SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
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, 1998
[ ] 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.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-2511270
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
- --------------------------------------------------------------------------------
24 Richmond Hill Avenue, Stamford, Connecticut 06901
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 359-4100 .
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 24, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $11,811,835.
As of February 24, 1999, there were 6,617,526 shares outstanding of the
Registrant's Common Stock.
<PAGE>
Part I
Item 1. - Business
Sirco International Corp. (the "Company") is a diversified entity with
operations organized into three industry segments. The Company's
telecommunications division focuses on developing integrated telephone service
in the emerging competitive local exchange carrier industry and offers a bundled
package of telecommunications products, including local and long distance
telephony, voice mail, paging, Internet access, dedicated access, Web site
design, Web site hosting, and other enhanced and value-added telecommunications
services tailored to meet the needs of its customers. The Company's retail
division sells travel products, uniforms and study guides via retail stores,
E-commerce sites and a Web site primarily to professional airline crew members.
The luggage division designs, manufacturers and markets on a wholesale basis a
broad line of soft luggage, sports bags, backpacks, children's bags, tote bags
and related products.
Development of Business
The Company was incorporated in the state of New York in 1964 and
developed a line of high quality handbags, totes, luggage and sport bags to be
sold at competitive prices. In 1995, the Company divested its handbag
operations, which had experienced several years of operating losses. Although
the Company was profitable in fiscal 1996, the loss in fiscal 1996 of two
licensed trade names, "FILA" and "Atlantic," under which the Company sold a
significant portion of its luggage and sport bag products, had a material
adverse impact on the Company's net sales during all subsequent periods, which
resulted in operating losses and a downsizing of the luggage operations. In
August 1997, to help bolster luggage division sales and to provide a channel of
distribution to a mobile customer base that would be a potential target for
online Internet sales, the Company acquired a retail operation, Airline
Ventures, Inc. ("AVI"), which sells travel and aviation related products to
professional airline crew members.
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 had 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, and the other focusing on the
telecommunications industry, including primarily CLECs.
In furtherance of its diversification strategy, in October 1997, the
Company made an investment in Access One Communications, Inc. ("Access One"), a
CLEC operating in Florida that 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 24, 1999, the Company
was the largest shareholder of Access One, owning approximately 31% of Access
One's capital stock. Access One has advised the Company that, at February 24,
1999, OPC had approximately 18,000 local access lines.
<PAGE>
The Company commenced operations in the telecommunications industry in
fiscal 1998 by acquiring on February 27, 1998, Essex Communications, Inc.
("Essex"), a newly-formed CLEC. Essex was formed 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. Essex provisioned its first line
in May 1998 and has grown to over 2,000 lines as of February 24, 1999. Essex has
customers in New York and New Jersey, and has recently obtained permission to
operate in Massachusetts, Connecticut and Virginia. 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 is to be 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 ("RBOCs"). In addition to
local telephone line usage, Essex sells other enhanced and value-added
telecommunication services, such as voice mail, paging, long-distance,
teleconferencing and Internet services.
In furtherance of the Company's telecommunications strategy, the
Company acquired on August 14, 1998, WebQuill Internet Services, LLC
("WebQuill"), an Internet service provider ("ISP") based in Connecticut.
WebQuill is a full-service, value-added ISP providing national dial-up access,
dedicated access, Web site design, Web site hosting and E-commerce sites.
Due to the increased focus by the Company on E-commerce sites, Internet
access and telecommunications services, and the significant decrease in luggage
division sales in recent fiscal years, the Board of Directors decided in
February 1999 to divest the Company's luggage division. Since such time, the
Company has been in discussions with several prospective purchasers of the
division's assets, including certain members of the Company's management.
However, there can be no assurance that the Company will successfully reach an
agreement with any prospective purchaser or that the terms of any such sale will
be favorable to the Company. The Company's luggage division accounted for net
sales of approximately $15,553,000, $15,732,000 and $27,746,000 for fiscal 1998,
1997 and 1996, respectively, which accounted for approximately 91.3%, 98.3% and
100%, respectively, of the Company's net sales for such periods. The luggage
division reported significant net operating losses for each of the last two
fiscal years. See Note 9 of the Notes to Consolidated Financial Statements.
Information concerning sales, business segment operations and
identifiable assets attributable to each of the Company's reportable industry
segments can be found in Note 9 of the Notes to Consolidated Financial
Statements and is incorporated herein by reference.
Business Strategy
Telecommunications Division. The Company is focusing its
telecommunications marketing efforts on small and medium-sized businesses with
telecommunications usage of less than $2,000 per month. The Company's
telecommunications strategy is to continue to increase its customer base by
being more flexible, responsive and innovative to the needs of its target
customers than the RBOCs, which have historically concentrated their sales and
marketing efforts on residential and large business customers. The Company
intends to expand its telecommunications customer base without any significant
capital expenditures on telecommunications facilities, as the Company believes
it is more cost efficient to quickly grow its telecommunications entity with a
"leased facilities" or "virtual facilities" strategy in which the necessary
telecommunications facilities are leased from an RBOC. Since its inception,
<PAGE>
Essex, like virtually all other non-facilities based CLECs, was primarily a
reseller of local telephone service from an RBOC. Following a recent Supreme
Court ruling which upheld the Federal Communications Commission ("FCC")
requirements to open local phone service to competition, the Company was able to
refocus its sales strategy by commencing to sell direct local access and related
products and services as a facilities-based carrier through facilities leased
from Bell Atlantic Corporation ("Bell Atlantic"). As a result, the Company is in
the process of converting its resold customer base to leased facilities with
Bell Atlantic in the state of New York. The Company's affiliate in Florida,
Access One, has secured a leased facilities agreement with respect to all nine
states covered by BellSouth Corporation ("BellSouth").
The Company believes its "leased facilities" strategy will afford it
more flexibility to take advantage of regulatory and industry dynamics than its
facilities-based competitors that are building their own facilities. For
example, the FCC's position on unbundled network elements has evolved to the
point where competitors are now able to purchase on an economic basis unbundled
network elements from the RBOCs and bundle them into alternative local service
options. The Company expects to exploit this opportunity by recombining network
elements to expand its product offerings and improve its strategic position. In
addition, the Company believes the increased construction by facilities-based
CLECs will ultimately benefit the Company by creating alternative wholesale
partners other than RBOCs.
The Company has been certified by the applicable state Public Service
Commission and currently operates as a CLEC in New York and New Jersey. In
addition, the Company has been certified to operate as a CLEC in Connecticut,
Massachusetts and Virginia, and may also consider the acquisition of other CLECs
to increase the number of states within which it can operate. The Company has
determined that multi-site customer organizations greatly desire consolidated
billing for all their locations. Currently, none of the RBOCs and only a limited
number of CLECs provide multi-site organizations with the option to consolidate
their invoices into one consolidated bill. The Company currently offers
customers the ability to receive one invoice for all their locations in a format
conducive to internal accounting systems requirements and on a medium of their
choice.
In furtherance of its bundling strategy, in August 1998, the Company
acquired WebQuill to provide Internet access, Web design, E-commerce design and
Web hosting for the customers of Essex and Access One. During 1998, WebQuill
entered into a frame relay cloud agreement with Southern New England Telephone
("SNET") that allows WebQuill to provide local dial-up access, dedicated 56K
frame relay access and dedicated T-1 access to customers located throughout the
state of Connecticut via a single point of presence ("POP") located in Norwalk,
Connecticut. In order to expand the geographic coverage of its Internet access
services, in December 1998, WebQuill entered into a nationwide dial-up access
agreement with an Internet access provider that provides WebQuill with access to
over 450 additional POPs throughout the United States. The Company intends to
enter into additional regional Internet access arrangements and deploy one or
more additional Company-owned POPs during 1999, in order to increase the density
of its Internet access coverage.
<PAGE>
In order to provide an additional service to its small business
customers, the Company initiated development of a virtual mall marketing and
Web-hosting program for the Internet. In January 1999, the Company registered 48
Internet site names incorporating the same state postal abbreviation formats
(e.g., "www.nj-search.com"). The Company plans to market sites on these virtual
malls to medium and small businesses seeking a lower cost option for selling
their products and services on the Internet. The Company intends to market these
sites directly to existing Access One and Essex customers and primarily through
third-party telemarketers to new customers.
WebQuill also designs and hosts more complex and expensive Web sites
for both larger businesses and those smaller businesses intending to concentrate
more of their resources on the development of Internet customer bases. These
sites, commonly referred to as E-commerce sites, facilitate the purchase of
goods and services with minimal need for human intervention. E-commerce sites
can feature products and services databases, online database search
capabilities, real time inventory availability and real time credit card
processing. In addition, the Company has recently introduced an E-commerce
fulfillment service, which it calls E-Complete, that provides warehousing and
shipping services to its E-commerce hosting customers.
Retail Division. The objective of the Company's retail division is to
be a leading supplier of travel-related and telecommunications products to
pilots and flight attendants. The Company leases space from American Airlines
for two retail stores that sell travel-related products to American Airline
employees, including the official pilot uniform and study guides for pilots. The
stores also sell identification cards, uniform supplies and travel needs to
flight attendants. In addition, the stores rent pagers to flight attendants who
are on reserve duty and offer Internet access services and local and long
distance telephone services. The Company plans to use the knowledge and
experience gained with American Airlines to provide similar products and
services to employees of other airlines. Small programs have been started with
Delta Airlines and Southwest Airlines to sell products in employee lounges.
The Company believes professional airline crew members are excellent
targets for online retail purchases, as they are constantly mobile and
frequently stay in touch with family and job-related duties via the Internet.
The Company has developed and will continue to develop E-commerce sites to
augment its in-store sales with sales to these and other online purchasers. The
Company currently markets its travel related products through the E-commerce
sites, www.avishop.com and www.800bags.com, and its Web site, www.tagintl.com.
Products and Services
The Company's telecommunications division offers a broad range of
voice, data and Internet services and has integrated these services into a
bundled package to offer a single source solution to meet its customers' needs.
The Company believes that its ability to offer one-stop integrated
communications services will enable it to capture a larger portion of its
customers' total expenditures on communication services and will reduce customer
turnover. The bundled package of telecommunications products includes local and
long distance telephony, voicemail, paging, Internet access, dedicated access,
Web site design, Web site hosting, E-commerce sites, and E-Complete, a product
which provides warehousing, picking, packing and shipping in addition to
E-commerce.
<PAGE>
The retail division sells name brand luggage, apparel and other travel
related accessories, as well as job related necessities, such as air maps, study
guides and flight kits, to professional airline crew members. It also offers
local and long distance telephony, calling cards, pagers and Internet access.
These products and services are sold through three retail stores, two E-commerce
sites and a Web site.
The Company's luggage division sells a wide variety of luggage, sport
bags, backpacks and duffels under many trade names, including "Cross Trainer,"
"JT Madison", "Mondo," and "Sirco Kids," all of which are registered. In
addition, the luggage division sells its products under certain trademarked
names licensed from others, including "Dunlop," "Generra," "Gold's Gym,"
"Hedgren," "Koosh," "Maui and Sons," "Perry Ellis" and "S>>M" by MTV. See
"License Agreements."
Markets and Customers
The Company focuses its telecommunications sales efforts for local and
long distance services on small and medium-sized businesses having fewer than 30
business lines in any one location. The Company believes that these customers
prefer a single source for all their telecommunications services. The Company
has chosen to focus on this segment based on its expectations that higher gross
margins will generally be available on services provided to these customers as
compared to larger businesses, and that RBOCs and facilities-based CLECs may be
less likely to apply significant resources to obtaining or retaining these
customers. The Company expects to attract and retain these customers through a
direct sales and telemarketing effort, by offering bundled local and long
distance services, as well as enhanced telecommunication services, at
competitive long distance rates and by responsive customer service and support.
The Company sells primarily through telemarketing agencies that are
paid only if the Company is successful in provisioning the prospect into a
customer. The Company does not intend to employ a significant direct sales
staff, as the per line cost of acquiring new accounts is currently substantially
lower using third-party telemarketers than it would be by direct marketing with
Company employees. To ensure customer satisfaction, the Company emphasizes
personalized care, with each customer having a single point of contact who is
responsible for solving problems and responding to customer inquiries.
The Company anticipates that the development of its CLEC business will
eventually impact the Company's overall seasonality trends by making quarterly
revenues less divergent. However, during the growth phase of its CLEC business,
the Company anticipates that it will not experience any normal seasonal trends
in its telecommunications division.
The target market for the retail division is professional airline crew
members. Currently, the Company sells to pilots and flight attendants from
American, Delta and Southwest Airlines. The business with American Airlines is
the largest, as it includes selling the American Airlines pilot uniform and
various approved apparel for both pilots and flight attendants. Two of the three
retail locations utilized by the Company are leased from American Airlines.
Retail sales employees service walk-in customers and phone orders, and warehouse
personnel process Internet orders.
The sale of product to crew members has not demonstrated any
seasonality, as the customers are using the products on a daily basis as part of
their normal work routine.
<PAGE>
The luggage division sells sport bag, backpack and related products
primarily to large national retail chain stores, including Target, Sears and
Kmart, and to regional discount store chains, such as ShopKo and Bradlees. The
Company also sells to department stores and other specialty stores, including
Federated Stores (Filene's and Stern's), Innovation Luggage and Bentley's
Luggage, to apparel chain stores, such as The Marmaxx Group and Ross Stores, and
to fitness related stores, such as Gold's Gyms. 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, 1998, 1997 and 1996, sales
to Target represented approximately 23%, 27% and 19%, respectively, of net
sales; sales to Kmart represented approximately 23%, 17% and 11% of net sales in
fiscal 1998, 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 luggage division 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.
The Company's percentage of luggage sales by fiscal quarter for the
fiscal years ended November 30, 1998, 1997 and 1996 are as follows:
Fiscal Fiscal Fiscal
1998 1997 1996
---- ---- ----
First Quarter 22.5% 19.2% 23.7%
Second Quarter 30.5 19.4 27.5
Third Quarter 25.7 37.1 27.7
Fourth Quarter 21.3 24.3 21.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The Company's luggage division typically experiences seasonality that
yields stronger operating results in the third and fourth quarters, and weaker
operating results in the first quarter. Operating results in the Company's
second fiscal quarter can be positively impacted by the strength of the
Company's "back to school" business.
License Agreements
The Company's luggage division 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," "Perry Ellis" and "S>>M" by MTV. Sales by the Company under
trademarked names licensed from others accounted for approximately 61%, 66% and
83% of the Company's net sales during the fiscal years ended November 30, 1998,
1997 and 1996, respectively.
<PAGE>
The 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.
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 and 1996, sales of Atlantic product approximated
$472,000, and $5,782,000, respectively, which represented approximately 2.9% and
20.8%, respectively, of the Company's total net sales for those periods, and
approximately 63.8% and 95.4%, 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 in the fiscal
year ended November 30, 1996. 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 years ending November 30, 1998
and 1997.
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 year ended
November 30, 1996 were approximately $8,584,000 (including approximately
$482,000 sold to FILA), or 30.9% 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,
1998.
Trademarks
The Company's luggage division 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 luggage division 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.
<PAGE>
Backlog
The Company's telecommunications division bills features and services
in advance and usage in arrears. Due to the nature of the Company's agreements
with Bell Atlantic, there is no backlog of unprovisioned customers at any given
time, as a customer can be switched to the Company system in one day. The
Company's retail division operates without a backlog, as Internet orders and
catalog orders are typically shipped within one day of receipt. A substantial
portion of the net sales of the Company's luggage division is based on orders
for immediate delivery and therefore, backlog is not necessarily indicative of
future net sales for this division.
Vendors
The telecommunications division does not own any part of a local
exchange network or a long distance network and is completely reliant on third
party vendors for the services it provides to its customers, except for the
Internet services provided by its subsidiary, WebQuill. As a result, the Company
depends entirely on facility-based carriers for the transmission of customer
phone calls. For each local exchange market in which the Company operates, there
currently is a single provider from whom the Company can purchase local exchange
service on a ubiquitous basis. Under the Telecommunications Act of 1996, the
Company is entitled to access to such local exchange service. Although the
Company believes that its relations with its underlying carriers are good, and
it believes that its carriers want to cooperate with the development of the
Company's business, the termination of any of the Company's contracts with its
carriers or a reduction in the quality or increase in the cost of such carriers'
services could have a material adverse effect on the Company's financial
condition and results of operations.
The Company also relies on the carriers for timely and accurate call
detail records so that the Company can invoice its customers. Furthermore, it
relies on a third party to read the usage tapes provided by the carrier and
generate an invoice to send to the Company's customers.
The Company purchases products for its retail division 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.
The Company's luggage, sport bag, backpack and related products are
primarily produced by various manufacturers in 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.
The following table sets forth by percentage of purchases for the
fiscal years ended November 30, 1998, 1997 and 1996, countries in which the
luggage division's products were manufactured:
<PAGE>
Fiscal Fiscal Fiscal
1998 1997 1996
---- ---- ----
China 73.3% 67.8% 63.9%
Philippines 17.7 6.3 7.3
Taiwan 6.4 14.5 17.5
Thailand 2.6 6.6 3.3
Indonesia 0.0 4.6 0.0
Korea 0.0 0.2 2.9
Other 0.0 0.0 5.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Competition
The Company's telecommunications division operates in a highly
competitive environment and has no significant share in any market in which it
operates. Most of its actual and potential customers have substantially greater
financial, technical, marketing and other resources (including brand name
recognition) than the Company. For example, AT&T Corp., MCI Communications and
Sprint Corporation, among other carriers, have each begun to offer local
telecommunications services in major U.S. markets using their own facilities or
by reselling the Incumbent Local Exchange Carrier's ("ILECs'") services.
Furthermore, the continuing trend toward business alliances in the
telecommunications industry and the lack of substantial barriers to entry in the
data and Internet services markets could help to generate substantial new
competition. In each of the states in which the Company is licensed, the primary
competitor is the ILEC serving that geographic area. ILECs are established
providers of dedicated and local telephone services to all or virtually all
telephone subscribers within their respective service areas. ILECs also have
established relationships and know-how with regard to interacting with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provided increased business
opportunities to voice, data and Internet-service providers such as the Company,
the decisions also provide the ILECs with increased pricing flexibility.
In addition to competition from long distance service providers and
ILECs, several other entities currently offer or are capable of offering local
service, such as cable television companies, electric utilities, microwave
carriers and wireless telephone system operators. These entities, upon entering
into appropriate interconnection agreements or resale agreements with ILECs, can
offer single source local and long distance services like those offered by the
Company.
The competition for retail sales to professional airline crew members
is highly fragmented and has few barriers to entry. The Company's ability to
compete effectively is directly related to the level of cooperation and
publicity that airlines generate for the retail outlets run by the Company.
Currently the Company enjoys an advantage with American Airlines because it is
allowed to sell certain products to American Airlines' employees on a payroll
deduct program and it is allowed to sell pilot uniforms. These agreements, in
addition to two leases from American Airlines for retail sites in Dallas, Texas,
help to limit the extent of competition in the Dallas area. However, the Company
competes nationwide against several online retailers and against retail stores
in various cities that are important airline hubs.
<PAGE>
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.
Government Regulation
Local and long distance telecommunications services are subject to
regulation by the FCC and by state regulatory authorities. Among other things,
these regulatory authorities impose regulations governing the rates, terms and
conditions for interstate and intrastate telecommunications services and require
the Company to file tariffs for interstate and international service with the
FCC and obtain approval for intrastate service provided in the states in which
it currently markets its services. The Company must obtain and maintain
certificates of public convenience and necessity from regulatory authorities in
the states in which it operates. The Company is also required to file and obtain
prior regulatory approval for tariffs and intrastate services. In addition, the
Company must update or amend the tariffs and, in some cases, the certificates of
public convenience and necessity, when rates are adjusted or new products are
added to the local and long distance services offered by the Company. Changes in
existing laws and regulations, particularly regulations resulting in increased
price competition, may have a significant impact on the Company's business
activities and on the Company's future operating results. The Company is also
subject to Federal Trade Commission regulation and other federal and state laws
relating to the promotion, advertising and direct marketing of its products and
services. Certain marketing practices, including the means to convert a
customer's long distance telephone service from one carrier to another, have
recently been subject to increased regulatory review of both federal and state
authorities. Even though the Company has implemented procedures to comply with
applicable regulations, increased regulatory scrutiny could adversely affect the
transitioning of customers and the acquisition of new customer bases. Amendments
to existing statutes and regulations, adoption of new statutes and regulations
and expansion of the Company's operations into new geographic areas and new
services could require the Company to alter methods of operation or obtain
additional approvals, at costs which could be substantial. There can be no
assurance that the Company will be able to comply with applicable laws,
regulations and licensing requirements. Failure to comply with applicable laws,
regulations and licensing requirements could result in civil penalties,
including substantial fines, as well as possible criminal sanctions.
<PAGE>
Employees
At February 24, 1999, the Company employed 88 employees, of which 77
were employed on a full-time basis and 11 were employed on a part-time basis,
and had approximately 15 independent sales representatives. At such date, 11 of
the Company's employees were employed in the Company's executive offices in
Stamford, Connecticut; 42 were employed in the Company's warehouse in La Mirada,
California; 12 were employed in the Company's retail division stores in Dallas,
Texas; 19 were employed in the Company's telecommunications subsidiaries; and 4
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.
Forward Looking Statements
The statements contained in this Report that are not historical facts
are "forward-looking statements" which can be identified by the use of
forward-looking terminology, such as "estimates," "projects," "plans,"
"believes," "expects," "anticipates," "intends," or the negative thereof or
other variations thereon, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader of the forward-looking
statements, such as the Company's plans to expand the number of states in which
its telecommunications division operates, to divest its luggage operations, to
take advantage of the market opportunity presented by the Company's target
markets and to further develop the Company's telecommunications, Internet and
retail airline businesses, in addition to other statements contained in this
Report regarding matters that are not historical facts, that these statements
are only estimates or predictions. No assurances can be given regarding the
achievement of future results, as actual results may differ materially as a
result of risks facing the Company, and actual events may differ from the
assumptions underlying statements which have been made regarding anticipated
events. Such risks and assumptions include, but are not limited to the Company's
ability to successfully market its services to current and new customers,
generate customer demand for its product and services in the geographical areas
in which the Company can operate, access new markets, negotiate and maintain
suitable reseller and interconnection agreements with the ILECs, and negotiate
and maintain suitable vendor relationships, all in a timely manner, at
reasonable cost and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to vary in
such forward looking statements. All written and oral forward looking statements
made in connection with this Report that are attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
<PAGE>
Item 2. - Properties
The following table sets forth pertinent facts concerning the Company's
material properties at February 24, 1999, 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 28,800 SF)
Mississauga
Ontario, Canada L4Y 1M6
<CAPTION>
Properties Leased:
- ------------------
Approximate Lease Annual
Location Use Square Feet Expires Rent(1)
-------- --- ----------- ------- -------
<C> <C> <C> <C> <C>
366 Fifth Avenue Showroom (2) 3,340 10/18/06 $ 96,000
New York, NY 10001
48 South Service Road Office 5,486 4/30/03 $ 93,000
Melville, NY, 11747
24 Richmond Hill Avenue Executive Offices (2) 7,800 6/30/01 $112,000
Stamford, CT. 06901
16000 Heron Avenue Warehouse (2) 116,000(3) 3/31/00 $456,000
La Mirada, CA. 90638
1930 W. Airfield Drive Warehouse 2,000 7/31/00 $ 13,000
DFW Airport, TX 75261
Terminal 3E Retail 1,700 8/24/00 $ 55,000
DFW Airport, Texas 75261
8412 Sterling Suite B Warehouse 2,470 9/30/00 $ 15,000
Irving, Texas, 75063
</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) These leased facilities, in addition to the owned property in Mississauga,
Canada, are part of the luggage operations that the Company has offered for
sale.
<PAGE>
(3) 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," except those spaces marked
as belonging to the luggage division. The Company believes that the remaining
properties are suitable and adequate for the business of the Company.
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.
Item 4 - Submission of Matters To a Vote of Security Holders
None.
<PAGE>
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 SmallCap
Market. 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 $3.500 $1.750
2nd Quarter 7.375 3.500
3rd Quarter 7.750 5.875
4th Quarter 7.250 3.250
Fiscal 1998
-----------
1st Quarter $4.375 $1.625
2nd Quarter 7.000 3.375
3rd Quarter 6.563 1.000
4th Quarter 1.719 0.625
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. In addition, where applicable, such quotations
have been adjusted to give effect to the two-for-one stock split effected in May
1997.
As of February 24, 1999, there were 313 holders of record of the Common
Stock and approximately 1,300 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.
On September 4, 1998, the Company acquired from Access One 400,000
shares of Common Stock, par value $.001 per share, of Access One in
consideration of the issuance by the Company of 400,000 shares of Common Stock
of the Company. In September 1998, the Company also issued 50,000 shares of
Common Stock to the former shareholders of Essex in conjunction with the
attainment of certain performance objectives agreed to in connection with the
acquisition of Essex, and 30,916 shares of Common Stock to Geils & Co., in
conjunction with fees earned for acquisition and financing services. Such
transactions were effected pursuant to Section 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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Earnings Statement:
Net Sales $ 17,037 $ 16,008 $ 27,746 $ 24,812 $ 27,600
Gross Profit 3,066 2,205 7,088 6,130 6,067
Income (Loss) Before
Provision for Income Taxes
and Extraordinary Items (5,135) (2,994) 925 (996) (2,435)
Net Income (Loss) (4,977) (2,868) 622 (996) (2,435)
Net Income (Loss) per
Common Share:
Basic (0.96) (0.88) 0.24 (0.41) (1.01)
Diluted (0.96) (0.88) 0.23 (0.41) (1.01)
Cash Dividends - - - - -
Balance Sheet:
Working Capital $ 334 $ 5,107 $ 1,553 $ 1,142 $ 1,362
Property, Plant, Equipment 835 827 888 650 773
Total Assets 11,029 14,042 9,577 10,003 10,252
Long-Term Debt (Less Current
Maturities) 291 4,522 348 590 50
Stockholders' Equity 3,754 3,216 2,780 1,897 2,898
</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 1998 Compared to Fiscal Year 1997
Net sales for fiscal 1998 increased by approximately $1,029,000 to
approximately $17,037,000 as compared to approximately $16,008,000 reported in
fiscal 1997. The following table presents the Company's net sales by industry
segment for the fiscal years ended November 30, 1998 and 1997:
Fiscal Fiscal Increase
Industry segment 1998 1997 (Decease)
- ---------------- ---- ---- ---------
Wholesale luggage ....... $15,553,000 $15,732,000 ($ 179,000)
Retail sales ............ 1,111,000 276,000 835,000
Telecommunications ...... 373,000 -- 373,000
----------- ----------- -----------
Total ................... $17,037,000 $16,008,000 $ 1,029,000
----------- ----------- -----------
Net sales for the Company's wholesale luggage division in fiscal 1998
were similar to the net sales from the prior fiscal year as the luggage
division's net sales decreased approximately $179,000, or 1%, as compared to the
prior fiscal period.
Net sales of the Company's retail division, consisting of the
operations of AVI, increased by approximately $835,000 in fiscal 1998 to
approximately $1,111,000 from approximately $276,000 in fiscal 1997 as the
Company reported a full year of retail operations in fiscal 1998 as compared to
only three months in fiscal 1997. AVI operates three retail stores in Texas for
professional airline flight crew members and sells pilot uniforms, study guides
and travel products. Its products are also sold on an E-commerce site,
www.avishop.com, and on a Web site, www.tagintl.com. The Company is aggressively
working to increase sales in this division and believes that the promotion of
its E-commerce site for online purchases, the acquisition in January 1999 of a
smaller competitor and the awarding by American Airlines of a new pilot shirt to
which AVI will have exclusive selling rights should result in an increase in net
sales for fiscal 1999 of at least fifty percent over the net sales in fiscal
1998.
<PAGE>
Net sales of the Company's telecommunications division, consisting of
the operations of Essex and WebQuill, amounted to approximately $373,000 in
fiscal 1998, its first year of operation. Essex is certified to resell local
telephone services and value-added products in the states of Connecticut,
Massachusetts, New Jersey, New York and Virginia and currently has over 2,000
installed access lines. WebQuill provides dial-up and dedicated Internet access,
Web design, hosting and E-commerce development to small and medium sized
businesses.
The telecommunications division is currently billing approximately
$150,000 per month to its customers, or approximately $1,800,000 on an
annualized basis. The Company believes that fiscal 1999 sales can be greater
than the current annualized monthly sales figures if the Company obtains the
appropriate financial resources to fund the telecommunications division's
growth. The Company plans to focus a greater amount of its total corporate
resources on this division once the anticipated divestiture of the luggage
division occurs.
The Company's gross margin increased in fiscal 1998 by approximately
$861,000 to approximately $3,066,000 from approximately $2,205,000 in fiscal
1997. The Company's gross margin percentage increased to 18.0% in fiscal 1998
from 13.8% in fiscal 1997. The increase in gross margin percentage is primarily
due to the favorable mix of higher margin products in the luggage division,
which reported a gross margin of 17%, combined with a 44% gross margin from the
retail division and a 14% gross margin from the telecommunications division. The
Company anticipates that the retail division margins will not vary significantly
in fiscal 1999 and that the telecommunications division margins will increase
dramatically, toward a 30% level on a going-forward basis as the Company
converts approximately 2,000 lines that are being resold in New York on the Bell
Atlantic network to a Bell Atlantic leased network facility. The Company plans
to convert such lines over the next six months.
Selling, warehouse and general and administrative expenses increased in
fiscal 1998 by approximately $1,279,000, or approximately 24.8%, to
approximately $6,446,000 from approximately $5,167,000 reported in fiscal 1997.
This increase in expenses was primarily attributable to the Company's
telecommunications operations, which were not in operation in fiscal 1997, and
to the Company's retail division, which was only in operation for three months
in fiscal 1997.
Interest expense decreased in fiscal 1998 by approximately $60,000, or
10.5%, to approximately $514,000 from approximately $574,000 reported in fiscal
1997 due to relative changes in average borrowings for the periods.
Miscellaneous income decreased in fiscal 1998 by approximately $345,000
to approximately $133,000 from approximately $478,000 reported in fiscal 1997.
This decrease represented a decline in the Company's commission income generated
from sales arranged by the Company between overseas suppliers and certain
customers that was offset in part by an increase in rental income.
The Company is currently the largest shareholder of Access One, owning
approximately 31% of Access One's capital stock at February 24, 1999. As the
Company's investment in Access One is accounted for under the equity method of
accounting, the Company is required to include its portion of Access One's net
loss in the Company's results of operations. For fiscal 1998, the Company has
recorded a loss of approximately $1,423,000 relating to its investment in Access
One. The Company has been advised by Access One that Access One's losses in
fiscal 1998 were primarily the result of funding aggressive customer growth and
<PAGE>
the related costs associated with hiring employees to verify and provision
lines, to staff a customer service operation and to develop a management
information system. In addition, in fiscal 1998, Access One purchased local
telephone service from BellSouth at a wholesale discount of 16.8% and passed on
almost half of its discount to its customer base. The gross profit on this
business was not large enough to cover the selling, general and administrative
expenses associated with operating a local phone company. However, in February
1999, Access One signed a leased facilities agreement with BellSouth pursuant to
which it can substantially increase its gross profit percentage on local
service. If Access One can successfully convert its customers to this leased
facilities agreement, Access One anticipates being able to reach a monthly
breakeven level within the next twelve months.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company reported operations in one business segment in fiscal 1997
and 1996. Net sales for fiscal 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 was primarily attributable to three developments: the Company's loss
of the license to sell FILA Sport S.p.A. ("FILA") product (see below) in the
United States, effective in June 1996; the Company's loss of the license to sell
product from Airway Industries, Inc. ("Airway") (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 net 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:
Fiscal Fiscal Increase/
1997 1996 (Decrease)
----------- ----------- ------------
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 4,344,000 1,084,000
----------- ----------- ------------
Total net sales .......... $16,008,000 $27,746,000 $(11,738,000)
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 was primarily
attributable to 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 had
two components. First, fiscal 1997 net sales contained a higher percentage of
unlicensed products, which traditionally have a lower gross profit margin, and
second, fiscal 1997 net sales included net sales relating to 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.
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 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.
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. On December 31, 1997, the Company's license
for Cherokee products expired and was not renewed.
Selling, warehouse and general and administrative expenses decreased by
approximately $739,000 to approximately $5,166,000 from approximately $5,905,000
in fiscal 1996. The reduction in expenses was 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 $200,000 to
approximately $573,000 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.
<PAGE>
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.
Liquidity and Capital Resources
At November 30, 1998, the Company had cash and cash equivalents of
approximately $352,000 and working capital of approximately $334,000, an
increase of approximately $238,000 and a decrease of approximately $4,774,000,
respectively, over amounts reported at November 30, 1997. The decrease in
working capital results primarily from a reclassification of the Company's
working capital loan on the balance sheet. As discussed below, the full amount
of borrowings from the Company's working capital lender is classified as a
current liability at November 30, 1998, whereas a substantial portion, or
approximately $4,199,000, was classified as long-term debt at November 30, 1997.
Net cash provided by (used in) operating activities aggregated
approximately $1,783,000, ($6,627,000) and $2,044,000 in fiscal 1998, 1997 and
1996, respectively. The increase in net cash provided by operating activities in
fiscal 1998 as compared to fiscal 1997, primarily reflects a decrease in
inventory and accounts receivable offset by the increase in the Company's net
loss from operations. The reduction in inventory levels is primarily due to the
Company's ability to better manage purchases relative to sales forecasts and the
lack of import quota purchase constraints in fiscal 1998 that existed in fiscal
1997. The reduction in accounts receivable primarily reflects tighter credit and
collection policies. 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.
Net cash used in investing activities aggregated approximately
$158,000, $58,000 and $332,000 in fiscal 1998, 1997 and 1996, respectively. The
principal uses of cash from investing activities in fiscal 1998, 1997 and 1996
was for the purchase of fixed assets, which included renovation of the Company's
New York City showroom in fiscal 1996. In fiscal 1998 and 1997, the principal
sources of net cash provided by investing activities was proceeds from the sale
of a subsidiary.
Net cash (used in) provided by financing activities aggregated
approximately ($1,399,000), $6,391,000 and ($1,503,000) in fiscal 1998, 1997 and
1996, respectively. In fiscal 1998, net cash used in financing activities
resulted from a decrease in long-term debt of approximately $4,231,000 which was
partially offset by an increase in short-term debt of approximately $1,671,000;
proceeds of approximately $18,000 from the exercise of stock options; proceeds
of approximately $651,000 from a private equity placement; and proceeds of
approximately $468,000 from the exercise of stock warrants. 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
facility. This increase was the result of a working capital agreement (see
below) under which the Company may borrow up to 80% of the dollar amount of its
eligible accounts receivable and 50% of its eligible inventory. 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.
<PAGE>
On December 17, 1996, the Company entered into a financing agreement
with Coast Business Credit ("Coast"), a division of Southern Pacific Thrift and
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, 1998, the Company was indebted to Coast in the principal amount
of approximately $3,186,000 and had no outstanding letters of credit. At
November 30, 1998, the prime rate was 7.75%. Although this loan matures on
December 31, 1999, the entire loan was reclassified as a current liability at
November 30, 1998 because the Company was in violation of two loan covenants at
such date, one of which has since been cured. Although Coast offered to provide
a written waiver of such violations, the Company declined to accept such waiver
as it deemed the conditions of the waiver to be unreasonably expensive. The
reclassification of debt from long-term to current had a significant impact on
the Company's working capital position at November 30, 1998. The Company expects
that all amounts due to Coast will be repaid in full in connection with the
disposition of the Company's luggage division.
Sirco Canada has a mortgage on its real property in the amount of
$298,000. The mortgage is payable in monthly installments of approximately
$3,138, which includes interest at the rate of 10.25% per annum, with a balloon
payment of approximately $291,000 in the year 2000. As of November 30, 1998,
Sirco Canada was in violation of a loan covenant, which violation was
permanently waived by the bank. Sirco Canada does not have a working capital
lender or 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. Sirco Canada is
part of the wholesale luggage division which the Company plans to divest.
In fiscal 1998, the Company had approximately $198,000 in capital
expenditures. The Company expects to make additional capital expenditures for
equipment for its telecommunications division over the next twelve months, but
does not expect them to be significant.
At November 30, 1998, the Company owned approximately 31% of Access
One, a Florida-based competitive local exchange carrier that had at February 24,
1999, approximately 18,000 installed access lines and revenues of approximately
$900,000 per month. Although Access One has approximately 750 shareholders, it
is not publicly traded, there is no readily ascertainable market for its stock,
and the shares held by the Company bear a restrictive legend stating that the
shares have not been registered under the Securities Act of 1933. The Company
has been furnished by Access One a written valuation of Access One's access
lines, which notes that current market values of the access lines of publicly
held CLECs are in the range of $400 to $550 per installed access line. Although
Access One has experienced operating losses, and requires additional funding to
execute its business plan, and the report of the independent auditors of Access
One for its year ended October 31, 1998 indicates that there is substantial
doubt about Access One's ability to continue as a going concern, the Company has
determined, based upon such valuation, that there is not a permanent impairment
of value with regard to the investment of approximately $1,515,000 in Access One
that is recorded on the Company's books. The investment in Access One is
recorded on the Company's books by the equity method of accounting.
<PAGE>
Management believes that the retail division's working capital and cash
flow from operations will be sufficient to meet the cash and capital
requirements for the Company's retail division for the next twelve months.
However, if the Company is unable to successfully divest its luggage division,
and the depressed levels of sales of the luggage division continue to generate
operating losses and require operating cash, the Company may experience
temporary cash shortages, which could have an adverse effect on the financial
condition or results of operations of both the retail division and the
telecommunications division.
The report of the independent auditors on the Company's 1998 financial
statements indicates there is substantial doubt about the Company's ability to
continue as a going concern. Management anticipates that it will need to raise
up to $2 million to meet the cash requirements for its telecommunications
division contemplated by the fiscal 1999 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. The inability to carry out this plan may result in
the continuance of unprofitable operations, which would adversely affect the
financial condition and results of operations of the Company.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 instead of the year 2000. This reading could result in a system
failure or miscalculations and cause a disruption in operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activity.
Based on a recent assessment, the Company determined that it will be required
to modify or replace portions of its software and hardware so that its systems
will function properly with respect to the dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and hardware, the Year 2000 issue will not pose significant operational
problems for its systems. The modifications required primarily affect the
information systems utilized by the luggage division, which the Company plans to
divest. The Company believes its retail division's computer-controlled system is
compliant, and the telecommunication's computer-controlled system is in the
process of transferring to computer programs which are compliant.
The Company is in the process of contacting all of its significant suppliers
and large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company's total Year 2000 project cost and estimates to
complete include the estimated costs and time associated with the impact of
third party Year 2000 issues based on presently available information. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have a material
adverse effect in the Company's systems. The telecommunications division has
identified that the third party which processes Essex's customer invoices is not
compliant with the Year 2000 issues. The Company has identified another third
party which is compliant, and if needed, the Company will utilize the new third
party source for customer invoicing by June 1999 should its current billing
provider fail to convert its systems six months before the year 2000.
<PAGE>
The Company will utilize both internal and external resources to reprogram, or
replace, and test the software and hardware for Year 2000 compliance. The
Company's objective is to complete the Year 2000 project not later than June 30,
1999, which is prior to any anticipated impact on its operating systems. The
total cost of the Year 2000 project for the Company is estimated to be less than
$100,000. Through year-end 1998, the Company has incurred approximately $40,000
in expenses related to the assessment of, and preliminary efforts on, its Year
2000 project and the development and implementation of various plans for systems
modifications and testing.
All costs associated with the Year 2000 project are being funded through
operating cash flow. Costs and timetables for Year 2000 projects associated with
corporate mergers and acquisitions are not included in the above estimates, and
will be funded on a case-by-case basis as they occur.
The costs of the project and the date which the Company has established to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans,
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions, and similar uncertainties.
Income Taxes
The Company has recorded no current United States income tax expense in fiscal
1998 and has recorded a Canadian income tax benefit of approximately $158,000.
At November 30, 1998, a full valuation allowance was provided on net deferred
tax assets of $3,800,000 based upon the Company's recent history of losses and
the uncertainty surrounding the Company's ability to recognize such assets.
Should the Company be successful in divesting its luggage division, the net
operating loss carryforward available to the Company relating to losses of the
luggage division, or approximately $8,400,000, may no longer be available to the
Company to reduce future taxable income.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, "Earnings per Share" ("Statement 128").
Statement 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. The Company adopted the
provisions of Statement 128 effective November 30, 1998. All earnings per share
amounts for all periods presented have been restated to conform to the Statement
128 requirements.
<PAGE>
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 130, "Reporting Comprehensive Income" ("Statement
130"). Statement 130 establishes standards for the reporting and display of
comprehensive income and its components in financial statements. Comprehensive
income, as defined, is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. The provisions of Statement 130 are effective for periods beginning
after December 15, 1997. Accordingly, the Company will adopt this standard for
its fiscal year ending November 30, 1999.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 131, "Disclosures about Segments of an Enterprise
and Related Information" ("Statement 131"), which establishes standards for
segment reporting and disclosure of additional information on products and
services, geographic areas and major customers. The provisions of Statement 131
are effective for periods beginning after December 15, 1997. Accordingly, the
Company will adopt this standard for its fiscal year ending November 30, 1999.
The application of Statement 131 may require additional business segment
disclosure than what the Company currently provides in its financial statements.
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 24, 1999:
<TABLE>
<CAPTION>
Name and Position Principal Occupation for Past 5 Years and
With the Company Age Current Public Directorships or Trusteeships
- ---------------- --- --------------------------------------------
<S> <C> <C>
Joel Dupre 45 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 44 Director since 1995 and Secretary of the Company; Partner
for more than five years of Pryor Cashman Sherman & Flynn
LLP, counsel to the Company.
Richard Pyles 42 Senior Vice President of the Company since November 1996;
Vice President of Marketing and Sales from September 1992 to
November 1996.
Paul H. Riss 43 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.
Anthony Scalice 62 Director since May 1998, and President and Chief Executive
Officer of Essex Communications, Inc., a wholly-owned
subsidiary of the Company, since February 1998; President of
Pinnacle Telephone Consultants, Inc., a telecommunications
firm specializing in the private payphone industry, from June
1997 to February 1998; President of Crescent Public
Communications, Inc., a private sales and servicing company,
from May 1995 to May 1997; President of Pinnacle
Telecommunications Consultants, Inc., from July 1991 to May
1995.
Barrie Sommerfield 69 Director since April 1997; Chairman or Vice Chairman of
Gore, Sommerfield, Ditnes International, Inc., a consultant
for trademark licenses, for more than five years.
Eric Smith 54 Director since 1988; Vice President-General Manager of West
Coast Distribution Center since 1983.
</TABLE>
<PAGE>
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. For the year ended November 30, 1998 Anthony
Scalice, a director of the Company, failed to file in a timely manner a
Statement of Initial Beneficiary Ownership on Form 3.
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 and all other executive officers of the Company who
received more than $100,000 in compensation during fiscal 1998 (collectively
referred to as the "Named Executives"):
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
----------------------------------------
Other Annual
Name and Compensation Options(3) All Other
Principal Position Year Salary(s) Bonus(s) ($) (#) Compensation
------------------ ---- --------- -------- --- --- ------------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre 1998 $223,333 None None 125,000 None
Chairman of the Board 1997 240,000 None None 80,000 None
& Chief Exec. Officer 1996 216,667 None None 80,000 None
Richard Pyles (1) 1998 95,833 None None 20,000 None
Senior Vice President 1997 100,000 $6,000 None 5,000 None
1996 98,341 None None 135,000 None
Paul H. Riss (2) 1998 120,833 None None 50,000 None
Chief Financial Officer 1997 125,000 None None 40,000 None
1996 12,354 None None 70,000 None
</TABLE>
- --------------------------
(1) Mr. Pyles was elected Senior Vice President in November 1996. At all other
times, Mr. Pyles served as Vice President-Marketing and Sales of the
Company.
(2) Mr. Riss has been Chief Financial Officer of the Company since November
1996.
(3) Options have been adjusted to reflect a two-for-one stock split in May
1997.
<PAGE>
Board of Directors Compensation
The Company does not currently compensate directors for service on the
Board of Directors.
Option Grant Table
The following table sets forth information as to the options granted to
the Named Executives and all other employees during the fiscal year ended
November 30, 1998.
<TABLE>
<CAPTION>
Individual Grants
Percent of
Total Potential Realizable
Number of Options/ Value at Assumed
Securities SARs Annual rates of Stock
Underlying Granted to Price Appreciation
Options/ Employees Exercise or for Option Term(3)
SARs in Fiscal Base Price Expiration
Name Granted(1) Year(2) ($/Share) Date 5% ($) 10% ($)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre 125,000(4) 41.7% $2.13 01/29/03 $73,600 $162,500
Richard Pyles 20,000(4) 6.7 1.94 01/29/03 10,700 23,700
Paul H. Riss 50,000(4) 16.7 1.94 01/29/03 26,800 59,200
All Other
Employees 68,500(4) 22.9 1.94 01/29/03 36,700 76,600
36,000(5) 12.0 2.88 08/14/03 28,600 63,300
</TABLE>
- ---------------
(1) No SAR's were granted by the Company in fiscal 1998.
(2) In fiscal 1998, the Company granted options on 140,000 shares, as adjusted
for a two-for-one stock split in May 1997, of the Common Stock to six
employees.
(3) The amounts shown in these two columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Commission's executive
compensation disclosure rules and are not intended to forecast the future
appreciation of the Common Stock.
(4) Options become exercisable on the first anniversary date of the option
grant date of January 29, 1998.
(5) Options become exercisable on the first anniversary date of the option
grant date of August 14, 1998.
<PAGE>
Stock Option Exercises
The following table contains information relating to the exercise of
the Company's stock options by the Named Executives in fiscal 1998, as well as
the number and value of their unexercised options as of November 30, 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value Fiscal Year-End(#)(1) at Fiscal Year End($)(2)
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel Dupre -- -- 125,000 165,000 -- --
Richard Pyles -- -- 20,000 10,000 -- --
Paul H. Riss 500 3,000 97,000 57,500 -- --
</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, 1998,
multiplied by the difference between the closing price of the Common Stock
on November 30, 1998, which was $0.97 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 $0.97 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.
<PAGE>
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.
<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), 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.
<PAGE>
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.
Board of Directors Interlocks and Insider Participation in Compensation
Decisions
The following members of the Board of Directors were officers of the
Company or a subsidiary of the Company during the fiscal year ended November 30,
1998: Joel Dupre, Eric Smith, Paul H. Riss and Anthony Scalice. Such members
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation during the fiscal year ended November 30, 1998.
Item 12. - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 26, 1999, the names,
addresses and number of shares of Common Stock beneficially owned by all persons
known to the management of the 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):
<PAGE>
<TABLE>
<CAPTION>
Shares Percent of
Beneficially of Outstanding
Name and Address Owned Common Stock
---------------- ----- ------------
<S> <C> <C>
Joel Dupre(1) 787,668 11.4%
c/o Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901
Paul H. Riss(2) 142,000 2.1%
Anthony Scalice(3) 97,500 1.5%
Eric M. Hellige(4) 44,760 less than 1%
Richard Pyles (5) 30,000 less than 1%
Eric Smith(5) 30,000 less than 1%
Barrie Sommerfield(6) 20,200 less than 1%
All directors and executive officers 1,127,128 15.7%
of the Company as a group (seven individuals)
</TABLE>
- ------------
(1) Includes 265,000 shares of Common Stock subject to options which are
presently exercisable, and includes 25,000 shares for which Mr. Dupre has
granted to Mr. Hellige stock purchase options.
(2) Includes 137,000 shares of Common Stock subject to options which are
presently exercisable.
(3) Includes 50,000 shares of Common Stock subject to warrants which are
presently exercisable.
(4) Includes 25,000 shares of Common Stock subject to options granted by Mr.
Dupre which are presently exercisable and 19,760 shares issuable upon the
conversion of 33 shares of Series A Convertible Preferred Stock owned by
Mr. Hellige.
(5) Consists of 30,000 shares of Common Stock subject to options which are
presently exercisable.
(6) Includes 20,000 shares of Common Stock subject to options which are
presently exercisable.
<PAGE>
Item 13. - Certain Relationships and Related Transactions
Mr. Joseph Takada, the beneficial owner of approximately 4.9% 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, 1998, the Company paid aggregate commissions of
approximately $18,000 to Ideal. Mr. Cheng-Sen Wang, the beneficial owner of
approximately 2.7% 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, 1998,
the Company paid aggregate commissions of approximately $295,000 to Kao-Lien.
Mr. Albert Cheng, the beneficial owner of 2.7% of the outstanding shares of
Common Stock, is the President of Constellation Enterprise Co., Ltd.
("Constellation"). During the fiscal year ended November 30, 1998, the Company
purchased approximately $548,000 of luggage and backpack products from
Constellation.
During the fiscal year ended November 30, 1998, the Company purchased
approximately $783,000 in luggage products from Evereal Industries Limited, a
beneficial owner of 0.7% of the outstanding shares of Common Stock; $896,000 in
luggage products from Hing Wah Leather Products Mfy. Ltd., a beneficial owner of
0.5% of the outstanding shares of Common Stock; and $61,000 in luggage products
from Koon Hing Plastic Factory, a beneficial owner of 0.5% of the outstanding
shares of Common Stock.
In May 1998, Ideal accepted 66,667 shares of Common Stock and
Constellation accepted 88,889 shares of Common Stock in settlement of unpaid
debts from the Company amounting to $300,000 and $400,000, respectively. The
Company is obligated to issue additional shares of Common Stock to Ideal and
Constellation, of up to 66,667 shares and 88,889 shares, respectively, should
the sale of the shares issued in May 1998 obtain a selling price of less than
$4.50 per share.
At November 30, 1998, the Company owed Ideal, Kao-Lien and
Constellation approximately $69,000, $107,000 and $253,000, respectively.
In December 1998 and February 1999, Mr. Dupre lent the Company $110,000
and $225,000, respectively. Such loans are for a term of two years and bear
interest at the rate of 8% per annum.
Paul H. Riss, a director and the Chief Financial Officer of the
Company, is a member of the Board of Directors of Access One, an affiliate of
the Company. Mr. Riss owns options to purchase 100,000 shares of common stock of
Access One. The Company's Chairman and Chief Executive Officer, Joel Dupre, owns
306,000 shares of common stock of Access One, or approximately 2.4% 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 LLP, 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, 1998 did not exceed 5% of such firm's or the
Company's revenues. Mr. Hellige owns 25,000 shares of common stock of Access
One, an affiliate of the Company.
Barrie Sommerfield, a director of the Company, is the Chairman 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 1998 of
approximately $17,000.
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) Articles of Incorporation and By-laws
(a) Certificate of Incorporation, as amended, incorporated by
reference to the Company's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on
August 27, 1969 under Registration Number 2-34436.
(b) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to the Company's
definitive proxy statement filed with the Securities and
Exchange commission in connection with the Company's
Annual Meeting of Shareholders held in May, 1984.
(c) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to Exhibit 3(b)
to the Company's Annual Report on Form 10-K for the year
ended November 30, 1988.
(d) Certificate of Amendment to the Certificate of
Incorporation, incorporated by reference to Exhibit 3(e)
to the Company's Annual Report on Form 10-K for the year
ended November 30, 1994, as amended.
(e) Certificate of Amendment of the Certificate of
Incorporation, incorporated by reference to Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the
Quarter ended August 30, 1995.
(f) Certificate of Amendment of Certificate of Incorporation
filed February 17, 1999.
(g) By-laws, amended and restated as of December, 1996,
incorporated by reference to Exhibit 3(e) to the Company's
Annual Report on Form 10-K for the year ended November 30,
1996.
(10) Material Contracts
(a) Stock Purchase Agreement dated February 27, 1998 between
the Company and the shareholders of Essex Communications,
Inc., incorporated by reference to Exhibit 10(a) to the
Company's Annual Report on Form 10-K dated November 30,
1997.
(b) Lease Agreement dated February 14, 1990 between
Oro-May-Broward Investment Company and the Company for
property located in La Mirada, California, incorporated by
reference to Exhibit 10(j) to the Company's Annual Report
on Form 10-K for the year ended November 30, 1989, as
amended.
(c) Sirco International Corp. 1995 Stock Option Plan,
incorporated by reference to Exhibit 10(I) to the
Company's Annual Report on Form 10-K for the year ended
November 30, 1995, as amended.
(d) Sirco International Corp. 1996 Restricted Stock Award
Plan, incorporated by reference to Exhibit A to the
Company's Proxy Statement dated October 24, 1996.
(e) Employment Agreement, dated November 5, 1996 between the
Company and Paul Riss, incorporated by reference to
Exhibit 10(f) to the Company's Annual Report on Form 10-K
for the year ended November 30, 1996.
<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.
(g) Promissory Note, dated December 17, 1998, between the
Company and Joel Dupre, Chairman and Chief Executive
Officer.
(h) Promissory Note, dated January 29, 1999, between the
Company and Joel Dupre, Chairman and Chief Executive
Officer.
(22) Subsidiaries of Company - The significant subsidiaries of
Company, all of which are wholly-owned by Company and included in
its consolidated financial statements, are as follows:
Name Jurisdiction of Organization
---- ----------------------------
Airline Ventures, Inc. Texas
Essex Communications, Inc. New York
Sirco Industries, Limited Hong Kong
Sirco International (Canada) Limited Canada
WebQuill Internet Services LLC. Connecticut
American Telecom LLC Connecticut
(23) Consent of Nussbaum Yates & Wolpow, P.C.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None
<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 26th day of February, 1999.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------- ------------------------------------ ------------------
<S> <C> <C>
/s/ Joel Dupre Chairman and Chief Executive Officer February 26, 1999
- -------------- (Principal Executive Officer)
Joel Dupre
/s/ Paul H. Riss Chief Financial Officer and Director February 26, 1999
- ----------------- (Principal Financial and
Paul H. Riss Accounting Officer)
/s/ Eric M. Hellige Director February 26, 1999
- -------------------
Eric M. Hellige
/s/ Anthony Scalice Director February 26, 1999
- -------------------
Anthony Scalice
/s/ Barrie Sommerfield Director February 26, 1999
- ----------------------
Barrie Sommerfield
/s/ Eric Smith Director February 26, 1999
- --------------
Eric Smith
</TABLE>
<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:
Report of Independent Auditors F-2 - F-3
Consolidated balance sheets - November 30, 1998 and 1997 F-4 - F-5
Consolidated statements of operations - Years ended November 30,
1998, 1997 and 1996 F-6
Consolidated statements of stockholders' equity - Years ended
November 30, 1998, 1997 and 1996 F-7 - F-8
Consolidated statements of cash flows - Years ended November 30,
1998, 1997 and 1996 F-9 - F-10
Notes to consolidated financial statements - Years ended November
30, 1998, 1997 and 1996 F-11- F-40
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, 1998, 1997 and 1996 F-41
Access One Communications Corp and Subsidiaries:
Report of Independent Auditors F-42
Consolidated balance sheets - October 31, 1998 and 1997 F-43
Consolidated statements of operations - Years ended
October 31, 1998 and 1997 F-44
Consolidated statement of stockholders' equity (deficiency) -
Years ended October 31, 1998 and 1997 F-45
Consolidated statements of cash flows - Years ended October
31, 1998 and 1997 F-46
Notes to consolidated financial statements- Years ended October
31, 1998 and 1997 F47 - F62
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.
Stamford, Connecticut
We have audited the accompanying consolidated balance sheets of Sirco
International Corp. and subsidiaries as of November 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended November 30, 1998, 1997 and 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 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 provide a reasonable basis for our opinion.
In our opinion, based on our audits, 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, 1998 and 1997, and the consolidated results of their operations and
their consolidated cash flows for the years ended November 30, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
F-2
<PAGE>
The Board of Directors and Shareholders
Sirco International Corp.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations and has incurred significant losses from
its operations. Further, as of November 30, 1998, the Company was in default of
certain debt covenants contained in its financing agreement which could result
in termination of the agreement and the debt becoming due and payable
immediately. These factors, among others, raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We had previously issued our report on the consolidated financial statements and
related schedules referred to above for the year ended November 30, 1997. That
report indicated that the 1997 consolidated financial statements of Access One
Communications Corp., an entity in which the Company had an investment accounted
for under the equity method, were audited by other auditors and that our report
was based, in part, upon the report of the other auditors. Our report herein
differs from the previously issued report in that, based upon additional
procedures performed with respect to Access One Communications Corp., our report
is based on our audit.
/s/NUSSBAUM YATES & WOLPOW, P.C.
--------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 12, 1999
February 25, 1999 as to the last paragraph of Note 2
F-3
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 352,489 $ 114,190
Accounts receivable, principally trade - net of
allowance of $337,000 and $200,000 in 1998
and 1997 ................................................ 1,565,727 3,166,804
Inventories ............................................... 4,397,635 7,707,631
Prepaid expenses .......................................... 199,805 253,225
Other current assets ..................................... 36,791 44,231
Recoverable income taxes .................................. 149,902 125,517
----------- -----------
Total current assets ................. 6,702,349 11,411,598
----------- -----------
Property, plant and equipment - at cost:
Land ...................................................... 185,279 199,425
Building .................................................. 459,788 494,891
Machinery and equipment ................................... 941,127 748,085
Leasehold improvements .................................... 320,132 320,132
----------- -----------
1,906,326 1,762,533
Less accumulated depreciation and amortization ............ 1,070,852 935,220
----------- -----------
835,474 827,313
----------- -----------
Other assets:
Investment in and advances to subsidiary .................. 464,573 514,797
Goodwill, net of accumulated amortization of $110,302 in
1998 ................................................... 1,377,958 --
Investment in affiliate, net of accumulated amortization of
$375,000 in 1998 ....................................... 1,476,434 1,080,000
Other ..................................................... 172,254 207,940
----------- -----------
3,491,219 1,802,737
----------- -----------
Total assets ......................... $11,029,042 $14,041,648
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
(Continued)
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30, 1998 AND 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt .......................... $ 3,193,344 $ 1,522,060
Due to related parties ........................................ 519,596 974,046
Accounts payable .............................................. 993,779 2,489,259
Accrued expenses and taxes .................................... 1,661,420 1,318,863
------------ ------------
Total current liabilities ................ 6,368,139 6,304,228
------------ ------------
Long-term debt, less current maturities ........................... 290,994 4,521,795
------------ ------------
Due to related parties and accounts payable refinanced ............ 615,829 --
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares
authorized, 700 shares issued in 1998, liquidation
preference $1,000 per share ................................ 70 --
Common stock, $.10 par value; 20,000,000 shares
authorized in 1998 and 10,000,000 shares
authorized in 1997, 6,343,316 and 4,300,400
shares issued in 1998 and 1997 ............................. 634,331 430,040
Capital in excess of par value ................................ 12,851,015 7,753,368
Deficit ........................................................... (8,864,535) (3,887,532)
Treasury stock at cost, 11,000 shares ......................... (27,500) (27,500)
Treasury stock held by equity investee ........................ (159,396) (420,000)
Accumulated foreign currency translation
adjustment ................................................. (679,905) (632,751)
------------ ------------
Total stockholders' equity ............... 3,754,080 3,215,625
------------ ------------
Total liabilities and stockholders' equity $ 11,029,042 $ 14,041,648
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ..................................... $ 17,037,186 $ 16,007,983 $ 27,745,955
Cost of goods sold ............................ 13,971,644 13,802,712 20,657,633
------------ ------------ ------------
Gross profit .................................. 3,065,542 2,205,271 7,088,322
Selling, warehouse, general and administrative
expenses ................................... 6,445,648 5,166,849 5,905,152
------------ ------------ ------------
Income (loss) from operations ................. (3,380,106) (2,961,578) 1,183,170
------------ ------------ ------------
Other (income) expense:
Interest expense ........................... 514,033 573,544 772,812
Interest income ............................ (49,843) (63,506) (58,214)
Loss on equity investment .................. 1,423,300 -- --
Commission and other income, net ........... (132,618) (477,934) (456,873)
------------ ------------ ------------
1,754,872 32,104 257,725
------------ ------------ ------------
Income (loss) before provision for income taxes (5,134,978) (2,993,682) 925,445
Provision for (recovery of) income taxes ...... (157,975) (125,517) 303,209
------------ ------------ ------------
Net earnings (loss) ........................... ($ 4,977,003) ($ 2,868,165) $ 622,236
============ ============ ============
Net earnings (loss) per common share -
basic ...................................... ($ .96) ($ .88) $ .24
============ ============ ============
Net earnings (loss) per common share -
diluted .................................... ($ .96) ($ .88) $ .23
============ ============ ============
Number of common shares used in basic
earnings (loss) per share .................. 5,184,748 3,243,392 2,582,688
Incremental shares from assumed conversions
of options and warrants .................... -- -- 88,384
------------ ------------ ------------
Number of common shares used in diluted
earnings (loss) per share .................. 5,184,748 3,243,392 2,671,072
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Preferred Stock Common Stock Capital
---------------------- ----------------------- In Excess of
Shares Amount Shares Amount Par Value Deficit
------ ------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1995 - $ - 2,430,400 $243,040 $3,906,014 ($1,641,603)
Net income - - - 622,236
Exercise of stock options - - 200,000 20,000 230,000 -
Currency translation
adjustment - - - - - -
------- ------ --------- -------- ---------- -----------
Balance, November 30, 1996 - - 2,630,400 263,040 4,136,014 (1,019,367)
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 - - 700,000 70,000 1,439,104 -
Stock issued for equity
investment in Access One
Communications Corp. - - 425,000 42,500 1,457,500 -
Treasury stock acquired by
equity investee - - - - - -
Currency translation
adjustment - - - - - -
------- ------ --------- -------- ---------- -----------
Balance, November 30, 1997 - - 4,300,400 430,040 7,753,368 (3,887,532)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Accumulated
Treasury Foreign
Stock Held Currency
Treasury by Equity Translation
Stock Investee Adjustment
--------- -------- -----------
<S> <C> <C> <C>
Balance, November 30, 1995 ($27,500) $ - ($ 583,023)
Net income - - -
Exercise of stock options - - -
Currency translation
adjustment - - 11,332
------- -------- ---------
Balance, November 30, 1996 (27,500) - (571,691)
Net loss - - -
Exercise of stock options - - -
Issuance of common stock
in private placement - - -
Exercise of warrants - - -
Stock issued for equity
investment in Access One
Communications Corp. - - -
Treasury stock acquired by
equity investee - (420,000) -
Currency translation
adjustment - - (61,060)
------- -------- ---------
Balance, November 30, 1997 (27,500) (420,000) (632,751)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
(Continued)
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Preferred Stock Common Stock Capital
----------------- ---------------------- In Excess of
Shares Amount Shares Amount Par Value
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1997 ................................. -- -- 4,300,400 430,040 7,753,368
Net loss ................................................ -- -- -- -- --
Exercise of stock options ............................... -- -- 15,000 1,500 16,688
Stock issued for debt retire-
ment- ................................................. -- -- 260,000 26,000 1,144,000
Exercise of warrants .................................... -- -- 212,000 21,200 446,704
Stock issued for acquisition of
Essex Communications, Inc. ............................ -- -- 350,000 35,000 702,820
Stock issued for acquisition of
Webquill Internet Services, LLC ....................... -- -- 375,000 37,500 637,500
Issuance of preferred stock ............................. 700 70 -- -- 651,315
Stock issued for services ............................... -- -- 30,916 3,091 19,520
Stock issued for equity investment
in Access One Communications .......................... -- -- 800,000 80,000 1,479,100
Reduction in treasury stock held by
equity investee ....................................... -- -- -- -- --
Currency translation adjustment ......................... -- -- -- -- --
--- -------- --------- ---------- -----------
Balance, November 30, 1998 ................................. 700 $ 70 6,343,316 $ 634,331 $12,851,015
=== ======== ========= ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
Accumulated
Treasury Foreign
Stock Held Currency
Treasury by Equity Translation
Deficit Stock Investee Adjustment
---------- ------- -------- --------
<S> <C> <C> <C> <C>
Balance, November 30, 1997 ................................. (3,887,532) (27,500) (420,000) (632,751)
Net loss ................................................ (4,977,003) -- -- --
Exercise of stock options ............................... -- -- -- --
Stock issued for debt retire-
ment- ................................................. -- -- --
Exercise of warrants .................................... -- -- -- --
Stock issued for acquisition of
Essex Communications, Inc. ............................ -- -- -- --
Stock issued for acquisition of
Webquill Internet Services, LLC ....................... -- -- -- --
Issuance of preferred stock ............................. -- -- -- --
Stock issued for services ............................... -- -- -- --
Stock issued for equity investment
in Access One Communications .......................... -- -- -- --
Reduction in treasury stock held by
equity investee ....................................... -- -- 260,604 --
Currency translation adjustment ......................... -- -- -- (47,154)
----------- -------- --------- ---------
Balance, November 30, 1998 ................................. ($8,864,535) ($27,500) ($159,396) ($679,905)
=========== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .................................... ($4,977,003) ($2,868,165) $ 622,236
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................... 227,005 110,168 254,321
Loss on equity investment including goodwill
amortization of $375,000 ....................... 1,423,300
Stock issued for services ....................... 22,611 -- --
Provision for losses on accounts receivable
and other assets .............................. 299,000 278,000 32,000
(Gain) loss on sale of property, plant and
equipment ..................................... -- 7,012 (1,601)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ......................... 1,289,333 (594,077) (663,322)
Inventories ................................. 3,275,479 (3,325,876) 1,354,698
Prepaid expenses ............................ 42,988 12,926 1,643
Other current assets ........................ 6,595 79,014 1,134
Other assets ................................ 41,839 (60,538) 6,967
Due to related parties ...................... 652,159 713,858 (56,722)
Accounts payable and accrued expenses ....... (495,661) (531,320) 178,393
Income taxes ................................ (24,930) (448,240) 314,425
----------- ----------- -----------
Net cash provided by (used in) operating activities .. 1,782,715 (6,627,238) 2,044,172
----------- ----------- -----------
Investing activities, net of effects of acquisitions:
Purchases of property, plant and equipment ........ (57,765) (87,045) (339,179)
Proceeds from sale of property, plant and equipment -- 3,607 7,038
Cash inflow from agreement to sell subsidiary ..... 50,224 25,700 --
Payment of certain obligations of WebQuill Internet
Services, LLC ................................... (150,000) -- --
----------- ----------- -----------
Net cash used in investing activities ................ (157,541) (57,738) (332,141)
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
(Continued)
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
<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)
Proceeds from (repayment of) revolving credit
line, net .................................... (2,527,977) 5,714,056 --
Repayment of long-term debt .................... (8,470) (6,550) (460,301)
Repayment of officer loan ...................... -- -- (35,000)
Proceeds from exercise of stock options ........ 18,188 166,250 250,000
Proceeds from private placement of common stock -- 609,000 --
Proceeds from exercise of warrants ............. 467,904 1,509,104 --
Proceeds from issuance of preferred stock ...... 651,385 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities (1,398,970) 6,391,039 (1,503,498)
----------- ----------- -----------
Effect of exchange rate changes on cash ........... 12,095 18,084 5,269
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents .. 238,299 (275,853) 213,802
Cash and cash equivalents at beginning of year .... 114,190 390,043 176,241
----------- ----------- -----------
Cash and cash equivalents at end of year .......... $ 352,489 $ 114,190 $ 390,043
=========== =========== ===========
Cash paid during the year for:
Interest ....................................... $ 502,005 $ 510,869 $ 675,006
=========== =========== ===========
Income taxes ................................... $ -- $ 300,015 $ --
=========== =========== ===========
Supplemental disclosure of non-cash investing and
financing activities:
See Notes 2, 3, 8 and 16.
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles
Description of Business and Concentration of Credit Risk
Prior to the fiscal year ended November 30, 1998, substantially all of
the Company's operations were as 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. 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.
In fiscal 1997, the Company commenced operations, through its wholly
owned subsidiary, Airline Ventures, Inc. ("AVI"), as a retailer that
sells travel products, uniforms and study guides via retail stores,
e-commerce sites and a website primarily to airline crew members.
In fiscal 1998, the Company commenced operations, through the acquisition
of a newly formed competitive local exchange carrier, Essex
Communications, Inc. ("Essex") as a reseller of Bell Atlantic local and
long-distance telecommunications services to local and long-distance
customers in New York and New Jersey. In addition, in 1998, the Company
acquired WebQuill Internet Services, LLC ("WebQuill"), an internet
service provider ("ISP") based in Connecticut. WebQuill is a full
service, value added ISP providing national dial-up access, dedicated
access, website design, website hosting and e-commerce sites.
On October 2, 1997, the Company acquired 28% of Access One
Communications, Inc. ("Access"), formerly known as CLEC Holding Corp, a
competitive local exchange carrier and a reseller of BellSouth local and
long-distance telecommunications services to business and residential
customers in the southeastern United States, principally Florida. During
1998, the Company acquired additional shares of Access (see Note 16).
F-11
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles (Continued)
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 31% owned
affiliate are accounted for on the equity method.
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.
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 according to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Under the liability method specified by SFAS 109,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse and the effect of net operating loss
carryforwards. Deferred tax expense is the result of changes in deferred
tax assets and liabilities. A valuation allowance has been established to
reduce the deferred tax assets as it is more likely than not that such
portion of the deferred tax assets will not be realized.
F-12
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles (Continued)
Income Taxes (Continued)
Income taxes have not been provided on undistributed earnings of foreign
subsidiaries, which amounted to approximately $2,900,000 as of November
30, 1998 because the Company expects to reinvest these earnings in the
businesses of the subsidiaries.
Revenue Recognition
The luggage and retail segments recognize revenue upon the shipment or
delivery of merchandise. The telecommunications segment recognizes
revenue as services are provided to customers.
Earnings (Loss) Per Share
For the year ended November 30, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
which replaces the presentation of primary earnings per share ("EPS") and
fully diluted EPS with a presentation of basic EPS and diluted EPS for
all periods presented. Basic EPS excludes common stock equivalents and is
computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
common stock equivalents such as stock options and warrants were
exercised. The effect of stock options and warrants on the calculation of
earnings per common share was anti-dilutive in 1998 and 1997.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-13
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles (Continued)
Goodwill
The excess cost over net assets acquired (goodwill) is being amortized on
a straight-line basis over 7 years.
Impairment of Long-Lived Assets
The Company reviews its intangible assets and other long-lived assets for
impairment at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset should be
assessed. Management evaluates the intangible assets related to each
acquisition individually to determine whether an impairment has occurred.
An impairment is recognized when the discounted future cash flows
estimated to be generated by the acquired business is insufficient to
recover the current unamortized balance of the intangible asset, with the
amount of any such deficiency charged to income in the current year.
Estimates of future cash flows are based on many factors, including (i)
current operating results of the applicable business, (ii) projected
future operating results of the applicable business, (iii) the occurrence
of any significant regulatory changes which may have an impact on the
continuity of the business, and (iv) any other material factors that
affect the continuity of the applicable business. Management believes
that no material impairment in the carrying value of long-lived assets
existed at November 30, 1998 or 1997.
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, investments in
and advances to its subsidiary, excess of costs over net assets of
businesses acquired, and investment in affiliate.
F-14
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles (Continued)
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.
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.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires disclosure of all components
of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in the equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Accordingly, the Company will adopt this
standard for its fiscal year ending November 30, 1999.
F-15
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
1. Description of Business and Summary of Accounting Principles (Continued)
New Accounting Standards (Continued)
In July 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires certain
financial and supplementary information to be disclosed on an annual and
interim basis for each reportable segment of an enterprise. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997.
Accordingly, the Company will adopt this standard for its fiscal year
ending November 30, 1999.
2. Going Concern Matters and Realization of Assets
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. However,
the Company has sustained substantial losses from operations in its two
most recent fiscal years. In addition, the Company is experiencing
difficulty in generating sufficient cash flow to meet and sustain its
obligations. Further, as of November 30, 1998, the Company was in default
of certain debt covenants contained in its financing agreement which
could result in termination of the agreement and the debt becoming due
and payable immediately.
F-16
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
2. Going Concern Matters and Realization of Assets (Continued)
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to
meet its financing requirements on a continuing basis, to maintain
present financing, and to succeed in its future operations. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company
be unable to continue in existence.
Management has taken the steps described in the next two paragraphs to
revise its operating and financial requirements, which it believes are
sufficient to provide the Company with the ability to continue in
existence; however, there can be no assurance that management's plans can
be accomplished.
In January 1999, the Board of Directors of the Company decided to dispose
of substantially all of the assets and liabilities of the Company's major
business segment, its luggage business, and to focus all of its available
resources on the remaining two business segments of the Company. While a
formal plan of disposal has not yet been approved, management of the
Company has entered into discussions with representatives of several
potential buyers and believes that it will be able to successfully
dispose of this segment's assets and liabilities, which will include the
repayment of the Company's existing indebtedness to Coast Business
Credit, a division of Southern Pacific Thrift and Loan Association
("Coast"). Disposal by sale or spin-off is under consideration and
estimated gain or loss on disposal could vary materially depending on the
particular plan selected. No provision has been made in the accompanying
financial statements to account for this disposal. See Note 9 for
additional financial information regarding this segment.
In February 1999, the Company entered into various agreements to convert
approximately $616,000 of trade accounts payable (as of November 30,
1998) with foreign suppliers (substantially all of whom are related
parties), into common stock and, accordingly, such amount has been
excluded from current liabilities as of November 30, 1998. Essex expects
to increase its margins as they convert their lines to a Bell Atlantic
leased network facility.
F-17
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
3. Acquisitions
On February 27, 1998, the Company acquired all of the outstanding shares
of common stock of Essex in exchange for 250,000 shares of the Company's
common stock and warrants to purchase up to 225,000 shares of the
Company's common stock at $2.75 per share. The warrants vest at the rate
of 75,000 immediately; if certain performance conditions are met, the
remaining warrants vest. In addition, if certain performance conditions
are met, up to 625,000 additional shares of common stock may be issued.
As of November 30, 1998, 100,000 additional shares were issued to the
former shareholders of Essex as certain performance conditions were met.
The transaction was accounted for as a purchase. The purchase price
exceeded the fair value of net assets acquired by approximately $737,000,
which is being amortized on a straight-line basis over 7 years. The
results of operations of Essex are included in the accompanying financial
statements from the date of acquisition.
On August 14, 1998, the Company acquired all of the membership interests
of WebQuill in exchange for 525,000 shares of the Company's common stock
(of which 375,000 shares were delivered to the sellers and 150,000 shares
were deposited in an escrow account and will be delivered upon attainment
of certain performance conditions) and the payment of $150,000 of
Webquill's obligations. The transaction was accounted for as a purchase.
The purchase price exceeded the fair value of net assets acquired by
approximately $750,000, which is being amortized on a straight-line basis
over 7 years. The results of operations of WebQuill are included in the
accompanying financial statements from the date of acquisition.
Pro forma financial statements of the above acquisitions as if they
occurred as of December 1, 1996 have not been presented since the results
were not material. The above companies did not conduct significant
operations prior to the acquisition date.
F-18
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
4. Loans Payable to Financial Institutions and Long-Term Debt
On December 17, 1996, the Company entered into a financing agreement with
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% at November 30, 1998), matures
on December 31, 1999, and is guaranteed by the Company's Chairman and
Chief Executive Officer. The Company has granted Coast a security
interest in substantially all of the Company's assets. The agreement with
Coast contains various restrictive covenants, including among others, a
restriction on the payment or declaration of any cash dividends, a
restriction on the acquisition of any assets other than in the ordinary
course of business in excess of $100,000, restrictions related to
mergers, borrowing and debt guarantees and a $100,000 annual limitation
(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 $3,186,079 and $5,714,056 at November 30, 1998 and 1997 under
this agreement. As of November 30, 1998, the Company was in default of
certain debt covenants contained in its financing agreement which could
result in termination of the agreement and the debt becoming due and
payable immediately. Since the loan is callable by Coast, the entire
amount outstanding to Coast has been classified as a current liability at
November 30, 1998. The Company classified approximately $1,515,000 of the
loan as a current liability at November 30, 1997, the amount scheduled
for repayment during fiscal 1998.
F-19
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
4. Loans Payable to Financial Institutions and Long-Term Debt (Continued)
In August 1995, the Company's Canadian subsidiary refinanced a real
property mortgage of approximately $368,000. The mortgage is payable in
monthly installments of approximately $3,138 including interest at 10.25%
with a balloon payment of approximately $291,000 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 may not pay dividends to the parent.
Long-term debt consists of the following:
1998 1997
---------- ----------
Loan payable to Coast $3,186,079 $5,714,056
Subsidiary mortgage payable 298,259 329,799
---------- ----------
3,484,338 6,043,855
Less current maturities 3,193,344 1,522,060
----------- -----------
$ 290,994 $4,521,795
=========== ==========
Principal payments are due as follows:
Year ended November 30,
1999 $ 3,193,344
2000 290,994
-----------
$ 3,484,338
===========
F-20
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
5. Income Taxes
At November 30, 1998, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $9,250,000 expiring in
the years 2001 through 2013. There is an annual limitation of
approximately $187,000 on the utilization of approximately $2,300,000 of
such net operating loss carryforwards under the provisions of Internal
Revenue Code Section 382.
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ....................... $ 3,250,000 $ 2,440,000
Allowance for doubtful accounts and accruals ........... 270,000 210,000
Inventory .............................................. 230,000 330,000
Depreciation ........................................... 100,000 110,000
----------- -----------
3,850,000 3,090,000
Deferred tax liabilities:
Installment sale of investment .......................... (50,000) (50,000)
----------- -----------
3,800,000 3,040,000
Valuation allowance ........................................ (3,800,000) (3,040,000)
----------- -----------
Net deferred tax assets .................................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance at November 30, 1996 was $1,970,000
F-21
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
5. Income Taxes (Continued)
The following is a reconciliation of the tax provisions for the three
years ended November 30, 1998 with the statutory Federal income tax rates:
<TABLE>
<CAPTION>
Percentage of Pre-Tax Income
1998 1997 1996
----- ----- -----
<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 ....................................... (3.2) (4.3) (6.8)
Operating losses generating no current tax benefit,
United States ................................. 34.0 34.0 --
Other items, net .................................. -- .1 .9
----- ----- -----
(3.2%) (4.1%) 32.8%
====== ===== =====
</TABLE>
6. 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-22
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
6. Pension Plans (Continued)
Effective June 30, 1995, the plan was frozen, ceasing all benefit
accruals and resulting in a plan curtailment.
Net periodic pension cost (gain) included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest cost on projected benefit obligation ................... $ 56,393 $ 57,257 $ 53,707
Return on assets ................................................ (63,704) (66,110) (69,235)
Net amortization and deferral ................................... (4,112) (4,112) (6,199)
-------- -------- --------
($11,423) ($12,965) ($21,727)
======== ======== ========
</TABLE>
Following is a summary of significant actuarial assumptions used:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rates 7.0% 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-23
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
6. 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,
1998 1997
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $820,734 and $813,095 at
November 30, 1998 and 1997, respectively ....... ($823,568) ($816,427)
========= =========
Projected benefit obligation for service rendered
to date ........................................ ($823,568) ($816,427)
Plan assets at fair value, primarily money market
funds .......................................... 786,343 834,747
--------- ---------
Plan assets in excess of (deficiency in) unfunded
projected benefit obligation ................... (37,225) 18,320
Unrecognized net gain from past experience
different from that assumed and effects of
changes in assumptions ......................... -- 45,599
Unrecognized net asset being amortized over
13 years from December 1, 1987 ................. -- (12,215)
--------- ---------
(Accrued) prepaid pension cost ................... ($ 37,225) $ 51,704
========= =========
</TABLE>
7. Commitments
The Company conducts a substantial portion of its operations utilizing
leased facilities. Rent expense, charged to operations, was $825,000,
$704,000 and $659,000 in 1998, 1997 and 1996, 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 8)
under a sublease which expires in May, 2000. Total minimum sublease
rentals to be received in the future amounted to approximately $487,000
at November 30, 1998.
F-24
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
7. 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,
1999 $ 870,000
2000 594,000
2001 256,000
2002 196,000
2003 144,000
Thereafter 237,000
----------
$2,297,000
==========
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
2001. The agreements provide for royalties based upon net sales with
certain stated minimum annual amounts. The amount of future minimum
royalties aggregates approximately $650,000 at November 30, 1998. Royalty
expense amounted to $545,000, $660,000 and $1,160,000 in fiscal 1998,
1997 and 1996, respectively. As of November 30, 1998 and 1997,
approximately $560,000 and $506,000, 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% of the Company's net sales in fiscal 1996.
F-25
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
8. 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. In fiscal 1996, interest and
handling and other fees paid to Yashiro amounted to approximately
$105,000.
In May 1998, the Company issued 260,000 shares to foreign vendors valued
at $1,170,000 or $4.50 per share in satisfaction of existing trade
accounts payable. Included in this amount were 155,556 shares issued to
companies controlled by existing shareholders. The agreements with the
vendors provided that if the vendor were to sell such shares within one
year at a price below $4.50 per share (subject to a $2.25 floor), up to
an additional 260,000 shares would be issued to the vendors. Subsequent
to November 30, 1998, a substantial portion of these shares became
issuable.
During the years ended November 30, 1998, 1997 and 1996, the Company
purchased approximately $2,287,000, $891,000 and $355,000, respectively,
of luggage and backpack products from companies controlled by
stockholders. During the years ended November 30, 1998, 1997 and 1996,
the Company paid approximately $312,000, $208,000 and $786,000,
respectively, as buying commissions to companies controlled by other
stockholders. As of November 30, 1998 and 1997, there was outstanding
$926,205 and $974,046 to such related parties.
F-26
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
9. Segment Reporting
Prior to the fiscal year ended November 30, 1998, substantially all of
the Company's operations were in one segment, the luggage segment, with a
minor amount of operations through its AVI subsidiary in the retail
travel products segment, which principally sells uniforms and other
travel related products to professional flight crew members. During the
fiscal year ended November 30, 1998, the Company commenced operations in
a new segment, telecommunications, through its Webquill and Essex
Communications subsidiaries. The Company's consolidated operations
outside the United States, which are exclusively in the luggage business,
are organized into geographic regions by segment. Intersegment
transactions are not reported separately since they are not material.
For purpose of segment reporting, the Company allocates general corporate
expenses to each segment on the basis of the segment's revenues.
Substantially all goodwill amortization is attributable to the
telecommunications segment and to the Company's equity investment in
Access One Communications Corp. Identifiable assets are those assets
applicable to the respective industry segments.
<TABLE>
<CAPTION>
Data by Segment for the
Years ended November 30,
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Operating revenues:
Luggage ...................... $ 15,552,245 $ 15,732,112 $27,745,955
Telecommunications ........... 373,885 -- --
Retail-related travel products 1,111,056 275,871 --
------------ ------------ -----------
Total operating revenues $ 17,037,186 $ 16,007,983 $27,745,955
============ ============ ===========
Net earnings (loss):
Luggage ...................... ($ 2,662,653) ($ 2,762,993) $ 622,236
Telecommunications ........... (720,807) -- --
Retail-related travel products (170,243) (105,172) --
Loss on equity investment .... (1,423,300) -- --
------------ ------------ -----------
Net earnings (loss) .... ($ 4,977,003) ($ 2,868,165) $ 622,236
============ ============ ===========
</TABLE>
F-27
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
9. Segment Reporting (Continued)
<TABLE>
<CAPTION>
Data by Segment for the
Years ended November 30,
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Identifiable assets:
Luggage ........................ $ 8,284,553 $12,961,648 $9,576,861
Telecommunications ............. 878,421 -- --
Retail-related travel products . 389,634 -- --
----------- ----------- ----------
9,552,608 12,961,648 9,576,861
Investment in Access One
Communications Corp. ........... 1,476,434 1,080,000 --
----------- ----------- ----------
Total assets ............. $11,029,042 $14,041,648 $9,576,861
=========== =========== ==========
Depreciation expense:
Luggage ........................ $ 85,845 $ 105,023 $ 254,321
Telecommunications ............. 19,068 -- --
Retail-related travel products . 11,790 5,145 --
----------- ----------- ----------
Total depreciation expense $ 116,703 $ 110,168 $ 254,321
=========== =========== ==========
Capital expenditures:
Luggage ........................ $ 18,052 $ 41,918 $ 339,179
Telecommunications ............. 39,713 -- --
Retail-related travel products . -- 45,127 --
----------- ----------- ----------
Total capital expenditures $ 57,765 $ 87,045 $ 339,179
=========== =========== ==========
</TABLE>
F-28
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
9. Segment Reporting (Continued)
Geographic Segments:
<TABLE>
<CAPTION>
United Hong
Consolidated States Canada Kong
------------ ------------ ----------- -----------
(See Note 14)
<S> <C> <C> <C> <C>
Year ended November 30, 1998:
Net sales ........................ $ 17,037,186 $ 14,432,937 $ 753,926 $ 1,850,323
============ ============ =========== ===========
Net loss and loss before provision
for (recovery of) income taxes . ($ 5,134,978) ($ 4,752,294) ($ 382,349) ($ 335)
============ ============ =========== ===========
Identifiable assets .............. $ 11,029,042 $ 9,688,710 $ 1,338,222 $ 2,110
============ ============ =========== ===========
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
============ ============ =========== ===========
</TABLE>
F-29
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
10. Major Customers
Sales to one customer amounted to 23%, 27%, and 19% of net sales in
fiscal 1998, 1997 and 1996, respectively. Sales to another customer
amounted to 23%, 17% and 11% of net sales in fiscal 1998, 1997 and 1996,
respectively. Sales to another customer amounted to 14% of net sales in
fiscal 1997.
11. 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.
F-30
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
11. Investment In and Advances to Subsidiary (Continued)
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.
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, 2000. An amount
of $60,000 was forgiven in 1998 and $50,000 in each of 1997 and 1996. The
total amount forgiven will be $420,000. The remaining receivable of
approximately $300,000 is payable in ten equal quarterly installments
commencing in August 2000. Amounts outstanding after May 1, 2000 will
bear interest at the prime rate. Payments are being received on a current
basis.
At November 30, 1998, the aggregate principal balance of $665,000 due on
the above notes has been reduced for imputed interest of approximately
$40,000 and an allowance of approximately $160,000 for uncollectibility.
F-31
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
12. 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.
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.
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.
13. Stockholders' Equity
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-32
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
13. Stockholders' Equity (Continued)
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.
In June 1998, the Company issued 700 shares of Series A preferred stock
("preferred stock") having a par value of $.10 per share. Each preferred
share is convertible at the option of the holder into common shares at a
conversion rate of 300 shares of common stock through May 31, 1999; after
May 31, 1999, $1,000 divided by the lesser of $3.33 or the market price
of the Company's common stock subject to a floor of $1.67. The Company
may cause the conversion of the preferred stock at any time after May 31,
1999 based upon the above conversion formula. The preferred shares have
the same voting and dividend rights as common shares based upon the
number of shares of common stock into which the preferred stock is
convertible to. The preferred shares have a liquidation preference of
$1,000 per share.
F-33
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
13. Stockholders' Equity (Continued)
The following is a summary of outstanding options:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- --------- -----
<S> <C> <C> <C>
Outstanding, December 1, 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 $2.03
Exercised/canceled during year
ended November 30, 1997 (148,000) $1.00 - $1.6875 $1.12
-------
Outstanding November 30, 1997 395,000 $1.00 - $2.13 $1.63
Granted during year ended
November 30, 1998 299,500 $2.79 - $3.13 $2.96
Exercised/canceled during year
ended November 30, 1998 (38,000) $1.00 - $2.84 $2.20
--------
Outstanding November 30, 1998 656,500 $1.00 - $3.13 $2.20
=======
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
=======
Options exercisable, November
30, 1998 322,500 $1.00 - $2.13 $1.70
=======
</TABLE>
F-34
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
13. Stockholders' Equity (Continued)
The following table summarizes information about the options outstanding
at November 30, 1998:
<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 - $1.44 220,000 2.59 $1.37 162,500 $1.36
$1.94 - $2.13 160,000 3.24 $2.03 160,000 $2.03
$2.79 - $3.13 276,500 4.23 $2.96 - -
</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: annual dividends of $0.00 for all years, expected
volatility of 93% for 1996, 88% for 1997, and 117% for 1998, risk-free
interest rate of 6.54% for 1996, 6.03% for 1997, and 5.66% for 1998, and
expected life of five years for all grants. The weighted-average fair
value of stock options granted in 1998, 1997 and 1996 was $2.36, $.91 and
$.66, respectively.
Under the above model, the total value of stock options granted in 1998,
1997 and 1996 was $652,976, $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 ($5,131,886) in
1998, ($2,906,052) in 1997, and $620,904 in 1996, the Company's pro forma
loss per share would be ($.99) for 1998, ($.90) for 1997, and would not
change for 1996.
F-35
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
13. 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, each 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, 1998, substantially all the warrants had been exercised and
the remaining warrants expired.
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 1998 and 1997.
14. 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. The lease was renewed for an additional two-year period commencing
January 1, 1999 for approximately $100,000 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-36
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
14. 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 9 for information with respect to Sirco Canada's operations.
15. 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.
16. Investment in and Transactions with Affiliate
On October 22, 1997, the Company acquired 3,000,000 common shares of
Access One Communications Corp. and Subsidiaries ("Access"), formerly
known as CLEC Holding Corp., 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.
In addition, during fiscal 1998, there were two additional exchanges of
shares with Access. The first exchange occurred on April 23, 1998 when
the Company exchanged 350,000 shares of its common stock for 300,000
shares of Access common stock. This exchange was valued at $1,233,750.
Additionally, Access agreed to reimburse Sirco $150,000 for expenses, of
which $75,000 was paid by Access. In addition, Access owed the Company an
additional $90,000. The aggregate of $165,000 is included in accounts
receivable. The second exchange occurred on September 10, 1998 when the
Company exchanged 400,000 shares of its common stock for 400,000 shares
of Access common stock. This exchange was valued at $221,280. In
February, 1998, the Company exchanged 50,000 shares of its common stock
for 200,000 shares of Access common stock during 1998 with a private
investor. This exchange was valued at $104,070.
F-37
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
16. Investment in and Transactions with Affiliate (Continued)
The Company's investment in Access is carried on the equity method of
accounting. At November 30, 1998 and 1997, the cost of the investment in
Access had been reduced by $159,396 and $420,000, attributable to the
Company's portion (at cost) of the Company's common stock held by Access,
with a corresponding charge to treasury stock. As of November 30, 1998,
the Company owned approximately 31% of Access. The Company, for its
fiscal year ended November 30, 1998, included its share of Access'
operations based on Access' year end of October 31, 1998. All of the
Company's investment at November 30, 1998 and 1997 represents goodwill,
which is being amortized over seven years, based on original cost. The
Company recorded a loss of $1,423,000 (including goodwill amortization of
$375,000) on its equity in the operations of Access for the year ended
November 30, 1998 (none for the year ended November 30, 1997).
Access was formed in 1991 and was inactive until September 1997, when
Access acquired 95% of the capital stock of The Other Phone Company, Inc.
("OPC"), an integrated telecommunications provider based in Florida.
Substantially all of Access' revenues represent the resale of telephone
services pursuant to a resale agreement with one supplier, BellSouth
Corporation.
The results of operations for the year ended October 31, 1998 and for the
period September 9, 1997 through October 31, 1997 and financial position
of Access as of October 31, 1998 and 1997 are summarized below:
Condensed Income Statement Information
1998 1997 (1)
---------- --------
Revenue $5,811,038 $479,516
Cost of service 5,045,514 366,243
Gross profit 765,524 113,273
Net loss (4,761,333) (158,098)
F-38
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
16. Investment in and Transactions with Affiliate (Continued)
Condensed Balance Sheet Information
1998 1997 (1)
---------- ----------
Current assets, including investment
in Sirco International Corp. common
shares carried at $396,175 and $1,500,000
at October 31, 1998 and 1997* $1,621,223 $2,082,905
Non-current assets 630,394 117,884
Goodwill 1,633,732 1,909,043
Current liabilities 4,200,705 1,603,050
Non-current liabilities 181,124 410,229
Stockholders' equity (deficiency) (496,480) 2,096,553
* The 1997 shares were sold in January and February 1998 for
$687,500.
(1) The amounts for 1997 differ from those previously reported. The
effects to the Company of such changes are not material.
In September, 1997, the Company's Chief Executive Officer loaned Access
$150,000. On November 10, 1997, the loan, plus accrued interest of
$3,000, was converted into 306,000 shares of Access common stock
(approximately 3% of Access' outstanding shares).
F-39
<PAGE>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
16. Investment in Affiliate (Continued)
In addition, Access granted options to purchase common shares of Access
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 Access (100,000 shares at $1.00 per share).
Although Access has approximately 750 shareholders, it is not publicly
traded, there is no readily ascertainable market for its stock, and the
shares of Access held by the Company have not been registered under the
Securities Act of 1933. Among other matters, Access has experienced
significant operating losses, has violated covenants contained in its
financing agreement, is having difficulty meeting its obligations as they
become due, is in dispute with its principal supplier, and requires
substantial amounts of additional funding to execute its business plan.
In addition, the report of the independent auditors of Access indicates
there is substantial doubt about Access' ability to continue as a going
concern. The Company has been furnished by Access with a written
valuation which states that the estimated current aggregate market value
of the access lines controlled by Access range between $7,200,000 and
$9,900,000. The Company has determined that there is not an impairment of
value with respect to its investment in Access as of November 30, 1998
and 1997.
17. Subsequent Events
In January 1999, the Company acquired all of the outstanding shares of
Tag Air, Inc. ("Tag Air") in exchange for 148,000 shares of the Company's
common stock valued at $190,000 in a transaction to be accounted for as a
purchase. Tag Air is a retailer that sells name brand luggage, apparel
and travel-related accessories to airline pilots and flight crews.
F-40
<PAGE>
<TABLE>
<CAPTION>
SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED NOVEMBER 30, 1998, 1997 AND 1996
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, 1998:
Allowance for doubtful accounts $ 200,000 $ 299,000 $162,000 $ 337,000
Valuation allowance for deferred
tax asset ................... $3,040,000 $ 760,000 -- $3,800,000
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
</TABLE>
* Net of recoveries
F-41
<PAGE>
Report of Independent Auditors
------------------------------
Board of Directors
Access One Communications Corp.
Orlando, Florida
We have audited the accompanying consolidated balance sheets of Access One
Communications Corp. and subsidiaries as of October 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years 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 audits.
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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Access
One Communications Corp. and subsidiaries as of October 31, 1998 and 1997, and
the consolidated results of their operations and cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a substantial loss for the year ended October 31, 1998, has
a stockholder's equity deficiency and negative working capital as of October 31,
1998, is in dispute with its principal supplier, and is having difficulty
meetings its obligations as they become due. Further, as of October 31, 1998,
the Company was in default of certain debt covenants contained in its financing
agreement which could result in termination of the agreement and the debt
becoming due and payable immediately. These factors, among others, as discussed
in Note 1 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/NUSSBAUM YATES & WOLPOW, P.C.
--------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
December 4, 1998
(January 28, 1999 as to the last
paragraph of Note 2)
F-42
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 118,042 $ 140,242
Investment securities .................................... 396,175 1,500,000
Accounts receivable, net of allowance for doubtful
accounts of $333,946 and $29,361 in 1998 and 1997 ...... 1,057,271 387,152
Prepaid expenses and other current assets ................ 49,735 55,511
----------- -----------
Total current assets ......................... 1,621,223 2,082,905
----------- -----------
Property and equipment, net ................................. 254,060 117,884
----------- -----------
Other assets:
Goodwill, net of accumulated amortization of $293,446
and $18,135 in 1998 and 1997 ........................... 1,633,732 1,909,043
Deposits ................................................. 376,334 --
----------- -----------
2,010,066 1,909,043
----------- -----------
$ 3,885,349 $ 4,109,832
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Loan payable, bank ....................................... $ -- $ 250,000
Loans payable, Receivables Funding Corporation ........... 1,054,046 --
Due to related parties ................................... 185,000 749,521
Current portion of long-term debt ........................ 227,291 213,748
Accounts payable ......................................... 2,148,609 304,109
Accrued expenses and other current liabilities ........... 585,759 85,672
----------- -----------
Total current liabilities .................... 4,200,705 1,603,050
Long-term debt, less current portion ........................ 181,124 410,229
----------- -----------
4,381,829 2,013,279
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
(Continued)
1998 1997
----------- -----------
<S> <C> <C>
Stockholders' equity (deficiency):
Common stock, $.001 par value, authorized 25,000,000
shares; issued and outstanding 12,776,000 and 10,715,000
shares in 1998 and 1997 ................................ 12,776 10,715
Additional paid-in capital ............................... 4,534,905 2,243,936
Unrealized holding loss on investment securities ......... (124,730) --
Accumulated deficit ...................................... (4,919,431) (158,098)
----------- -----------
(496,480) 2,096,553
----------- -----------
$ 3,885,349 $ 4,109,832
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998 AND 1997
1998 1997
------------ -----------
<S> <C> <C>
Revenue ............................................ $ 5,811,038 $ 479,516
Cost of service .................................... 5,045,514 366,243
------------ -----------
Gross profit ....................................... 765,524 113,273
------------ -----------
Operating expenses:
Selling ......................................... 725,574 70,283
Administrative .................................. 3,427,414 184,716
------------ -----------
Total operating expenses .............. 4,152,988 254,999
------------ -----------
Loss from operations ............................... (3,387,464) (141,726)
------------ -----------
Other expense:
Interest and loan fees .......................... 312,869 16,372
Loss on sale of investment securities ........... 1,061,000 --
------------ -----------
1,373,869 16,372
------------ -----------
Net loss ........................................... ($ 4,761,333) ($ 158,098)
============ ===========
Basic and diluted net loss per common share ........ ($ .41) ($ .05)
============ ===========
Weighted average number of common shares outstanding 11,641,592 3,180,000
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1998 AND 1997
Common Stock Additional
-------------------------- Paid-in
Shares Amount Capital
----------- ----------- ----------
<S> <C> <C> <C>
Balance, November 1, 1996 ............................... 2,500,000 $ 2,500 ($2,500)
Capital contributed ..................................... -- -- 100
Stock issued to reimburse Chairman for expenses ......... 750,000 750 34,250
Stock issued to acquire OPC Acquisition Corp. ........... 4,000,000 4,000 429,251
Stock issued pursuant to private placements, net ........ 465,000 465 285,835
Stock issued to Sirco International Corp. in exchange
for 425,000 shares of Sirco International Corp.......... 3,000,000 3,000 1,497,000
Net loss for the year ended October 31, 1997 ............ -- -- --
---------- ---------- ----------
Balance, October 31, 1997 ............................... 10,715,000 10,715 2,243,936
Stock issued to Sirco International Corp. in exchange
for 750,000 shares of Sirco International Corp. ........ 700,000 700 1,454,330
Stock issued to related parties in satisfaction of loans
and accrued interest ................................... 846,000 846 422,154
Stock issued to president of The Other Phone
Company Inc. for compensation .......................... 200,000 200 99,800
Stock issued pursuant to private placements ............. 315,000 315 314,685
Net loss for the year ended October 31, 1998 ............ -- -- --
Unrealized holding loss on investment ................... -- -- --
---------- ---------- ----------
Balance, October 31, 1998 ............................... 12,776,000 $ 12,776 $4,534,905
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED OCTOBER 31, 1998 AND 1997
(continued)
Unrealized
Holding
Loss on
Investment Accumulated
Securities Deficit Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance, November 1, 1996 ............................... $ -- $ -- $ --
Capital contributed ..................................... -- -- 100
Stock issued to reimburse Chairman for expenses ......... -- -- 35,000
Stock issued to acquire OPC Acquisition Corp. ........... -- -- 433,251
Stock issued pursuant to private placements, net ........ -- -- 286,300
Stock issued to Sirco International Corp. in exchange
for 425,000 shares of Sirco International Corp.3,000,000
-- -- 1,500,000
Net loss for the year ended October 31, 1997 ............ -- (158,098) (158,098)
----------- ----------- -----------
Balance, October 31, 1997 ............................... -- (158,098) 2,096,553
Stock issued to Sirco International Corp. in exchange
for 750,000 shares of Sirco International Corp. ........ -- -- 1,455,030
Stock issued to related parties in satisfaction of loans
and accrued interest ................................... -- -- 423,000
Stock issued to president of The Other Phone
Company Inc. for compensation .......................... -- -- 100,000
Stock issued pursuant to private placements ............. -- -- 315,000
Net loss for the year ended October 31, 1998 ............ -- (4,761,333) (4,761,333)
Unrealized holding loss on investment ................... (124,730) -- (124,730)
----------- ----------- -----------
Balance, October 31, 1998 ............................... ($ 124,730) ($4,919,431) ($ 496,480)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1997
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... ($4,761,333) ($ 158,098)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ........................................... 342,897 22,595
Provision for losses on receivables ..................................... 592,720 16,590
Loss on sale of securities .............................................. 1,061,000 --
Stock issued for compensation ........................................... 100,000 --
Reimbursement of expenses to Sirco International Corp. .................. 75,000 --
Expenses reimbursed through issuance of common stock .................... -- 35,000
Changes in operating assets and liabilities, net of effect of acquisition
in 1997:
Accounts receivable ................................................. (1,262,839) (172,679)
Prepaid expenses .................................................... 5,776 (16,770)
Deposits ............................................................ (376,334) 3,674
Accounts payable .................................................... 1,844,500 159,901
Accrued expenses .................................................... 523,087 44,019
----------- -----------
Total adjustments ............................................... 2,905,807 92,330
----------- -----------
Net cash used in operating activities ........................... (1,855,526) (65,768)
----------- -----------
Cash flows from investing activities:
Sale of securities .......................................................... 1,373,125 --
Purchase of equipment ....................................................... (203,762) (17,969)
Acquisition of OPC .......................................................... -- (1,000,000)
----------- -----------
Net cash provided by (used in) investing activities ............. 1,169,363 (1,017,969)
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998 AND 1997
(continued)
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Repayment of loan payable, bank ............................................. (250,000) --
Borrowings, Receivable Funding Corporation, net ............................. 1,054,046 --
Repayment to related parties, net ........................................... (239,521) --
Principal payments of long-term debt ........................................ (215,562) (59,822)
Proceeds from issuance of long-term debt .................................... -- 502,442
Proceeds from issuance of common stock and
contribution to capital ................................................... 315,000 719,651
----------- -----------
Net cash provided by financing activities ....................... 663,963 1,162,271
----------- -----------
Net increase (decrease) in cash and cash equivalents ........................... (22,200) 78,534
Cash and cash equivalents, beginning of year ................................... 140,242 61,708
----------- -----------
Cash and cash equivalents, end of year ......................................... $ 118,042 $ 140,242
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid - interest ......................................................... $ 312,869 $ 4,462
Non-cash investing and financing activities (see Notes 3 and 7)
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Access One Communications Corp. and its subsidiaries ("the Company").
All significant intercompany balances and transactions have been
eliminated.
Organizational Background
Access One Communications and Subsidiaries ("The Company") formerly known
as CLEC Holding Corp. ("CLEC"), formerly PRS SUB II ("PRS"), was
incorporated under the laws of the State of New Jersey in 1991. The
Company emerged from bankruptcy, pursuant to a Bankruptcy Court Order in
1996, and was inactive until September 1997.
On September 9, 1997, the Company acquired 95% of the common stock of The
Other Phone Company, Inc. ("OPC"), a reseller of local and long-distance
telecommunications services to businesses and residential customers in
the Southeastern United States, principally in Florida, which began
operations in January, 1997. The cost of the acquisition, which was
accounted for as a purchase, was $1,927,178 ($1,000,000 paid in cash and
the remainder in seller notes (see Note 8), and the entire purchase price
of $1,927,178 was allocated to goodwill. The consolidated financial
statements include the results of operations of OPC since September 9,
1997.
The following unaudited pro forma consolidated results of operations for
the year ended October 31, 1997 assumes the OPC acquisition occurred as
of November 1, 1996:
Net sales $1,723,853
Net loss ($561,348)
Loss per share ($.09)
F-47
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Investment Securities
Marketable equity securities, all of which have represented common shares
of Sirco International Corp. ("Sirco"), have been categorized as
available for sale and as a result, are stated at fair value. Unrealized
holding gains and losses are included as a component of stockholders'
equity until realized. Realized gains and losses are determined based on
the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is being provided
by the straight-line method over the estimated useful lives of the
assets, generally three to seven years. Leasehold improvements are
amortized, using the straight-line method, over the term of the lease or
the useful life of the improvements, whichever is shorter.
Earnings Per Share
For the year ended October 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
which replaces the presentation of primary earnings per share ("EPS") and
fully diluted EPS with a presentation of basic EPS and diluted EPS. Basic
EPS excludes common stock equivalents and is computed by dividing net
income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if common stock equivalents such
as stock options and warrants were exercised. The effect of stock options
and warrants on the calculation of earnings per common share was
anti-dilutive in 1998 and 1997.
Goodwill
The excess of the cost of subsidiaries over the equity in underlying net
assets at the dates of acquisition (goodwill) is being amortized over 7
years.
F-48
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets
The Company reviews its intangible assets and other long-lived assets for
impairment at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset should be
assessed. Management evaluates the intangible assets related to each
acquisition individually to determine whether an impairment has occurred.
An impairment is recognized when the discounted future cash flows
estimated to be generated by the acquired business is insufficient to
recover the current unamortized balance of the intangible asset, with the
amount of any such deficiency charged to income in the current year.
Estimates of future cash flows are based on many factors, including (i)
current operating results of the applicable business, (ii) projected
future operating results of the applicable business, (iii) the occurrence
of any significant regulatory changes which may have an impact on the
continuity of the business, and (iv) any other material factors that
affect the continuity of the applicable business.
The Company has been furnished with a written valuation, which states
that the estimated current aggregate market value of the access lines
controlled by the Company ranges between $7,200,000 and $9,900,000.
Management believes that no material impairment in the carrying value of
long-lived assets existed at October 31, 1998 or 1997.
Revenue Recognition
Revenues are recognized as services are provided to customers and consist
primarily of charges for use of local and long-distance services.
Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
Income Taxes." Under the asset and liability method specified by SFAS
109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities. The principal type of
differences between assets and liabilities for financial statement and
tax return purposes are allowances for doubtful accounts, depreciation
and amortization, and net operating losses.
F-49
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and 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.
Fair Value of Financial Instruments
The Company's principal financial instruments consist of cash and cash
equivalents, investment securities, and loans and notes payable. The
Company believes that the carrying amount of such instruments
approximates fair value.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." Adoption of this pronouncement is
required for fiscal years beginning after December 15, 1997. The Company
will adopt SFAS No. 130 for the fiscal year ended October 31, 1999.
Adoption of this pronouncement will have no effect on the operations of
the Company.
Reclassifications
Reclassifications have been made to the October 31, 1997 financial
statements to confirm to the current year presentation.
F-50
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
1. Summary of Significant Accounting Policies (Continued)
Going Concern Matters and Realization of Assets
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company has
incurred a substantial loss for the year ended October 31, 1998, has an
owners' equity deficiency and negative working capital as of October 31,
1998, is in dispute with its principal supplier, BellSouth Corporation
("BellSouth"), and is having difficulty meeting its other obligations as
they become due. Further, as of October 31, 1998, the Company was in
default of certain debt covenants contained in its financing agreement
which could result in termination of the agreement and the debt becoming
due and payable immediately.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn, is dependent upon the Company's ability to
generate sufficient cash flow to meet its obligations on a timely basis,
to obtain additional financing, and ultimately to attain profitability.
The Company is actively pursuing additional financing and the Company has
entered into a new agreement with BellSouth, which it believes will
increase its operating profitability. There can be no assurance that
management's plans can be accomplished. The financial statements do not
include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
2. Description of Business and Concentrations
The Company provides local and long-distance telecommunications services
to business and residential customers in the Southeastern United States,
principally in Florida. The Company's business is highly competitive and
is subject to various Federal, State and local regulations, including the
Federal Communications Commission and various state public service
commissions.
F-51
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
2. Description of Business and Concentrations (Continued)
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables.
The Company's trade receivables are geographically concentrated with
businesses and residential customers primarily located in the State of
Florida. The Company continually evaluates the creditworthiness of its
customers; however, it generally does not require collateral. The
Company's allowance for doubtful accounts is based on historical trends,
current market conditions and other relevant factors.
During the years ended October 31, 1998 and 1997, the Company purchased
approximately 90% of its telephone services under a resale agreement with
one supplier, BellSouth. BellSouth is one of only a few potential
suppliers for the Company's local telephone resale business and,
therefore, the loss of the Company's relationship with BellSouth could
adversely affect the Company's ability to continue in business. On
January 28, 1999, the Company filed a complaint against BellSouth with
the Florida Public Service Commission alleging, amongst other
allegations, breach of certain clauses under the resale agreement. The
complaint states that the Company has suffered direct damages in excess
of $1,700,000 and consequential damages in excess of $10,000,000 as a
result of BellSouth's breaches of the resale agreement. The Company has
recorded a liability in full to BellSouth of approximately $1,550,000 at
October 31, 1998 representing BellSouth's allowable charges under the
resale agreement. The Company intends to withhold payment of such amount
until resolution of the complaint. There can be no assurance that the
Company will be successful in its resolution of the aforementioned
BellSouth matters.
3. Investment Securities
On October 22, 1997, the Company exchanged 3,000,000 shares of its common
stock for 375,000 shares of unregistered Sirco common stock, subject to
certain price protection adjustments, which required Sirco to issue an
additional 50,000 shares of common stock to the Company. The Company
valued the entire 425,000 shares at $1,500,000 at the exchange date and
on October 31, 1997, which represented its estimate of the fair value of
the aforementioned Sirco shares. During fiscal 1998, the aforementioned
425,000 shares were sold for proceeds of $687,500, resulting in a
realized loss of $812,500.
F-52
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
3. Investment Securities (Continued)
In addition, during fiscal 1998, there were two additional exchanges of
shares with Sirco. The first exchange occurred on April 23, 1998 when the
Company exchanged 300,000 of its common stock for 350,000 shares of Sirco
common stock. This exchange was valued at $1,233,750. Of this first
exchange, 265,000 shares were sold for proceeds of $685,625, resulting in
a realized loss of $248,500. The second exchange occurred on September
10, 1998 when the Company exchanged 400,000 shares of its common stock
for 400,000 shares of Sirco common stock. This exchange was valued at
$221,280. As of October 31, 1998 and 1997, the Company owned 485,000 and
425,000 shares of Sirco's common stock, which represents approximately 8%
and 10% of Sirco's common stock, respectively. As of October 31, 1998 and
1997 Sirco owned approximately 31% and 28% of the Company's common stock.
The Company's investment in Sirco shares are summarized as follows:
<TABLE>
<CAPTION>
Gross
Unrealized
Cost Fair Value Holding Loss
----------- ----------- ----------
<S> <C> <C> <C>
October 31, 1998 $ 520,905 $ 396,175 ($124,730)
October 31, 1997 $ 1,500,000 $ 1,500,000 -
</TABLE>
The remaining shares of Sirco stock as of October 31, 1998 are pledged
and held as collateral by Receivables Funding Corporation (see Note 6).
F-53
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
4. Property and Equipment
1998 1997
--------- ---------
Furniture and fixtures ................... $ 63,916 $ 28,921
Office equipment ......................... 101,846 19,184
Computer equipment ....................... 152,126 71,169
Billing software ......................... 20,175 19,295
Leasehold improvements ................... 4,268 --
--------- ---------
342,331 138,569
Less accumulated depreciation
and amortization ........................ (88,271) (20,685)
--------- ---------
$ 254,060 $ 117,884
========= =========
5. Loan Payable, Bank
As of October 31, 1997, the Company was obligated under a line of credit
with NationsBank for $250,000 which was repaid during fiscal 1998.
Borrowings under this line of credit bear interest at 7.00% and are
secured by a $250,000 certificate of deposit held by the 5% stockholders
of OPC. As of October 31, 1997, there are no maximum additional available
borrowings on this line of credit. The agreement expired on December 5,
1997.
6. Loans Payable, Receivable Funding Corporation
Receivable Financing
On December 26, 1997, the Company's subsidiary, OPC entered into a
Receivable Sale Agreement ("the Agreement") with Receivables Funding
Corporation ("RFC"). The agreement provides for OPC to sell up to
$1,500,000 of its eligible receivables (as defined) to RFC on a periodic
basis and to grant to RFC a security interest in the receivables
purchased by RFC. As of October 31, 1998, $652,581 was outstanding under
this agreement.
F-54
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 1998 AND 1997
6. Loans Payable, Receivable Funding Corporation (Continued)
Receivable Financing (Continued)
The agreement, in substance, does not transfer the risk of loss to RFC,
and has been treated as a financing for financial statement purposes. In
substance, OPC borrows under the agreement at approximately five
percentage points above the prime rate.
The agreement has a termination date of the earlier of (a) December 26,
1999; (b) a termination event as defined in the agreement; (c) the
occurrence of an event of seller default as defined in the agreement; or
(d) ninety days following the Company's delivery of a written notice to
RFC setting forth the Company's desire to terminate the agreement and the
payment of a termination fee (as defined). The Company is in default of
certain of the covenants contained in the agreement, which gives RFC the
right to request repayment of all amounts due upon demand, and
accordingly, the entire obligation has been classified as a current
liability.
Senior Secured Promissory Note
The Company entered into a Senior Secured Promissory Note ("the Note)
with RFC on September 2, 1998. The Note provides for borrowings up to a
maximum of $1,200,000, to be drawn in minimum increments of $100,000. The
Note matures the earlier of 48 months, or co-terminus with the Agreement
described above. Borrowings under the note shall not exceed the sum of
25% of the Net Value of Purchased Receivables (as defined in the
Agreement) and 30% of the then 3-day average of Sirco common shares held
as collateral. In no event shall more than 50% of Borrowing Availability
(as defined) be represented by the Sirco shares. Each draw shall be
repaid in equal monthly principal payments based on a level amortization
over 48 months from the date of the draw, plus accrued interest, payable
monthly in arrears at the prime rate plus 5.5 percentage points.
As of October 31, 1998, the Company had outstanding borrowings of
$401,465 under the note. Since the Company is in violation of several
covenants contained in the agreement, and therefore callable by RFC, the
entire obligation has been classified as a current liability.
F-55
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
7. Due To Related Parties
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Note payable to John Murray, the seller of OPC, and minority interest
owner of 5% of OPC, payable in one payment of $250,000 on November 10,
1997; interest is imputed at 7%; secured by all assets of OPC as of
September 9, 1997 and the 475 shares of OPC common stock purchased $ -- $249,521
Note payable to Ken Baritz, Chairman of the Company, payable in one
payment of $250,000 on December 9, 1997 or on demand;
interest at 12%* -- 250,000 (i)
Note payable to Joel Dupre, Chairman of Sirco, payable in one payment of
$150,000 on December 9, 1997 or on demand;
interest at 12%* -- 150,000 (ii)
Note payable to Universal Claims Administrators, Inc., an entity owned by
certain shareholders of the Company, payable in one payment of $100,000
on December 9, 1997 or on demand;
interest at 12%* -- 100,000
Note payable to Ken Baritz, payable on demand, interest
at 12% 20,000 --
Note payable to Sirco, payable on demand, non-interest
bearing 75,000 (iii) --
Note payable to a subsidiary of Sirco, payable on demand,
interest at 8% 90,000 (iv) --
------------ --------
$ 185,000 $749,521
============ ========
</TABLE>
* These notes were secured by a second position behind John Murray in 475
shares of the common stock of OPC.
(i) During the year ended October 31, 1998, the Company issued 540,000 shares
of common stock in satisfaction of this loan and $20,000 of accrued
interest thereon.
(ii) During the year ended October 31, 1998, the Company issued 306,000 shares
of common stock in satisfaction of this loan and $3,000 of accrued
interest thereon.
(iii) During 1998, the Company agreed to reimburse Sirco $150,000 for certain
expenses, of which $75,000 was paid to Sirco, and $75,000 is owed to
Sirco at October 31, 1998.
(iv) Represents funds advanced in fiscal 1998 by a subsidiary of Sirco to
Access.
F-56
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
8. Long-Term Debt
1998 1997
--------- ---------
Note payable to John Murray, payable in quarterly
installments of $62,500 which includes imputed
interest at 7%, maturing on July 1, 2000 ....... $ 408,415 $ 620,468
Other ............................................ -- 3,509
--------- ---------
408,415 623,977
Less current maturities .......................... (227,291) (213,748)
--------- ---------
$ 181,124 $ 410,229
========= =========
Maturities on long-term debt are as follows as of October 31, 1998:
Year ending
October 31,
-----------
1999 $227,291
2000 181,124
---------
$408,415
========
The note to John Murray is secured by 95% of the shares of OPC, and such
shares are held in escrow until the debt is repaid.
9. Income Taxes
At October 31, 1998, the Company has an operating loss carryforward of
approximately $3,100,000 which is available to offset future taxable
income. A valuation allowance has been recognized to offset the full
amount of the deferred tax asset of approximately $1,200,000 and $30,000
at October 31, 1998 and 1997 due to the uncertainty of realizing the
benefit of the loss carryforwards. The loss carryforwards will expire in
2013.
F-57
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
9. Income Taxes
The Company's effective income tax rate differs from the federal
statutory rates as follows:
1998 1997
------ ------
Federal statutory rate 34.0% 34.0%
Utilization of net operating loss carryforwards (34.0) (34.0)
----- -----
- -
===== =====
10. Commitments and Contingencies
Leases
The Company leases office facilities and certain equipment under
operating leases that expire through 2003. The leases require minimum
annual rental and certain other expenses including maintenance and taxes.
Rent expense for the years ended October 31, 1998 and 1997 was
approximately $86,000 and $7,000.
As of October 31, 1998, the Company's future minimum rental commitments
are as follows:
1999 $108,524
2000 66,103
2001 61,867
2002 62,571
2003 25,284
F-58
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
11. Stockholders' Equity
Common Stock Reverse Split
In August 1997, the Board of Directors authorized a one-for-four reverse
stock split of common shares. All share and earnings per common share
amounts included in these financial statements have been adjusted for the
reverse stock split.
Stock Issued for Compensation
On December 1, 1997, pursuant to an employment agreement, the Company
issued 200,000 shares of unregistered common stock to the new President
of OPC. Compensation expense of $100,000 was recorded in fiscal 1998 for
these shares.
Stock Options
On October 22, 1997, the Company, pursuant to the Sirco Stock Purchase
Agreement, granted to Sirco's nominee to the Board of Directors options
to purchase up to 100,000 shares of common stock for up to three years at
an exercise price of $1.00 per share. On December 1, 1997, the Company
granted options to the President of OPC to purchase 800,000 shares of
common stock for up to three years at an exercise price of $.50 per
share.
In December 1997, January 1998 and February 1998, the Company granted
options to employees to purchase 200,000 shares of common stock at an
exercise price of $1.00 per share. These options were issued to four
officers of OPC. Options to purchase 50% of the shares of common stock
will vest at the one-year anniversary of grant, 25% at the two-year
anniversary of grant and the balance of 25% at the three-year anniversary
of grant. These options will expire in five years.
No options were exercised during the years ended October 31, 1998 and
1997.
F-59
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
11. Stockholders' Equity (Continued)
The following is a summary of outstanding options:
<TABLE>
<CAPTION>
Weighted-
Average
Number Exercise Price Exercise
of Shares Per Share Price
--------- --------- -----
<S> <C> <C> <C>
Outstanding, November 1, 1996 - $ - $ -
Granted during the year ended
October 31, 1997 100,000 $1.00 $1.00
---------
Outstanding October 31, 1997 100,000 $1.00 $1.00
Granted during the year ended
October 31, 1998 1,000,000 $.50 - $1.00 $ .60
Canceled during the year
ended October 31, 1998 (50,000) $1.00 $1.00
---------
Outstanding October 31, 1998 1,050,00 $.50 - $1.00 $ .62
=========
Options exercisable, October
31, 1997 100,000 $1.00 $1.00
==========
Options exercisable, October
31, 1998 900,00 $.50 - $1.00 $ .56
==========
</TABLE>
F-60
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
11. Stockholders' Equity (Continued)
The following table summarizes information about the options outstanding
at October 31, 1998:
<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>
$ .50 800,000 4.08 $ .50 800,000 $ .50
$ 1.00 250,000 4.10 $1.00 100,000 $1.00
</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: annual dividends of $0.00 for all years, expected
volatility of 0% for all years, risk-free interest rate of 6.33% for
fiscal 1997, and 5.96% for fiscal 1998, and expected life of five years
for all grants. The weighted-average fair value of stock options granted
in fiscal 1998 and 1997 was $.15 and $.27, respectively.
Under the above model, the total value of stock options granted in fiscal
1998 and 1997 was $139,569 and $26,772, respectively, which would be
amortized ratably on a pro forma basis over the related vesting periods,
which range from immediate vesting to three years. Had the Company
determined compensation cost for these plans in accordance with SFAS No.
123, the Company's pro forma net loss would have been ($4,876,001) in
fiscal 1998 and ($184,870) in fiscal 1997, the Company's pro forma loss
per share would be ($.42) for fiscal 1998 and ($.06) for fiscal 1997, and
would not change for 1996.
F-61
<PAGE>
ACCESS ONE COMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED OCTOBER 31, 1998 AND 1997
11. Stockholders' Equity (Continued)
Stock Warrants
On September 9, 1997, in connection with borrowings from related parties,
the Company granted warrants to such related parties to purchase 500,000
shares of common stock. The exercise price is $1.20 for a period of three
years.
On December 25, 1997, the Company granted warrants to purchase 25,000
shares of common stock to an individual. The exercise price is $1.20 for
a period of three years.
None of the warrants were exercised during the years ended October 31,
1998 and 1997. The Company has determined that the warrants did not have
any significant value at the date of issuance and, accordingly, no
portion of the proceeds of the related debt was allocated to the
warrants.
12. Restatements and Prior Period Adjustment
The Company's financial statements as of October 31, 1997 have been
restated to reflect an expense for advertising and marketing expenses,
which had previously been deferred. In addition, goodwill and minority
interest have been restated to correct errors in the computation of such
amounts as they related to the acquisition of OPC.
The effect of the restatement for the year ended October 31, 1997 is as
follows:
As Previously
Reported As Restated
----------- -----------
Balance sheet:
Deferred line installation costs ........... $ 124,546 $ --
Goodwill ................................... 1,953,623 1,909,043
Minority interest .......................... 113,446 --
Accumulated deficit ........................ (101,276) (158,098)
Statement of operations:
Loss before minority interest in loss of
consolidated subsidiary .................. (102,418) (158,098)
Net loss ................................... (101,276) (158,098)
Basic and diluted net loss per share ....... ($ .03) ($ .05)
F-62
EXHIBIT 3(f)
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
SIRCO INTERNATIONAL CORP.
Under Section 805 of the Business Corporation Law
--------------------
FIRST: The name of the corporation is Sirco International Corp. The
name under which the corporation was formed is Sirco Products Co. Inc.
SECOND: The certificate of incorporation of the corporation was filed
by the Department of State on July 22, 1964.
THIRD: The amendment to the certificate of incorporation effected by
this certificate of amendment is as follows:
To create a series of Preferred Stock, par value $.10 per
share, designated Series B Preferred Stock.
FOURTH: To accomplish the foregoing amendment, Article FOURTH of the
certificate of incorporation is hereby amended to add the following paragraph E:
E. Series B Preferred Stock. A series of 1300 shares of
preferred stock, par value $0.10 per share, of the corporation shall be
created and be designated "Series B Preferred Stock" having the
following rights and preferences:
SECTION 1. Dividends and Distributions. Commencing from the
date of initial issuance of shares of Series B Preferred Stock (the
"Date of Issuance"), the holder of each issued and outstanding share of
Series B Preferred Stock shall be entitled to receive, out of assets at
the time legally available for such purpose, dividends and
distributions, whether in cash or property or in securities of the
corporation, including subscription or other rights to purchase or
acquire securities of the corporation ("Distributions"), when and as
declared by the Board of Directors of the corporation (each such date,
a "Dividend Payment Date") on the shares of common stock, par value
$0.10 per share, of the corporation, such that when and as a
Distribution is declared, paid and made on shares of common stock, the
Board of Directors shall also declare a Distribution at the same rate
and in like kind on the shares of Series B Preferred Stock, so that the
Series B Preferred Stock will participate equally with the common
stock, share for share, in such Distribution. In connection therewith,
each share of Series B Preferred Stock shall entitle the holder thereof
to such Distributions based upon the number of shares of common stock
into which such share of Series B Preferred Stock is then convertible,
rounded to the nearest one tenth of a share. If on any Dividend Payment
Date the corporation shall not be lawfully permitted under New York law
to pay all or a portion of any such declared Distributions, the
corporation shall take such action as may be lawfully permitted in
order to enable the corporation, to the extent permitted by New York
law, lawfully to pay such Distributions.
<PAGE>
SECTION 2. Liquidation. (a) In the event of any liquidation,
dissolution or winding-up of the corporation, either voluntary or
involuntary (a "Liquidation"), the holders of shares of Series B
Preferred Stock then issued and outstanding shall be entitled to be
paid out of the assets of the corporation available for distribution to
its shareholders, whether from capital, surplus or earnings, before any
payment shall be made to the holders of shares of common stock or upon
any other series of preferred stock of the corporation with a
liquidation preference subordinate to the liquidation preference of the
Series B Preferred Stock, an amount equal to one thousand dollars
($1,000) per share. If, upon any Liquidation of the corporation, the
assets of the corporation available for distribution to its
shareholders shall be insufficient to pay the holders of shares of the
Series B Preferred Stock, and the holders of any other series of
preferred stock with a liquidation preference equal to the liquidation
preference of the Series B Preferred Stock, the full amounts to which
they shall respectively be entitled, the holders of shares of Series B
Preferred Stock and the holders of any other series of preferred stock
with liquidation preference equal to the liquidation preference of the
Series B Preferred Stock shall receive all of the assets of the
corporation available for distribution and each such holder of shares
of Series B Preferred Stock and the holders of any other series of
preferred stock with a liquidation preference equal to the liquidation
preference of the Series B Preferred Stock shall share ratably in any
distribution in accordance with the amounts due such shareholders.
After payment shall have been made to the holders of shares of the
Series B Preferred Stock of the full amount to which they shall be
entitled, as aforesaid, the holders of shares of Series B Preferred
Stock shall be entitled to no further distributions thereon and the
holders of shares of common stock and of shares of any other series of
stock of the corporation shall be entitled to share, according to their
respective rights and preferences, in all remaining assets of the
corporation available for distribution to its shareholders.
(b) A merger or consolidation of the corporation with
or into any other corporation, or a sale, lease, exchange or transfer
of all or any part of the assets of the corporation which shall not in
fact result in the liquidation (in whole or in part) of the corporation
and the distribution of its assets to its shareholders shall not be
deemed to be a voluntary or involuntary liquidation (in whole or in
part), dissolution or winding-up of the corporation.
SECTION 3. Conversion of Series B Preferred Stock. The holders
of Series B Preferred Stock shall have the following conversion rights:
(a) Optional Right to Convert. Each share of Series B
Preferred Stock shall be convertible at the option of the holder (an
"Optional Conversion") into fully paid and non-assessable shares of
common stock at any time after the original issuance of the Series B
Preferred Stock (such date being referred to as a "Conversion Date") at
the conversion price (the "Conversion Price") set forth below.
(b) Mechanics of Conversion. Each holder of Series B
Preferred Stock who desires to convert the same into shares of common
stock shall provide written notice (a "Conversion Notice") via
confirmed facsimile to the corporation at its principal executive
<PAGE>
offices. The original Conversion Notice and the certificate or
certificates representing the Series B Preferred Stock for which
conversion is elected, duly endorsed in blank or accompanied by proper
instruments of transfer, shall be delivered to the corporation at its
principal executive offices by overnight domestic courier or by
international courier. The date upon which a Conversion Notice is
properly received by the corporation shall be a "Notice Date".
(c) Conversion Price. Each share of Series B
Preferred Stock shall be convertible into a number of shares of common
stock determined in accordance with the following formula (the
"Conversion Formula"):
1,000
Conversion Price
where:
Conversion
Price = (A) prior to November 18, 1999, $1.00 or (B) on or
after November 18, 1999, the lesser of (i) $1.00 or (ii) the average
closing share price of the common stock, as reported by NASDAQ, for the
twenty (20) trading days immediately preceding November 18, 1999;
provided, however, that in no event shall the Conversion Price be less
than $.50
(d) Mandatory Conversion. At any time after November
18, 1999 the corporation may cause the conversion (a "Mandatory
Conversion") of the Series B Preferred Stock outstanding into fully
paid and non-assessable shares of common stock pursuant to the
Conversion Formula, based upon the Conversion Price then in effect.
To effect a Mandatory Conversion, the corporation shall issue
to each holder of record of the Series B Preferred Stock a notice
stating that the corporation is effecting a Mandatory Conversion with
regard to the Series B Preferred Stock. Such notice shall contain a
statement indicating the number of shares of Series B Preferred Stock
subject to the Mandatory Conversion, the number of shares of common
stock to be received by holders upon conversion and the effective date
of such conversion (the "Conversion Date"). As soon as practicable
after the Conversion Date, each holder of Series B Preferred Stock
shall surrender certificates for all shares being converted duly
endorsed in blank or accompanied by proper instruments of transfer and
the corporation shall deliver to such holder or such holder's nominee
certificates representing the number of shares of common stock to which
such holder shall be entitled. The Mandatory Conversion of Series B
Convertible Stock shall be deemed to have occurred on the Conversion
Date without regard to the time of surrender of such shares of Series B
Preferred Stock and (i) such shares of Series B Preferred Stock shall
no longer be deemed outstanding and all rights whatsoever with respect
to such shares shall terminate (except the right of a holder to receive
certificates representing the number of shares of common stock to which
such holder is entitled, together with a cash payment in lieu of any
fractional shares of common stock) and (ii) holders entitled to receive
shares of common stock deliverable upon conversion of such shares of
Series B Preferred Stock shall be treated for all purposes as the
holder of record of such shares of common stock on the Conversion Date
notwithstanding that the share register of the corporation shall then
be closed or the certificates representing the shares of common stock
shall not then be actually delivered to such holder.
<PAGE>
(e) Fractional Shares. No fractional share shall be
issued upon the conversion of any of the Series B Preferred Stock. All
shares of common stock (including fractions thereof) issuable upon
conversion of the Series B Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance
of a fraction of a share of common stock, the corporation shall, in
lieu of issuing any fractional share, pay the holder otherwise entitled
to such fraction a sum in cash equal to the closing price per share of
the common stock, as reported by NASDAQ, on the Notice Date multiplied
by such fraction.
(f) Reservation of Common Stock Issuable Upon
Conversion. The corporation shall at all times reserve and keep
available out of its authorized but unissued shares of common stock,
solely for the purpose of effecting the conversion of the Series B
Preferred Stock, such number of shares of common stock free of
preemptive rights as shall be sufficient to effect the conversion of
all shares of Series B Preferred Stock then outstanding; and if at any
time the number of authorized but unissued shares of common stock shall
not be sufficient to effect the conversion of all then outstanding
shares of Series B Preferred Stock, the corporation will take such
action as may be necessary to increase its authorized but unissued
shares of common stock to such number of shares as shall be sufficient
for such purpose.
(g) Adjustment of Conversion Price.
(i) If, prior to the conversion of all
outstanding shares of Series B Preferred Stock, the corporation shall
reclassify, subdivide or combine its outstanding shares of common stock
into a greater or smaller number of shares by a stock split, stock
dividend or other similar event, then in each such case the Conversion
Price shall be adjusted to that price which will permit the number of
shares of common stock into which Series B Preferred Stock may be
converted to be increased or reduced in the same proportion as are the
number of shares of common stock.
(ii) If, prior to the conversion of all of
the outstanding shares of Series B Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of
common stock of the corporation shall be changed into the same or a
different number of shares of the same or another class or classes of
stock or securities of the corporation or another entity, then the
holders of shares of Series B Preferred Stock shall thereafter have the
right to purchase and receive upon conversion of the Series B Preferred
Stock, upon the basis and upon the terms and conditions specified in
this Paragraph D of this Article Fourth and in lieu of the shares of
common stock immediately theretofore issuable upon conversion, such
share of stock and/or securities as may be issued or payable with
respect to or in exchange for the number of shares of common stock
immediately theretofore purchasable and receivable upon the conversion
of the Series B Preferred Stock held by such holders had such merger,
consolidation, exchange of shares, recapitalization or reorganization
<PAGE>
not taken place, and in any such case appropriate provisions shall be
made with respect to the rights and interests of the holders of the
Series B Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion
of the Series B Preferred Stock) shall thereafter be applicable, as
nearly as may be practicable in relation to any shares of stock or
securities thereafter deliverable upon the exercise hereof. The
corporation shall not effect any transaction described in this
subsection unless the resulting successor or acquiring entity (if not
the corporation) assumes by written instrument the obligation to
deliver to the holders of the Series B Preferred Stock such shares of
stock and/or securities as, in accordance with the foregoing
provisions, the holders of the Series B Preferred Stock may be entitled
to purchase.
(iii) If any adjustment under this
subsection would create a fractional share of common stock or a right
to acquire a fractional share of common stock, such fractional share
shall be disregarded and the number of shares of common stock issuable
upon conversion shall be the next higher number of shares.
(h) The corporation will pay any and all issue or
other taxes that may be payable in respect of any issue or delivery of
shares of common stock on conversion of shares of Series B Preferred
Stock pursuant hereto. The corporation shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved
in the issue or delivery of common stock in a name other than that in
which the shares of Series B Preferred Stock so converted were
registered, and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the corporation the
amount of such tax, or has established, to the satisfaction of the
corporation, that such tax has been paid.
SECTION 4. Status of Converted Shares. In the event any shares
of Series B Preferred Stock shall be converted as contemplated by this
Paragraph D of this Article Fourth, the shares so converted shall be
canceled, shall return to the status of authorized but unissued
preferred stock, par value $0.10 per share, of the corporation, of no
designated class or series, and shall not be issuable by the
corporation as Series B Preferred Stock.
SECTION 5. Voting Rights. (a) Except as otherwise specifically
provided by the New York Business Corporation Law or as otherwise
provided herein, the holders of Series B Preferred Stock shall be
entitled to vote on any matters required or permitted to be submitted
to the holders of shares of common stock for their approval, and such
holders of shares of Series B Preferred Stock and holders of shares of
common stock shall vote as a single class, with the holders of shares
of Series B Preferred Stock having the number of votes to which they
would be entitled if the Series B Preferred Stock were converted into
shares of common stock in accordance with the Conversion Formula.
(b) So long as Series B Preferred Stock is
outstanding, the corporation shall not, without the affirmative vote or
consent of the holders of at least a majority (or such higher
percentage, if any, as may then be required by applicable law) of all
<PAGE>
outstanding shares of Series B Preferred Stock, voting separately as a
class, amend any provision of the certificate of incorporation of the
corporation so as to change the preferences, conversion or other
rights, voting powers, restrictions or limitations as to dividends or
other distributions of the Series B Preferred Stock.
SECTION 6. Rank and Limitations of Preferred Stock. All shares
of Series B Preferred Stock shall rank equally with each other share of
Series B Preferred Stock and shall be identical in all respects.
FIFTH: The manner in which the foregoing amendment of the certificate
of incorporation was authorized is as follows:
The Board of Directors duly authorized the foregoing amendment
at a Board of Directors meeting held on January 25, 1999.
<PAGE>
IN WITNESS WHEREOF, the undersigned have subscribed this document on
February 17, 1999 and do hereby affirm under the penalties of perjury, that the
statements contained therein have been examined by the undersigned and are true
and correct.
/s/ Joel Dupre
--------------
Joel Dupre
Chairman of the Board and Chief
Executive Officer
/s/ Eric M. Hellige
-------------------
Eric M. Hellige
Secretary
EXHIBIT 10G
PROMISSORY NOTE
Amount: $110,000.00 Dated as of: December 17, 1998
FOR VALUE RECEIVED, SIRCO INTERNATIONAL CORP. (the "Maker"), promises
to pay to JOEL DUPRE (the "Holder"), at the address of the Holder set forth in
Section 10 hereof or at such other place or to such other person as may be
designated in writing by the Holder, on December 31, 2000 (the "Maturity Date"),
the principal amount of One Hundred Ten Thousand Dollars ($110,000.00).
1. From the date this Note becomes due and payable in accordance with
the foregoing, the principal amount of this Note then outstanding shall bear
interest, until the principal amount hereof is paid in full, at a rate equal to
eight percent (8%) per annum. Such accrued interest shall be due and payable on
the Maturity Date.
2. All payments of principal of or interest on or other sums due in
connection with this Note shall be payable by check or wire transfer in lawful
money of the United States which shall be legal tender for public and private
debts at the time of payment. This Note may be prepaid, in whole or in part, at
any time without penalty. Any partial prepayment of principal shall be applied
against the unpaid principal balance hereof.
3. All powers and remedies given to the Holder pursuant to the terms of
this Note shall, to the extent permitted by law, be deemed cumulative and shall
not be exclusive of any other powers and remedies available to the Holder, by
judicial proceedings or otherwise, to enforce the performances or observance of
the covenants and agreements contained in this Note, and every power and remedy
given by the foregoing or by law to the Holder may be exercised from time to
time, and as often as shall be deemed expedient by the Holder.
4. The obligations of the Maker to the Holder of this Note shall be
absolute and unconditional and the rights of the Holder shall not be subject to
any defenses, set-offs, counterclaims, or recoupment by reason of any
indebtedness or liability at any time owing by the Holder to the Maker.
5. This Note may not be changed orally. No waiver, amendment or
modification of this Note shall be valid except with respect to the specific
instance and unless evidenced by a writing duly executed and acknowledged under
oath by the party to be charged herewith, and no evidence of any waiver,
amendment or modification shall be offered or received in evidence in any
proceeding, arbitration or litigation between the Maker and the Holder affecting
the rights and obligations of the Maker and Holder under this Note, unless such
waiver, amendment or modification is in writing, duly executed and acknowledged
as aforesaid.
6. This Note is not transferable and may not be assigned by the Holder
or transferred by the Holder by negotiation without the prior written consent of
the Maker.
7. This Note shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
8. If any one or more of the provisions contained in this Note shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. This Note shall be governed by the laws of the State of New York
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
10. All notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered by hand or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
if to the Maker, to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901-3601
Attention: Paul Riss
with a copy to:
Pryor, Cashman, Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attention: Eric M. Hellige, Esq.
if to the Holder, to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901-3601
Attention: Joel Dupre
IN WITNESS WHEREOF, the Maker has signed this Note as of the day and
year first above written.
SIRCO INTERNATIONAL CORP.
By:
Paul H. Riss
Chief Financial Officer
<PAGE>
EXHIBIT 10H
PROMISSORY NOTE
Amount: $225,000.00 Dated as of: January 29, 1999
FOR VALUE RECEIVED, SIRCO INTERNATIONAL CORP. (the "Maker"), promises
to pay to JOEL DUPRE (the "Holder"), at the address of the Holder set forth in
Section 10 hereof or at such other place or to such other person as may be
designated in writing by the Holder, on January 31, 2001 (the "Maturity Date"),
the principal amount of Two Hundred Twenty Five Thousand Dollars ($225,000.00).
1. From the date this Note becomes due and payable in accordance with
the foregoing, the principal amount of this Note then outstanding shall bear
interest, until the principal amount hereof is paid in full, at a rate equal to
eight percent (8%) per annum. Such accrued interest shall be due and payable on
the Maturity Date.
2. All payments of principal of or interest on or other sums due in
connection with this Note shall be payable by check or wire transfer in lawful
money of the United States which shall be legal tender for public and private
debts at the time of payment. This Note may be prepaid, in whole or in part, at
any time without penalty. Any partial prepayment of principal shall be applied
against the unpaid principal balance hereof.
3. All powers and remedies given to the Holder pursuant to the terms of
this Note shall, to the extent permitted by law, be deemed cumulative and shall
not be exclusive of any other powers and remedies available to the Holder, by
judicial proceedings or otherwise, to enforce the performances or observance of
the covenants and agreements contained in this Note, and every power and remedy
given by the foregoing or by law to the Holder may be exercised from time to
time, and as often as shall be deemed expedient by the Holder.
4. The obligations of the Maker to the Holder of this Note shall be
absolute and unconditional and the rights of the Holder shall not be subject to
any defenses, set-offs, counterclaims, or recoupment by reason of any
indebtedness or liability at any time owing by the Holder to the Maker.
5. This Note may not be changed orally. No waiver, amendment or
modification of this Note shall be valid except with respect to the specific
instance and unless evidenced by a writing duly executed and acknowledged under
oath by the party to be charged herewith, and no evidence of any waiver,
amendment or modification shall be offered or received in evidence in any
proceeding, arbitration or litigation between the Maker and the Holder affecting
the rights and obligations of the Maker and Holder under this Note, unless such
waiver, amendment or modification is in writing, duly executed and acknowledged
as aforesaid.
6. This Note is not transferable and may not be assigned by the Holder
or transferred by the Holder by negotiation without the prior written consent of
the Maker.
7. This Note shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
8. If any one or more of the provisions contained in this Note shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Note, but this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
9. This Note shall be governed by the laws of the State of New York
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
10. All notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered by hand or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
if to the Maker, to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901-3601
Attention: Paul Riss
with a copy to:
Pryor, Cashman, Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022
Attention: Eric M. Hellige, Esq.
if to the Holder, to:
Sirco International Corp.
24 Richmond Hill Avenue
Stamford, Connecticut 06901-3601
Attention: Joel Dupre
IN WITNESS WHEREOF, the Maker has signed this Note as of the day and
year first above written.
SIRCO INTERNATIONAL CORP.
By:
Paul H. Riss
Chief Financial Officer
Consent of Independent Auditors
-------------------------------
We have issued our report dated February 12, 1999 (except for Note 2, as to
which the date is February 25, 1999), 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, 1998. We
hereby consent to the incorporation by reference of said report in Registration
Statement No. 333-19611 of Sirco International Corp. on Form S-8 and in
Registration Statements No. 333-25971, No. 333-27911 and No. 333-52525 of Sirco
International Corp. on Form S-3.
/s/NUSSBAUM YATES & WOLPOW, P.C.
- --------------------------------
NUSSBAUM YATES & WOLPOW, P.C.
Melville, New York
February 26, 1999
<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> 12-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 352,489
<SECURITIES> 0
<RECEIVABLES> 1,902,727
<ALLOWANCES> 337,000
<INVENTORY> 4,397,635
<CURRENT-ASSETS> 6,702,349
<PP&E> 1,906,326
<DEPRECIATION> 1,070,852
<TOTAL-ASSETS> 11,029,042
<CURRENT-LIABILITIES> 6,368,139
<BONDS> 290,994
0
70
<COMMON> 634,331
<OTHER-SE> 3,119,679
<TOTAL-LIABILITY-AND-EQUITY> 11,029,042
<SALES> 17,037,186
<TOTAL-REVENUES> 17,169,804
<CGS> 13,971,644
<TOTAL-COSTS> 6,445,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 299,000
<INTEREST-EXPENSE> 514,033
<INCOME-PRETAX> (5,134,978)
<INCOME-TAX> (157,975)
<INCOME-CONTINUING> (4,977,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,977,003)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
