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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 0-4465 SIRCO INTERNATIONAL CORP. - -------------------------------------------------------------------------------- (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 17, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $10,270,400. As of February 17, 1998, there were 4,300,400 shares outstanding of the Registrant's Common Stock. Part I Item 1. - Business Sirco International Corp. (the "Company") designs, manufacturers and markets a broad line of soft luggage, sports bags, backpacks, children's bags, tote bags and related products. The Company's strategy is to produce a diverse line of high quality, fashionable products at competitive prices. The Company believes its ability to merchandise high quality products is facilitated by its creative design, manufacturing and sourcing capabilities. The Company sells its products under many trade names, including "Cross Trainer," "JT Madison", "Mondo," and "Sirco Kids," all of which are registered. In addition, the Company sells its products under certain trademarked names licensed from others, including "Dunlop," "Generra," "Gold's Gym," "Hedgren," "Koosh," "Maui and Sons," and "Perry Ellis." See "License Agreements." The Company also designs and manufactures soft luggage and sports bags on a contract basis for unaffiliated retailers and sportswear companies, and sells luggage and American Airlines logo products to American Airlines, Inc. employees. Virtually all of the Company's products are manufactured by foreign suppliers in accordance with the Company's design specifications. During the fiscal year ended November 30, 1997, approximately 68% of the Company's products were manufactured in the People's Republic of China. The primary markets for the Company's products are the United States and Canada. Reference is hereby made to Note 7 of the Notes to Consolidated Financial Statements for information with respect to the amount of net sales, net income (loss) before provision for income taxes and identifiable assets of the Company's foreign operations. During the fiscal year ended November 30, 1997, the Company engaged in only one line of business and does not consider such business to be divided into "industry segments." During the later part of fiscal 1997, the Company's Board of Directors began to review proposals for increasing the value of the Company's common stock and thereby increasing shareholder value by considering alternative business opportunities, including several outside of the luggage industry. Based in part on the significant growth opportunities in the telecommunications industry and the relatively high valuations that have been placed on competitive local exchange carriers ("CLECs") by the U.S. capital markets, in the fourth quarter of fiscal 1997, the Board determined to diversify into two business segments, one focusing on the travel business (luggage, sport bags and the American Airlines employee stores), and the other focused on the telecommunications industry, including primarily CLECs. In furtherance of its diversification strategy, in October 1997, the Company made an investment in CLEC Holding Corp. ("CHC") which owns 95% of the capital stock of The Other Phone Company, Inc. ("OPC"), an integrated telecommunications provider based in Florida. The Company has recorded its investment as an asset on its balance sheet using the equity method of accounting. At February 28, 1998, the Company was the largest shareholder of CHC, owning approximately 28% of CHC's capital stock. CHC has advised the Company that, at February 28, 1998, OPC had approximately 9,000 local access lines, compared to approximately 2,500 access lines at September 9, 1997. The Company commenced operations in a new industry segment in fiscal 1998 by acquiring on February 27 , 1998, Essex Communications, Inc. ("Essex"), a newly formed CLEC. Essex intends to attract and retain a geographically concentrated customer base in the metropolitan New York region, primarily through the resale of products and services of incumbent and alternative facilities-based local providers. In March 1998, Essex signed an agreement with Bell Atlantic - New Jersey, Inc. ("New Jersey Bell") allowing Essex to resell local telephone service in New Jersey, and has filed an application with New Jersey Bell for the approval of the resale agreement by the State of New Jersey Board of Public Utilities. Essex has also filed applications to resell local telephone service with the New York State Public Service Commission and the Connecticut Department of Public Utility Control. Essex intends to focus its marketing efforts primarily on small and medium sized businesses with telecommunications usage of less than $2,000 per month. Its customer service strategy will include being more responsive and innovative in satisfying customers' needs, while providing a product that is less expensive than the telephone service provided by the regional Bell operating companies. In addition to local telephone line usage, Essex plans to sell other enhanced and value added telecommunication services, such as voice mail, paging, long-distance and teleconferencing. See "Recent Developments." The Company was incorporated in New York in 1964. Markets and Customers The Company sells its luggage, sport bag, backpack and related products primarily to large national retail chain stores, including Target, Sears, Kmart and Wal-Mart, and to regional discount store chains, such as ShopKo, Bradlees and Caldor. The Company also sells to department stores and other specialty stores, including Federated Stores (Bloomingdale's and Stern's), The May Company, Innovation Luggage and Bentley's Luggage, and to apparel chain stores, such as The Marmaxx Group and Ross Stores. The Company also sells such products to sporting goods retailers, such as Gold's Gyms, and to warehouse clubs, such as Price Costco. The loss by the Company of several of these customers would have an adverse effect on the Company's operations. However, the Company believes that these customers, if lost, could be partially, if not completely, replaced by others. During the fiscal years ended November 30, 1997, 1996 and 1995, sales to Target represented approximately 27%, 19% and 25%, respectively, of net sales; sales to Kmart represented approximately 17% and 11% of net sales in fiscal years 1997 and 1996, respectively; and sales to The Marmaxx Group represented approximately 14% of net sales in fiscal 1997. No other customer accounted for more than 10% of net sales in any of such fiscal years. The Company currently maintains showrooms in New York City and Ontario, Canada. The Company solicits business directly from its customers, using the services of both full-time sales persons and independent sales representatives. The independent sales representatives represent a number of manufacturers or wholesalers other than the Company, and are compensated on a commission basis, typically pursuant to the terms of a non-exclusive sales representative contract. The Company fills orders on the terms and conditions of standard purchase orders it receives from customers. The Company's percentage of sales by fiscal quarter for the fiscal years ended November 30, 1997, 1996 and 1995 are as follows: Fiscal Fiscal Fiscal 1997 1996 1995 ------ ------ ------ First Quarter 19.2% 23.7% 19.5% Second Quarter 19.4 27.5 21.3 Third Quarter 37.1 27.7 31.9 Fourth Quarter 24.3 21.1 27.3 ---- ---- ---- 100.0% 100.0% 100.0% The Company typically experiences seasonality that yields stronger operating results in the third and fourth quarters, and weaker operating results in the first quarter. This trend occurred in fiscal 1997 but did not occur in fiscal 1996 because of new selling markets that the Company was able to pursue in the first and second quarters in conjunction with the termination of a license agreement with FILA Sport S.p.A. (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations). The sale of product to American Airlines, Inc. employees was not material in fiscal 1997 and did not impact seasonality. Since the Company is selling travel related products to pilots and flight attendants, there is little seasonality, as the customers are using the products on a daily basis as part of their normal work routine. The expansion of this business to additional airports or to other airlines may eventually have the effect of decreasing the Company's overall seasonality. The Company anticipates that its acquisition of Essex and the development of its CLEC business also will eventually impact the Company's overall seasonality trends by making quarterly revenues less divergent. Design and Merchandising The Company's licensed and branded products feature dynamic and colorful new styles that use innovative graphics and product designs and are constructed of quality fabrics and other materials. In order to continue to provide high-quality designs for both its licensed and non-licensed products, the Company established a design development center employing creative and merchandising professionals who work with state-of-the-art resources. In addition, the Company actively solicits participation from key customers in the development of specific products. The Company's design and merchandising department, which is based out of the Company's headquarters, emphasizes creativity and responsiveness to consumer preferences in the development of new products. The design and merchandising department, together with the Company's marketing personnel, evaluates the designs and fashion trends in the marketplace and applies these in its product development. The Company's design and marketing personnel frequently visit customers, suppliers and trade shows and conduct market research to identify developing consumer trends and new product ideas. License Agreements The Company has licensing agreements which allow it to produce and sell luggage, sport bags and related travel accessories bearing the trade names of Dunlop, Generra, Gold's Gym, Hedgren, Koosh, Maui and Sons, and Perry Ellis. Sales by the Company under trademarked names licensed from others accounted for approximately 66%, 83% and 65% of the Company's net sales during the fiscal years ended November 30, 1997, 1996 and 1995, respectively. The Company's licenses generally entitle the Company to use the names, symbols and logos of the licensors on an exclusive basis in the manufacture and sale of the Company's products within a defined territory. All of the Company's licenses call for a royalty to be paid to the licensor based on a percentage of net sales, except for the license for Hedgren products, which is based on a percentage of net purchases. Royalties vary by product and licensor and generally range from 5.0% to 7.0% of net sales. Minimum payments are applied against royalty fees either over the term of the contract or annually, depending on the contract. In addition, the licenses generally require payments by the Company to certain promotional programs sponsored by the licensor. The Company's license agreements generally have terms of three years. The terms of renewal options are negotiated and vary on a license-by-license basis. The Company recently negotiated the termination of its license to sell luggage and luggage related products bearing the Skechers name and logo. The Company's license for Cherokee products expired on December 31, 1997 and was not renewed. The Company believes that, in fiscal 1998, it can replace the sales of products bearing the Cherokee name with sales of its Dunlop and Mondo products. During fiscal 1996, the Company received notification from Airway Industries Inc. ("Airway") that Airway would not renew its License Agreement with the Company pursuant to which Sirco International (Canada) Limited, the Company's Canadian subsidiary ("Sirco Canada"), was granted an exclusive license to sell in Canada, luggage and luggage related products under the trade names "Atlantic" and "Oleg Cassini" through December 31, 1996. During the fiscal years ended November 30, 1997, 1996 and 1995, sales of Atlantic product approximated $472,000, $5,782,000 and $3,571,000, respectively, which represented approximately 2.9%, 20.8% and 14.3%, respectively, of the Company's total net sales for those periods, and approximately 63.8%, 95.4% and 97.6%, respectively, of the total net sales of Sirco Canada for those periods. Sirco Canada lost approximately $167,000 in the fiscal year ended November 30, 1997 and earned approximately $434,000 and $269,000 in fiscal years ended November 30, 1996 and 1995, respectively. In addition, following receipt of notification from Airway and Douglas Turner, then the President of Sirco Canada and a Director of the Company, that Airway and Mr. Turner had mutually agreed to Airway's future employment of Mr. Turner in its efforts to distribute directly its products in Canada, the Company terminated its employment of Mr. Turner in September 1996. The loss of the Airway license had an adverse effect on the Company's results of operations for the fiscal year ending November 30, 1997. After extensive negotiations with FILA Sport S.p.A. ("FILA"), in February 1996, the Company and FILA entered into an agreement pursuant to which the Company ceased shipping FILA product under a non-exclusive license with FILA during fiscal 1996. Net sales of the FILA product for the fiscal years ended November 30, 1996 and 1995 were approximately $8,584,000 (including approximately $482,000 sold to FILA) and $5,314,000, respectively, or 30.9% and 21.4%, respectively, of the Company's total net sales. The loss of the ability to sell product bearing the FILA trademark had an adverse effect on the Company's results of operations through the fiscal year ending November 30, 1997. Although the Company continuously explores the licensing of new trademarked names, future net sales could be negatively impacted if sales from new licenses or increases in sales under the existing licenses do not replace the sales of FILA product. Trademarks The Company sells products under proprietary trade names and logos, including "Cross Trainer," "JT Madison," "Mondo," and "Sirco Kids," all of which are registered in the United States. The Company considers its trademarks to be of considerable value to its business and intends to protect them to the fullest extent practicable. The Company takes all reasonable measures to assure that any product bearing a Company-owned trademark or logo reflects the consistency and quality associated with its products bearing licensed trademarks or logos. Backlog A substantial portion of net sales is based on orders for immediate delivery and therefore, backlog is not necessarily indicative of future net sales. Suppliers The Company's luggage, sport bag, backpack and related products are primarily produced by various manufacturers in Indonesia, the People's Republic of China, the Philippines, Taiwan and Thailand. Although the simultaneous loss of several of these manufacturers would temporarily adversely affect the Company's business, the Company is of the opinion that generally these manufacturers could be replaced by others. The Company's business could also be adversely affected by a disadvantageous change in the exchange rate of the dollar with certain foreign currencies, by changes in tariffs or import restrictions, as well as political and economic conditions in the countries from which it imports. For the fiscal years ended November 30, 1997, 1996 and 1995, the Company's products were manufactured in the following countries: Fiscal Fiscal Fiscal 1997 1996 1995 ------ ------ ------ China 67.81% 63.86% 80.85 Taiwan 14.52 17.47 6.87 Thailand 6.56 3.33 7.31 Philippines 6.26 7.28 3.62 Indonesia 4.64 0.00 0.00 Korea 0.21 2.91 0.78 Other 0.00 5.15 0.57 ------ ------ ------- 100.00% 100.00% 100.00% ======= ======= ======= The Company purchases products for its American Airlines employee stores from various domestic suppliers who have license agreements to sell product displaying the American Airlines, Inc. logo or trade name. The Company also buys non-logo product from a variety of domestic sources. Competition The Company experiences substantial competition in most of its luggage, sport bag, backpack and related product categories from a number of well established domestic and foreign distributors, some of which have greater financial resources than the Company. The Company believes the principal competitive factors affecting its business are styling, pricing and distribution. Increased competition by existing and future competitors could result in reductions in sales or prices of the Company's products that could materially impair the Company's profitability. In addition, a substantial portion of the Company's products are sold under non-exclusive licensing agreements. Although the Company has been successful in obtaining and renewing such licenses, there can be no assurance that existing competitors will not obtain competing licenses in the future or that additional large, well-financed companies will not enter the licensed luggage, sport bag or backpack business. Because the Company imports its manufactured goods from overseas suppliers, delivery to its customers is dependent upon the timing of overseas manufacturing and shipping schedules, which may put the Company at a competitive disadvantage to domestic manufacturers. The Company expects that it will face significant competition in connection with its proposed entry into the telecommunications industry. The Company expects to experience significant competition for its proposed local telephone services, including local exchange services, from incumbent local exchange carriers ("ILECs"), which currently dominate their local telecommunications markets, and others, including other CLECs. ILECs have long-standing relationships with their customers which may create significant competitive barriers. Furthermore, ILECs may have the potential to subsidize competitive service from monopoly service revenues. In addition, a continuing trend toward business combinations and alliances in the telecommunications industry may create significant additional competitors. The Company will also face competition in its proposed markets and in most other markets into which it may expand from one or more CLECs operating fiber optic networks. Most of the Company's existing and potential competitors in the telecommunications industry have financial, personnel and other resources significantly greater than those of the Company. Employees At February 17, 1998, the Company employed 84 employees, of which 82 were employed on a full-time basis and two were employed on a part-time basis, and had approximately 23 independent sales representatives. At such date, approximately 12 of the Company's employees were employed in the Company's executive offices in Stamford, Connecticut; approximately 59 were employed in the Company's warehouse in La Mirada, California; nine were employed in the Company's American Airlines store in Dallas, Texas, one was employed in the Company's showroom facility in New York, New York; and three were employed in the Company's Canadian showroom and warehouse facilities in Ontario, Canada. The Company is not subject to any collective bargaining agreement and believes that its relationship with its employees is good. Recent Developments On February 27, 1998, the Company commenced operations in the telecommunications industry by acquiring Essex, a startup CLEC that has filed in New Jersey, New York and Connecticut to become a reseller of local telephone services. The Company believes that Essex is positioning itself to take advantage of the opportunities created by the Telecommunications Act of 1996 (the "Telecommunications Act"), which requires the regional Bell operating companies ("RBOCs") to perform a number of duties, including allowing local telephone service competition, in order to qualify for long distance entry in their local service areas. Essex believes that it will be able to gain rapid market entry because it is a non-facilities based provider and will therefore not incur the significant costs and developmental delays that are inherent in constructing network and transmission facilities. Furthermore, Essex intends to take advantage of telecom relationships established by the Company's affiliate, CHC, which has negotiated favorable long distance rates and voice mail rates from third party providers, and will not incur extra time or expense having to negotiate such agreements. Where possible, Essex will attempt to provide service to CHC's multi-state customers that also have business locations in the New York metropolitan area. All of the telecommunications operations of Essex are subject to state and federal regulations. Essex must obtain and maintain certificates of public convenience and necessity from most states in which it plans to offer services. Many comprehensive changes in the regulatory environment have already occurred as a result of the Telecommunications Act, and Essex cannot predict how the relevant provisions of the Telecommunications Act will evolve and be interpreted by federal and state regulators, courts and the RBOCs. The timing and terms of any resale agreement between Essex and a RBOC is at least partially controlled by the individual RBOC, although the RBOCs have the duty to negotiate the resale agreements on a good-faith basis. Essex has been negotiating with Bell Atlantic Corporation and has executed a resale agreement for New Jersey, in addition to various other operational agreements, such as on-line access to computer facilities. Item 2. - Properties The following table sets forth pertinent facts concerning the Company's material properties at February 15, 1998, all of which are owned or leased by either the Company or one of its subsidiaries: Property Owned: Location Use Approximate Square Feet - -------- --- ----------------------- 1321 Blundell Road Showroom, Offices 35,000 (leases out 34,000 SF) Mississauga Ontario, Canada L4Y 1M6 Properties Leased: Approximate Lease Annual Location Use Square Feet Expires Rent(1) - -------- --- ----------- ------- ------- 366 Fifth Avenue Showroom 3,340 10/18/06 $ 96,000 New York, NY 10001 24 Richmond Hill Avenue Executive Offices 7,800 9/14/00 $137,000 Stamford, CT. 06901 16000 Heron Avenue Warehouse, Offices 116,000(2) 3/31/00 $456,000 La Mirada, CA. 90638 1930 W. Airfield Drive Warehouse 2,000 7/31/98 $ 12,048 DFW Airport, Texas 75261 Terminal 3E Retail 1,700 8/24/00 $ 55,200 DFW Airport, Texas 75261 24 Professional Centre Pkwy Office 1,016 10/31/98 $ 17,676 San Rafael, CA 94903 (1) The Company is required to pay its proportionate share of any increase during the term of the lease in real estate taxes and expenses of maintaining the premises computed on the basis of the percentage of the total square footage of the premises occupied by the Company. (2) Approximately 38,000 square feet of warehouse and office space has been subleased to Bueno of California, Inc., the purchaser of the Company's former handbag division, through the end of the lease term at a rental rate of $10,000 per month, increasing to $17,000 per month in the last year of the lease term. The Company's owned and leased space is fully utilized for the purposes set forth in the table above under the caption "Use," and believes that its properties are suitable and adequate for the business of the Company. Item 3. - Legal Proceedings The Company is not involved in any pending legal proceeding other than non-material ordinary routine litigation incidental to its business. Part II Item 5. - Market for the Company's Common Equity and Related Stockholder Matters The Common Stock, $.10 par value (the "Common Stock"), of the Company is traded in the over-the-counter market and is quoted on the NASDAQ inter-dealer automated quotations system. The high and low bid quotations for each quarterly period of the Company's last two fiscal years are listed below: High Low ---- --- Fiscal 1997 1st Quarter 3-1/2 1-3/4 2nd Quarter 7-3/8 3-1/2 3rd Quarter 7-3/4 5-7/8 4th Quarter 7-1/4 3-1/4 Fiscal 1996 1st Quarter 2-3/4 1-1/8 2nd Quarter 2-3/4 1-13/16 3rd Quarter 2-1/2 1-9/16 4th Quarter 2-1/4 1-5/16 (The quotations set forth in the table above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.) As of February 17, 1998, there were 163 holders of record of the Common Stock and approximately 760 beneficial holders. The Company has not declared any cash dividends during the past fiscal year with respect to the Common Stock. The declaration by the Company of any cash dividends in the future will depend upon the determination of the Company's Board of Directors as to whether, in light of the Company's earnings, financial position, cash requirements and other relevant factors existing at the time, it appears advisable to do so. The Company's current financing arrangements contain certain restrictions regarding the payment of dividends. In April 1997, the Company raised $609,000, net of placement agent fees of $91,000, through the issuance of 400,000 Units at $1.75 per Unit, each Unit consisting of one share of Common Stock, one common stock Class A warrant ("Class A Warrants") exercisable at $2.06 per share for one year, and one common stock Class B warrant ("Class B Warrants") exercisable at $2.56 per share for one year. In connection with the transaction, an aggregate of 120,000 Class A warrants were issued to the placement agent and a consulting firm. As of November 30, 1997, 700,000 warrants had been exercised and 110,000 Class A Warrants and 110,000 Class B Warrants remained outstanding. The Units were offered and sold in a private placement effected pursuant to Section 4(2) of the Securities Act of 1933, as amended. On October 22, 1997, the Company acquired from CLEC 3,000,000 shares of common stock, par value $.001 per share, of CLEC in consideration of the issuance by the Company of 425,000 shares of Common Stock of the Company. Such transaction was effected pursuant to Sections 4(2) of the Securities Act of 1933, as amended. 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. Fiscal Years Ended November 30, 1997 1996 1995 1994 1993 (In thousands, except per share amounts) Earnings Statement: Net Sales $ 16,008 $ 27,746 $ 24,812 $ 27,600 $ 27,746 Gross Profit 2,205 7,088 6,130 6,067 6,620 Income (Loss) Before Provision for Income Taxes and Extraordinary Items (2,994) 925 (996) (2,435) (948) Net Income (Loss) (2,868) 622 (996) (2,435) (964) Net Income (Loss) per Common Share: Primary (0.88) 0.23 (0.41) (1.01) (0.40) Fully Diluted (0.88) 0.23 (0.41) (1.01) (0.40) Cash Dividends - - - - - Balance Sheet: Working Capital $ 5,107 $ 1,553 $ 1,142 $ 1,362 $ 4,031 Property, Plant, Equipment 827 888 650 773 832 Total Assets 14,042 9,577 10,003 10,252 11,929 Long-Term Debt (Less Current Maturities) 4,522 348 590 50 506 Stockholders' Equity 3,216 2,780 1,897 2,898 5,374 Item 7. - Management's Discussions and Analysis of Financial Condition and Results of Operations The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, among others, general economic and business conditions; industry trends; the loss of major customers; dependence on foreign sources of supply; the loss of licenses; availability of management; availability, terms and deployment of capital; the seasonal nature of the Company's business; and changes in state and federal regulations of the telecommunications industry. Fiscal Year 1997 Compared to Fiscal Year 1996 Net sales for fiscal year 1997 decreased by approximately $11,738,000 to approximately $16,008,000 as compared to approximately $27,746,000 reported in fiscal 1996. Net sales for the Company's United States and Canadian operations decreased in fiscal 1997 by approximately $6,450,000 and $5,288,000, respectively, from amounts reported in the prior fiscal year. This decline in net sales is primarily attributable to three developments: the Company's loss of the license to sell FILA product (see below) in the United States, effective in June 1996; the Company's loss of the license to sell Airway product (see below) in Canada, effective in December 1996; and a decrease in demand in the United States for the Company's other mature brand names. This decline in sales was partially offset by sales growth in new licenses that were signed in 1996 for the Perry Ellis and Hedgren brand names. Net sales per brand name for the two fiscal years were as follows: 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 4,334,000 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 is attributable to the discontinuance of certain products in fiscal 1997 for which the Company recorded an inventory reserve of approximately $615,000, the lack of a sufficiently large revenue base over which to spread fixed costs and to a change in product mix. The change in product mix has two components. First, fiscal 1997 sales contained a higher percentage of unlicensed products, which traditionally have a lower gross profit margin, and second, fiscal 1997 sales contained the new brand names of Perry Ellis and Hedgren, as compared to the more established brand names of FILA and Atlantic in fiscal 1996. Established brand name products generally are able to demand a higher gross margin than less established brand name products, which are vying for shelf space with other new products from competitors. After extensive negotiations in February 1996, the Company and FILA entered into an agreement pursuant to which the Company ceased shipping products under the FILA license on June 30, 1996. The Company sold approximately $8,584,000 of FILA product in fiscal 1996 compared to no sales of FILA product in fiscal 1997. The loss of the FILA trademark had an adverse impact on the Company's results of operations in the fiscal year ended November 30, 1997, and will have an adverse impact on the Company's results of operations for the fiscal year ending November 30, 1998. During fiscal 1996, Airway notified the Company that it would not renew its license agreement with the Company, pursuant to which Sirco Canada was granted an exclusive license to sell in Canada luggage and luggage related products under the trade names "Atlantic" and "Oleg Cassini" through December 31, 1996. In November 1996, the Company entered into an Asset Purchase Agreement with Airway, whereby Airway agreed, among other things, to purchase any remaining Atlantic inventory owned by Sirco Canada on December 31, 1996, to purchase certain fixed assets and to enter into a two year lease for a substantial portion of the premises owned by Sirco Canada at fair market value. In November 1996, the Company restructured Sirco Canada, hired a new president to run the operation and started to market the Company's other licensed products in Canada. Sirco Canada sold approximately $472,000 of Airway product in the first quarter of fiscal 1997 prior to the December 31, 1996 termination date. Sirco Canada sold approximately $5,782,000 of Airway product in fiscal year 1996. The loss of the Airway license had an adverse impact on the Company's results of operations for fiscal 1997 and will have an adverse effect on the Company's results of operations throughout the fiscal year ending November 30, 1998. During fiscal 1997, the Company terminated its license for products bearing the "Skechers" trade name or logo, which products had not generated the sales volume that was anticipated. The Company anticipates that the Skechers sales volume in fiscal 1997 will be replaced by new licenses (see below) that the Company believes will have a greater level of acceptance in the marketplace. On December 31, 1997, the Company's license for Cherokee products expired and was not renewed. The Company believes that sales of Cherokee products will be replaced by an increase in sales of the Company's Dunlop and Mondo products in fiscal 1998. The Company continuously evaluates potential licenses and seeks to determine the value an individual trade name will add to its product mix. Licensed trade names can help give the Company a marketing advantage with certain retailers over similar products offered by competitors. The Company started shipping products under the Perry Ellis and Hedgren trade names in fiscal 1996 and recorded aggregate net sales for these products of approximately $3,443,000 in fiscal 1997, compared to aggregate net sales of approximately $206,000 in fiscal 1996. The Company has recently introduced new products under the trade names of "Koosh," which is for children's products, and "Maui and Sons," which is for active young men's and children's products. The Company does not anticipate losing any licenses in fiscal 1998, although the Company may elect to terminate less successful licenses. The Company believes that, although a licensed name can often help the Company sell a product, the excellent service and high quality products provided by the Company to its customers, regardless of what name is on the product, will result in most of the Company's customers reordering products from the Company based primarily on quality and value, and, to a lesser extent, on the trade name. Selling, warehouse and general and administrative expenses decreased by approximately $738,000 to approximately $5,167,000 from approximately $5,905,000 in fiscal 1996. The reduction in expenses is attributable to lower selling expenses as a result of the reduction in net sales, and lower warehousing and general and administrative expenses as a result of the restructuring of the Company's Canadian operation. Included in the selling, warehouse and general and administrative expenses reported in fiscal 1996 was a one-time write-off of restrictive covenants, with a book value of approximately $152,000, which resulted from the pre-payment in fiscal 1996 of the Company's obligations to the Company's former parent, Yashiro Company, Inc. ("Yashiro"), and the release of any covenants not to compete between the Company and Yashiro, as provided for under Non-Competition Agreements entered into between the Company and Yashiro in March 1995 in connection with the sale by the Company of its former handbag division. Interest expense decreased in fiscal 1997 by approximately $199,000 to approximately $574,000 from approximately $773,000 reported in fiscal 1996 due to lower average borrowings and a new working capital lender in fiscal 1997 for which the Company was able to pay down working capital loan advances with cash collections in a more expedient manner than was possible under the working capital facility employed in fiscal 1996. Miscellaneous income increased in fiscal 1997 by approximately $21,000 to approximately $478,000 from approximately $457,000 reported in fiscal 1996. The decline of approximately $29,000 in the Company's commission income generated from sales arranged by the Company between overseas suppliers and certain domestic customers was offset by an increase of approximately $50,000 in rental income reported by the Company's Canadian subsidiary as a result of a restructuring of the Company's Canadian operations. The income tax benefit in fiscal 1997 of approximately $126,000 is for the recovery of Canadian income taxes paid in prior years. The provision for income taxes in fiscal 1996 of approximately $303,000 primarily consisted of Canadian corporate income taxes. Fiscal Year 1996 Compared to Fiscal Year 1995 Net sales for fiscal year 1996 increased by approximately $2,934,000 to approximately $27,746,000 as compared to approximately $24,812,000 reported in fiscal 1995. Net sales for the Company's luggage and backpack divisions increased by approximately $1,974,000 during fiscal 1996. Net sales reported for the Company's discontinued FILA product line (see above) increased by approximately $3,270,000 to approximately $8,584,000 as compared to approximately $5,314,000 reported in fiscal 1995 while sales for the Company's non-FILA products decreased by approximately $1,296,000 during the same period. Included in the sales increase for FILA was approximately $482,000 of FILA product sold to FILA, of which approximately $320,000 was sold at the Company's cost. The decrease in non-FILA sales is primarily attributable to increases in a direct buy program to certain customers who purchased approximately $3,495,000 worth of the Company's products directly from the Company's suppliers in the Far East. This amount was approximately $1,760,000 higher than the $1,735,000 purchased in fiscal 1995 by these customers. The Company receives commissions on these sales and records these "direct buy" transactions as commission income. If these sales had been made from product imported by the Company and then sold to its customers, the net sales of non-FILA product would have increased by approximately $464,000 during fiscal 1996. Net sales for the Company's Canadian subsidiary increased by approximately $2,402,000 during fiscal 1996 due to strong sales for its discontinued Atlantic luggage line (see above). Included in the Company's net sales for fiscal 1995 were approximately $1,423,000 in net sales attributable to the Company's former handbag division, which was sold on March 20, 1995. The Company's gross profit for fiscal 1996 increased by approximately $958,000 to approximately $7,088,000 from approximately $6,130,000 reported in fiscal 1995 and the gross profit percentage in fiscal 1996 increased to 25.5% from 24.7% reported in fiscal 1995. Included in the Company's gross profit for fiscal 1995 was approximately $81,000 attributable to the Company's former handbag division. Selling, warehouse, and general and administrative expenses decreased by approximately $371,000 to approximately $5,905,000 from approximately $6,276,000 reported in fiscal 1995. Included in the Company's expenses for fiscal 1995 were approximately $840,000 in expenses directly related to the Company's former handbag division. Selling, warehouse, and general and administrative expenses increased in fiscal 1996 for the Company's luggage and backpack divisions and Canadian operation by approximately $469,000. Included in this increase was the one-time write-off of restrictive covenants, with a book value of approximately $152,000, which resulted from the pre-payment of the Company's obligations to the Company's former parent, Yashiro, under the Non-Competition Agreements entered into between the Company and Yashiro in March 1995 in connection with the sale of its former handbag division. Additionally, the other major components of this increase in expenses were approximately $150,000 in increased warehouse costs and approximately $120,000 in increased selling expenses. Included in the Company's operating results for fiscal 1995 was a one-time charge of approximately $425,000 attributable to the loss on the sale of the Company's former handbag division in March 1995 to Bueno of California, Inc., an affiliate of Yashiro. Interest expense decreased by approximately $94,000 in fiscal 1996 due to lower average borrowings. Miscellaneous income increased by approximately $127,000 in fiscal 1996 as a result of increases in the Company's "direct buy" business as discussed above. The income tax provision increased in fiscal 1996 by approximately $303,000, primarily due to profits reported by the Company's Canadian subsidiary. Liquidity and Capital Resources At November 30, 1997, the Company had cash and cash equivalents of approximately $114,000, and working capital of approximately $5,107,000, a decrease of approximately $276,000 and an increase of $3,554,000, respectively, over amounts reported at the end of the prior fiscal year. Net cash provided by (used in) operating activities aggregated approximately ($6,627,000), $2,044,000 and ($1,505,000) in fiscal years 1997, 1996 and 1995, respectively. The increase of approximately $8,671,000 in net cash used in operating activities in fiscal 1997, as compared to fiscal 1996, primarily reflects the poor operating results for fiscal 1997 as compared to fiscal 1996 and the need to maintain higher inventory levels than normal to generate sales. The increase of approximately $3,549,000 in net cash provided by operating results in 1996 as compared to 1995, reflects improved operating results between the two years and a lower level of inventory being required to generate sales. Net cash provided by (used in) investing activities aggregated approximately ($58,000), ($332,000) and $32,000 in fiscal years 1997, 1996 and 1995, respectively. The principal uses of cash from investing activities in fiscal 1997 and 1996 was for the purchase of fixed assets, which included renovation of the Company's New York showroom in fiscal 1996. In fiscal 1995, the principal source of net cash from investing activities was proceeds from the sale of a subsidiary. Net cash provided by (used in) financing activities aggregated approximately $6,391,000, ($1,503,000) and $697,000 in fiscal years 1997, 1996 and 1995, respectively. In fiscal 1997, repayments of short-term debt of approximately $1,601,000 were offset by an increase of approximately $5,714,000 in net cash provided by a revolving credit line facility. This increase is the result of a new working capital agreement in fiscal 1997 (see below) under which the Company may borrow up to 80% of the dollar amount of its eligible accounts receivable plus 50% of its eligible inventory. In fiscal 1996, the Company sold its accounts receivable to a factor and recorded the money advanced from the factor as a reduction in accounts receivable. During fiscal 1997, the Company also received approximately $166,000 in proceeds from the exercise of stock options; approximately $609,000 in proceeds from a private equity placement; and approximately $1,509,000 in proceeds from the exercise of stock warrants. Approximately $7,000 of net cash was used to pay long-term debt in fiscal 1997. In fiscal 1996, approximately $1,258,000 of net cash was used to repay short-term debt and approximately $460,000 was used to repay long-term debt. In fiscal 1996, the Company received $250,000 in proceeds from the exercise of stock options. In fiscal 1995, the Company's primary sources of net cash from financing activities were from the proceeds of short-term and long-term borrowings in excess of debt repayments. On December 17, 1996, the Company entered into a financing agreement with Coast Business Credit ("Coast"), a division of Southern Pacific Thrift & Loan Association, pursuant to which Coast makes available to the Company a line of credit of $7,000,000 with advances based on 80% of the Company's eligible accounts receivable and 50% of the Company's eligible inventory. Under the terms of the agreement, inventory financing is not to exceed $3,000,000, including letters of credit. Interest on the loan is 2% per annum above the prime rate. As of November 30, 1997, the Company was indebted to Coast in the principal amount of approximately $5,714,000 and had no outstanding letters of credit. At November 30, 1997, the prime rate was 8.50%. Sirco Canada has a bank mortgage on its real property in the amount of approximately $350,000. The mortgage is payable in monthly installments of approximately $3,500 which includes interest at the rate of 10.25% per annum, with a balloon payment of approximately $325,000 in the year 2000. As of November 30, 1997, Sirco Canada was in violation of certain loan covenants. The bank has agreed to waive the defaults until December 1, 1998. Sirco Canada does not have a working capital lender or a letter of credit facility. The Company uses the letter of credit facility from its financing agreement with Coast to open letters of credit for purchases made directly by Sirco Canada. Sirco Canada reimburses the Company for all appropriate expenditures made on behalf of Sirco Canada. Management believes that Sirco Canada has adequate working capital to operate without a revolving line of credit; however, management is considering the establishment of a working capital facility for Sirco Canada. In fiscal 1997, the Company had approximately $87,000 in capital expenditures, primarily for costs incurred in connection with computer equipment. Capital expenditures are not expected to be significant in fiscal 1998. As of February 17, 1998, The Company owns approximately 3,200,000 shares, or approximately 28%, of CLEC Holding Corp. ("CHC") a Florida based competitive local exchange carrier. Although CHC has approximately 750 shareholders, it is not publicly traded, there is no readily ascertainable market for the stock, and the shares held by the Company bear a restrictive legend that notes that the shares have not been registered under the Securities Act of 1933. The investment in CHC is recorded on the Company's books by the equity method. Management believes that the Company's present sources of financing, combined with its present working capital and cash flow from operations, will be sufficient to meet the cash and capital requirements for the Company's travel division for the next twelve months. However, if the depressed levels of sales do not increase or the Company is unable to improve its cash position by raising additional capital, the Company may experience temporary cash shortages. Such cash shortages may negatively impact the Company's ability to purchase inventory in a timely manner, which could negatively impact the Company's results of operations. The Company anticipates that it will need to raise up to $2 million to meet the cash requirements for its telecommunications division contemplated by the fiscal 1998 business plan for that division. There can be no assurances that the Company will be able to obtain such funding when needed, or that such funding, if available, will be obtainable on terms acceptable to the Company. The failure by the Company to raise the necessary funds to finance its telecommunications operations will have an adverse effect on the ability of the Company to carry out its business plan for its telecommunications division. Item 8. - Financial Statements and Supplementary Data The financial statements and supplementary data to be provided pursuant to this Item 8 are included under Item 14 of this Report. Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Part III Item 10. - Directors and Executive Officers of the Company The following table contains certain information regarding directors and executive officers of the Company as of February 17, 1998: Name and Position Principal Occupation for Past 5 Years and With the Company Age Current Public Directorships or Trusteeships - ---------------- --- -------------------------------------------- Joel Dupre 44 Director since 1990; Chairman of the Board and Chief Executive Officer of the Company since March 1995; Executive Vice President from November 1992 to March 1995 and a Vice President from 1989 to 1992. Eric M. Hellige 43 Director since 1995 and Secretary of the Company; Partner for more than five years of Pryor, Cashman, Sherman & Flynn, counsel to the Company. Richard Pyles 41 Senior Vice President of the Company since November 1996; Vice President of Marketing and Sales from September 1992 to November 1996. Paul H. Riss 42 Director since 1995, and Chief Financial Officer and Treasurer of the Company since November 1996; Chief Financial Officer of Sequins International Inc., a manufacturer of sequined fabrics and trimmings from June 1992 to November 1996. Barrie Sommerfield 68 Director since April 1997; Vice Chairman of Gore, Sommerfield, Ditnes International, Inc., a consultant for trademark licenses, for more than five years. Eric Smith 53 Director since 1988; Vice President- General Manager of West Coast Distribution Center since 1983. The term of office of the directors is one year, expiring on the date of the next annual meeting and thereafter until their respective successors shall have been elected and shall qualify, or until their death, resignation or removal. Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more than ten percent (10%) of a registered class of the Company's equity securities ("10% Stockholders"), to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and 10% Stockholders are required by Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. Item 11. - Executive compensation Summary of Cash and Certain Other Compensation The following table sets forth, for the last three fiscal years, all compensation awarded to, earned by or paid to the chief executive officer ("CEO") of the Company (Mr. Joel Dupre, the Chairman of the Board and Chief Executive Officer of the Company since March 20, 1995; Mr. Yutaka Yamaguchi, the Chairman of the Board and Chief Executive Officer of the Company prior to March 20, 1995), and all other executive officers of the Company who received more than $100,000 in compensation during fiscal 1997 (collectively referred to as the "Named Executives"): Summary Compensation Table Long Term Annual Compensation Compensation Awards -------------------------------------- ----------------------- Other Annual (5) Name and Compensation Options All Other Principal Position Year Salary(s) Bonus(s) ($) (#) Compensation ------------------ ---- --------- -------- --- --- ------------ Joel Dupre (1) 1997 $240,000 None None 80,000 None Chairman of the Board 1996 216,667 None None 80,000 None & Chief Exec. Officer 1995 216,667 None None None None Yutaka Yamaguchi (2) 1997 None None None None None Former Chairman of the 1996 None None None None None Board & Chief Exec 1995 None None None None None Officer Richard Pyles (3) 1997 100,000 None None 5,000 None Senior Vice President 1996 98,341 $ 6,000 None 135,000 None 1995 95,025 None None 20,000 None Paul H. Riss (4) 1997 125,000 None None 40,000 None Chief Financial Officer 1996 12,354 None None 70,000 None 1995 None None None None None - --------------------------- (1) Mr. Dupre held the title of Executive Vice President of the Company during the fiscal year ended November 30, 1994. In March 1995, Mr. Dupre was elected Chairman of the Board and Chief Executive Officer of the Company. (2) Mr. Yamaguchi resigned as an officer and director of the Company effective January 1, 1995. (3) Mr. Pyles was elected Senior Vice President in November 1996. At all other times, Mr. Pyles served as Vice President-Marketing and Sales of the Company. (4) Mr. Riss has been Chief Financial Officer of the Company since November 1996. (5) Options have been adjusted to reflect a two-for-one stock split in May 1997. Board of Directors Compensation The Company does not currently compensate directors for service on the Board of Directors. Option Grant Table The following table sets forth information as to the options granted to the Named Executives and all other employees during the fiscal year ended November 30, 1997. 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% ($) - ---- ---------- ------- --------- ---- ------ ------- Joel Dupre 80,000(4) 57.1% $2.13 02/24/02 $47,078 $104,031 Yutaka Yamaguchi -- -- -- -- -- -- Richard Pyles 5,000(4) 3.6 1.94 02/24/02 2,700 5,900 Paul H. Riss 20,000(4) 14.3 1.94 02/24/02 10,800 23,600 All Other Employees 40,000(4) 25.0 1.94 02/24/02 21,600 47,200 - --------------- (1) No SAR's were granted by the Company in fiscal 1997. (2) In fiscal 1997, the Company granted options on 140,000 shares, as adjusted for a two-for-one stock split in May 1997, of the Common Stock to six employees. (3) The amounts shown in these two columns represent the potential realizable values using the options granted and the exercise price. The assumed rates of stock price appreciation are set by the Commission's executive compensation disclosure rules and are not intended to forecast the future appreciation of the Common Stock. (4) Options become exercisable on the first anniversary date of the option grant date of February 24, 1997. Stock Option Exercises The following table contains information relating to the exercise of the Company's stock options by the Named Executives in fiscal 1997, as well as the number and value of their unexercised options as of November 30, 1997. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Number of Securities Underlying Unexercised Value of Unexercised Shares Options at In-the-Money Options Acquired on Value Fiscal Year-End(#)(1) at Fiscal Year End($)(2) Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ----------- ----------- ------------- ------------------------- Joel Dupre -- -- 20,000 140,000 $37,500 $217,500 Yutaka Yamaguchi -- -- -- -- -- -- Richard Pyles 20,000 $46,666 15,000 5,000 28,125 6,563 Paul H. Riss 5,000 25,000 50,000 55,000 97,188 89,688 - ----------- (1) The sum of the numbers under the Exercisable and Unexercisable column of this heading represents each Named Executives total outstanding options to purchase Common Stock. (2) The dollar amounts shown under the Exercisable and Unexercisable columns of the heading represent the number of exercisable and unexercisable Company options, respectively, which were "In-the-Money" on November 30, 1997, multiplied by the difference between the closing price of the Common Stock on November 30, 1997, which was $3.25 per share, and the exercise price of the Company options. For purposes of these calculations, In-the-Money options are those with an exercise price below $3.25 per share. Employee Retirement Plan In June 1995, the Board of Directors of the Company determined to discontinue benefit accruals under the Company's tax qualified Employee Retirement Plan (the "Retirement Plan"). Pursuant to action taken by the Board of Directors at such time, benefits ceased to accrue for all active participants under the Retirement Plan on June 30, 1995. The Retirement Plan is administered by the Board of Directors. Each of the Company's United States-based employees was eligible to participate in the Retirement Plan. However, effective as of July 1, 1995 and in connection with the Board's action, the Retirement Plan was amended to provide that no additional eligible employees may participate in the Retirement Plan and accrue benefits thereunder. The following table discloses estimated annual benefits payable upon retirement in specified compensation and years of service classification. Projected Benefits at Retirement Years of Service - ------------------------------------------------------------------------------------------------ 15 20 25 30 35 Salary(1) - ------------------------------------------------------------------------------------------------ $ 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) (1) The annual benefits shown in the Table are integrated with Social Security and there are no other offsets to benefits. (2) In general, section 401(a)(17) of the Internal Revenue Code provides that for 1994, compensation used for computing benefits under a tax-qualified employee pension plan cannot exceed $150,000 (as adjusted). (3) Under current law, the maximum annual benefit payable under the Retirement Plan cannot exceed $120,000 (as adjusted). The Retirement Plan is funded by the Company on an actuarial basis, and the Company contributes annually the minimum amount required to cover the normal cost for current service and to fund supplemental costs, if any, from the date each supplemental cost was incurred. Contributions were intended to provide for benefits attributed to service to date, and also for those expected to vest in the future. Based on the assumption used in the actuarial valuation, the Retirement Plan is fully funded. The estimated credited years of service for each of the executive officers named in the Summary Compensation Table is as follows: Joel Dupre (12 years), Yutaka Yamaguchi (none) Richard Pyles (3 years) and Paul H. Riss (none). The frozen accrued monthly benefit for Mr. Dupre and Mr. Pyles is $1,678 and $239, respectively. $150,000 of Mr. Dupre's compensation shown in the Summary Compensation Table was used to compute his projected benefit under the Retirement Plan. Benefits are computed on the basis of a straight-life annuity. Benefits under the Retirement Plan are integrated with Social Security benefits. The Retirement Plan will continue to comply with the applicable sections of the Internal Revenue Code, the Employee Retirement Income Security Act, and applicable Internal Revenue Services rules and regulations. In accordance with the terms of the Retirement Plan, distributions will continue to be made to retired and terminated employees who are participants in the Retirement Plan. Board of Directors Interlocks and Insider Participation in Compensation Decisions The following former and present members of the Board of Directors were officers of the Company or a subsidiary of the Company during the fiscal year ended November 30, 1997: Joel Dupre, Eric Smith, Eric M. Hellige, Paul H. Riss and Barrie Sommerfield. Such members participated in deliberations of the Company's Board of Directors concerning executive officer compensation during the fiscal year ended November 30, 1997. Item 12. - Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of February 17, 1998, the names, addresses and number of shares of common stock beneficially owned by all persons known to the management of t he Company to be beneficial owners of more than 5% of the outstanding shares of Common Stock, and the names and number of shares beneficially owned by all directors of the Company and all executive officers and directors of the Company as a group (except as indicated, each beneficial owner listed exercises sole voting power and sole dispositive power over the shares beneficially owned): Shares Percent of Beneficially of Outstanding Name and Address Owned Common Stock ---------------- ----- ------------ Joel Dupre(1) 1,486,000 33.6% c/o Sirco International Corp. 24 Richmond Hill Avenue Stamford, Connecticut 06901 Pacific Million Enterprise Ltd. (2)(3) 266,666 6.2% The Gateway, Tower 2, Suite 1807 25 Canton Road Tsimshatsui, Kowloon, Hong Kong Joseph Takada(2)(3) 266,666 6.2% c/o Pacific Million Enterprise Ltd. The Gateway, Tower 2, Suite 1807 25 Canton Road Tsimshatsui, Kowloon, Hong Kong Cheng-Sen Wang(2) 177,778 4.1% c/o Kao-Lien International Co., Ltd. 404 Jen-Air Road 6th Floor, Section 4 Taipei, Taiwan R.O.C. Albert H. Cheng(2)(4) 88,888 2.1% c/o Constellation Enterprises Co., Ltd. 199 Chung Ching North Road 11th Floor, Section 3 Taipei, Taiwan R.O.C. Shares Percent of Beneficially of Outstanding Name and Address Owned Common Stock ---------------- ----- ------------ Paul H. Riss(5) 75,000 1.7% Richard Pyles (6) 20,000 less than 1% Eric Smith(6) 20,000 less than 1% Barrie Sommerfield(6) 20,200 less than 1% Eric M. Hellige(7) 25,000 less than 1% All directors and executive officers 1,621,200 35.6% of the Company as a group (six individuals) (1) Includes 120,000 shares of Common Stock subject to options which are presently exercisable and 533,332 shares for which Mr. Dupre has the right to exercise sole voting control pursuant to a Voting Agreement dated as of May 1, 1995 (the "Voting Agreement") under which Pacific, Mr. Wang and Mr. Cheng granted Mr. Dupre the right to exercise sole voting control with respect to 266,666; 177,778; and 88,888 shares, respectively, held of record by them. Includes 25,000 shares for which Mr. Dupre has granted to Mr. Hellige stock purchase options. (2) As a result of the Voting Agreement, Mr. Dupre, Pacific (together with Mr. Takada - see Note 3), Mr. Wang and Mr. Cheng may be deemed to be a "group" within the meaning of Section 13d-3 of the Securities Exchange Act of 1934, and, therefore, deemed to beneficially own an aggregate of 1,366,000 shares of Common Stock. (3) Pacific has granted to Mr. Dupre an option to purchase all of the 266,666 shares it owns of record. By virtue of his ownership of 95% of the issued and outstanding shares of common stock of Pacific, Joseph Takada may be deemed to be the beneficial owner of all the shares of Common Stock beneficially owned by Pacific. (4) Mr. Cheng has granted to Mr. Dupre an option to purchase all of the 88,888 shares he owns of record. (5) Includes 70,000 shares of Common Stock subject to options which are presently exercisable. (6) Consists of 20,000 shares of Common Stock subject to options which are presently exercisable (7) Consists of 25,000 shares of Common Stock subject to options granted by Mr. Dupre which are presently exercisable. Item 13. - Certain Relationships and Related Transactions Mr. Joseph Takada, the beneficial owner of approximately 6.2% of the outstanding shares of Common Stock, is the Managing Director of Ideal Pacific Ltd, ("Ideal"), the Company's manufacturing agent in Hong Kong. During the fiscal year ended November 30, 1997, the Company paid aggregate commissions of approximately $40,000 to Ideal. Mr. Cheng-Sen Wang, the beneficial owner of approximately 4.1% of the outstanding shares of Common Stock, is the Managing Director of Kao-Lien International Co., Ltd. ("Kao-Lien"), the Company's manufacturing agent in Taiwan. During the fiscal year ended November 30, 1997, the Company paid aggregate commissions of approximately $168,000 to Kao-Lien. Mr. Albert Cheng, the beneficial owner of 2.1% of the outstanding shares of Common Stock, is the President of Constellation Enterprise Co., Ltd. ("Constellation"). During the fiscal year ended November 30, 1997, the Company purchased approximately $891,000 of luggage and backpack products from Constellation. At November 30, 1997, the Company owed Ideal, Kao-Lien and Constellation approximately $305,000, $141,000 and $528,000, respectively. Paul H. Riss, a director and the Chief Financial Officer of the Company, is a member of the Board of Directors of CHC, an affiliate of the Company. Mr. Riss owns options to purchase 100,000 shares of common stock of CHC. The Company's Chairman and Chief Executive Officer, Joel Dupre, owns 306,000 shares of common stock of CHC, or approximately 2.7% of the outstanding shares, and owns options to purchase an additional 150,000 shares. Eric M. Hellige, a director of the Company, is a member of Pryor, Cashman, Sherman & Flynn, counsel to the Company ("Pryor, Cashman"). Fees paid by the Company to Pryor, Cashman for legal services rendered during the fiscal year ended November 30, 1997 did not exceed 5% of such firm's or the Company's revenues. Mr. Hellige owns 25,000 shares of common stock of CHC, an affiliate of the Company. Barrie Sommerfield, a director of the Company, is a Vice Chairman of Licensing of Gore, Sommerfield, Ditnes International, Inc. ("Gore Sommerfield"), a firm which provides consulting services to the Company with regard to the licensing of trademarked names. The Company paid fees to Gore Sommerfield in fiscal 1997 of approximately $4,000. The Company believes that all purchases from or transactions with affiliated parties were on terms and at prices substantially similar to those available from unaffiliated third parties. PART IV Item 14. - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements. 2. Financial Statement schedules 3. Exhibits (3) (a) Certificate of Incorporation, as amended, incorporated by reference to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 27, 1969 under Registration Number 2- 34436. (b) Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to the Company's definitive proxy statement filed with the Securities and Exchange commission in connection with the Company's Annual Meeting of Shareholders held in May, 1984. (c) Certificate of Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended November 30, 1988. (d) Certificate of Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended November 30, 1994, as amended. (e) Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 30, 1995. (f) By-laws, amended and restated as of December, 1996, incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. (4) (a) Form of Class A Warrant Agreement dated April 17, 1997. (b) form of Class B Warrant Agreement dated April 17, 1997. (10)(a) Stock Purchase Agreement dated February 27, 1998 between the Company and the shareholders of Essex Communications, Inc. (b) Lease Agreement dated February 14, 1990 between Oro-May-Broward Investment Company and the Company for property located in La Mirada, California, incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended November 30, 1989, as amended. (c) Sirco International Corp. 1995 Stock Option Plan, incorporated by reference to Exhibit 10(I) to the Company's Annual Report on Form 10-K for the year ended November 30, 1995, as amended. (d) Sirco International Corp. 1996 Restricted Stock Award Plan, incorporated by reference to Exhibit A to the Company's Proxy Statement dated October 24, 1996. (e) Employment Agreement, dated November 5, 1996 between the Company and Paul Riss, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. (f) Loan and Security Agreement, dated December 16, 1996, between the Company and Coast Business Credit, a division of Southern Pacific Thrift & Loan Association, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996.. (22) Subsidiaries of Company - The significant subsidiaries of the Company, all of which are wholly-owned by the Company and included in its consolidated financial statements, are as follows: Name Jurisdiction of Organization ---- ---------------------------- Airline Ventures, Inc. Texas Essex Communications, Inc. New Jersey Sirco Industries, Limited Hong Kong Sirco International (Canada) Limited Canada (23.1) Consent of Nussbaum Yates & Wolpow, P.C. (23.2) Consent of Blackman Kallick Bartelstein, LLP (23.3) Consent of Deloitte & Touche (27) Financial Data Schedule (b) Reports on Form 8-K. During the fourth quarter of fiscal 1997, the Company filed a Current Report on Form 8-K dated October 22, 1997, reporting the Company's investment in CLEC Holding Corp. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 12th day of March, 1998. SIRCO INTERNATIONAL CORP. (Company) By: /s/ Joel Dupre -------------- Joel Dupre, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Joel Dupre Chairman and Chief Executive -------------- March 12, 1998 Officer (Principal Executive Officer) March 12, 1998 Joel Dupre /s/ Paul H. Riss Chief Financial Officer and ---------------- (Principal Financial and March 12, 1998 Director Accounting Officer) Paul H. Riss /s/ Eric M. Hellige Director March 12, 1998 ------------------- Eric M. Hellige /s/ Barrie Sommerfield Director March 12, 1998 ---------------------- Barrie Sommerfield /s/ Eric Smith Director March 12, 1998 -------------- Eric Smith EXHIBITS (a) 1. Financial Statements. 2. Financial Statement schedules 3. Exhibits (3) (a) Certificate of Incorporation, as amended, incorporated by reference to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 27, 1969 under Registration Number 2- 34436. (b) Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to the Company's definitive proxy statement filed with the Securities and Exchange commission in connection with the Company's Annual Meeting of Shareholders held in May, 1984. (c) Certificate of Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended November 30, 1988. (d) Certificate of Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended November 30, 1994, as amended. (e) Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 30, 1995. (f) By-laws, amended and restated as of December, 1996, incorporated by reference to Exhibit 3(e) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. (4) (a) Form of Class A Warrant Agreement dated April 17, 1997. (b) form of Class B Warrant Agreement dated April 17, 1997. (10)(a) Stock Purchase Agreement dated February 27, 1998 between the Company and the shareholders of Essex Communications, Inc. (b) Lease Agreement dated February 14, 1990 between Oro-May-Broward Investment Company and the Company for property located in La Mirada, California, incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended November 30, 1989, as amended. (c) Sirco International Corp. 1995 Stock Option Plan, incorporated by reference to Exhibit 10(I) to the Company's Annual Report on Form 10-K for the year ended November 30, 1995, as amended. (d) Sirco International Corp. 1996 Restricted Stock Award Plan, incorporated by reference to Exhibit A to the Company's Proxy Statement dated October 24, 1996. (e) Employment Agreement, dated November 5, 1996 between the Company and Paul Riss, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996. (f) Loan and Security Agreement, dated December 16, 1996, between the Company and Coast Business Credit, a division of Southern Pacific Thrift & Loan Association, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended November 30, 1996.. (22) Subsidiaries of Company - The significant subsidiaries of the Company, all of which are wholly-owned by the Company and included in its consolidated financial statements, are as follows: Name Jurisdiction of Organization ---- ---------------------------- Airline Ventures, Inc. Texas Essex Communications, Inc. New Jersey Sirco Industries, Limited Hong Kong Sirco International (Canada) Limited Canada (23.1) Consent of Nussbaum Yates & Wolpow, P.C. (23.2) Consent of Blackman Kallick Bartelstein, LLP (23.3) Consent of Deloitte & Touche (27) Financial Data Schedule FORM 10-K ITEM 14(a)(1) AND (2) SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Sirco International Corp. and Subsidiaries are included in Item 8: Consolidated Balance Sheets - November 30, 1997 and 1996 F-6 Consolidated Statements of Operations - Years ended November 30, 1997, 1996 and 1995 F-8 Consolidated Statements of Stockholders' Equity - Years ended November 30, 1997, 1996 and 1995 F-9 Consolidated Statements of Cash Flows - Years ended November 30, 1997, 1996 and 1995 F-10 Notes to Consolidated Financial Statements - Years ended November 30, 1997, 1996 and 1995 F-12 The following consolidated financial statement schedules of Sirco International Corp. and Subsidiaries are included in Item 14(d): Schedule II - Valuation and Qualifying Accounts - Years ended November 30, 1997, 1996 and 1995 F-34 All other schedules are omitted because they are not required, are inapplicable, or the information is included in the financial statements or notes thereto. F-1 Report of Independent Auditors The Board of Directors and Shareholders Sirco International Corp. We have audited the accompanying consolidated balance sheets of Sirco International Corp. and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended November 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Sirco International (Canada) Limited, a wholly-owned subsidiary of Sirco International Corp. as of and for the years ended November 30, 1996 and 1995. We did not audit the consolidated financial statements of CLEC Holding Corp. and subsidiaries, an entity in which the Company had a 28% equity interest as of November 30, 1997, accounted for under the equity method. In the aggregate, such statements reflect total assets constituting 8% and 30% of the related consolidated assets as of November 30, 1997 and 1996, and such statements constitute 22% of consolidated revenues for the year ended November 30, 1996 and 15% of consolidated revenues for the year ended November 30, 1995. Those financial statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Sirco International (Canada) Limited and CLEC Holding Corp. and subsidiaries for the periods specified above, are based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. F-2 The Board of Directors and Shareholders Sirco International Corp. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sirco International Corp. and its subsidiaries as of November 30, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for the years ended November 30, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. We have also audited Schedule II for the years ended November 30, 1997, 1996 and 1995. In our opinion, based on our audits and the reports of the other auditors, these schedules present fairly, in all material respects, the information required to be set forth therein. /s/NUSSBAUM YATES & WOLPOW, P.C. ----------------------------- NUSSBAUM YATES & WOLPOW, P.C. Melville, New York February 4, 1998 (except for Note 15, as to which the date is February 27, 1998) F-3 Independent Auditor's Report The Board of Directors and Stockholders CLEC Holding Corp. and Subsidiaries Roseland, New Jersey We have audited the accompanying consolidated balance sheet of CLEC Holding Corp. and subsidiaries as of October 31, 1997, and the related consolidated statements of operations and stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CLEC Holding Corp. and subsidiaries as of October 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/BLACKMAN KALLICK BARTELSTEIN, LLP --------------------------------- BLACKMAN KALLICK BARTELSTEIN, LLP Chicago, Illinois February 18, 1998 F-4 Auditor's Report To the Shareholder Sirco International (Canada) Limited We have audited the balance sheets of Sirco International (Canada) Limited as at November 30, 1996, and the statements of operations, and retained earnings and changes in financial position for each of the years in the two-year period ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 1996, and the results of its operations and the changes in its financial position for each of the years in the two-year period ended November 30, 1996 in accordance with generally accepted accounting principles. /s/Deloitte & Touche - -------------------- Deloitte & Touche Chartered Accountants December 18, 1996 F-5 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 1997 AND 1996 ASSETS 1997 1996 ----------- ----------- Current assets: Cash and cash equivalents .................... $ 114,190 $ 390,043 Accounts receivable, trade - net of allowance of $200,000 and $276,000 in 1997 and 1996 and including $1,244,000, net of advances, due from factor in 1996, respectively ..... 3,166,804 2,825,764 Inventories .................................. 7,707,631 4,406,066 Prepaid expenses ............................. 253,225 256,134 Other current assets 44,231 .................. 123,245 Recoverable income taxes ..................... 125,517 -- ----------- ----------- Total current assets .... 11,411,598 8,001,252 ----------- ----------- Property, plant and equipment - at cost: Land ......................................... 199,425 210,672 Building ..................................... 494,891 503,599 Machinery and equipment ...................... 748,085 841,455 Leasehold improvements ....................... 320,132 311,441 ----------- ----------- 1,762,533 1,867,167 Less accumulated depreciation and amortization 935,220 979,457 ----------- ----------- 827,313 887,710 ----------- ----------- Other assets ..................................... 207,940 147,402 ----------- ----------- Investment in and advances to subsidiary ......... 514,797 540,497 ----------- ----------- Investment in affiliate .......................... 1,080,000 -- ----------- ----------- Total assets ............ $14,041,648 $ 9,576,861 =========== =========== See accompanying notes to consolidated financial statements. F-6 (Continued) SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) NOVEMBER 30, 1997 AND 1996 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------- ------------ Current liabilities: Loan payable to financial institution ......................... $ 1,071,000 Short-term loan payable to former related parties ............. 529,821 Current maturities of long-term debt .......................... $ 1,522,060 6,735 Due to related parties ........................................ 974,046 260,188 Accounts payable .............................................. 2,489,259 2,659,323 Accrued expenses and taxes .................................... 1,318,863 1,920,897 ------------ ------------ Total current liabilities ................ 6,304,228 6,447,964 ------------ ------------ Long-term debt, less current maturities ........................... 4,521,795 348,401 ------------ ------------ Commitments and contingencies Stockholders' equity: Common stock, $.10 par value; 10,000,000 shares authorized, 4,300,400 and 2,630,400 shares issued in 1997 and 1996 ............................. 430,040 263,040 Preferred stock, $.10 par value; 1,000,000 shares authorized, none issued Capital in excess of par value ................................ 7,753,368 4,136,014 Deficit ........................................................... (3,887,532) (1,019,367) Treasury stock at cost, 11,000 shares ......................... (27,500) (27,500) Treasury stock held by equity investee ........................ (420,000) -- Accumulated foreign currency translation adjustment ................................................. (632,751) (571,691) ------------ ------------ Total stockholders' equity ............... 3,215,625 2,780,496 ------------ ------------ Total liabilities and stockholders' equity $ 14,041,648 $ 9,576,861 ============ ============ See accompanying notes to consolidated financial statements. F-7 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1997 1996 1995 ----------- ------------ ------------ Net sales ............................................. $ 16,007,983 $ 27,745,955 $ 24,812,147 Cost of goods sold .................................... 13,802,712 20,657,633 18,682,304 ------------ ------------ ------------ Gross profit .......................................... 2,205,271 7,088,322 6,129,843 Selling, warehouse, general and adminis- trative expenses ................................... 5,166,849 5,905,152 6,276,379 ------------ ------------ ---------- Income (loss) from operations ......................... (2,961,578) 1,183,170 (146,536) ------------ ------------ ---------- Other (income) expense: Interest expense ................................... 573,544 772,812 866,597 Interest income .................................... (63,506) (58,214) (111,710) Loss on sale of handbag division ................... -- -- 425,163 Commission and other income, net ................... (477,934) (456,873) (330,087) ------------ ------------ ---------- 32,104 257,725 849,963 ------------ ------------ ---------- Income (loss) before provision for income taxes ....... (2,993,682) 925,445 (996,499) Provision for (recovery of) income taxes .............. (125,517) 303,209 -- ------------ ------------ ------------ Net income (loss) ..................................... ($ 2,868,165) $ 622,236 ($ 996,499) ============ ============ ========== Earnings (loss) per common and common equivalent share: Primary ........................................ ($ .88) $ .23 ($ .41) ============ ============ ============ Assuming full dilution ......................... ($ .88) $ .23 ($ .41) ============ ============ ============ Shares used in computing earnings (loss) per common and common equivalent share Primary ........................................ 3,243,392 2,668,502 2,419,400 ============ ============ ============ Assuming full dilution ......................... 3,243,392 2,678,314 2,419,400 ============ ============ ============ See accompanying notes to consolidated financial statements. F-8 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 Treasury Accumulated Common Stock Capital Stock Held Currency Number of In Excess of Treasury by Equity Translation Shares Amount Par Value Deficit Stock Investee Adjustment --------- ----------- ----------- ---------- ----------- ----------- ------------ Balance, November 30, 1994 as previously reported ................ 1,215,200 $ 121,520 $ 4,027,534 ($ 645,104) ($ 27,500) ($ 578,403) Two-for-one stock split ............... 1,215,200 121,520 ($ 121,520) -- -- -- --------- ----------- ----------- Balances at November 30, 1994 as adjusted .... 2,430,400 243,040 3,906,014 -- -- -- Net loss .............. -- -- -- (996,499) -- -- Currency translation adjustment .......... -- -- -- -- -- (4,620) --------- ----------- ----------- ---------- ----------- ----------- Balance, November 30, 1995 2,430,400 243,040 3,906,014 (1,641,603) (27,500) (583,023) Net income ............ -- -- -- 622,236 -- -- Exercise of stock options ............. 200,000 20,000 230,000 -- -- -- Currency translation adjustment .......... -- -- -- -- -- 11,332 --------- ----------- ----------- ---------- ----------- ----------- Balance, November 30, 1996 2,630,400 263,040 4,136,014 (1,019,367) (27,500) (571,691) Net loss .............. -- -- -- (2,868,165) -- -- Exercise of stock options ............. 145,000 14,500 151,750 -- -- -- Issuance of common stock in private placement ......... 400,000 40,000 569,000 -- -- -- Exercise of warrants for common stock .... 700,000 70,000 1,439,104 -- -- -- Stock issued for equity investment in CLEC Holdings, Inc. .... 425,000 42,500 1,457,500 -- -- -- Treasury stock held by equity investee ..... ($ 420,000) Currency translation adjustment .......... -- -- -- -- -- -- (61,060) Balance, November 30, 1997 4,300,400 $ 430,040 $ 7,753,368 ($3,887,532) ($ 27,500) ($ 420,000) ($ 632,751) =========== =========== =========== =========== =========== =========== =========== See accompanying notes to consolidated financial statements. F-9 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1997 1996 1995 ----------- ----------- ----------- Operating activities: Net income (loss) .................................... ($2,868,165) $ 622,236 ($ 996,499) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ................... 110,168 254,321 195,634 Loss on sale of handbag division ................ -- -- 425,163 Provision for losses on accounts receivable and other assets .............................. 278,000 32,000 128,000 (Gain) loss on sale of property, plant and equipment ..................................... 7,012 (1,601) 525 Changes in operating assets and liabilities: Accounts receivable ........................... (594,077) (663,322) (477,148) Inventories ................................... (3,325,876) 1,354,698 (2,432,693) Prepaid expenses .............................. 12,926 1,643 62,525 Other current assets .......................... 79,014 1,134 157,707 Other assets .................................. (60,538) 6,967 74,800 Due to related parties ........................ 713,858 (56,722) -- Accounts payable and accrued expenses ......... (531,320) 178,393 1,357,217 Income taxes .................................. (448,240) 314,425 -- ----------- ----------- ----------- Net cash provided by (used in) operating activities .. (6,627,238) 2,044,172 (1,504,769) ----------- ----------- ----------- Investing activities: Purchases of property, plant and equipment ........ (87,045) (339,179) (30,195) Proceeds from sale of property, plant and equipment 3,607 7,038 1,605 Cash inflow from agreement to sell subsidiary ..... 25,700 -- 60,296 ----------- ----------- ----------- Net cash provided by (used in) investing activities .. (57,738) (332,141) 31,706 ----------- ----------- ----------- See accompanying notes to consolidated financial statements. F-10 (Continued) SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1997 1996 1995 ----------- ----------- ----------- Financing activities: Repayment of loans payable to financial institutions and short-term loans payable to related parties, net ........................... ($1,600,821) ($1,258,197) ($1,761,501) Proceeds from short-term borrowings ................. -- -- 2,506,995 Proceeds from revolving credit line, net ............ 5,714,056 -- -- Proceeds from long-term debt ........................ -- -- 357,455 Repayment of long-term debt ......................... (6,550) (460,301) (441,440) Proceeds from (repayment of) officer loan ........... -- (35,000) 35,000 Proceeds from exercise of stock options ............. 166,250 250,000 -- Proceeds from private placement of common stock ..... 609,000 -- -- Proceeds from exercise of warrants .................. 1,509,104 -- -- ----------- ----------- ----------- Net cash provided by (used in) financing activities .... 6,391,039 (1,503,498) 696,509 ----------- ----------- ----------- Effect of exchange rate changes on cash ................ 18,084 5,269 (3,074) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ....... (275,853) 213,802 (779,628) Cash and cash equivalents at beginning of year ......... 390,043 176,241 955,869 ----------- ----------- ----------- Cash and cash equivalents at end of year ............... $ 114,190 $ 390,043 $ 176,241 =========== =========== =========== Cash paid during the year for: Interest ............................................ $ 510,869 $ 675,006 $ 836,437 =========== =========== =========== Income taxes ........................................ $ 300,015 $ -- $ -- =========== =========== =========== See accompanying notes to consolidated financial statements. Supplemental disclosure of non-cash investing and financing activities: During 1997, the Company exchanged 425,000 shares of common stock for 3,000,000 common shares of CLEC Holding Corp. valued at $1,500,000 (see Note 14). On March 20, 1995, the Company sold inventory of its handbag division with a book value of $1,889,368 for a sales price of $1,700,431 to Bueno of California, Inc. Substantially all of the sales price was not received in cash, but was offset by the Company against the repayment of indebtedness of the Company to Bueno's parent company, Yashiro Co., Inc. F-11 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1. Description of Business and Summary of Accounting Principles Description of Business and Concentration of Credit Risk The Company is a wholesaler of children's bags, tote bags, sport bags, backpacks, soft luggage and related products generally under trademarked names and licensed from others principally in the United States and Canada (see Note 12). The principal markets for the Company's products are the large national retail chain stores, department stores, specialty stores and sporting goods retailers. Trade receivables potentially subject the Company to credit risk. The Company extends credit to its customers based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. On October 2, 1997, the Company acquired 28% of CLEC Holding Corp ("CLEC"), a reseller of Bell South services that provides local service exclusively in the State of Florida, known as a competitive local exchange carrier (see Note 14). On February 27, 1998, the Company acquired a newly formed competitive local exchange carrier, Essex Communications, Inc. (see Note 15). Prior to the sale of its handbag division on March 20, 1995, the Company also was a wholesaler of handbags (see Note 10). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of significant intercompany balances and transactions. Investments in a 28%-owned affiliate are accounted for on the equity method. Revenue Recognition Revenue is recognized upon the shipment of merchandise. Inventories Inventories, consisting primarily of finished goods purchased for resale, are stated at the lower of cost (first-in, first-out and average) or market. F-12 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1. Description of Business and Summary of Accounting Principles (Continued) Property, Plant and Equipment and Depreciation Depreciation is computed primarily by use of accelerated methods over the estimated useful lives of the assets. The estimated useful lives are 20 years for building, 5 to 10 years for machinery and equipment and the life of lease for leasehold improvements. Foreign Currency Translation Assets and liabilities of the Company's foreign subsidiaries are translated at year-end exchange rates, and income and expenses are translated at average exchange rates prevailing during the year with the resulting adjustments accumulated in stockholders' equity. Income Taxes The Company accounts for income taxes on the liability method, as provided by Statement of Financial Accounting Standards 109, Accounting for Income Taxes. Income taxes have not been provided on undistributed earnings of foreign subsidiaries, which amount to approximately $2,900,000 as of November 30, 1997 because the Company expects to reinvest these earnings in the businesses of the subsidiaries. Income (Loss) Per Share Income (loss) per share is calculated based on the weighted average number of common shares and in 1996, common equivalent shares, outstanding. On May 5, 1997, a two-for-one stock split of the Company's common stock was effected in the form of a 100 percent stock dividend. All references to number of shares, except shares authorized, and to per share information in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. F-13 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1. Description of Business and Summary of Accounting Principles (Continued) Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents for purposes of the consolidated statement of cash flows. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used in accounting for accounts receivable allowances, inventory valuations, income taxes and investments in and advances to its subsidiary. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of significant financial instruments: Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Investments in and Advances to Subsidiary The fair value of investments in and advances to subsidiary is estimated based on discounted cash flow analyses using estimated interest rates and an appropriate allowance for uncollectibility. The carrying amount approximates its fair value. F-14 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 1. Description of Business and Summary of Accounting Principles (Continued) Fair Value of Financial Instruments (Continued) Long-Term Debt The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for debt of the same remaining maturities and approximates the carrying amount. The Company has no instruments with significant off-balance-sheet risk. Reclassifications Certain reclassifications have been made to conform to the 1997 presentation. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which will require companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS that is currently required. The new standard requires additional information disclosures, and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997 (the Company's first quarter of fiscal 1998), and will require restatement of EPS for all prior periods reported. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting (SFAS) No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, expand or modify disclosures and will have no impact on our consolidated financial position, statements of operations or cash flows. F-15 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 2. Loans Payable to Financial Institutions and Long-Term Debt The Company had an agreement with a factor (see Note 8) whereby it could borrow up to 40% (as amended) of the value of its finished goods inventory. Interest was at prime plus 1.75% per annum (10% at November 30, 1996). Borrowings were collateralized by the inventory. The Company had outstanding $1,071,000 as of November 30, 1996 under this agreement. On December 17, 1996, the aforementioned factoring agreement was terminated and replaced with a financing agreement with Coast Business Credit, a division of Southern Pacific Thrift and Loan Association ("Coast"), that provides for revolving loans and letter of credit financing in the amount of the lesser of $7,000,000 or the sum of (a) 80% of eligible accounts receivable (as defined) and (b) 50% of eligible inventory (as defined) up to a maximum inventory loan of $3,000,000 less 50% of letter of credit financing outstanding. The amount of the facility available for letter of credit financing is limited to $2,500,000. The loan bears interest at 2% above the prime rate (10.5% at November 30, 1997), matures on December 17, 1998, and is guaranteed by the Company's Chairman and Chief Executive Officer. The Company has granted Coast a security interest in substantially all of the Company's assets. The agreement with Coast contains various restrictive covenants, including among others, a restriction on the payment or declaration of any cash dividends, a restriction on the acquisition of any assets other than in the ordinary course of business in excess of $100,000, restrictions related to mergers, borrowing and debt guarantees and a $100,000 annual limitation (as defined) on the acquisition or retirement of the Company's common and preferred stock. The agreement also requires the Company to maintain a minimum tangible net worth of $1,400,000. The Company had outstanding loans of $5,714,056 at November 30, 1997 under this agreement. The Company anticipates that approximately $1,515,000 of this loan will be repaid during fiscal 1998, and, accordingly, such amount has been classified as a current liability as of November 30, 1997. F-16 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 2. Loans Payable to Financial Institutions (Continued) On August 1, 1995, the Company's Canadian subsidiary entered into a financing agreement with a Canadian bank that provided for a revolving loan and letter of credit financing in the amount of the lesser of $525,000 or the sum of a percentage of accounts receivable (as defined), 50% of letters of credit outstanding, and 25% of eligible finished goods inventory (as defined) with interest payable monthly at 1.25% above the Canadian prime rate. In May 1996, the agreement was amended to increase the revolving loan to approximately $876,000. As of November 30, 1996, there was no balance outstanding under this agreement in direct borrowings. As of November 30, 1996, there were outstanding letters of credit in the amount of $46,000. In January 1997, the Company received notification from the Canadian bank that the revolving loan agreement was terminated. In August 1995, the bank also refinanced a real property mortgage of approximately $368,000. The mortgage is payable in monthly installments of approximately $3,500 including interest at 10.25% with a balloon payment of approximately $325,000 in the year 2000. Substantially all of the assets of the Canadian subsidiary have been pledged as collateral for the above loans. The Canadian subsidiary has agreed to certain financial covenants (current ratio, debt-to-equity ratio, debt service coverage) and not to pay dividends to the parent. As of November 30, 1997, the Canadian subsidiary was in violation of certain loan covenants. The bank has agreed to waive the defaults until December 1, 1998. Maturities of long-term debt (see below) give effect to this debt becoming due on such date. Long-term debt consists of the following: 1997 1996 ---------- ---------- Loan payable to Coast Business Credit ........ $5,714,056 Subsidiary mortgage payable .................. 329,799 $ 355,136 ---------- ---------- 6,043,855 355,136 Less current maturities ...................... 1,522,060 6,735 ---------- ---------- $4,521,795 $ 348,401 ========== ========== Principal payments are due as follows: Year ended November 30, 1998 $1,522,060 1999 4,521,795 ---------- $6,043,855 ========== F-17 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 3. Income Taxes At November 30, 1997, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $5,900,000 expiring in the years 2001 through 2012. There is an annual limitation of approximately $187,000 on the utilization of approximately $2,600,000 of net operating loss carryforwards under the provisions of Internal Revenue Code Section 382. A net operating loss of approximately $3,300,000 is available in addition to the annual limitation. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of November 30, 1997 and 1996 are as follows: 1997 1996 --------- ----------- Deferred tax assets: Net operating loss carryforwards ......................... $ 2,440,000 $ 1,360,000 Allowance for doubtful accounts and accruals ............. 210,000 483,000 Inventory ................................................ 330,000 90,000 Depreciation ............................................. 110,000 110,000 ----------- ----------- 3,090,000 2,043,000 Deferred tax liabilities: Installment sale of investment .......................... (50,000) (60,000) ----------- ----------- 3,040,000 1,983,000 Valuation allowance ........................................ (3,040,000) (1,970,000) ----------- ----------- Net deferred tax assets .................................... $ -- $ 13,000 =========== =========== The valuation allowance at November 30, 1995 was $2,240,000 F-18 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 3. Income Taxes (Continued) The following is a reconciliation of the tax provisions for the three years ended November 30, 1997 with the statutory Federal income tax rates: Percentage of Pre-Tax Income 1997 1996 1995 ---- ---- ---- Statutory Federal income tax rate (34.0%) 34.0% (34.0%) State and local income taxes, net of Federal income tax benefit .1 .2 - Differences in foreign and U.S. tax rates - 11.6 - Utilization of United States net operating loss carryforwards - (7.1) - Utilization of foreign tax loss carryforwards/ carryback (4.3) (6.8) (7.8) Operating losses generating no current tax benefit: United States 34.0 - 37.8 Foreign - - 1.6 Other items, net .1 .9 2.4 ------ ------ ----- (4.1%) 32.8% -% ====== ===== ===== 4. Pension Plans The Company has a defined benefit plan covering substantially all of its domestic employees. The benefits provided are primarily based upon years of service and compensation, as defined. The Company's funding policy is to contribute annually the minimum amount required to cover the normal cost and to fund supplemental costs, if any, from the date each supplemental cost was incurred. Contributions were intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Plan assets consist primarily of investments in money market funds. F-19 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 4. Pension Plans (Continued) Effective June 30, 1995, the plan was frozen, ceasing all benefit accruals and resulting in a plan curtailment. The Company recognized a curtailment gain of approximately $112,500 in accordance with Statement of Financial Accounting Standards No. 88 - "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." Net periodic pension cost (gain) (exclusive of the curtailment gain in 1995) included the following components: Year Ended November 30, 1997 1996 1995 --------- --------- --------- Service cost - benefits earned in current year - - $ 39,355 Interest cost on projected benefit obligation $ 57,257 $ 53,707 54,221 Return on assets (66,110) (69,235) (71,434) Net amortization and deferral (4,112) (6,199) (12,198) --------- --------- --------- ($12,965) ($21,727) $ 9,944 ========= ========= ========= Following is a summary of significant actuarial assumptions used: November 30, 1997 1996 1995 Weighted average discount rates 7.5% 7.5% 7.5% Rates of increase in compensation levels 5.0% 5.0% 5.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% F-20 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 4. Pension Plans (Continued) The following table sets forth the Plan's funded status and amounts recognized in the Company's statement of financial position at: November 30, 1997 1996 --------- --------- Accumulated benefit obligation, including vested benefits of $813,095 and $758,758 at November 30, 1997 and 1996, respectively .......... ($816,427) ($766,797) ========= ========= Projected benefit obligation for service rendered to date ........................................... ($816,427) ($766,797) Plan assets at fair value, primarily money market funds ............................................. 834,747 830,636 --------- --------- Plan assets in excess of projected benefit obligation 18,320 63,839 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions ............................ 45,599 (8,773) Unrecognized net asset being amortized over 13 years from December 1, 1987 .................... (12,215) (16,327) --------- --------- Prepaid pension cost ................................ $ 51,704 $ 38,739 ========= ========= 5. Commitments The Company conducts a substantial portion of its operations utilizing leased facilities. Rent expense, charged to operations, was $704,000, $659,000 and $725,000 in 1997, 1996 and 1995, respectively. In addition to the annual rent, the Company pays real estate taxes, insurance and other occupancy costs on its leased facilities. A portion of one warehouse facility is subleased to a subsidiary of Yashiro (see Note 6) under a sublease which expires in May, 2000. Total minimum sublease rentals to be received in the future amounted to $398,000 at November 30, 1997. F-21 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 5. Commitments (Continued) The minimum annual rental commitments exclusive of sublease rentals under all operating leases that have remaining non-cancelable terms in excess of one year are approximately as follows: Year ended November 30, 1998 $744,000 1999 762,000 2000 488,000 2001 157,000 2002 84,000 Thereafter 320,000 ---------- $2,555,000 ========== The Company has entered into various licensing agreements under which it has obtained the right to market children's bags, tote bags and related products with trade names. The terms of such agreements vary through June 1999. The agreements provide for royalties based upon net sales with certain stated minimum annual amounts. The amount of future minimum royalties aggregate approximately $820,000 at November 30, 1997. Royalty expense amounted to $660,000, $1,160,000 and $937,000 in fiscal 1997, 1996 and 1995, respectively. As of November 30, 1997 and 1996, approximately $506,000 and $471,000, respectively, had been accrued for unpaid royalties. During fiscal 1996, the Company modified its agreement with a licensor whereby the Company ceased to ship its product under this license after June 30, 1996. Sales of this licensed product amounted to approximately 29% and 21% of the Company's net sales in 1996 and 1995. F-22 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 6. Related Party Transactions On March 20, 1995, the Company entered into a Letter of Credit Agreement with Yashiro Co. Inc. (together with its affiliates, "Yashiro"), which prior to March 20, 1995, owned approximately 56% of the Company, to provide for short-term financing for import purchases. Pursuant to this agreement, Yashiro had agreed to issue, until March 20, 1997, unsecured trade letters of credit in an aggregate amount of up to the lesser of $1,200,000, or 35% of the Company's inventory. Amounts borrowed under this agreement were repayable 100 days after delivery of the goods. On August 28, 1996, the agreement was amended to, among other things, reduce the aggregate amount of letters of credit to be issued to the lesser of $1,000,000 or 35% of the Company's inventory. In addition to interest, which was payable monthly at 2% above the prime rate, Yashiro was paid a handling fee of 3% of the cost of the goods. The Company's liability to Yashiro was approximately $530,000 at November 30, 1996 and the Company had outstanding letters of credit of approximately $242,000 at November 30, 1996. In fiscal 1997, 1996 and 1995, interest and handling and other fees paid to Yashiro amounted to approximately $18,000, $105,000 and $417,000, respectively. During the year ended November 30, 1995, the Company purchased approximately $734,000 of handbags and accessories from an affiliate of Yashiro. During the years ended November 30, 1997, 1996 and 1995, the Company purchased approximately $891,000, $355,000 and $193,000, respectively, of luggage and backpack products from a company controlled by a stockholder. During the years ended November 30, 1997, 1996 and 1995, the Company paid approximately $208,000, $786,000 and $602,000, respectively, as buying commissions to companies controlled by other stockholders. As of November 30, 1997 and 1996, there was outstanding $974,046 and $260,188 to such related parties. F-23 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 7. Segment Reporting United Hong Consolidated States Canada Kong ------------ ------------ ------------ ------------ (See Note 12) Year ended November 30, 1997: Net sales ........................ $ 16,007,983 $ 15,233,619 $ 774,364 $ -- ============ ============ ============ ============ Net loss and loss before provision for (recovery of) income taxes . ($ 2,993,682) ($ 2,696,043) ($ 294,953) ($ 2,686) ============ ============ ============ ============ Identifiable assets .............. $ 14,041,648 $ 12,671,236 $ 1,369,967 $ 445 ============ ============ ============ ============ Year ended November 30, 1996: Net sales ........................ $ 27,745,955 $ 21,683,680 $ 6,062,275 $ -- ============ ============ ============ ============ Net income (loss) and income (loss) before provision for income taxes ................ $ 925,445 $ 193,752 $ 735,747 ($ 4,054) ============ ============ ============ ============ Identifiable assets .............. $ 9,576,861 $ 6,724,377 $ 2,850,942 $ 1,542 ============ ============ ============ ============ Year ended November 30, 1995: Net sales ........................ $ 24,812,147 $ 21,132,714 $ 3,660,079 $ 19,354 ============ ============ ============ ============ Net income (loss) and income (loss) before provision for income taxes ................ ($ 996,499) ($ 1,154,408) $ 269,488 ($ 111,579) ============ ============ ============ ============ Identifiable assets .............. $ 10,002,740 $ 7,780,427 $ 2,213,154 $ 9,159 ============ ============ ============ ============ 8. Accounts Receivable and Major Customers The Company had an agreement with a factor pursuant to which the Company sold substantially all of its accounts receivable on a pre-approved non-recourse basis. Under the terms of the agreement, the factor advanced funds to the Company based on invoice amounts. Interest on such advances was payable at 2% in excess of the prime rate through October 31, 1995 and 1.75% in excess of the prime rate thereafter. The Company also paid a factoring commission of 1% (.75% after November 1, 1995) of the invoice amount subject to a minimum of $96,000 per annum. As described in Note 2, the agreement was terminated on December 17, 1996. F-24 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 8. Accounts Receivable and Major Customers (Continued) Sales to one customer amounted to 27%, 19%, and 25% of net sales in fiscal 1997, 1996 and 1995, respectively. Sales to another customer amounted to 17% and 11% of net sales in fiscal 1997 and 1996, respectively. Sales to another customer amounted to 14% in fiscal 1997. 9. Investment In and Advances to Subsidiary Effective July 15, 1992, the Company entered into an agreement to sell all of the stock of its then wholly-owned subsidiary, Sirco Leatherwares Limited (the "Subsidiary"). In exchange for the stock, the Company received a non-interest bearing $650,000 note. The note is guaranteed by an officer of the Subsidiary who is also an officer of the buyer and, until December 1996, served on the Board of Directors of the Company. The agreement also requires the Company to forgive a portion of the amounts due to it from the Subsidiary. The Company's ability to collect the note receivable and the balance of the receivable from the Subsidiary is dependent upon cash flows from the Subsidiary's operations and/or the buyer's ability to refinance the obligations. As the risks and other incidents of ownership have not transferred to the buyer with sufficient certainty, this transaction has not been accounted for as a sale for accounting purposes. The Company recorded a loss on this transaction in fiscal 1992, as the present value of the amounts to be received under the note and the revised accounts receivable were less than (i) the carrying value of the Company's investment in the Subsidiary plus (ii) the amounts receivable from the Subsidiary. The non-interest bearing $650,000 note received in exchange for stock in the Subsidiary ("the Stock Note") was due in thirty-two equal quarterly installments of $20,213 beginning in August 1992. During fiscal 1996, the parties agreed to a one year payment moratorium as to the Stock Note. On February 6, 1997, the parties agreed to modify the remaining repayment terms and to resume payments. The note, as modified, is to be repaid as follows: $10,156 on February 7, 1997, $10,156 on March 10, 1997, four quarterly payments of $10,156 commencing on May 1, 1997 and ending on February 1, 1998, five quarterly payments of $20,313 commencing on May 1, 1998 and ending on May 1, 1999, and four quarterly payments of $50,781 commencing on August 1, 1999 and ending on May 1, 2000. Payments are being received on a current basis. F-25 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 9. Investment In and Advances to Subsidiary (Continued) Also, pursuant to the agreement to sell the Company's investment in the Subsidiary, the Subsidiary agreed to pay interest quarterly at 8.5% per annum on a receivable of approximately $720,000. If the Subsidiary is not in default on the payment of interest, the Company will forgive a portion of the receivable, in amounts as defined, through May 1, 1998. An amount of $40,000 was forgiven in each of 1997, 1996 and 1995. The total amount forgiven will be $280,000. The remaining receivable of approximately $400,000 is payable in ten equal quarterly installments commencing in August 1998. Amounts outstanding after May 1, 1998 will bear interest at the prime rate. Payments are being received on a current basis. At November 30, 1997, the aggregate principal balance of $715,000 due on the above notes has been reduced for imputed interest of approximately $40,000 and an allowance of approximately $160,000 for uncollectibility. 10. Loss on Sale of Handbag Division On March 20, 1995, the Company sold its handbag division to Bueno of California, Inc. ("Bueno"), a subsidiary of Yashiro. The Company and Bueno entered into an Asset Purchase Agreement pursuant to which the Company sold to Bueno all of the inventory relating to the Company's handbag division, and certain equipment relating to the Company's handbag division for $1,785,666, of which $86,168 was paid in cash and $1,699,448 was applied by the Company to the repayment of indebtedness of the Company to Yashiro. This sale resulted in a loss to the Company of $425,163. Net sales of the Company's handbag division for the year ended November 30, 1995 was $1,423,000, and related gross profit was $81,000. In connection therewith, the Company had entered into six year non-competition agreements covering North America with Yashiro, another affiliate of Yashiro, Mr. Yutaka Yamaguchi and Mr. Takeshi Yamaguchi, former stockholders and/or officers of the Company. Aggregate consideration to these parties was $240,000 payable in three annual installments of $80,000 including interest at 10% which commenced March 31, 1996. The present value of the restrictive covenant ($198,350) was being amortized over the life of the agreement. During 1996, the Company paid its non-competition agreement liability in full, the non-competition agreement was terminated, and the Company wrote off the remaining balance of the restrictive covenant asset. F-26 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 10) Loss on Sale of Handbag Division (Continued) In addition, the Company had agreed to pay severance pay to Mr. Takeshi Yamaguchi in the amount of $200,000, payable in two annual installments of $100,000 plus interest at 10% per annum which commenced March 31, 1996. This amount had been charged to operations in 1995. During 1996, the Company paid its severance agreement liability in full. 11. Stockholders' Equity The Company accounts for its stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation expense is recognized. In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation," (SFAS No. 123) for disclosure purposes; accordingly, no compensation expense has been recognized in the results of operations for its stock option plans as required by APB Opinion No. 25. On August 17, 1995, the stockholders of the Company (i) approved an increase in the number of authorized shares of common stock from 3,000,000 shares to 10,000,000 shares; (ii) authorized the Company to issue 1,000,000 shares of preferred stock, par value $.10 per share, with rights and privileges to be determined by the board of directors; and (iii) approved the 1995 Stock Option Plan of the Company (the "Plan"). The Plan provides for the grant of incentive stock options, non-qualified stock options, tandem stock appreciation rights, and stock appreciation rights exercisable in conjunction with stock options to purchase a specified number of shares of common stock. During fiscal 1997, the stockholders of the Company approved an amendment to the Plan to increase the number of shares of common stock that may be issued to 1,200,000 shares. F-27 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 11. Stockholders' Equity (Continued) Weighted- Average Number Exercise Price Exercise of Shares Per Share Price --------- --------- ----- Outstanding, December 1, 1994 - - - Granted during year ended November 30, 1995 146,000 $1.00 $1.00 ------- Outstanding, November 30, 1995 146,000 $1.00 $1.00 Granted during year ended November 30, 1996 437,000 $1.25 - $1.6875 $1.34 Exercised during year ended November 30, 1996 (200,000) $1.25 $1.25 -------- Outstanding November 30, 1996 383,000 $1.00 - $1.6875 $1.26 Granted during year ended November 30, 1997 160,000 $1.94 - $2.13 $2.04 Exercised/canceled during year ended November 30, 1997 (148,000) $1.00 - $1.6875 $1.09 -------- Outstanding November 30, 1997 395,000 $1.00 - $2.13 $1.64 ======= Options exercisable, November 30, 1995 40,000 $1.00 $1.00 ======== Options exercisable, November 30, 1996 183,500 $1.00 - $1.6875 $1.12 ======== Options exercisable, November 30, 1997 140,000 $1.00 - $1.44 $1.33 ======== F-28 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 11. Stockholders' Equity (Continued) The following table summarizes information about the options outstanding at November 30, 1997: 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 $1.00 - $1.44 235,000 3.58 $1.36 140,000 $1.33 $1.94 - $2.14 160,000 4.24 $2.04 - - For disclosure purposes, the fair value of each stock option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions used for stock options granted in fiscal 1997 and 1996, respectively: annual dividends of $0.00 for both years, expected volatility of 93% for 1996 and 88% for 1997, risk-free interest rate of 6.54% and 6.03%, and expected life of five years for all grants. The weighted-average fair value of stock options granted in 1997 and 1996 was $.91 and $.66, respectively. Under the above model, the total value of stock options granted in 1997 and 1996 was $146,041 and $101,740, respectively, which would be amortized ratably on a pro forma basis over the related vesting periods, which range from five to ten years. Had the Company determined compensation cost for these plans in accordance with SFAS No. 123, the Company's pro forma net income (loss) would have been ($2,906,052) in 1997 and $620,904 in 1996, the Company's pro forma earnings (loss) per share would be ($.90) for 1997 and would not change for 1996. The SFAS No. 123 method of accounting does not apply to options granted prior to January 1, 1995, and accordingly, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-29 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 11. Stockholders' Equity (Continued) In April, 1997, the Company raised $609,000, net of placement agent fees, through the private placement issuance of 400,000 units at $1.75 per unit, consisting of one share of common stock, one common stock Class A warrant exercisable at $2.06 per share for one year, and one common stock Class B warrant exercisable at $2.56 per share for one year. Additionally, 120,000 Class A warrants were granted to the placement agent and a consulting firm in connection with the transaction. As of November 30, 1997, 700,000 warrants had been exercised and 110,000 Class A and 110,000 Class B warrants were outstanding. On October 24, 1996, the shareholders of the Company adopted the Sirco International Corp. 1996 Restricted Stock Award Plan (the "Restricted Stock Award Plan"). An aggregate of 400,000 shares of common stock of the Company has been reserved for issuance in connection with awards granted under the Restricted Stock Award Plan. Such shares may be awarded from either authorized and unissued shares or treasury shares. The maximum number of shares that may be awarded under the Restricted Stock Award Plan to any individual officer or key employee is 100,000. Approximately five employees of the Company and its subsidiaries are currently eligible to participate in the Restricted Stock Award Plan. No shares were awarded during 1997 and 1996. 12. Canadian Operations During fiscal 1996, the Company received notification from Airway Industries Inc. ("Airway") that the licensing agreement with the Company's Canadian subsidiary, Sirco International (Canada) Limited ("Sirco Canada"), would cease on December 31, 1996. On November 22, 1996, Sirco Canada leased substantially all of its facility to Airway for a two-year period commencing on January 1, 1997 for a rental of $65,000 per annum. On December 31, 1996, Sirco Canada sold its then remaining inventory, supplies, furniture and fixtures to Airway, and substantially all of Sirco Canada's employees terminated their employment with Sirco Canada and were then hired by Airway. Sirco Canada did not incur any significant gain or loss on the sale of such assets to Airway. F-30 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 12. Canadian Operations (Continued) As the sales from the licensed products accounted for substantially all of Sirco Canada's sales, its future viability will depend on its ability to successfully introduce new products into the Canadian marketplace. Management believes that the Canadian operations will continue to be adversely affected through the next fiscal year. See Note 7 to the consolidated financial statements for information with respect to Sirco Canada's operations. 13. Fourth Quarter Adjustment During the fourth quarter of the year ended November 30, 1997, the Company recorded an adjustment of approximately $615,000 to write down certain inventory. 14. Investment in Affiliate On October 22, 1997, the Company acquired 3,000,000 common shares of CLEC Holding Corp. ("CLEC"), in exchange for 375,000 shares of the Company's common stock, subject to certain price protection adjustments which required the Company to issue an additional 50,000 shares of common stock. The Company's investment in CLEC represents approximately 28% of CLEC's total shares outstanding and is carried on the equity method of accounting. At November 30, 1997, the cost of the investment in CLEC of $1,500,000 had been reduced by $420,000, attributable to 28% of the cost of the 425,000 shares of the Company's common stock held by CLEC, with a corresponding charge to treasury stock. Substantially all of the investment represented goodwill of $1,080,000 which will be amortized over 15 years. CLEC issues its financial statements based on a fiscal year ending October 31. Accordingly, the Company has not recorded any equity in the operations of CLEC for the Company's year ended November 30, 1997. CLEC was formed in 1991 and was inactive until September 1997, when CLEC acquired 95% of the capital stock of The Other Phone Company, Inc. ("OPC"), an integrated telecommunications provider based in Florida. OPC is a reseller of Bell South services that currently provides local service exclusively in the State of Florida. F-31 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 14. Investment in Affiliate (Continued) The results of operations for the period September 9, 1997 through October 31, 1997 and financial position of CLEC as of October 31, 1997 are summarized below: Condensed Income Statement Information Revenue $479,516 Cost of service 347,683 Gross profit 131,833 Net loss (101,276) Condensed Balance Sheet Information Current assets, including investment in Sirco International Corp. common shares carried at $1,500,000* $2,177,239 Non-current assets 117,884 Goodwill 1,953,623 Current liabilities 1,571,696 Non-current liabilities 410,229 Minority interest 113,446 Net worth 2,153,375 * These shares were sold in January and February 1998 for $687,500. F-32 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 14. Investment in Affiliate (Continued) In September, 1997, the Company's Chief Executive Officer loaned CLEC $150,000. On November 10, 1997, the loan, plus accrued interest of $3,000, was converted into 306,000 shares of CLEC common stock (approximately 3% of CLEC's outstanding shares). In addition, CLEC granted options to purchase common shares of CLEC to the Chief Executive Officer of the Company (150,000 shares at $1.20 per share) and to another officer of the Company who serves on the Board of Directors of CLEC (100,000 shares at $1.00 per share). 15. Subsequent Event On February 27, 1998, the Company acquired all of the outstanding shares of common stock of Essex Communications, Inc. ("Essex") in exchange for 250,000 shares of the Company's common stock and warrants to purchase up to 225,000 shares of the Company stock at $2.75 per share. The warrants vest at the rate of 75,000 immediately; if certain performance conditions are met, the remaining warrants vest and up to 600,000 additional shares may be issued. Essex is a start-up telecommunications provider that has filed in New York, New Jersey and Connecticut to become a reseller of local phone services. This acquisition will be accounted for as a purchase. F-33 SIRCO INTERNATIONAL CORP. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995 Column A Column B Column C Column D Column E - ------------------------------------------ -------- -------- -------- -------- Additions Balance at Charged to Accounts Balance at Beginning Costs and Written End of Description of Period Expenses* Off Period ----------- --------- --------- --- ------ Year ended November 30, 1997: Allowance for doubtful accounts $ 276,000 $ 278,000 $354,000 $ 200,000 Valuation allowance for deferred tax asset $1,970,000 $1,070,000 - $3,040,000 Year ended November 30, 1996: Allowance for doubtful accounts $ 286,000 $ 32,000 $ 42,000 $ 276,000 Valuation allowance for deferred tax asset $2,240,000 ($ 270,000) - $1,970,000 Year ended November 30, 1995: Allowance for doubtful accounts $ 322,000 $ 128,000 $164,000 $ 286,000 Valuation allowance for deferred tax asset $2,840,000 ($ 600,000) - $2,240,000 * Net of recoveries F-34