SEPARATELY FROM THE SHARE OF COMMON STOCK AND THE CLASS A WARRANT
COMPRISING THE UNIT OF WHICH THIS CLASS B WARRANT IS A PART BEFORE THE EFFECTIVE
DATE OF A REGISTRATION STATEMENT FILED IN CONNECTION WITH THE COMMON STOCK
INCLUDED IN THE UNIT OF WHICH THIS CLASS B WARRANT IS A PART, UNLESS SUCH
TRANSFER IS EARLIER CONSENTED TO IN WRITING BY THE COMPANY.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IN ACCORDANCE WITH AN
EXEMPTION FROM REGISTRATION UNDER THAT ACT.
CLASS B WARRANT
SIRCO INTERNATIONAL CORP.
SHARES OF COMMON STOCK
This certifies that _______________ or any party to whom this Warrant is
assigned in accordance with its terms is entitled to subscribe for and purchase
_______ shares of the Common Stock of Sirco International Corp., a New York
corporation, on the terms and conditions of this Warrant.
1. Definitions. As used in this Warrant, the term:
1.1 "Business Day" means any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated to be closed by law or by executive order.
1.2 "Common Stock" means the Common Stock, par value $.10 per
share, of the Corporation.
1.3 "Corporation" means Sirco International Corp., a New York
corporation, or its successor.
1.4 "Expiration Date" means April 18, 1998.
1.5 "Holder" means __________________ or any party to whom
this Warrant is assigned in accordance with its terms.
1.6 "1933 Act" means the Securities Act of 1933, as amended.
1.7 "Warrant" means this Warrant and any warrants delivered in
substitution or exchange for this Warrant in accordance with the provisions of
this Warrant.
1.8 "Warrant Price" means $5.125 per share of Common Stock, as
such amount may be adjusted pursuant to Section 4 hereof.
2. Exercise of Warrant. At any time before the Expiration Date, the
Holder may exercise the purchase rights represented by this Warrant, in whole or
in part, by surrendering this Warrant (with a duly executed subscription in the
form attached) at the Corporation's principal office in Stamford, Connecticut,
and by paying the Corporation, by certified or cashier's check, the aggregate
Warrant Price for the shares of Common Stock being purchased.
<PAGE>
2.1 Delivery of Certificates. Within thirty (30) days after
each exercise of the purchase rights represented by this Warrant, the
Corporation shall deliver a certificate for the shares of Common Stock so
purchased to the Holder and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the balance of the shares of Common Stock
subject to this Warrant.
2.2 Effect of Exercise. The person entitled to receive the
shares of Common Stock issuable upon any exercise of the purchase rights
represented by this Warrant, shall be treated for all purposes as the holder of
such shares of record as of the close of business on the date of exercise.
2.3 Issue Taxes. The Corporation shall pay all issue and other
taxes that may be payable in respect of any issue or delivery to the Holder of
shares of Common Stock upon exercise of this Warrant.
3. Stock Fully Paid; Reservation of Shares. The Corporation covenants
and agrees that all securities that it may issue upon the exercise of the rights
represented by this Warrant will, upon issuance, be fully paid and nonassessable
and free from all taxes, liens and charges. The Corporation further covenants
and agrees that, during the period within which the Holder may exercise the
rights represented by this Warrant, the Corporation shall at all times have
authorized and reserved for issuance enough shares of its Common Stock or other
securities for the full exercise of the rights represented by this Warrant. The
Corporation shall not, by an amendment to its Certificate of Incorporation or
through reorganization, consolidation, merger, dissolution, issue or sale of
securities, sale of assets or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant.
4. Adjustments. The Warrant Price and the number of shares of Common
Stock that the Corporation must issue upon exercise of this Warrant shall be
subject to adjustment in accordance with Sections 4.1 through 4.3.
4.1 Adjustment to Warrant Price for Combinations or
Subdivisions of Common Stock. If the Corporation at any time or from time to
time after the date hereof (1) declares or pays, without consideration, any
dividend on the Common Stock payable in Common Stock; (2) creates any right to
acquire Common Stock for no consideration; (3) subdivides the outstanding shares
of Common Stock (by stock split, reclassification or otherwise); or (4) combines
or consolidates the outstanding shares of Common Stock, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Corporation shall
proportionately increase or decrease the Warrant Price, as appropriate.
4.2 Adjustments for Reclassification and Reorganization. If
the Common Stock issuable upon exercise of this Warrant changes into shares of
any other class or classes of security or into any other property for any reason
other than a subdivision or combination of shares provided for in Section 4.1,
including without limitation any reorganization, reclassification, merger or
consolidation, the Corporation shall take all steps necessary to give the Holder
the right, by exercising this Warrant, to purchase the kind and amount of
securities or other property receivable upon any such change by the owner of the
number of shares of Common Stock subject to this Warrant immediately before the
change.
<PAGE>
4.3 Spin Offs. If the Corporation spins off any subsidiary by
distributing to the Corporation's shareholders as a dividend or otherwise any
stock or other securities of the subsidiary, the Corporation shall reserve until
the Expiration Date enough of such shares or other securities for delivery to
the Holders upon any exercise of the rights represented by this Warrant to the
same extent as if the Holders owned of record all Common Stock or other
securities subject to this Warrant on the record date for the distribution of
the subsidiary's shares or other securities.
4.4 Certificates as to Adjustments. Upon each adjustment or
readjustment required by this Section 4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with this
Section, cause independent public accountants selected by the Corporation to
verify such computation and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based.
5. Fractional Shares. The Corporation shall not issue any fractional
shares in connection with any exercise of this Warrant.
6. Dissolution or Liquidation. If the Corporation dissolves, liquidates
or winds up its business before the exercise or expiration of this Warrant, the
Holder shall be entitled, upon exercising this Warrant, to receive in lieu of
the shares of Common Stock or any other securities receivable upon such
exercise, the same kind and amount of assets as would have been issued,
distributed or paid to it upon any such dissolution, liquidation or winding up
with respect to such shares of Common Stock or other securities, had the Holder
been the holder of record on the record date for the determination of those
entitled to receive any such liquidating distribution or, if no record is taken,
upon the date of such liquidating distribution. If any such dissolution,
liquidation or winding up results in a cash distribution or distribution of
property which the Corporation's Board of Directors determines in good faith to
have a cash value in excess of the Warrant Price provided by this Warrant, then
the Holder may, at its option, exercise this Warrant without paying the
aggregate Warrant Price and, in such case, the Corporation shall, in making
settlement to Holder, deduct from the amount payable to Holder an amount equal
to such aggregate Warrant Price.
7. Redemption. The Corporation possesses no right to redeem any
unexercised Warrants.
8. Transfer and Exchange.
8.1 Transfer. Subject to Section 8.3, the Holder may transfer
all or part of this Warrant at any time on the books of the Corporation at its
principal office upon surrender of this Warrant, properly endorsed. Upon such
surrender, the Corporation shall issue and deliver to the transferee a new
Warrant or Warrants representing the Warrants so transferred. Upon any partial
transfer, the Corporation shall issue and deliver to the Holder a new Warrant or
Warrants with respect to the Warrants not so transferred.
8.2 Exchange. The Holder may exchange this Warrant at any time
at the principal office of the Corporation for Warrants in such denominations as
the Holder may designate in writing. No such exchanges will increase the total
number of shares of Common Stock or other securities that are subject to this
Warrant.
<PAGE>
8.3 Securities Act of 1933. By accepting this Warrant, the
Holder agrees that this Warrant and the shares of the Common Stock issuable upon
exercise of this Warrant may not be offered or sold except in compliance with
the 1933 Act, and then only with the recipient's agreement to comply with this
Section 8 with respect to any resale or other disposition of such securities.
The Corporation may make a notation on its records in order to implement such
restriction on transferability. In connection with any transfer of all or a part
of this Warrant, the Corporation may require that the Holder deliver to the
Corporation such certificates and opinions of counsel as the Corporation may
reasonably request to confirm compliance with the 1933 Act.
9. Loss or Mutilation. Upon the Corporation's receipt of reasonably
satisfactory evidence of the ownership and the loss, theft, destruction or
mutilation of this Warrant and (in the case of loss, theft or destruction) of a
reasonably satisfactory indemnity or (in the case of mutilation) upon surrender
and cancellation of this Warrant, the Corporation shall execute and deliver a
new Warrant to the Holder.
10. Successors. All the covenants and provisions of this Warrant shall
bind and inure to the benefit of the Holder and the Corporation and their
respective successors and assigns.
11. Notices. All notices and other communications given pursuant to
this Warrant shall be in writing and shall be deemed to have been given when
personally delivered or when mailed by prepaid registered, certified or express
mail, return receipt requested. Notices should be addressed as follows:
(a) If to Holder, then to:
(b) If to the Corporation, then to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901
With a copy (which shall not constitute notice) to:
Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, New York 10022
Attention: Eric M. Hellige, Esq.
Such addresses for notices may be changed by any party by notice to the other
party pursuant to this Section 11.
12. Amendment. This Warrant may be amended only by an instrument in
writing signed by the Corporation and Holder.
13. Construction of Warrant. This Warrant shall be construed as a whole
and in accordance with its fair meaning. A reference in this Warrant to any
section shall be deemed to include a reference to every section the number of
which begins with the number of the section to which reference is made. This
Warrant has been negotiated by both parties and its language shall not be
construed for or against any party.
<PAGE>
14. Law Governing. This Warrant is executed, delivered and to be
performed in the State of New York and shall be construed and enforced in
accordance with and governed by New York law without regard to any conflicts of
law or choice of forum provisions.
Dated as of
SIRCO INTERNATIONAL CORP.
By:
Paul H. Riss
Chief Financial Officer
Attest:
Secretary
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant and agrees to purchase shares of Common Stock of Sirco
International Corp., all at the price and on the terms and conditions specified
in this Warrant.
Dated:
(Signature of Registered Holder)
(Street Address)
(City) (State) (Zip)
<PAGE>
ISSUE OF A NEW WARRANT
(To be executed only upon partial exercise,
exchange, or partial transfer of Warrant)
Please issue Warrants, each representing the right to purchase shares
of Common Stock of Sirco International Corp. to the registered holder.
Dated:
(Signature of Registered Holder)
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of this Warrant
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the Warrant, with respect to the number of shares of
Common Stock set forth below (the "Transfer"):
Name of Assignee Address No. of Shares
The undersigned irrevocably constitutes and appoints as the undersigned's
attorney-in-fact, with full power of substitution, to make the transfer on the
books of Sirco International Corp.
Dated:
(Signature)
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of February 27, 1998, among SIRCO
INTERNATIONAL CORP., a New York corporation ("Buyer"), and LYNN MINELLA, an
individual residing at 274 Keeler Drive, Ridgefield, Connecticut 06887
(individually, and as custodian for Alexander C. Minella and Lauren Minella,
"Minella"), TN CAPITAL GROUP INC. ("TN Capital"), a New York corporation with an
office at 1616 Post Road East, Suite 4442, Fairfield, Connecticut 06860, and
ANTHONY SCALICE, an individual residing at 2089 Washington Street, Merrick, New
York 11556 ("Scalice," and collectively with Minella and TN Capital, the
"Sellers").
W I T N E S S E T H:
WHEREAS, Sellers own all the issued and outstanding capital stock of
ESSEX COMMUNICATIONS, INC., a New York corporation (the "Company"); and
WHEREAS, Buyer desires to acquire from Sellers all the issued and
outstanding shares of capital stock, including any and all options, warrants and
distribution entitlements therewith, of the Company (collectively, the "Company
Shares") upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Section 1. Representations and Warranties of Sellers.
Sellers jointly and severally represent and warrant to
Buyer that:
1.1. The Company is a corporation duly organized and
validly existing and in good standing under the laws of the State of New York.
The Company has all necessary power to own all of its properties and assets and
to carry on its business as now being conducted.
1.2. At the date of this Agreement, the Company has an
authorized capitalization consisting of 200 shares of capital stock, no par
value, of which 100 shares are issued and outstanding, and of which none are
held in the treasury of the Company.
1.3. Set forth below is a true and correct list of the
beneficial and record owners of the issued and outstanding Company Shares:
Company
Owner Shares Owned
----- ------------
Lynn Minella 25
Lynn Minella, as custodian for Alexander C. Minella 10
Lynn Minella, as custodian for Lauren Minella 10
TN Capital 45
Anthony Scalice 10
100
<PAGE>
Each of the issued and outstanding Company Shares is fully paid and
non-assessable. The Company Shares are owned by the Sellers as the record owners
thereof free and clear of all liens, charges and encumbrances and are not
subject to any restrictions with respect to their transferability. The Company
does not have any outstanding options, warrants or rights to purchase any of its
securities.
1.4. The Company does not own stock in, and does not
control, directly or indirectly, any other corporation, association or business
organization. The Company is not a party to any joint venture or partnership.
1.5. Sellers have heretofore furnished Buyer with complete
copies of the unaudited financial statements of the Company for the period
commencing on the date of incorporation of the Company (December 8, 1997) and
ending February 19, 1998, including a balance sheet at February 19, 1998 and a
statement of operations for the period commencing on December 8, 1997 and ending
February 19, 1998. The balance sheet of the Company at February 19, 1998,
annexed hereto as Exhibit A, is herein referred to as the "Company Balance
Sheet."
All such financial statements have been prepared in
accordance with generally accepted accounting principles consistently followed
throughout the periods indicated, reflect all known liabilities of the Company,
including all known contingent liabilities as of their date, and present fairly
the financial condition of the Company at such date and the results of
operations for the period then ended.
1.6. The Company owns all of the personal property
reflected in the Company Balance Sheet and all personal property acquired by the
Company since the date thereof (except such property as has been disposed of in
the ordinary course of business) free and clear of any liens, claims, charges,
exceptions or encumbrances, except for those, if any, which in the aggregate are
not material and which do not materially affect the continued use of such
property. All machinery, tools, equipment and other tangible assets included in
determining the net worth of the Company in the Company Balance Sheet currently
are used by or useful to the Company in the ordinary course of business and are
in good operating condition and in a state of reasonable maintenance and repair.
1.7. Sellers have delivered to Buyer a true and complete
list as of the date of this Agreement, certified by an officer of the Company,
setting forth:
(a) The name of each director and officer of the
Company and the offices held by each.
(b) The name of each person receiving compensation
from the Company as of January 31, 1998, the amount paid or
payable to each such person for such services, and the basis
therefor.
(c) The name of each bank in which the Company has an
account or safe deposit box, the identifying numbers or
symbols thereof, and the name of each person authorized to
draw thereon or to have access thereto.
(d) The name of each person, if any, holding tax or
other powers of attorney from the Company, and a summary
statement of the terms thereof.
<PAGE>
1.8. There is no litigation, governmental investigation or
other proceeding pending or, so far as is known to the Company or its officers,
threatened against or relating to the Company, its properties or business, or
the transactions contemplated by this Agreement and, so far as is known to the
Company or its officers, no basis for any such action exists.
1.9. The Company does not own or have any rights in any
patents, patent applications, trademarks, trade names or copyrights. The Company
is not a licensor in respect of any patents, trademarks, trade names, copyrights
or applications therefor or manufacturing processes, formulas or trade secrets.
The Company does not require any licenses or other rights to use any patents,
trademarks, trade names, copyrights, manufacturing processes, formulas and trade
secrets of any third party necessary to conduct its business as now operated. No
significant claim is pending or, to the knowledge of Sellers or the officers of
the Company, has been made to the effect that the present or past operations of
the Company infringe upon or conflict with the asserted rights of others.
1.10. Sellers have delivered to Buyer true copies of all
material contracts, obligations and commitments of the Company. No material
default or alleged default exists thereunder, and there are no material
agreements of the parties relating to such contracts, obligations and
commitments, which have not been disclosed to Buyer. The Company is not a party
to any written or oral:
(a) Contract not made in the ordinary course of
business other than this Agreement.
(b) Employment contract which is not terminable
without cost or other liability to the Company, or any
successor thereof, upon notice of 30 days or less.
(c) Contract with any labor union.
(d) Bonus, pension, profit sharing, retirement, stock
purchase, hospitalization, insurance or similar plan providing
for employee benefits.
(e) Lease with respect to any property, real or
personal, whether as lessor or lessee.
(f) Contract for the future purchase of materials,
supplies or equipment (i) which is in excess of the current
requirements of the business of Seller now booked or for
normal operating inventories, or (ii) which is not terminable
without cost or liability to the Company, or any successor
thereof, upon notice of 30 days or less.
(g) Contract for the performance of service for or by
the Company which is not terminable without cost or liability
to the Company, or any successor thereof, upon notice of 30
days or less.
(h) Insurance contract.
(i) Contract continuing for a period of more than six
months from its date.
(j) Loan agreement or other contract for money
borrowed.
<PAGE>
1.11. The Company has not, since the date of the Company
Balance Sheet:
(a) Incurred any material obligation or liability
(absolute, accrued, contingent or otherwise), except in
connection with the performance of this Agreement.
(b) Discharged or satisfied any lien or encumbrance,
or paid or satisfied any obligation or liability (absolute,
accrued, contingent or otherwise) other than (i) liabilities
shown or reflected on the Company Balance Sheet, or (ii)
liabilities incurred since the date of the Company Balance
Sheet in the ordinary course of business.
(c) Increased or established any reserve for taxes or
any other liability on its books or otherwise provided
therefor, except as may have been required due to income or
operations of the Company since the date of the Company
Balance Sheet.
(d) Mortgaged, pledged or subjected to any lien,
charge or other encumbrance any of its assets, tangible or
intangible.
(e) Sold or transferred any of its assets or canceled
any debts or claims or waived any rights, except in the
ordinary course of business.
(f) Disposed of or permitted to lapse any patents or
trademarks or any patent or trademark applications material to
the operation of its business.
(g) Granted any general or uniform increase in the
rates of pay of employees or any substantial increase in
salary payable or to become payable by it to any officer,
employee, consultant, or agent (other than normal merit
increases), or by means of any bonus or pension plan, contract
or other commitment increased the compensation of any officer,
employee, consultant or agent.
(h) Made any declaration, setting aside or payment to
its shareholders of any dividend or other distribution in
respect of its capital stock, or redeemed or purchased any of
its capital stock, or agreed to take any such action.
(i) Except for this Agreement, entered into any
material transaction other than in the ordinary course of
business.
(j) Issued any stocks, bonds or other corporate
securities.
(k) Experienced damage, destruction or loss (whether
or not covered by insurance) materially and adversely
affecting any of its properties, assets or business, or
experienced any other material adverse change in its financial
condition, assets, liabilities or business.
<PAGE>
1.12. The Company has filed all tax returns required to be
filed by it under the laws of the United States, the state of its incorporation
and each state in which it conducts business. The Company has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
returns. The Company does not have any tax liability for which no tax reserve
has been made in respect of any jurisdiction in which the Company has business
activities. The amounts set up as provisions for taxes in the Company Balance
Sheet are sufficient for all accrued and unpaid federal, state, county and local
taxes, including any interest and penalties in connection therewith, of the
Company, whether or not disputed, for all fiscal periods to the date of the
Company Balance Sheet.
1.13. The Company has no material liabilities of any
character whatsoever, whether or not accrued and whether or not determined or
determinable (including, without limitation, tax liabilities due or to become
due), other than (i) liabilities disclosed in the Company Balance Sheet and (ii)
liabilities, none of which has been materially adverse to the business or assets
of the Company, incurred in the ordinary course of business subsequent to the
date of the Company Balance Sheet.
1.14. The Company is not in violation of, or in default
under, (i) any term or provision of its certificate of incorporation or by-laws;
(ii) any material term or provision or any financial covenants of any indenture,
mortgage, contract, commitment or other agreement or instrument to which it is a
party or by which it or any of its property or business is or may be bound or
affected; or (iii) any existing applicable law rule, regulation, judgment, order
or decree of any governmental agency or court, domestic or foreign, having
jurisdiction over the Company or any of the Company's properties or business.
The Company owns, possesses or has obtained all governmental and other
(including those obtainable from third parties) permits, certifications,
registrations, approvals, consents, orders, licenses, franchises or other
authorizations (collectively, the "Permits") necessary to own or lease, as the
case may be, and to operate its properties, whether tangible or intangible, and
to conduct the business and operations of the Company as presently conducted
and, with respect to the State of New Jersey, as proposed to be conducted, and
all such Permits are outstanding and in good standing, and there are no
proceedings pending or to the best of the Company's knowledge, threatened, or
any basis therefor, seeking to cancel, terminate or limit such Permits.
Section 2. Representations and Warranties by Buyer.
Buyer represents and warrants that:
2.1. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York.
2.2. Buyer has corporate power to execute, deliver and
perform this Agreement, and has taken all action required by law, its
certificate of incorporation, its by-laws or otherwise to authorize the
execution and delivery of this Agreement. The execution and delivery of this
Agreement does not, and the consummation of the purchase contemplated hereby
will not, violate any provision of the certificate of incorporation or by-laws
of Buyer, or any agreement, instrument, order, judgment or decree to which Buyer
is a party or by which it is bound, or violate any of the restrictions of any
kind to which it is subject. Buyer has all necessary power to own all of its
properties and assets and to carry on its business as now being conducted.
<PAGE>
2.3. On the Closing Date, Buyer will have a sufficient
number of authorized but unissued and/or treasury shares of Buyer's Stock
available for issuance to Sellers in the amount set forth in Section 3.1. The
shares of Buyer's Stock to be delivered to Sellers pursuant to this Agreement
will, when so delivered, be validly issued and outstanding, fully paid and
non-assessable.
2.4. Buyer had, as of December 31, 1997, an authorized
capitalization of 10,000,000 shares of common stock, $0.10 par value ("Buyer's
Stock"), of which 4,300,400 shares were issued and outstanding, 11,000 shares
were held in treasury and 1,200,000 shares were reserved for issuance under
Buyer's 1995 Stock Option Plan. In addition, the Buyer had, as of December 31,
1997, 1,000,000 shares of authorized but unissued preferred stock.
2.5. Buyer has heretofore furnished Sellers with a copy of
its Annual Report on Form 10-K for the fiscal year ended November 30, 1996,
including a consolidated balance sheet as at the end of such fiscal year and a
statement of income and retained earnings for such year, audited by Nussbaum,
Yates & Wolpow, independent accountants retained by Buyer. Buyer has also
furnished Seller with copies of its (i) Quarterly Reports on Form 10-Q for the
quarters ended February 28, 1997, May 30, 1997 and August 31, 1997
(collectively, the "Quarterly Reports on Form 10-Q") and (ii) Current Report on
Form 8-K dated November 6, 1997. The financial statements in said Annual Report
on Form 10-K, together with the notes thereto, have been prepared in accordance
with generally accepted accounting principles consistently followed throughout
the periods indicated, reflect all known liabilities of Buyer, including all
known contingent liabilities as of the end of said fiscal year, and present
fairly the financial condition of Buyer at said date and the consolidated
results of operations for the year then ended. Since the end of its last fiscal
year, there has been no material adverse change in the business or financial
condition of Buyer and its subsidiaries which has not been disclosed in the
Quarterly Reports on Form 10-Q, except for any such changes which may have
occurred in the ordinary course of business as a result of changes in general
economic conditions.
Section 3. Terms of the Exchange of Stock.
The exchange by Sellers of the Company Shares for shares
of Buyer's Stock and the acquisition of the Company Shares by Buyer in exchange
for its shares shall be made on the Closing Date (as defined in Section 4). Such
exchange shall be based on the respective representations, warranties and
agreements of Sellers and Buyer, and shall be subject to the terms and
conditions herein stated.
3.1. (a) Buyer shall, at the Closing Date, transfer and
deliver an aggregate 250,000 shares of Buyer's Stock to the Sellers in exchange
for the transfer and delivery by the Sellers to Buyer of all the issued and
outstanding Company Shares. The 250,000 shares of Buyer's Stock shall be divided
among, and registered in the name of, the Sellers as follows:
<PAGE>
<TABLE>
<CAPTION>
Seller Shares Percentage
------ ------ ----------
<S> <C> <C>
Lynn Minella 62,500 25%
Lynn Minella, as custodian for Alexander C. Minella 25,000 10
Lynn Minella, as custodian for Lauren Minella 25,000 10
TN Capital 112,500 45
Anthony Scalice 25,000 10
------- ---
Total 250,000 100%
</TABLE>
The shares of Buyer's Stock to be so transferred to the Sellers may be treasury
shares, newly issued shares, or any thereof, all in the absolute discretion of
Buyer.
(b) Buyer shall, at the Closing Date, transfer and
deliver to the Sellers three-year Warrants to purchase up to 225,000 shares of
Buyer's Stock at a price per share of $2.75, of which Warrants to purchase
75,000 shares shall vest and become exercisable immediately (the "Vested
Warrants"). Of the remaining 150,000 warrants to purchase such shares of Buyer's
Stock (the "Remaining Warrants"), 75,000 shall vest and become exercisable only
at such time as the Company has at least 7,500 local telephone lines in service
(exclusive of lines acquired from third parties after the Closing Date) and
75,000 shall vest and become exercisable only at such time as the Company has at
least 12,500 local telephone lines in service (exclusive of acquired lines). The
Vested Warrants shall be divided among, and registered in the name of, the
Sellers as follows:
Seller Warrants
------ --------
Lynn Minella 12,500
TN Capital 12,500
Anthony Scalice 50,000
------
Total 75,000
The Remaining Warrants shall be divided among, and registered in the name of,
the Sellers in the same proportion as the shares of Buyer's Stock delivered
pursuant to Section 3.1(a).
<PAGE>
(c) Buyer shall issue to the Sellers additional
shares of Buyer's Stock upon the Company obtaining the following performance
objectives over the 18-month period following the Closing Date (as defined
below):
Business Development: 25,000 shares for Bell Atlantic
contract
25,000 shares for an Interexchange
carrier agreement
25,000 shares for SNET contract
25,000 shares for N.Y. PSC approval
25,000 shares for CT PSC approval
Aggregate No.
of Growth Lines* Shares
2,000 100,000
4,000 100,000
6,000 100,000
8,000 100,000
10,000 100,000
12,000 100,000
- ---------------
* Exclusive of lines acquired from third parties after the Closing Date.
Such additional shares of Buyer's Stock shall be divided among, and registered
in the name of, the Sellers in the same proportion as the shares of Buyer's
Stock delivered pursuant to Section 3.1(a):
3.2. If any Seller shall fail or refuse to deliver to
Buyer on the Closing Date any Company Shares to be sold, transferred and
delivered by such Seller hereunder, such failure or refusal shall not relieve
any other Seller of any obligation under this Agreement, and Buyer, at its
option, and without prejudice to its rights against such defaulting Seller, may
either acquire the remaining Company Shares which it is entitled to purchase
hereunder, or refuse to do so and thereby terminate all its obligations
hereunder.
3.3. Buyer Stock issued pursuant to this Agreement shall
be restricted shares that will contain the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR IN ACCORDANCE WITH AN EXEMPTION FROM REGISTRATION UNDER THAT ACT.
3.4. Each of the Sellers and the Buyer shall be liable for
or required to pay their own costs fees or expenses including:
(a) Fees and expenses of any person for financial
services or services as a finder rendered in connection with
the sale contemplated by this Agreement.
<PAGE>
(b) Fees and expenses of legal counsel and
accountants for services rendered in connection with the sale
contemplated by this Agreement, including expenses of in
connection with the preparation and examination of financial
data.
(c) Documentary stamp taxes or other similar charges
incurred by the transfer of the Company Shares to Buyer.
Section 4. Closing.
The Closing of the transactions contemplated hereby shall
be held at the offices of Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New
York, New York 10022, or at such other place as the parties may agree upon, at
ten o'clock a.m., New York City Time on February 27, 1998, or at such later time
and date as may be mutually approved by the parties. The time and date of
Closing is herein called the "Closing Date."
Section 5. Access to Information and Documents.
Sellers will, or will cause the Company to, give to Buyer
and its counsel, accountants, and other representatives full access during
normal business hours to all the properties, documents, contracts and records of
the Company and furnish Buyer with copies of such documents (certified if so
requested) and with such information with respect to the affairs of the Company
as Buyer may from time to time reasonably request. Up to the Closing Date (and,
in the event of a termination of this Agreement, at all times thereafter), Buyer
will not disclose or use any confidential information of or with respect to the
Company which Buyer obtained from or through Sellers at any time or in any
manner during negotiations preceding the execution of this Agreement or after
its execution, and if the Closing is not consummated and this Agreement
terminates, Buyer agrees promptly to return all documents, contracts, records or
properties of the Company, and all copies thereof furnished pursuant to this
Section, or otherwise.
Section 6. Covenants of Sellers.
6.1. Prior to the Closing Date, Sellers will not incur any
lien, charge or encumbrance on any Company Shares owned by Sellers, other than
as provided in this Agreement.
6.2. Sellers will use their best efforts to preserve the
business organization of the Company intact, to keep available to Buyer and the
Company the services of the present officers and employees of the Company, and
to preserve for Buyer and the Company the good will of the suppliers, customers
and others having business relations with the Company.
6.3. Prior to the Closing Date, Sellers will not, without
first obtaining the written consent of Buyer, permit the Company to:
(a) Encumber any asset or enter into any transaction
or make any contract or commitment relating to its properties,
assets and business otherwise than in the ordinary course of
business.
(b) Enter into any employment contract which is not
terminable upon notice of 30 days or less at will without
penalty to the Company.
<PAGE>
(c) Enter into any contract or agreement which cannot
be performed within three months or less.
(d) Reclassify or change in any manner its
outstanding shares of capital stock or issue or sell any
shares of capital stock or other securities of the Company.
(e) Make any payment or distribution to the trustee
under any bonus, pension, profit sharing or retirement plan or
incur any obligation to make any such payment or contribution
which is not in accordance with the Company's usual past
practice, or make any payment or contribution or incur any
obligation pursuant to or in respect of any other plan or
contract or arrangement providing for bonuses, executive
incentive compensation, pensions, deferred compensation,
retirement payments, profit sharing or the like.
(f) Extend credit to any customer who became such on
or after the date of this Agreement.
(g) Guarantee the obligation of any person, firm or
corporation, except by the endorsement of negotiable
instruments for deposit or collection in the ordinary course
of business.
(h) Take any action of the character described in
Sections 1.11(a) to 1.11(k), inclusive.
6.4. Sellers will jointly and severally cooperate with
Buyer in delivering to Buyer all records, formulas, know-how, technical data,
secrets and other methods and processes used by the Company in its business, and
will cooperate with Buyer in connection therewith after the Closing Date in such
manner as may reasonably be required by Buyer.
Section 7. Covenants of Buyer.
If, prior to the Closing Date, Buyer shall pay a stock
dividend upon, or subdivide, split up, reclassify or combine its shares of
Common Stock, $0.10 par value, at the Closing Date Sellers shall be entitled to
receive, and Buyer shall deliver to Sellers, respectively, in lieu of the shares
of Buyer's Stock specified in Section 3.1, such number of shares of stock of
Buyer as Sellers would own or be entitled to receive if the Closing Date had
occurred immediately prior to the occurrence of such event and Sellers had at
all times thereafter retained the shares of Buyer's Stock which they would have
received at the Closing Date in accordance with the provisions of Section 3.1
and/or any shares thereafter issued in respect thereof by reason of any
subsequent event of the character specified above. All adjustments pursuant to
the provisions of this Section 7.1 shall be made to the nearest whole share, and
Buyer shall not be required to issue any fractional shares.
Section 8. Termination of Agreement.
8.1. This Agreement and the transactions contemplated
hereby may be terminated or abandoned at any time prior to the Closing Date:
<PAGE>
(a) By mutual consent of the Sellers and Buyer;
(b) By Buyer, if there has been a material
misrepresentation in this Agreement by any Seller, or a material breach
by any Seller of any of the warranties or covenants of Sellers set
forth herein, or a failure of any condition to which the obligations of
Buyer are subject;
(c) By Sellers, if there has been a material
misrepresentation in this Agreement by Buyer, or a material breach by
Buyer of any of the warranties or covenants of Buyer set forth herein,
or a failure of any condition to which the obligations of Sellers are
subject; or
(d) By Sellers or Buyer if the Closing Date shall not have
occurred on or prior to February 28, 1998 for any reason other than the
failure of the party seeking to terminate this Agreement to perform its
obligations hereunder.
8.2. In the event of any termination of this Agreement
pursuant to Sections 8.1(a) or 8.1(d), neither party shall have any further
obligation to the other except as set forth in Sections 3.4 and 5.
Section 9. Conditions to Closing - Buyer.
The obligation of Buyer to exchange Buyer's Stock for
Company Shares, pursuant to this Agreement, shall be subject to the
satisfaction, at or prior to the Closing Date, of the following conditions (any
of which may be waived by Buyer):
9.1. Each of the agreements of the Sellers to be performed
at or prior to the Closing Date pursuant to the terms hereof shall have been
duly performed.
9.2. Sellers shall have furnished Buyer with copies of the
following documents relating to the Company:
(a) The certificate of incorporation and all
amendments thereto of the Company, duly certified by the
appropriate official of the jurisdiction in which the Company
is incorporated.
(b) Certificates, executed by the proper official of
each jurisdiction, as to the good standing and qualification
to do business of the Company in the jurisdiction of its
incorporation and in each other jurisdiction in which it is
required to qualify to do business as a foreign corporation.
(c) By-laws of the Company, duly certified by its
Secretary.
(d) A list of shareholders of the Company as of
immediately prior to the Closing Date, duly certified by
its Secretary.
(e) Resignations, effective the Closing Date, of all
officers and directors of the Company.
<PAGE>
9.3. Sellers shall have furnished Buyer with a favorable
opinion, dated the Closing Date, of Alexander Minella, P.C., counsel for the
Company and the Sellers, in form and substance satisfactory to Buyer and its
counsel, to the effect that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of
the State of New York.
(b) The Company has power to own all of its
properties and assets and to carry on its business as it
is being conducted at the date of this Agreement and at
the Closing Date.
(c) The execution and delivery of this Agreement did
not, and the consummation of the transactions contemplated
hereby will not, violate the certificate of incorporation
or by-laws of the Company or the provisions of any
mortgage, lien, lease, agreement, instrument, order,
arbitration award, judgment or decree of which such
counsel has knowledge, to which the Company or any of the
Sellers is a party or by which it or any of them is bound,
or violate any other restriction of any kind or character
to which the Company or any of the Sellers is subject of
which such counsel has knowledge.
(d) The Company has an authorized capitalization
consisting of 200 shares of capital stock, no par value,
of which 100 shares are issued and outstanding, and none
of which are held in the treasury of the Company.
(e) The Company has good and marketable title to all
its properties and assets, including those reflected in
the Company Balance Sheet (except as since sold or
otherwise disposed of in the ordinary course of business),
subject to no mortgage, pledge, lien, conditional sale
agreement, encumbrance or charge, except as shown on the
Company Balance Sheet as securing specified liabilities
(with respect to which no default exists) and (ii) except
for minor imperfections of title and encumbrances, if any,
which are not substantial in amount, do not materially
detract from the value of the property subject thereto, or
materially impair the operations of the Company, and which
have arisen only in the ordinary course of business.
(f) Such counsel has no knowledge of, and does not
have any reasonable grounds to know of, any litigation,
proceeding or governmental investigation pending or
threatened against or relating to the Company, its
properties or business, or the transactions contemplated
by this Agreement or any legal impediment to the continued
operation and use by the Company in the ordinary course of
business of its properties and assets.
(g) The Company Shares being sold by the Sellers
herein constitute all the duly issued and outstanding
shares of capital stock of the Company, and all such
shares are fully paid and nonassessable.
<PAGE>
(h) Each of the Sellers has full power and authority
to sell, assign and transfer his Company Shares to Buyer
as provided in this Agreement, and good and marketable
title to all such Company Shares, free and clear of all
liens, charges and encumbrances, has been passed to Buyer
hereunder.
(i) This Agreement has been duly executed and
delivered by the Sellers and constitutes the legal, valid
and binding obligation of the Sellers, enforceable in
accordance with its terms.
(j) The Company is not in violation of, or in default
under, (i) any term or provision of its certificate of
incorporation or by-laws; (ii) any material term or
provision or any financial covenants of any indenture,
mortgage, contract, commitment or other agreement or
instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected;
or (iii) any existing applicable law rule, regulation,
judgment, order or decree of any governmental agency or
court, domestic or foreign, having jurisdiction over the
Company or any of the Company's properties or business.
The Company owns, possesses or has obtained all
governmental and other (including those obtainable from
third parties) permits, certifications, registrations,
approvals, consents, orders, licenses, franchises or other
authorizations (collectively, the "Permits") necessary to
own or lease, as the case may be, and to operate its
properties, whether tangible or intangible, and to conduct
the business and operations of the Company as presently
conducted and, with respect to the State of New Jersey, as
proposed to be conducted, and all such Permits are
outstanding and in good standing, and there are no
proceedings pending or to the best of the Company's
knowledge, threatened, or any basis therefor, seeking to
cancel, terminate or limit such Permits.
Such opinion shall also cover such other matters
incident to the transactions contemplated hereby as Buyer
or its counsel may reasonably request. In rendering its
opinion such counsel may rely upon title certificates,
abstracts or policies and certificates of public officials
and of officers of the Company as to factual matters not
independently established by such counsel; provided that
the extent of such reliance is specified in such opinion
and that copies of such documents so relied upon are
delivered to Buyer.
9.4. All legal matters shall have been approved by counsel
for Buyer, and Buyer shall have received from such counsel an opinion, dated the
Closing Date, satisfactory to Buyer, relating to legal matters in connection
with the transactions contemplated hereby.
9.5. The representations and warranties of Sellers
contained in this Agreement (including the Exhibits hereto) or in any
certificate or document delivered to Buyer pursuant hereto, shall be deemed to
<PAGE>
have been made again at the Closing Date and shall then be true in all material
respects; Sellers shall have performed and complied with all agreements and
conditions required by this Agreement to be performed or complied with by
Sellers prior to or at the Closing Date; and Buyer shall have been furnished
with certificates of the Sellers and of appropriate officers of the Company,
dated the Closing Date, certifying in such detail as Buyer may reasonably
request to the fulfillment of the foregoing conditions.
9.6. Each Seller shall have delivered to Buyer a
certificate or certificates for the number of Company Shares set forth opposite
such Seller's name in Section 1.3, duly endorsed for transfer, or with a duly
executed stock power attached.
9.7. Each Seller shall have executed and delivered to
Buyer a Shareholders' Agreement in the form of Exhibit B, attached hereto.
9.8. There shall not have been any material adverse change
in the financial condition of the Company at the Closing Date from that
disclosed in the Company Balance Sheet due to the results of operations of the
Company for the period from the date of the Company Balance Sheet to the Closing
Date, and Buyer shall have been furnished with certificates of the appropriate
officers of the Company, dated the Closing Date, to that effect.
9.9. Scalice shall have executed and delivered to the
Buyer an employment agreement in the form of Exhibit C hereto.
Section 10. Conditions to Closing - Sellers.
The obligation of Sellers to exchange Company Shares for
Buyer's Stock pursuant to this Agreement shall be subject to the satisfaction,
at or prior to the Closing Date, of the following conditions (any of which may
be waived by Sellers):
10.1. Each of the agreements of Buyer to be performed at
or prior to the Closing Date pursuant to the terms hereof shall have been duly
performed.
10.2. Buyer shall have delivered to each of the Sellers a
certificate or certificates for the number of shares of Buyer's Stock required
to be delivered to the respective Sellers under Section 3.1, in each case duly
registered in the name of the respective Seller.
10.3. Buyer shall have furnished Sellers with a favorable
opinion, dated the Closing Date, of Pryor, Cashman, Sherman & Flynn, counsel for
Buyer, in form and substance satisfactory to Sellers and their counsel, to the
effect that:
(a) Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of
New York.
(b) Buyer has corporate power to execute, deliver and
perform this Agreement, and has taken all action required by
law, its certificate of incorporation, its by-laws or
otherwise, to authorize such execution, delivery and
performance.
(c) This Agreement constitutes the valid and legally
binding agreement of Buyer in accordance with its terms.
<PAGE>
(d) Buyer has taken all necessary corporate action to
issue Buyer's Stock to Sellers, and upon such issuance to
Sellers, Buyer's Stock will have been duly authorized and
issued, fully paid and nonassessable.
(e) Good and marketable title to such Buyer's Stock,
free and clear of all liens, charges and encumbrances, has
been passed to Sellers hereunder, subject only to the
restrictions set forth in the investment agreements executed
by the Sellers.
Such opinion shall also cover such other matters incident to the transactions
contemplated hereby as Sellers or their counsel may reasonably request. In
rendering their opinion, such counsel may rely upon certificates of public
officials and of officers of Buyer as to matters of fact, provided that the
extent of such reliance is specified in such opinion or opinions and that copies
of such documents relied upon are delivered to Sellers.
10.4. Buyer shall have retained Geils & Co., Inc.
("Geils") on a month-to-month basis to provide the Buyer with investment banking
services according to the terms and conditions under the engagement letter dated
February 27, 1998, and attached hereto as Exhibit D.
10.5. All legal matters shall have been approved by
counsel for Sellers, and the Sellers shall have received from such counsel an
opinion, dated the Closing Date, satisfactory to Sellers, relating to legal
matters in connection with the transaction contemplated hereby.
10.6. The representations and warranties of Buyer
contained in this Agreement or in any certificate or document delivered to
Sellers pursuant hereto shall be deemed to have been made again at the Closing
Date and shall then be true in all material respects; Buyer shall have performed
and complied with all agreements and conditions required by this Agreement to be
performed or complied with by Buyer prior to or at the Closing Date; and Sellers
shall have been furnished with certificates of appropriate officers of Buyer,
dated the Closing Date, certifying in such detail as Sellers may reasonably
request, to the fulfillment of the foregoing conditions.
10.7. Buyer shall have executed and delivered to each
Seller a Shareholders' Agreement in the form of Exhibit B, attached hereto.
Section 11. Miscellaneous.
11.1. The representations and warranties made in this
Agreement and in any certificate, exhibit or document delivered in connection
therewith shall survive the Closing Date. The liability of Sellers for breach of
any representation or warranty shall be limited to the amount of damages
incurred by Buyer or the Company as a result of such breach.
11.2. Buyer and Sellers represent and warrant that there
are no claims for brokerage commissions or finder's fees in connection with the
transactions contemplated hereby resulting from any action taken by Sellers, by
Buyer, by the officers and directors of the Company or Buyer, or by any of them.
11.3. This Agreement shall be construed and enforced in
accordance with the internal law of the State of New York.
<PAGE>
11.4. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be validly given,
made or served if in writing and delivered personally, or sent by certified
mail, postage prepaid, or by telegraph, charges prepaid,
(a) if to Buyer, addressed to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901
Attention: Chief Executive Officer
with a copy to:
Pryor, Cashman, Sherman & Flynn
410 Park Avenue
New York, New York 10022
Attention: Eric M. Hellige, Esq.
(b) if to Sellers, addressed to:
Lynn Minella
274 Keeler Drive
Ridgefield, Connecticut 06877
TN Capital Group, Inc.
1616 Post Road East, Suite 4442
Fairfield, Connecticut 06860
Anthony Scalice
2089 Washington Street
Merrick, New York 11556
with a copy to:
Alexander Minella
2815 Middletown Road
Bronx, New York 10461
or such other address as shall be furnished in writing by either party to the
other party.
11.5. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement.
11.6. This Agreement may be executed in one or more
counterparts, and shall become effective when one or more counterparts have been
signed by each of the parties.
[Signature Page to follow]
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first above written.
SIRCO INTERNATIONAL CORP.
By: ____________________
Name:
Title:
SELLERS:
-------------------------
LYNN MINELLA
TN CAPITAL GROUP INC.
By: ____________________
Name:
Title:
-------------------------
ANTHONY SCALICE
[Company Logo]
Nussbaum Yates & Wolpow, P.C.
- --------------------------------------------------------------------------------
Certified Public Accountants
445 BROAD HOLLOW ROAD, MELVILLE, NY 11747
(516) 845-5252 FAX (516) 845-5279
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated February 4, 1998 (except for Note 15, as to
which the date is February 27, 1998) accompanying the consolidated financial
statements and schedule included in the Annual Report of Sirco International
Corp. and subsidiaries on Form 10-K for the year ended November 30, 1997. We
hereby consent to the incorporation by reference of said report in Registration
Statement No. 333-637 of Sirco International Corp. on Form S-8 and in
Registration Statement No. 333-25971 and No. 333-27911 of Sirco International
Corp. on Form S-3.
/s/NUSSBAUM YATES & WOLPOW, P.C.
--------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
March 25, 1997
[COMPANY LOGO]
BLACKMAN
KALLICK
Certified Public Accountants / Consultants to Business
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated February 18, 1998 accompanying the consolidated
financial statements and schedules included in the Annual Report of Sirco
International Corp. and subsidiaries on Form 10-K for the year ended November
30, 1997. We hereby consent to the incorporation by reference of said report in
Registration Statement No. 333-637 of Sirco International Corp. on Form S-8 and
in Registration Statement No. 333-25971 and No. 333-27911 of Sirco International
Corp. on Form S-3.
/s/Blackman Kallick Bartelstein, LLP
------------------------------------
BLACKMAN KALLICK BARTELSTEIN, LLP
Chicago, Illinois
March 19, 1998
Deloitte & Touche
[Company Logo]
Chartered Accountants
1 City Centre Drive Telephone: (905) 803-5100
Suite 1100 Facsimile: (905) 803-6101
Mississauga, Ontario, L5B 1M2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated December 18, 1996 on the financial statements of
Sirco International (Canada) Limited for the years ended November 30, 1996 and
November 30, 1995 accompanying the consolidated financial statements and
schedules included in the Annual Report of Sirco International Corp. and
subsidiaries on Form 10-K for the year ended November 30, 1997. We hereby
consent to the incorporation by reference of said report in Registration
Statement Number 333-637 of Sirco International Corp. on Form S-8 and in
Registration Statement Numbers 333-25971 and 333-27911 of Sirco International
Corp. on Form S-3.
/s/Deloitte & Touche
- --------------------
Deloitte & Touche
Chartered Accountants
March 19, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
"This schedule contains summary financial information extracted from the Balance
Sheet and Income Statement and is qualified in its entirety by reference to such
financial statements."
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 114,190
<SECURITIES> 0
<RECEIVABLES> 3,689,559
<ALLOWANCES> 522,755
<INVENTORY> 7,707,631
<CURRENT-ASSETS> 11,411,508
<PP&E> 1,762,533
<DEPRECIATION> 935,220
<TOTAL-ASSETS> 14,041,648
<CURRENT-LIABILITIES> 6,304,228
<BONDS> 4,521,795
0
0
<COMMON> 430,040
<OTHER-SE> 2,785,585
<TOTAL-LIABILITY-AND-EQUITY> 14,041,648
<SALES> 16,007,983
<TOTAL-REVENUES> 16,484,917
<CGS> 13,802,712
<TOTAL-COSTS> 5,166,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 573,544
<INCOME-PRETAX> (2,993,682)
<INCOME-TAX> (125,517)
<INCOME-CONTINUING> (2,868,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,868,165)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
