THRIFT MANAGEMENT INC, 10KSB40, 1998-04-14

THRIFT MANAGEMENT INC
10KSB40, 1998-04-14
MISCELLANEOUS SHOPPING GOODS STORES

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 number 333-5190-A

THRIFT MANAGEMENT, INC.
(Name of Small Business Issuer in Its Charter)

Florida 65-0309540
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

3141 W. Hallandale Beach Boulevard
Hallandale, Florida 33009
(Address of Principal Executive Offices) (Zip Code)

Issuer's Telephone Number, Including Area Code: (954) 985-8430

----------------
Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
---- ----

Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]

State issuer's revenues for its most recent fiscal year: $7,728,241

The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on March 19, 1998 was approximately $4,960,313.

As of March 19, 1998, there were 2,145,000 shares of the issuer's Common Stock,
$.01 par value, outstanding.

<PAGE> 2

DOCUMENTS INCORPORATED BY REFERENCE

None.

FORWARD-LOOKING STATEMENTS

Thrift Management, Inc. (the "Company") cautions readers that
certain important factors may affect the Company's actual results and
could cause such results to differ materially from any forward-looking
statements which may be deemed to have been made in this Report or
which are otherwise made by or on behalf of the Company. For this
purpose, any statements contained in this Report that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words
such as "may," "expect," "believe," "anticipate," "intend," "could,"
"estimate," or "continue" or the negative other variations thereof or
comparable terminology are intended to identify forward- looking
statements. Factors which may affect the Company's results include, but
are not limited to, limited history of profitability, dependence on
charitable donations and a limited number of charities, increase in the
cost of merchandise, reliance on management, competition and
seasonality. The Company is also subject to other risks detailed herein
or detailed from time to time in the Company's filings with the
Securities and Exchange Commission.

PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

The Company manages and operates retail outlets known as
thrift stores, which deal in new and used articles of clothing,
miscellaneous household items, furniture, bric-a-brac and antiques at
discounted prices. The Company currently operates five thrift stores in
South Florida: two in Hallandale, Florida (Broward County), one in
Margate, Florida (Broward County), one in Lauderdale Lakes, Florida
(Broward County) and one in Hialeah, Florida (Dade County). Inventory
for the Company's stores is obtained as the result of donations made to
charities under contracts entered into by the Company for the
solicitation and purchase of merchandise. The Company also purchases
merchandise in bulk from various independent contract collectors.

During 1997, the Company had solicitation and purchasing
agreements with two charities in the South Florida area, the Missing
Children Awareness Foundation and Temple Beth Ahm Israel. In addition,
the Company currently is in the process of entering into a solicitation
and purchasing agreement with the Samuel M. and Helene Soref Jewish
Community Center, Inc., a Florida not-for-profit corporation. The
Company is registered with the Department of Agriculture and Consumer
Affairs of the State of Florida as a professional solicitor. The
charities receive a percentage of gross revenues from the sale of the
donated merchandise. The charities gain the benefit of the Company's
expertise in solicitation and resale of donated goods through a higher
return on sales than the charity itself may be able to realize through
its own efforts.

The Company uses direct mail, newspaper advertising and
telemarketing to solicit donations for its client charities. The
Company currently uses approximately 15 trucks to make scheduled
pick-ups of donated goods. The donors are given receipts to document
the items donated. In 1997, the Company began operating manned Missing
Children Awareness Foundation donation trailers as a new source of
merchandise for its thrift stores. As of March 1998, the Company has
obtained placement approval for eight trailers. All merchandise
collected is then taken to the appropriate thrift shop, where it is
inspected, sorted, priced, tagged and displayed for sale. Items
remaining unsold in the stores are sold in bulk to exporters, which
ship the items to countries throughout the Caribbean, Central and South
America and Eastern Europe.

The Company positions its outlets in lower socio-economic
neighborhoods, on heavily traveled streets, and preferably in the
vicinity of other thrift shops. The Company believes that competition,
rather than being a limiting factor as it is in many other industries,
actually encourages sales because the close proximity of other outlets
attracts customers to the area to shop for new bargains, as the
merchandise changes frequently.

The Company currently intends to expand its operations by
opening additional thrift stores, initially in Florida, and ultimately
in various out-of-state locations. The Company's current plans include
opening approximately four to six

<PAGE> 3

additional stores during 1998 and 1999. In March 1998, the Company
entered into a letter of intent to lease a location for a new thrift
store in Pompano Beach, Florida (Broward County). In addition, the
Company currently intends to establish a merchandise export facility,
through which the Company will sell unsold inventory in bulk in the
Caribbean, Central and South America, and Eastern Europe.

The Company may also, from time to time, identify one or more
established thrift stores or other businesses related to the Company's
current operations, such as wholesale export businesses as possible
acquisition candidates. There can be no assurance that the Company
would be able to identify thrift stores or other businesses for
possible acquisition and, if identified, that the Company would be able
to consummate any such acquisitions.

In December 1996, the Company consummated its initial public
offering (the "IPO"), in which it sold 900,000 units (the "Units") at a
price of $5.75 per Unit. Each Unit consisted of one share of Common
Stock and one redeemable warrant to purchase one share of Common Stock
for $5.00 per share (the "Warrants"). Of the 900,000 shares of Common
Stock underlying the Units, 615,000 shares were offered by the Company
and 285,000 shares were offered by a selling shareholder. The Warrants
are exercisable for a period of five years commencing December 11, 1996
and may be redeemed by the Company on 30 days' notice at any time
during such period at a price of $.10 per Warrant if the closing bid
price of the Common Stock for 20 consecutive trading days ending on the
15th day prior to the date that notice of redemption was given by the
Company has been at least 150% of the exercise price then in effect.
The Company realized approximately $2.6 million in proceeds from the
IPO, net of underwriting discounts and expenses and other offering
expenses.

The Company was incorporated in Florida in July 1991. Its
executive offices are located at 3141 West Hallandale Beach Boulevard,
Hallandale, Florida 33009, telephone number (305) 985-8430.

As used herein, the "Company" refers to Thrift Management,
Inc. ("TMI") and its wholly owned subsidiaries, Thrift Shops of South
Broward, Inc., Thrift Shops of West Dade, Inc., Hallandale Thrift
Management, Inc., (HTMI), Hallandale Thrift, Inc., North Broward
Consignment, Inc. and Thrift Shops of North Lauderdale, Inc.,
(collectively, the "Subsidiaries"). Effective as of May 31, 1996,
the Company completed a tax-free reorganization (the "Reorganization")
whereby the Subsidiaries, which had previously been separate but
affiliated companies, became wholly owned subsidiaries of TMI. Unless
the context specifically states otherwise, all disclosure in this
Report gives pro forma effect to consummation of the Reorganization.

INVENTORY COLLECTION

A significant portion of the merchandise offered in the
Company's thrift stores is obtained as the result of donations made to
charities. The Company enters into a contract with a participating
charity pursuant to which the Company solicits donations of merchandise
on behalf of the charity, picks-up and sorts donated merchandise and
resells the merchandise, principally through its thrift stores. The
Company bears all costs of and assumes all responsibility for the
solicitation of donations and operation of the thrift stores and pays
the charity a percentage of gross sales for all merchandise (typically
in the range of 2% to 3%). The Company believes that such amount is
comparable to, if not better than, that which a charity would typically
earn if it operated its own thrift store and bore the costs of and
responsibility for such operation, including the costs of solicitation
and collection of donated merchandise, rent and other operating costs
for the thrift store and hiring of personnel. Moreover, the Company
believes that its experience in soliciting donations and reselling
merchandise make its services attractive to charities, which may have
little experience in the field. The Company is currently party to
contracts with the Missing Children Awareness Foundation and Temple
Beth Ahm Israel, and in March 1998, the Company is in the process of
entering into a solicitation and purchasing agreement with the Samuel
M. and Helene Soref Jewish Community Center, Inc. As the Company
expands its operations, it may seek arrangements with additional
charities. There can be no assurance, however, that the Company will be
able to successfully do so.

The Company also purchases merchandise in bulk from various
independent contract collectors that maintain drop boxes to supplement
the merchandise obtained from its agreements with its charities.

<PAGE> 4

THRIFT STORE OPERATIONS

The Company currently uses approximately 15 trucks to make
scheduled pick-ups of donated merchandise. The donors are given
receipts to document the items donated.

Following pick-up, merchandise is taken to the appropriate
thrift store where it is sorted and inspected. Unsuitable items, such
as those that are broken, badly stained or torn, are either discarded
or sold in bulk to exporters, which pay the Company between $.12 and
$.20 per pound and resell the items in countries in the Caribbean,
Central and South America and Eastern Europe. Goods deemed suitable for
sale in the Company's thrift stores are priced and date-coded by color.
Pricing is for the most part subjective and is based upon the Company's
experience of how much a customer is willing to pay for a particular
type of item.

Apparel accounts for a majority of the Company's sales. Other
items sold by the Company include furniture, bric-a-brac, antiques,
small appliances (such as toasters, stereos and televisions), linens
and domestics, and other merchandise such as toys, books, records and
jewelry. Furniture is only sold in two of the Company's thrift stores
and the Company currently does not plan to sell furniture in future
thrift stores.

Sales areas are well lighted and merchandise is displayed in
loose arrangements to promote browsing. Apparel is grouped and
displayed by sex, type and color. For example, all women's blouses are
hung together by color. Furniture items (which include brown goods,
case goods, and upholstered pieces) requiring minor repairs, such as
loose legs or cracked parts, are repaired by Company employees prior to
display. Furniture and small appliances are sold "as is." Items of
bric-a-brac and antiques are evaluated by an antiques expert and are
displayed in a separate controlled-access area.

In order to tempt the frequent shopper and control inventory
levels, the Company encourages rapid inventory turnover and displays
new merchandise on a daily basis. For example, apparel items are
generally allowed to remain in inventory for up to four weeks, during
which time the prices of the items are subject to weekly markdowns.
Merchandise remaining unsold at the end of a specified time period is
removed from inventory and sold in bulk to exporters.

In order to provide convenient shopping hours for customers,
the Company's thrift stores are generally open from 8:00 a.m. until
6:00 p.m. on Monday, Tuesday, Thursday and Saturday; from 8:00 a.m.
until 9:00 p.m. on Wednesday and Friday; and from 9:00 a.m. until 5:00
p.m. on Sunday.

MARKETING

The Company's primary mode of soliciting donations is through
direct mail, using a colored 5-1/2" x 8-1/2" postcard, sent to between
50,000 and 75,000 households per week. Mailings are targeted to
selected zip codes in Dade, Broward and Palm Beach counties in South
Florida. The postcard prominently bears the name of the charity sponsor
and a telephone number to call to offer donations. Supporting this
effort is a team of employees who field pick-up calls and who telephone
previous donors to solicit additional merchandise donations. In order
to encourage repeat donations, the Company endeavors to provide prompt
and courteous pick-up of donated merchandise. The Company supplements
its direct mail efforts through advertising in local publications. The
Company began implementing a new method of soliciting donations by
operating manned Missing Children Awareness Foundation donation
trailers located primarily in high traffic retail strip centers.

Customers at the Company's thrift stores can be classified
into three general categories: (i) shoppers who must clothe and supply
their family on a limited budget, (ii) "bargain hunters" who look for
quality items in bric-a-brac, antiques and new or nearly new clothing,
and (iii) dealers in antiques and clothing, flea market operators and
wholesalers who are seeking merchandise for their own operations. As
many of the Company's customers are repeat shoppers who frequently
visit the Company's thrift stores searching for bargains, the Company
seeks to introduce new merchandise on a daily basis and display
merchandise in a manner designed to encourage browsing.

The Company also seeks to attract customers to its outlets by
locating its outlets in the vicinity of other thrift stores, which the
Company believes attracts potential customers to the area and through
the use of high visibility signage.

<PAGE> 5

STORE LOCATIONS

The following sets forth information with respect to the
Company's five thrift stores:
<TABLE>
<CAPTION>

Approximate Lease
Location Date Opened Square Footage Exp./Renewal
- -------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
3149 W. August 1986 8,300 April 2001/
Hallandale one five-year
Beach Boulevard renewal option
Hallandale, FL

3141 W. August 1992 15,000 April 2001/
Hallandale one five-year
Beach Boulevard renewal option
Hallandale, FL

901 E. Tenth Ave November 1992 10,500 October 1999/
Hialeah, FL one seven-year
renewal option

1041 N. State Rd. 7 November 1995 10,050 November 2000/
Margate, FL two five-year
renewal options

3200 N. State Rd. 7 July 1997 29,000 June 2002/two
Lauderdale Lakes, Fl five year options
</TABLE>

Aggregate monthly rental for the Company's five thrift stores is approximately
$39,000.

The Company seeks to locate its outlets in lower socio-economic
neighborhoods that have a high concentration of potential customers and, if
possible, in the vicinity of other thrift stores, which serves to attract the
potential customer base to the area. The Company also seeks locations on highly
traveled streets with adequate on-site parking and the availability, under
zoning ordinances, of high visibility signage. The Company believes that
numerous adequate retail locations exist, such as former drug stores, discount
outlets and specialty retail stores that meet the Company's criteria for store
locations and that can be leased at reasonable rates. The Company is actively
seeking additional store locations. There can be no assurances, however, that
once the Company identifies suitable locations, it will be able to negotiate
acceptable lease terms.

EXPANSION STRATEGY

The Company's strategy is to expand its operations by opening
additional thrift stores or acquiring existing thrift stores or other businesses
related to the Company's current operations. The strategy is to expand initially
in Florida, and ultimately in various out-of-state locations. The Company
currently anticipates that its new stores will range from 9,000 to 15,000 square
feet with smaller stores selling men's, women's and children's apparel,
accessories, shoes and linens, with the larger stores also selling bric-a-brac
and household items.

<PAGE> 6

The Company currently intends to open approximately four to six
additional stores during 1998 and 1999. The Company's ability to expand its
chain of thrift stores will depend on, among other things, securing suitable
locations, obtaining sufficient merchandise and having adequate financing to
effect its expansion plans. There can be no assurance that the Company will be
able to open additional thrift stores or that any thrift stores so opened will
be profitable.

An additional area of potential expansion is the direct export of
certain merchandise. Currently, donated merchandise that is unsuitable for sale,
as well as merchandise that remains in inventory beyond a specified time period,
is sold in bulk to exporters that resell the items in countries in the
Caribbean, Central and South America, and Eastern Europe. The Company currently
sells approximately 85,000 pounds of merchandise per week in bulk to exporters.
As the Company opens additional thrift stores, it expects that the volume of
bulk merchandise available for export will increase. When it reaches a level of
approximately 150,000 pounds per week, the Company believes that it will be
economically advantageous to export such merchandise directly. In order to do
so, the Company will need to establish a separate facility to receive, sort and
grade the export merchandise, bale it and otherwise prepare the merchandise for
shipment. There can be no assurance that the Company's operations will generate
a sufficient amount of bulk merchandise to enable the Company to begin direct
export of such merchandise, that the Company will have the necessary financing
to establish the needed facility if it elects to do so, or that if the Company
expands into this field of business, that it can do so successfully or
profitably.

The Company may also, from time to time, identify one or more
established thrift stores or other businesses related to the Company's current
operations, as possible acquisition candidates. The Company's criteria for
identifying existing stores as possible acquisition candidates are similar to
those used by the Company when identifying locations for new stores. The Company
would consider whether an existing store would be an acquisition candidate based
on the store's proximity to lower socio-economic neighborhoods and to other
thrift stores; the store's location on highly traveled streets with adequate
on-site parking and permitted high-visibility signage; the store's size; the
store's profitability; the terms of the existing lease, if any; and the
anticipated purchase price. The criteria for identifying other businesses as
acquisition candidates would be based on the geographic area of the business'
operations; the financial condition of the business, including the nature of the
assets used in its operations; the value of any goodwill associated with the
business; the business' profitability; the anticipated purchase price; and such
other criteria as are deemed relevant by the Board of Directors. The Company
does not at the present time expect that any such existing stores or businesses
would be acquired from or in a transaction involving the Company's management,
principal shareholders or other affiliates.

Such acquisitions would be consummated in exchange for combinations of
cash, notes, shares of the Company's capital stock and options to purchase
shares of the Company's capital stock and depending, in part, on the Company's
available working capital or other sources of funds and its anticipated capital
needs at the time of the proposed acquisition. Although the Company does not
currently anticipate incurring debt to fund any such acquisitions, management
may determine that, depending on prevailing market interest rates, the cost of
funds available to the Company, and the extent of revenues generated by the
acquisition candidate, the use of debt to fund an acquisition may be
advantageous to the Company. Such debt would result in an ongoing interest
expense obligation for the Company, however. Issuance of shares of the Company's
capital stock in an acquisition would enable the Company to preserve its cash,
but could have the effect of diluting the Company's earnings on a per share
basis or diluting the voting control of existing shareholders, and could result
in an additional ongoing dividend obligation, depending on the terms of the
stock issued.

There can be no assurance that the Company would be able to identify or
negotiate an acquisition transaction with any such stores or other businesses
or, even if negotiations are undertaken that the Company would be able to
consummate any such acquisitions.

<PAGE> 7

COMPETITION

The Company faces competition from a variety of discount retail stores.
The Company competes for donations of merchandise and with other thrift stores
for sales. Some of such other thrift stores are located in the vicinity of the
Company's outlets. The Company believes, however, that other thrift stores
located in close proximity allow customers to shop around for the best choices
and as a result be more efficient shoppers, which encourages business. In
addition to other thrift stores that sell used goods, low-end discounters such
as K-Mart and Wal-Mart, which offer new clothing, housewares and furniture at
deep discount prices, compete with the Company to a lesser extent. These
competitors generally have greater financial and other resources than the
Company.

GOVERNMENT REGULATION

In order to solicit donations of merchandise on behalf of charities,
the Company must be registered as a professional solicitor with and is subject
to oversight by the Department of Agriculture and Consumer Affairs of the State
of Florida. In the event the Company expands its operations to other states, the
Company will likely be subject to similar licensing and oversight in those
jurisdictions. As a professional solicitor, the Company and its personnel are
required to comply with various regulations governing the manner and terms of
solicitations, including, among other things, the requirement to post a surety
bond. Failure to comply with these regulations could result in disciplinary
action including significant fines and penalties or suspension or revocation of
licenses. Such disciplinary action, if taken, would likely have a material
adverse effect on the operations, revenues and prospects of the Company.

EMPLOYEES

As of March 18, 1998, the Company employed approximately 214 full-time
employees. None of the Company's employees are members of labor unions.
Management believes that it enjoys satisfactory relations with its employees.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's executive offices occupy approximately 2,100 sq. ft.
located at 3141 W. Hallandale Beach Boulevard, Hallandale, Florida 33009. See
"Store Locations" in Part I, Item 1 above for more information, including the
rental payments, regarding the Company's store locations.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently a party to any action, proceeding or
litigation, which, if adversely determined, would have a material adverse effect
on the Company's business, operations, revenues and prospects.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

<PAGE> 8

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCK MATTERS

MARKET INFORMATION

The Company's Common Stock and Warrants have traded since December 5,
1996 under the symbols "THMM" and "THMMW," respectively, on the OTC Bulletin
Board operated by the NASDAQ Stock Market, Inc. The high and low prices as
furnished by the National Quotation Bureau Incorporated for the Company's Common
Stock for 1997 are set forth below. These bid prices are inter-dealer prices
without retail markup, markdown or commission, and may not represent actual
transactions.

<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------- --------------
PERIOD HIGH LOW HIGH LOW
------ ---- --- ---- ---
<S> <C> <C> <C> <C>
27 days ending December 31, 1996 $7.500 $5.750 $1.250 $1.250
First Quarter ending March 31, 1997 $7.250 $5.750 $3.000 $0.750
Second Quarter ending June 30, 1997 $6.875 $1.125 $3.000 $0.250
Third Quarter ending September 30, 1997 $3.750 $2.000 $1.000 $0.250
Fourth Quarter ending December 31, 1997 $3.250 $1.750 $1.000 $0.375

</TABLE>
HOLDERS

As of March 20, 1998, there were approximately 14 holders of record of
the Common Stock and 19 holders of record of the Warrants. The Company believes
that the Common Stock and Warrants are each held by in excess of 300 beneficial
holders.

DIVIDEND POLICY

The Board of Directors does not currently contemplate the payment of
cash dividends. Any decisions as to the payment of cash dividends on the Common
Stock will depend on the Company's ability to generate earnings, its need for
capital, its overall financial condition and such other factors as the Board of
Directors deems relevant.

SALES OF UNREGISTERED SECURITIES

None

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included in Part II, Item 7 of this Report.

GENERAL

The Company was organized in July 1991 for the purpose of managing the
operation of retail thrift stores that offer new and used articles of clothing,
furniture, miscellaneous household items and antiques. The Company is registered
with the State of Florida as a professional solicitor. The Company obtains its
merchandise primarily from two sources: (i) purchase contracts with charitable
organizations in return for an average of 2% to 3% of its gross sales from
certain of its thrift stores; and (ii) various independent contract collectors
from whom the Company purchases merchandise in bulk. Items from the stores that
remain unsold are sold in bulk to exporters, which ship the items to countries
throughout the Caribbean, Central and South America, and Eastern Europe. Through
its Subsidiaries, the Company operates its five retail stores. HTMI is
responsible for the solicitation of donations on behalf of the charities through
direct mailings, newspaper advertising and telemarketing and operating manned
donation trailers. HTMI is, in addition, responsible for the pickup of the
donated merchandise throughout the communities surrounding the Company's stores.

<PAGE> 9

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31,
1996. The Company recognizes merchandise sales when the customer pays for the
merchandise upon exiting the Company store. Merchandise inventories consist of
donated and purchased used clothing, furniture, miscellaneous household items
and antiques. Purchased and donated inventories have been assigned a value based
upon the retail method of accounting including all costs connected to bringing
the merchandise to the selling floor. These costs include advertising,
marketing, transportation, and grading and processing costs plus commissions
paid to the sponsoring charitable organization.

Revenues for the years ended December 31, 1997 and 1996 totaled
$7,728,241 and $6,104,905, respectively. Revenues increased by $1,623,336, or
27%, for 1997, as compared to 1996. Although the Company's gross profit for 1997
increased to $3,777,225, as compared to $3,289,695 for 1996, the Company's gross
profit margins for 1997 decreased to 48.9% versus the 53.9% for 1996.

The net increase in the Company's sales during 1997, as compared to
1996, is attributable to the following:

1. The sales of the Company's fifth retail store, which opened on July
19, 1997, were $434,592.
2. The 1997 sales on the four other stores increased by $1,188,744,
for a 19.5% increase in same-store sales.

Although the Company's gross profits increased substantially, the
decrease in the gross profit percentage for 1997 as compared to 1996 is
principally attributable to the cost of the merchandise partially offset by the
effect of a change in the method of accounting for inventories. The Company has
two sources for merchandise, direct donated goods through the charities with
which it has entered into purchase contracts, and the purchase of merchandise in
bulk from various independent contract collectors. In order for the Company to
support the 19% sales increase in four existing stores plus the sales of the new
store, the Company has relied to an even greater degree on purchased merchandise
as compared to merchandise acquired through direct donations. This affected the
mix of purchased goods to donated goods, with 1997 purchased goods increasing
60% over the prior year, whereas total cost of goods increased only 40%. The
additional cost resulting from the Company's greater reliance on purchased goods
is a primary factor resulting in a lower gross profit margin.

Merchandise inventory has been valued using the retail method of
accounting as of December 31, 1997. This accounting principle was adopted by the
Company on October 1, 1997. Merchandise inventory in prior periods and years was
valued using the specific identification method. The new method of valuing
inventories was adopted due to cost/benefit considerations of applying the
specific identification method of accounting for inventories in the Company's
current operating environment. The effect of this change in 1997 was to increase
gross profit by 1.4 percentage points and income before income taxes by
approximately $106,000. (See Note 3 to the Consolidated Financial Statements.)

In 1997, the Company entered into an additional agreement with the
Missing Children Awareness Foundation and began operating manned donation
trailers as an additional source of donated merchandise. As of March 1998, the
Company has obtained site location approval for a total of eight trailers. The
Company plans to continue to expand this new source of donated merchandise. In
addition, the Company currently is in the process of entering into a
solicitation and purchasing agreement with the Samuel M. and Helene Soref Jewish
Community Center, a new charity for the Company. In 1997, the Company continued
to purchase merchandise from various independent contract collectors. The
Company plans to develop or acquire independent contract collectors to provide
another internal source of merchandise; however, there can be no assurance that
it will be able to do so.

The Company's operating expenses for 1997 were $3,447,983 (or 45% of
sales) as compared to $3,163,455 (or 52% of sales) for 1996, representing an
increase of $284,528 or 9%. The 1997 operating expenses of the new North
Lauderdale store were $251,567. Operating expenses for 1996 included a $150,000
bonus for the tax reimbursement to the Company's President. In 1997, this
expense was largely offset by the $115,683 or 43% increase in professional and
consulting fees, from $271,364 in 1996 to $387,047 in 1997.

The income from operations increased $203,002 or 161% from $126,240 in
1996 (2.1% of sales), to $329,242 in 1997 (4.4% of sales). This is the effect of
a 27% increase in sales with only a 9% increase in operating expenses, partially
offset by the lower 48.9% gross profit percentage in 1997 as compared to 53.9%
in 1996.

<PAGE> 10

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had working capital of $2,338,499 as
compared to $2,260,670 at December 31, 1996. For 1997, cash decreased by
$367,648 as compared to an increase of $2,554,484 in 1996, which was principally
a result of purchases of property and equipment needed for the Company's new and
existing stores.

Net cash provided by operations for 1997 and 1996 amounted to $148,724
and $128,767, respectively, or an increase of $19,957. Net cash used in
financing activities for 1997 was $182,970 as compared to net cash provided by
financing activities of $2,501,865 for 1996. This decrease is primarily the
result of the following items in 1996: receipt of net proceeds of $2,596,950
from the IPO, receipt of net proceeds of $680,000 from two private offerings,
liquidation of the Company's liability to the Miami Jewish Home, dividends and
loans paid to the then sole stockholder, and the purchase of Common Stock and
warrants for $500,000. As discussed in Note 12 to the Company's financial
statements, the Company completed two private offerings in February and May of
1996, respectively. As discussed in Note 12 to the financial statements, the
Company sold to a single investor in February 1996, and as subsequently amended
during October 1996, 300,000 shares of Common Stock and warrants for aggregate
consideration of $250,000 in the form of a $250,000 promissory note, which bore
interest at 7% per annum. This note was paid in August 1996.

As discussed in Note 12 to the financial statements, during May 1996,
and as subsequently amended during October 1996, the Company sold 20 units of
the Company's securities at $25,000 per unit. Each unit consisted of 15,000
shares of Common Stock and 10,000 warrants. The Company received from this
offering net proceeds of $430,000, after deducting the placement agent's
commission and legal costs of $60,000 and $10,000, respectively. A portion of
said proceeds were used to liquidate current liabilities, including reducing
accounts payable and accrued expenses to reduce vendors' payment cycles. In
December 1996, the NASD deemed certain of the investors in the private offering
to be affiliates of the underwriter of the IPO for purposes of determining the
fairness of the compensation payable to the underwriter in connection with the
IPO. Accordingly, in order to comply with the NASD's rules, upon completion of
the IPO, the Company redeemed the shares of Common Stock and warrants sold in
the offering for the aggregate of $500,000 originally paid by investors in the
private offering. A portion of the net proceeds of the IPO was used to effect
such redemption.

In December 1996, the Company consummated the IPO, in which it sold
900,000 Units at a price of $5.75 per Unit. Each Unit consisted of one share of
Common Stock and one Warrant to purchase one share of Common Stock for $5.00 per
share. Of the 900,000 shares of Common Stock underlying the Units, 615,000
shares were offered by the Company and 285,000 shares were offered by the
investor in the February 1996 private offering. The Warrants are exercisable for
a period of five years commencing December 11, 1996 and may be redeemed by the
Company on 30 days' notice at any time during such period at a price of $.10 per
Warrant if the closing bid price of the Common Stock for 20 consecutive trading
days ending on the 15th day prior to the date that notice of redemption was
given by the Company has been at least 150% of the exercise price then in
effect. The Company realized approximately $2,596,950 in proceeds from the IPO,
net of underwriting discounts and expenses and other offering expenses which
amounted to $653,050.

The Company believes that its current capital resources, together with
cash flow from its operations, will be sufficient to meet its anticipated
working capital requirements through at least 1998. There can be no assurances,
however, that such will be the case.

INFLATION AND SEASONALITY

Although the Company cannot accurately determine precisely the effects
of inflation, management does not believe that inflation currently has a
material effect on the Company's sales or results of operations.

The Company's operations are located in South Florida, which has
numerous part-time residents during the winter. The Company's results of
operations reflect the seasonal nature of this market, with donations and sales
of merchandise being higher in the winter months.

YEAR 2000

The Company has evaluated the potential impact of the year 2000 on its
business, including its information systems, and does not expect this issue to
have a significant effect on its results of operations.

<PAGE> 11

Item 7. FINANCIAL STATEMENTS

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----
Independent Auditors' Report..............................................12
Independent Auditors' Report..............................................13
Consolidated Balance Sheet................................................14
Consolidated Statements of Operations .................................15-16
Consolidated Statements of Stockholders' Equity (Deficiency)..............17
Consolidated Statements of Cash Flows..................................18-19
Notes to Consolidated Financial Statements.............................20-38

<PAGE> 12

INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Thrift Management, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Thrift
Management, Inc. and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, 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 consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 consolidated financial position of
Thrift Management, Inc. and Subsidiaries as of December 31, 1997, and the
consolidated results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for inventories in 1997.

/s/ Berkowitz Dick Pollack & Brant LLP
- --------------------------------------
Berkowitz Dick Pollack & Brant LLP
Miami, Florida
March 25, 1998

<PAGE> 13
INDEPENDENT AUDITORS' REPORT

To the Stockholders of Thrift Management, Inc. and Subsidiaries

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1996 of
Thrift Management, Inc. and subsidiaries (the "Company"). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows for the year ended December 31, 1996 of the Company in conformity
with generally accepted accounting principles.

/s/ SCARANO & TOMARO, P.C.

Scarano & Tomaro, P.C.
Syosset, New York
February 17, 1997

13
<PAGE> 14

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 1997

<TABLE>
<CAPTION>
<S> <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 2,202,540
Merchandise inventories 328,433
Prepaid expenses 126,532
Advances to stockholder 63,156
---------------

TOTAL CURRENT ASSETS 2,720,661

EQUIPMENT, FIXTURES AND IMPROVEMENTS, net 466,234

ADVANCES TO STOCKHOLDER 63,156

PREPAID CONSULTING SERVICES 25,000

COVENANTS NOT TO COMPETE, net 36,142

OTHER ASSETS 100,294
---------------
TOTAL ASSETS $ 3,411,487
===============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Current portion of note payable $ 4,665
Accounts payable 141,890
Accrued expenses 207,591
Accrued income taxes 28,016
---------------

TOTAL CURRENT LIABILITIES 382,162

NOTE PAYABLE, less current portion 5,052
---------------
TOTAL LIABILITIES 387,214
---------------
COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY
Preferred stock: $.01 par value, authorized 1,500,000
shares, issued and outstanding 250,000 shares 2,500
Common stock: $.01 par value, authorized 15,000,000
shares, issued and outstanding 2,145,000 shares 21,450
Additional paid-in capital 3,052,266
Accumulated deficit (51,943)
---------------

TOTAL STOCKHOLDERS' EQUITY 3,024,273
---------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,411,487
===============

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 15

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------

Net sales $ 7,728,241 $ 6,104,905

Cost of goods sold 3,951,016 2,815,210
----------- -----------

GROSS PROFIT 3,777,225 3,289,695

Selling, general and administrative
expenses 3,372,356 3,013,455
Officer's bonus incentive 75,627 150,000
----------- -----------

TOTAL OPERATING EXPENSES 3,447,983 3,163,455
----------- -----------

INCOME FROM OPERATIONS 329,242 126,240

Interest expense (1,365) (1,732)
Interest income 98,065 --
----------- -----------

INCOME BEFORE INCOME
TAX EXPENSE (BENEFIT) 425,942 124,508

Income tax expense (benefit) 162,000 (34,000)
----------- -----------

NET INCOME $ 263,942 $ 158,508
=========== ===========

Pro forma data:
Income before pro forma income tax provision $ 124,508

Pro forma income tax provision 46,900
-----------
Pro forma net income $ 77,608
===========

<PAGE> 16

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS--Continued

YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Earnings per share:
Basic:
Net income $ 0.12 $ 0.10
=============== ===============

Diluted:
Net income $ 0.12 $ 0.10
=============== ===============

Weighted average number of shares:
Basic 2,131,000 1,638,125
=============== ===============
Diluted 2,169,000 1,638,125
=============== ===============

Pro forma earnings per common equivalent share:
Income before pro forma income tax expense $ 0.08
===============

Pro forma income tax provision $ 0.03
===============

Pro forma net income $ 0.05
===============

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 17

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Stockholders'
--------------------- ---------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficiency)
----------- -------- ---------- -------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 -- $ -- 1,200,000 $ 2,200 $ 9,540 $ (191,009) $ (179,269)

Sale of Common stock in connection
with private placement -- -- 300,000 3,000 247,000 -- 250,000

Sale of common stock in connection
with confidential private offering
memorandum, net of costs of $70,000 300,000 3,000 427,000 -- 430,000

Issuance of preferred stock in
connection with reorganization 250,000 2,500 -- -- -- -- 2,500

Reorganization of affiliates -- -- -- 9,800 (9,800) -- --

Sale of common stock in connection
with initial public offering, net of
costs and deferred costs of
$901,524 -- -- 615,000 6,150 2,842,326 -- 2,848,476

Purchase and retirement of common
stock -- -- (300,000) (3,000) (497,000) -- (500,000)

Net income for the year ended
December 31, 1996 -- -- -- -- -- 158,508 158,508

"S" Corporation distributions -- -- -- -- -- (283,384) (283,384)
--------- -------- --------- --------- ----------- ----------- ---------

Balances at December 31, 1996 250,000 2,500 2,115,000 21,150 3,019,066 (315,885) 2,726,831

Common Stock issued for consulting
services 30,000 300 33,200 33,500

Net income for the year ended
December 31, 1997 263,942 263,942
--------- -------- --------- --------- ----------- ----------- ----------
Balances at December 31, 1997 250,000 $ 2,500 2,145,000 $ 21,450 $ 3,052,266 $ (51,943) $3,024,273
========= ======== ========= ========= =========== =========== ==========

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 18

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 263,942 $ 158,508
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 85,809 94,118
Loss on sale of equipment 1,708 --
Common stock issued for consulting services 33,500 --
Deferred income tax expense (benefit) 66,000 (66,000)
Changes in assets and liabilities:
Increase in merchandise inventories (213,461) (3,915)
Increase in prepaid expenses (33,586) (116,014)
Decrease in accounts payable (162,114) (126,822)
Decrease (increase) in other 4,835 (9,635)
Increase in accrued expenses 74,075 216,527
Increase (decrease) in accrued
income taxes 28,016 (18,000)
----------- -----------
Total adjustments (115,218) (29,741)
----------- -----------

NET CASH PROVIDED BY
OPERATING ACTIVITIES 148,724 128,767
----------- -----------

Cash flows from investing activities:
Purchase of property and equipment (369,714) (76,148)
Proceeds from disposal of property and equipment 36,312 --
----------- -----------

NET CASH USED IN
INVESTING ACTIVITIES (333,402) (76,148)
----------- -----------

</TABLE>

<PAGE> 19

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Advances to stockholder, net (145,386) (6,036)
Principal payments on notes payable (37,584) (81,606)
Principal repayments on stockholder loans -- (220,549)
Proceeds from sale of preferred stock -- 2,500
Proceeds from initial public offering and
private placements -- 4,500,000
Costs of initial public offering and private placements -- (931,524)
Repurchase of common stock -- (500,000)
Dividends paid -- (260,920)
----------- -----------

NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (182,970) 2,501,865
----------- -----------

NET (DECREASE) INCREASE
IN CASH (367,648) 2,554,484

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 2,570,188 15,704
----------- -----------

CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,202,540 $ 2,570,188
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:

Cash paid during the year for:

Interest $ 1,500 $ 5,750
=========== ===========

Income taxes $ 41,000 $ 50,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through
issuance of notes payable $ -- $ 15,024
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE> 20

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--GENERAL

Thrift Management, Inc. (the "Company" or "TMI"), was organized in the State of
Florida on July 22, 1991 for the purpose of managing the operation of retail
thrift stores which offer for sale new and used articles of clothing, furniture,
miscellaneous household items and antiques. The Company is registered with the
State of Florida as a professional solicitor. The Company obtains its
merchandise primarily from two sources, i) purchase contracts with charitable
organizations in return for an average of 2% to 3% of its gross sales from
certain of its thrift stores, and ii) purchases from various independent
contract collectors who maintain drop boxes from whom the Company purchases
merchandise in bulk at a flat rate per pound. Items from the stores which remain
unsold are sold in bulk to exporters for export to countries throughout the
Caribbean, Central and South America, and Eastern Europe. Through its
wholly-owned subsidiaries, the Company operates five (5) retail stores plus a
management company. Hallandale Thrift Management, Inc. ("HTMI") is responsible
for the solicitation of donations on behalf of the charities with which the
Company has contracts through direct mailing, newspaper advertising and
telemarketing. HTMI is responsible for operating donation trailers and the
pickup of donated merchandise throughout the communities in which the Company
operates. HTMI was organized in the State of Florida on December 9, 1993.

The Company's five (5) retail stores are operated under separate wholly-owned
subsidiaries as follows:

Thrift Shops of South Broward, Inc. ("TSSB")
Organized in the State of Florida on May 19, 1989.

Thrift Shops of West Dade, Inc. ("TSWD")
Organized in the State of Florida on October 8, 1992.

Hallandale Thrift, Inc. ("HTI")
Organized in the State of Florida on June 14, 1993.

North Broward Consignment, Inc. ("NBCI")
Organized in the State of Florida on May 10, 1995.

Thrift Shops of North Lauderdale, Inc. ("TSNL")
Organized in the State of Florida on January 24, 1997.

<PAGE> 21

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 1--GENERAL--Continued

On January 23, 1998, Thrift Retail, Inc. was organized in the State of Florida
for the purpose of operating a new store to be opened in 1998.

On May 31, 1996, following the completion of the private offering, the Company
reorganized its capital structure as more fully discussed in Note 12. The
financial statements give retroactive effect to the reorganization of the
Company's capital structure.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The consolidated financial statements for the years ended
December 31, 1997 and 1996 include the accounts of the Company, HTMI, TSSB,
TSWD, HTI, NBCI and TSNL (collectively the "Companies"). As of May 31, 1996,
HTMI, TSSB, TSWD, HTI, NBCI and TSNL became wholly-owned subsidiaries of the
Company pursuant to the reorganization plan. All significant intercompany
accounts and transactions have been eliminated for financial statement
presentation purposes.

EQUIPMENT, FIXTURES AND IMPROVEMENTS: Equipment, fixtures and improvements are
recorded at cost. Depreciation is provided using the straight-line method over
the estimated useful lives (5-10 years) of the related assets. Leasehold
improvements are amortized over the lesser of the related lease terms including
options expected to be exercised or the estimated useful lives of the
improvements. Maintenance and repairs are charged to operations as incurred.

MERCHANDISE INVENTORIES: Merchandise inventories consist primarily of new and
used clothing, furniture, miscellaneous household items and antiques which are
stated at the lower of cost or market. In 1997, the Company adopted the retail
method of accounting. In 1996, a specific identification method of valuing the
inventory was used (Note 3). The cost of inventories includes the actual cost of
merchandise paid to the respective charities or the independent contract
collectors plus all expenses incurred that were directly associated with the
acquisition and processing of such inventory including certain store overhead
and salaries. Inventory write-downs are recorded in the period in which it
becomes reasonably evident that the merchandise is not saleable or the market
value is less than cost.

<PAGE> 22

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

COVENANTS NOT TO COMPETE: Covenants not to compete consist of costs incurred in
connection with the buyout of a previous stockholder. Such covenants not to
compete are being amortized on a straight line basis over their contractual
lives of six years.

INTANGIBLE ASSETS: Included in other assets are intangible assets consisting of
organizational and trade name costs which have been recorded at cost.
Organizational and trade name costs are being amortized on a straight-line basis
over their estimated useful lives which range from five years to fifteen years.

EARNINGS PER SHARE: The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share". Under
the provisions of SFAS 128, primary earnings per share has been replaced by
basic earnings per share, which does not include the dilutive effect of stock
options in its calculation. In addition, fully diluted earnings per share has
been replaced by diluted earnings per share. All prior period earnings per share
amounts have been restated to reflect the requirements of SFAS 128. Basic
earnings per share has been computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share has been
computed using the weighted average number of common shares and equivalents
(representing the dilutive effect of stock options) outstanding during the
period.

For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include stock options with an exercise price that
exceeds the average fair market value of the Company's common stock for the
period. For the year ended December 31, 1997, options to purchase 725,000 shares
of common stock at an average price of $4.94 were excluded from the computation.

Pro forma net income per share is computed using the weighted average number of
shares outstanding during each respective period, and is based on the number of
shares issued and outstanding giving retroactive effect to the Company's
reorganization in 1996.

INCOME TAXES: The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes", which requires an asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases for assets and liabilities

<PAGE> 23

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

is determined quarterly. Deferred income tax assets and liabilities are computed
for those differences that have future tax consequences using the currently
enacted tax laws and rates that apply to the periods in which they are expected
to affect taxable income. Valuation allowances are established, if necessary, to
reduce the deferred tax asset to the amount that will more likely than not be
realized. Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and liabilities.

Prior to the reorganization, the Companies, with the consent of their then sole
stockholder, elected under the Internal Revenue Code to be taxed as "S"
Corporations. In lieu of corporation income taxes, the stockholders of an "S"
Corporation are taxed on their proportionate share of a company's taxable income
or loss. Accordingly, no provision or liability for federal taxes is included in
the consolidated financial statements through May 31, 1996. Effective June 1,
1996, the Company was taxed as a "C" Corporation as a result of its new capital
restructure pursuant to the reorganization. The Company files a consolidated
federal and state income tax return with its subsidiaries. The 1996 pro forma
income tax provision represents the approximate Federal and State income taxes
that the Company would have incurred had the Company not been an "S" Corporation
during 1996 and accordingly, subject to Federal and State income taxes.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. At
December 31, 1997, cash equivalents include an investment in Federal Home Loan
Bank Bonds amounting to approximately $1,450,000 with an interest rate of 5.537%
maturing in March 1998.

FAIR VALUE DISCLOSURES: The carrying value of cash, prepaid expenses, advances
to stockholder, accounts payable and accrued expenses are a reasonable estimate
of their fair value. The carrying value of the Company's note payable at
December 31, 1997 is a reasonable estimate of its fair value based upon
currently available interest rates of similar instruments available with similar
maturities.

USE OF ACCOUNTING ESTIMATES: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Accordingly,
actual results could differ from those estimates.

NOTE 3--CHANGE IN ACCOUNTING PRINCIPLE

Merchandise inventory has been valued using the retail method of accounting as
of December 31, 1997. This accounting principle was adopted by the Company on
October 1, 1997. Merchandise inventory in prior periods and years was valued
using the specific identification method. The newly adopted accounting principle
is preferable in the circumstances due to cost benefit considerations of
applying the specific identification method of accounting for inventories in the
Company's current operating environment. The effect of this change in

<PAGE> 24

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 3--CHANGE IN ACCOUNTING PRINCIPLE--Continued

1997 was to increase income before income taxes by approximately $106,000 and
net income by approximately $66,000 (or $0.03 per share). The cumulative effect
of this accounting change and proforma amounts for prior years have not been
determined due to the unavailability of prior retail inventory data.

NOTE 4--ADVANCES TO STOCKHOLDER

As of December 31, 1997, the Company has a remaining advance amounting to
$126,312 to its majority stockholder. The advances are non-interest-bearing and
are being amortized into operations as compensation of $5,263 per month through
December of 1999.

NOTE 5--EQUIPMENT, FIXTURES AND IMPROVEMENTS, NET

Equipment, fixtures, and improvements consist of the following at December 31,
1997:

Furniture, fixtures and equipment $ 380,520
Leasehold improvements 180,369
Transportation equipment 75,227
-----------
636,116

Less accumulated depreciation (169,882)
-----------
$ 466,234
===========

<PAGE> 25

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 5--EQUIPMENT, FIXTURES AND IMPROVEMENTS, NET--Continued

Depreciation and amortization expense for the years ended December 31, 1997 and
1996 amounted to $61,714 and $68,753, respectively.

NOTE 6--COVENANTS NOT TO COMPETE

In connection with two six-year non-competition agreements with a former
stockholder, the Company agreed to pay an aggregate of $182,500 as consideration
for said individual agreeing not to engage in any facet of the thrift shop
business within a defined geographic area. Pursuant to a final judgement against
such former stockholder in connection with a legal action, the former
stockholder relinquished his rights to receive further payments from the Company
under this agreement and the balance due under the agreement was assigned to a
not for profit corporation. For each of the years ended December 31, 1997 and
1996, amortization expense related to this amounted to approximately $24,100
(Note 11).

NOTE 7--ACCRUED EXPENSES

Accrued expenses at December 31, 1997 consist of the following:

Payroll $ 129,220
Sales taxes 32,666
Professional fees 18,891
Rent 10,652
Other 16,162
-----------
$ 207,591
===========

NOTE 8--NOTE PAYABLE

At December 31, 1997, the Company's note payable amounts to $9,717, bears
interest at the rate of 10.17%, and is payable in monthly installments of $505
including principal and interest. The note is collateralized by certain store
equipment.

<PAGE> 26

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 8--NOTE PAYABLE--Continued

Maturities of the note payable are as follows:

Year Ending
December 31,
------------
1998 $ 4,665
1999 5,052
-------
Total $ 9,717
=======

NOTE 9--INCOME TAX EXPENSE (BENEFIT)

The components of income tax expense (benefit) are as follows:

YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
--------- ---------
Current:
Federal $ 82,000 $ 26,000
State 14,000 6,000
--------- ---------
96,000 32,000
--------- ---------
Deferred:
Federal 56,000 (56,000)
State 10,000 (10,000)
--------- ---------
66,000 (66,000)
--------- ---------

Total $ 162,000 $ (34,000)
========= =========

<PAGE> 27

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 9--INCOME TAX EXPENSE (BENEFIT)--Continued

Income taxes differ from amounts computed at the U.S. Statutory rate due to:

YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
--------- ---------
U.S. Federal statutory rate applied to
pretax income $ 145,000 $ 42,500
State income taxes, net of federal
income tax benefit 11,000 4,500
Benefit of S Corporation election, federal
and state -- (76,000)
Benefit of graduated tax rates to statutory
tax rate (4,000) (11,500)
Effect of annualizing income for the short
C Corporation year -- 6,500
Other 10,000 --
--------- ---------
$ 162,000 $ (34,000)
========= =========

NOTE 10--EARNINGS PER SHARE

The following table presents the calculation of basic and diluted earnings per
share:

YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
Numerator:
Net income $ 263,942 $ 158,508
---------- ----------

Denominator:
Denominator for basic earnings per
share--weighted-average shares 2,131,000 1,638,125

Effect of dilutive securities:
Employee stock options 38,000 --
---------- ----------

Denominator for diluted earnings per share 2,169,000 1,638,125
========== ==========

Earnings per share:
Basic $ 0.12 $ 0.10
========== ==========
Diluted $ 0.12 $ 0.10
========== ==========

<PAGE> 28

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES

DEFERRED COMPENSATION AGREEMENT: Pursuant to a deferred compensation agreement
dated March 10, 1995 with the Company's former President, upon liquidation of
any of the companies, such liquidating entity shall pay the former President the
sum of five (5%) percent of the gross sales proceeds from such liquidation,
payable fifty (50%) percent in the first year after liquidation and 50% in the
second year after liquidation.

AGREEMENT TO SOLICIT AND PURCHASE SALVAGEABLE MERCHANDISE WITH MISSING CHILDREN
AWARENESS FOUNDATION, INC.: On December 1, 1993, the Company entered into an
agreement to solicit salvageable merchandise for the Missing Children Awareness
Foundation, Inc. ("MCAF"), a Florida not-for-profit corporation. MCAF shall pay
the Company on a monthly basis a fee equal to eight percent (8%), as amended on
January 1, 1996, of the total gross sales of the merchandise in excess of $1,600
per month to be sold by certain of its thrift stores, plus reimbursement of all
expenses incurred by the Company in fulfilling its obligations pursuant to such
agreement, provided however, that in no event shall the total fee, including
expense reimbursements, exceed fifty percent (50%) of the total gross sales
price of the merchandise. The fee shall be paid monthly to the Company within
twenty (20) days following the end of each calendar month. The term of this
agreement is five (5) years, commencing on December 1, 1993, and terminating on
November 30, 1998, with one (1) five (5) year renewal option commencing December
1, 1998, unless terminated sooner or extended pursuant to the terms and
conditions of this agreement.

Also on December 1, 1993, TSSB entered into an agreement to purchase salvageable
merchandise from MCAF. Pursuant to such agreement, MCAF agreed to sell to TSSB
all merchandise received as contributions. The price to be paid to MCAF shall be
based upon a percentage of the gross sales price of such merchandise. For the
purpose of the agreement, the term "gross sales" shall mean the income derived
from the sale of the merchandise. The purchase price shall be equal to the
greater of (1) $1,600 per month or (2) 10%, as amended on January 1, 1996, of
the gross sales of the merchandise per month, payable monthly, based upon gross
sales of merchandise during the preceding calendar month.

The term of this agreement shall be for a period of five (5) years, commencing
on December 1, 1993 and terminating on November 30, 1998, with one (1) five (5)
year renewal option, commencing on December 1, 1998, unless terminated sooner or
extended pursuant to the terms and conditions of this agreement.

<PAGE> 29

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued

The net effect of the above agreements results in the Company paying a 2% fee on
gross sales of certain of its thrift stores.

AGREEMENT TO SOLICIT AND PURCHASE SALVAGEABLE MERCHANDISE WITH THE TEMPLE BETH
AHM ISRAEL: On February 1, 1994, HTMI entered into an agreement to solicit
salvageable merchandise for the Temple Beth Ahm Israel ("TBAI"), a Florida
not-for-profit corporation. Pursuant to such agreement, TBAI has retained the
services of HTMI to solicit and gather merchandise on its behalf. TBAI shall pay
HTMI on a monthly basis a sum equal to seven percent (7%), as amended on January
1, 1996, of the total gross sales of the merchandise in excess of $10,000 per
month to be sold by an affiliate of HTMI, plus reimbursement of all expenses
incurred by HTMI in fulfilling its obligations pursuant to such agreement,
provided however, that in no event shall the total fee, including expense
reimbursements, exceed fifty percent (50%) of the total gross sales price of the
merchandise. The fee shall be paid monthly to HTMI within five (5) days
following the charity's receipt of the fee due the charity from HTI. (See below
for agreement to purchase salvageable merchandise). In the event HTI fails to
pay TBAI, TBAI shall have no obligation to pay HTMI. The term of this agreement
shall be for a period of five (5) years, commencing on February 1, 1994, and
terminating on February 1, 1999, with one (1) five (5) year renewal option
commencing February 1, 1999, unless terminated sooner or extended pursuant to
the terms and conditions of this agreement.

Also on February 1, 1994, HTI entered into an agreement to purchase salvageable
merchandise from TBAI. Pursuant to such agreement, TBAI agreed to sell to HTI
all merchandise received as contributions. The price to be paid to TBAI shall be
based upon a percentage of the gross sales price of such merchandise. For the
purpose of the agreement, the term "gross sales" shall mean the income derived
from the sale of the merchandise. The purchase price shall be equal to the
greater of (1) $10,000 per month or (2) 10%, as amended on January 1, 1996, of
the gross sales of the merchandise, payable monthly, based upon gross sales of
merchandise during the preceding calendar month.

The term of this agreement is five (5) years, commencing on February 1, 1994,
and terminating on February 1, 1999, with one (1) five (5) year renewal option,
commencing on February 1, 1999, unless terminated sooner or extended pursuant to
the terms and conditions of this agreement.

<PAGE> 30

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued

The net effect of above agreements results in the Company paying a 3% fee on
gross sales of HTI.

DEPENDENCE ON CHARITABLE DONATIONS: The Company realizes a significant portion
of its revenues through the sale of donated charitable property. A recession
and/or change in the federal tax laws relating to charitable donations could
materially adversely affect the Company's business, operations, revenues and
prospects.

OPERATING LEASES: The Companies lease properties and equipment under
non-cancelable operating lease agreements which expire through June 2002 and
require minimum annual rentals. Certain leases provide for renewal options to
extend the leases up to an additional seven (7) years. Below is a summary of
each of the Company's subsidiary's respective lease terms.

HTI leases its location pursuant to a non-cancelable operating lease which
commenced on May 1, 1996 and expires on April 30, 2001. The lease contains an
option to renew for one (1) five (5) year period under the same terms and
conditions, except that the rent for each option year shall increase five (5)
percent per annum.

TSSB leases its location pursuant to a non-cancelable operating lease which
commenced on May 1, 1996 and expires on April 30, 2001. The lease contains an
option to renew for one (1) five (5) year period under the same terms and
conditions, except that the rent for each option year shall increase five (5)
percent per annum.

TSWD leases its location pursuant to a non-cancelable operating lease which
commenced on November 1, 1992 and expires on October 31, 1999. The lease
contains an option to renew for one (1) seven year period under the same terms
and conditions as the initial term. Annual rent increases are based upon the
consumer price index ("CPI") from a minimum of 4% to a maximum of 8%.

<PAGE> 31

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued

NBCI leases its location pursuant to a non-cancelable operating lease which
commenced in November 1995 and expires in November, 2000. The lease contains
two (2) successive five year renewal options. All terms and conditions of the
lease shall remain the same during the first and second option period as they
were during the initial term, except for rent increases. In addition to rent
payments, NBCI is liable for its pro-rata share of real estate taxes assessed.
NBCI receives a rent credit of $1 per square foot while the floor space adjacent
to its location remains vacant. As of December 31, 1997, this space was vacant
and NBCI was receiving the credit.

TSNL leases its location pursuant to a non-cancelable operating lease which
commenced on June 17, 1997 and expires on June 16, 2002. The lease contains two
(2) successive five year renewal options. All terms and conditions of the lease
shall remain the same during the first and second option period as they were
during the initial term, except for rent increases.

TMI leases an automobile pursuant to a non-cancelable operating lease dated
September 3, 1996 and expiring September 3, 1999. The lease requires monthly
payments of $518. The Company is responsible for all registration, maintenance
and insurance costs.

TMI leases an automobile pursuant to a non-cancelable operating lease dated
January 11, 1996 and expiring April 11, 1998. The lease requires monthly
payments of $615. The Company is responsible for all registration, maintenance
and insurance costs.

Total rent expense for the years ended December 31, 1997 and 1996 amounted to
$428,228 and $339,761, respectively.

A schedule of approximate consolidated future minimum rental payments is as
follows:

YEAR ENDING
-----------

1998 $ 499,000
1999 508,000
2000 430,000
2001 206,000
2002 64,000
----------
$1,707,000
==========

<PAGE> 32

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued

CONSULTING AGREEMENTS: On October 1, 1992, TSWD entered into a seven year
consulting agreement with the previous 50% stockholder of TSSB. This consultant
is responsible for all facets of day-to-day operations, and is required to spend
such time and attention as deemed necessary in order to accomplish the
objectives of the Company. However, in no event shall consultant spend less than
10 hours per week. This agreement was amended in October 1997 providing that the
consultant be paid $2,400 per month for the duration of the agreement.

On January 1, 1997, the Company entered into a one-year consulting agreement.
This consultant is responsible for evaluating and identifying possible new
locations for thrift stores and analyzing potential acquisitions of related
businesses. This agreement provided for a $2,000 monthly fee and the issuance of
30,000 shares of the Company's restricted common stock upon the successful
opening of a new store location and an additional 30,000 shares of the Company's
restricted common stock upon the successful opening of a second new store
location. Effective January 1, 1998, the agreement was extended for an
additional year to allow for the opening of the second store and the $2,000
monthly fee was terminated (Note 12).

Effective January 1, 1998, the Company entered into a consulting agreement with
a director of the Company pursuant to which the director will assist the
Company in developing, studying and evaluating capital-raising and proposals to
expand the Company's business, including through mergers and acquisitions. The
agreement is for a six-month term that automatically renews for additional
six-month terms unless terminated by the Company or the director at least 15
days prior to the end of the then-current term. As compensation for services
under the agreement, the Company granted to the director five-year options to
purchase 66,000 shares of the Company's Common Stock at a price of $2.00 per
share. The options vest as follows: 5,000 upon execution of the consulting
agreement, 5,000 at the end of the initial six-month term, and 14,000 at the
end of every six-month period thereafter until all of the options are vested
and exercisable. Any unvested options will be cancelled if the consulting
agreement is terminated by either party.

Consulting fee expense for the year ended December 31, 1997 and 1996 amounted to
$96,425 and $38,547, respectively.

LEGAL MATTERS: On December 3, 1987, the Jewish Home, a not-for-profit
corporation, filed an action against a previous stockholder in United States
District Court alleging trade name infringement and unfair competition. The
Company's majority stockholder and the Companies were not a party to such
action. During December 1993, the Court entered a final judgment in favor of
Jewish Home which included both a damage award and a grant of injunctive relief
against the Companies' previous stockholder ("Weiner").

During February 1994, the Jewish Home filed a motion for contempt against the
now majority stockholder of the Company alleging violations of the injunction.
On October 23, 1994, the Companies settled with the Jewish Home and the
agreement provided for the Companies to use a trade name approved by the Jewish
Home. In return for the use of this trade name, the Companies were required to
pay the Jewish Home a fee of $20,000. Simultaneously, Weiner relinquished his
rights to receive further payments from the Companies under non-competition
agreements, whereby the balance due to Weiner plus the additional fee were
assigned to the Jewish Home. On October 23, 1994, amounts payable to the Jewish
Home amounted to $146,188 including imputed interest of $16,777. $8,300 of the
settlement amount was paid in November and December 1994, with the balance
payable in equal payments of $3,320, including imputed interest at an annual
rate of 7.50%, over a 41 month period ending in April 1998. Such payments were
secured by a promissory note and a pledge of all the capital stock of the
Companies. On May 28, 1996, the Company liquidated amounts due to the Jewish
Home and the aforementioned capital stock of the Companies was released.

<PAGE> 33

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 11--COMMITMENTS AND CONTINGENCIES--Continued

EXECUTIVE EMPLOYMENT AGREEMENT: The Company entered into a five year employment
agreement with its newly elected President. At the end of each 12-month period
of the term of the agreement, the term will automatically be extended for one
additional 12-month period unless either party gives written notice of the
intent not to renew. The employment agreement which is effective June 1, 1996,
provides for, among other things, an annual base salary of $286,000 (subject to
a 10% annual automatic cost-of-living increase), an annual bonus in an amount
equal to 1% of the Company's annual gross revenues subsequent to the date of the
agreement, payment of life insurance premiums of approximately $12,000 annually
and an automobile allowance of $1,500 per month.

In connection with the employment agreement, the President was also granted
non-statutory performance options under the Company's 1996 Stock Option Plan to
purchase 700,000 shares of common stock. Of the total amount granted, 125,000 of
such options will vest upon the opening or acquisition by the Company of the
first new thrift store or related business following the consummation of the IPO
and an additional 125,000 will vest when such first new thrift store or related
business has operated profitably for one year. Similarly, 125,000 and 100,000 of
such options will vest upon the opening or acquisition by the Company of each of
the next two thrift stores or other businesses, respectively, and 125,000 and
100,000 will vest when such two thrift stores or related business, respectively,
operate profitably for one year. Subject to such vesting, the options will be
exercisable upon the later of (1) six months after consummation of the IPO (June
11, 1997) or (2) six months after the date of grant, and will expire 10 years
from the date of grant. The exercise price of the options is $5.00 per share. As
of December 31, 1997, 125,000 options were vested.

Effective as of June 19, 1997, the Company entered into an employment agreement
with its Chief Financial Officer for a term of 30 months. The employment
agreement provides for a base salary of $100,000 increasing to $137,500 on
January 1, 1998. The agreement also provides an annual automobile allowance not
to exceed $8,000 plus reimbursement of certain automobile related expenses and
an annual health insurance allowance of $4,800. The agreement provides for the
grant of options to acquire an aggregate of 25,000 shares of the Company's
Common Stock under the Company's 1996 Stock Option Plan, as amended. The
exercise price is $3.125 per share of Common Stock. The Options vest in
accordance with the following: Options to acquire 10,000 share of Common Stock
vest on January 1, 1998; Options to acquire 10,000 shares of Common Stock shall
vest on January 1, 1999; and Options to acquire 5,000 shares of Common Stock
shall vest on June 30, 1999, subject to meeting certain performance
requirements. Upon termination of the employment agreement by the Company other
than for cause, as defined in the agreement, the agreement provides for a
severance payment equal to three month's salary at the monthly rate then in
effect.

NOTE 12--STOCKHOLDERS' EQUITY

PRIVATE PLACEMENT: On February 29, 1996, the Company completed a private
placement originally selling 500,000 shares of common stock and 200,000 common
stock purchase warrants ("Warrants") to purchase one share of common stock each
to a single investor in a private transaction for an aggregate of $250,000. The
Company received a 7% $250,000 promissory note which was initially due on May
29, 1996 and extended to July 15, 1996. Such note was paid in full on August 2,
1996. During October 1996, such investor and the Company agreed to modify the
private transaction, whereby the number of shares were reduced to 300,000 and
the warrants were increased to 600,000. The Company has agreed to register under
the Securities Act of 1933, as amended, the resale of 100,000 of the 300,000
shares in the Company's Initial Public Offering ("IPO"). However, during
December 1996, the Company and the underwriter amended such

<PAGE> 34

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 12--STOCKHOLDERS' EQUITY--Continued

registration whereby it registered 285,000 of such shares. The Company shall
bear all fees and expenses related to this initial registration. The remaining
15,000 shares and the 600,000 warrants are being concurrently registered on
behalf of the selling security holders under a selling security holders'
prospectus.

CONFIDENTIAL PRIVATE OFFERING MEMORANDUM: Pursuant to a confidential private
offering memorandum (the "Offering") dated March 4, 1996, the Company originally
offered to accredited investors, for a period of sixty (60) days, units at a
purchase price of $25,000 per unit through a placement agent. Each unit
consisted of 20,000 shares of common stock and 10,000 warrants. Each warrant was
exercisable for a period of four (4) years commencing one year from the date of
issuance to purchase one share of common stock at a purchase price of $4.80 per
share. On May 3, 1996, the offering period was extended by mutual agreement.

The Company offered a minimum of six (6) units ($150,000) (the "Minimum
Offering") and a maximum of twenty (20) units ($500,000) (the "Maximum
Offering"). During May 1996, the Company sold all twenty (20) units which
yielded net proceeds to the Company of $430,000. During October 1996, the
Company amended the offering by decreasing the number of shares in each unit
sold from 20,000 shares to 15,000 shares. Accordingly, the Company has issued
300,000 shares in connection with the modified offering.

The Company originally agreed to register under the Securities Act of 1933, as
amended, the resale of 300,000 shares in the Company's IPO. The Company was to
bear all fees and expenses related to this initial registration. Concurrently
with the Company's IPO, the 200,000 warrants issued in connection with the
private offering memorandum were to be registered on behalf of the selling
security holders under a selling security holders prospectus. During December
1996, in order to comply with NASD rules, the Company agreed that upon
completion of the IPO, it would re-acquire such shares of Common Stock and
Common Stock Purchase Warrants for an aggregate of $500,000 as originally paid
by such Accredited Investors. Accordingly, a portion of the proceeds from the
IPO have been used to repurchase such securities.

The placement agent received a commission equal to nine (9%) percent of the
price of each unit sold and a non-accountable expense allowance equal to three
(3%) of the price of each unit.

<PAGE> 35

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 12--STOCKHOLDERS' EQUITY--Continued

REORGANIZATION: On May 31, 1996, TMI acquired all of the issued and outstanding
capital stock of its affiliates from its sole stockholder in exchange for a
total of 1,200,000 shares of common stock whereby 1,050,000 common shares and
250,000 shares of Series A Preferred Stock were issued to the prior sole
stockholder and 150,000 shares were issued to the former President/Director of
the Companies for nominal consideration pursuant to the exercise of an option.
Simultaneously, TMI effected a twelve thousand (12,000) for one (1) stock split
of its previous 100 outstanding shares of common stock. As a result of the
reorganization, each of the affiliated corporations became wholly-owned
subsidiaries of the Company.

The Company's authorized capital stock after the reorganization consists of
15,000,000 shares of common stock, par value $.01 per share and 1,500,000 shares
of preferred stock, par value $.01 per share. The financial statements give
retroactive effect to the reorganization of the Company's capital structure.

INITIAL PUBLIC OFFERING: On January 22, 1996, the Company signed a letter of
intent with an underwriter, which was subsequently amended during December 1996,
with respect to an IPO of units of securities on a "Firm Commitment" basis. The
Company was to offer 585,000 units at an IPO price of approximately $8.60 per
unit, for an aggregate public offering of approximately $5,031,000.

During December 1996, the Company and the underwriter agreed to amend the
offering whereby the Company offered a total of 900,000 units. Each unit
consisted of one share of Common Stock, (the "Common Stock") par value $.01 per
share and one redeemable warrant (the "Warrant") to purchase one share of Common
Stock for $5 per share. The 900,000 shares of Common Stock and Warrants were
offered to the public at $5.00 and $.75 each respectively. As an additional
incentive to the Company's President and majority stockholder, the Company
agreed to pay $150,000 to its President in the form of a bonus for reimbursement
for taxes. The Company accrued this bonus as of December 31, 1996 and the bonus
was paid during January 1997.

The offering was completed December 11, 1996, yielding the Company net proceeds
of $2,596,950 after deducting underwriter selling expenses and non-accountable
expense allowance, and purchase of securities previously sold. Simultaneously
with the offering, the Company charged all offering costs incurred to additional
paid-in capital which totaled $653,050. Of the 900,000 shares of Common Stock
included in the 900,000 units offered, 615,000 shares were offered by the
Company and 285,000 shares were offered by the holders thereof (the "initial
selling shareholders") directly to the Company's underwriter on the same terms
and conditions as the Company. The Company did not receive any of the proceeds
from the sale of the shares of common stock by the initial selling shareholders.
Accordingly, the gross offering proceeds to the Company was $3,750,000.

<PAGE> 36

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 12--STOCKHOLDERS' EQUITY--Continued

The Warrants are exercisable for a period of five years commencing one year from
the date of issuance, subject to prior redemption. The Warrants may be redeemed
by the Company on 30 days' notice at any time after one year from the date of
issuance at a redemption price of $.10 per Warrant if the closing bid price of
the Common Stock for 20 consecutive trading days ending on the 15th day prior to
the date notice of redemption was given by the Company has been at least 150% of
the exercise price then in effect. The Common Stock and Warrants are detachable
and separately tradeable immediately upon issuance.

In order to cover over-allotments, the Company granted the underwriter the
over-allotment option to purchase all or part of an additional fifteen percent
(15%) or 135,000 of the units for a period of thirty (30) calendar days from the
date of the closing. The over-allotment was exercisable by the underwriter
in whole or in part, from time to time during the over-allotment period and
resold to the public on the same terms as the units. The over-allotment option
was not exercised by the underwriter upon completion of the IPO.

As additional compensation to the underwriter, the Company issued five-year
warrants, exercisable after one year, to purchase 90,000 units at $9.49 per
unit. Lastly, the underwriter entered into a three-year consulting agreement
with the Company as financial consultants for a total fee of $75,000, which was
paid in full as of December 31, 1996.

STOCK ISSUED FOR CONSULTING SERVICES: On June 17, 1997, the Company issued
30,000 shares of its restricted common stock to a consultant in payment for
services rendered to the Company. Such restricted common stock was valued at
$33,500 using the Shelton pricing model. (Note 11)

STOCK OPTION PLAN: The Company has adopted the 1996 Stock Option Plan, ("1996
Plan") under which options to acquire up to 1,000,000 shares of Common Stock may
be granted. The 1996 Plan is designed to serve as an incentive for retaining
qualified and competent employees, directors, consultants and independent
contractors of the Company. The 1996 Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Code) and
nonstatutory stock options.

<PAGE> 37

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

NOTE 12--STOCKHOLDERS' EQUITY--Continued

The following summarizes the activity in the Plan for years ended December 31:

<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
STOCK OPTIONS
Options at beginning of year 700,000 $ 5.00 -- $ --

Options granted 215,000 $ 1.86 700,000 $ 5.00

Options at end of year 915,000 $ 3.83 700,000 $ 5.00

At end of year:
Shares exercisable 290,000 $ 3.10 125,000 $ 5.00

Weighted average fair value of options
granted during the year $ .84 $ .24

</TABLE>

The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for its employee stock options as permitted
under Statement of Financial Accounting Standards No. 123 ("FASB 123"),
"Accounting for Stock-Based Compensation," and, accordingly, recognized no
compensation expense for the stock option grants when the market price of the
underlying stock on the date of grant equals the exercise price of the Company's
employee stock option.

The stock options generally vest over a two year period and expire ten years
from the date of grant.

The Company issued 215,000 options to purchase restricted shares to employees
during 1997. Vesting periods range from the date of grant to two years. The
Company did not recognize any compensation expense during 1997 and 1996.

Proforma information has been determined as if the Company had accounted for its
employee stock options and restricted shares under the fair value method. The
fair value of each option grant is estimated on the date of grant using the
Shelton pricing model with an assumed dividend rate of 0%, an expected life of
10 years and a marketability discount of 55%. Had compensation cost for the
stock based compensation plan been determined in accordance with FASB 123, the
Company's net income (loss) would have been the following amounts:

<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Net income, as reported $263,942 $158,508
Pro forma net income $144,942 $ 47,508

Pro forma earnings per share:
Basic $ .07 $ .03
Diluted $ .07 $ .03

</TABLE>

The Company has adopted an Employee Stock Ownership Plan ("ESOP") covering all
eligible employees. The Company did not make any contributions to this Plan in
1997.

37
<PAGE> 38

THRIFT MANAGEMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

NOTE 13--RELATED PARTY TRANSACTIONS

ADVANCES TO STOCKHOLDER: As of December 31, 1997, the Company has advanced
$126,312 to its majority stockholder. The advances are non-interest-bearing and
are being amortized into operations as compensation of $5,263 per month through
December of 1999.

COVENANTS NOT TO COMPETE: In connection with two six-year non-competition
agreements with a former stockholder, the Company agreed to pay an aggregate of
$182,500 as consideration for said individual agreeing not to engage in any
facet of the thrift shop business within a defined geographic area. Pursuant to
a final judgment against this former stockholder, the former stockholder
relinquished his rights to receive further payments from the Companies under the
non-competition agreement.

DEFERRED COMPENSATION AGREEMENT: Pursuant to a deferred compensation agreement
dated March 10, 1995 with the Companies' former President, upon liquidation of
any of the consolidated companies, such liquidating entity shall pay the former
President the sum of five (5%) percent of the gross sales proceeds from such
liquidation payable fifty (50%) percent in the first year after liquidation and
50% in the second year after liquidation.

<PAGE> 39

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The financial statements of the Company as of and for the year ended
December 31, 1996 have been audited by Scarano & Tomaro, P.C., Independent
Certified Public Accountants, to the extent and for the period set forth in
their report appearing elsewhere herein and are included in reliance upon such
report given upon the authority of that firm as experts in giving said reports.
In July 1997, Scarano & Tomaro, P.C. was formed and is considered a successor
firm of Scarano & Lipton, P.C. for auditing purposes only.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>

Name Age Position
- ---- --- --------
<S> <C> <C>
Marc Douglas 39 President, Chief Executive Officer and Director

Ileen Little 60 Vice President, Secretary and Director

Stephen L. Wiley 58 Chief Financial Officer and Director

Jay M. Haft 62 Director

Stephen H. Bittel 41 Director
</TABLE>

<PAGE> 40
MARC DOUGLAS: Mr. Douglas founded the Company in 1991 and has served as
its Chief Operating Officer since its inception, and, in February 1996, was
elected President and a Director. Prior thereto, Mr. Douglas was Executive
Director of Thrift Shops of West Broward, Inc., and Southeast Thrift Shops of
South Broward, Inc., since 1986 and 1990, respectively. Mr. Douglas received his
A.A. in Business from Miami Dade Community College and his B.S. in Business from
Florida International University, Miami, Florida. Mr. Douglas is Ms. Little's
son.

In 1985, Marc Douglas, the Chief Executive Officer, President and a
Director of the Company, pled guilty to one count of wire fraud in a federal
criminal action arising from his employment from 1980 to 1982 as a salesman of
oil and gas leases for U.S. Oil & Gas Corporation. Mr. Douglas was sentenced to
a 90-day jail term and five years' probation and, in addition, entered into a
settlement agreement in a related civil action brought by the Federal Trade
Commission, in connection with which he paid $65,000 as restitution. In February
1998, Mr. Douglas filed an application for a Presidential pardon with the U.S.
Department of Justice. No estimate can be made at this time, however, of the
likelihood that a pardon will be granted and, if granted, of the timing of
receipt of any such pardon.

In 1989, Mr. Douglas, his spouse and M.J.S.S. Enterprises, Inc., a
corporation for which Mr. Douglas was an officer, filed for bankruptcy
protection. Both the personal and corporate bankruptcies were discharged in
1990.

ILEEN LITTLE: Ms. Little is currently the Vice President, Secretary and
a Director of the Company. From its inception until February 1996, when she was
elected to her current position, she acted as President and a Director of the
Company. Prior to joining the Company, Ms. Little was President of Thrift Shops
of West Broward, Inc., and Southeast Thrift Shops of South Broward, Inc., two
companies which she co-founded in 1986 and 1990, respectively. Ms. Little
received her B.S. in business from Brooklyn College. Ms. Little is Mr. Douglas'
mother.

STEPHEN L. WILEY: Mr. Wiley is currently the Chief Financial Officer
and a Director since June 1997. Prior to joining the Company, Mr. Wiley was
Senior Vice President and Chief Financial Officer of Linen Supermarket, Inc.
since 1989. Linen Supermarket, Inc. was a private company which operated 120
specialty linen retail stores in 6 states. In February 1997, Linen Supermarket,
Inc. filed for protection from its creditors under Chapter 13 of the Bankruptcy
Code which was converted to Chapter 11 in May 1997. Mr. Wiley has over 25 years
experience in the retail industry including over 10 years with the W.R. Grace
retail companies. Mr. Wiley received his B.S. in Industrial Management from
Purdue University in West Lafayette, Indiana and his M.B.A. from University of
Edinburgh in Edinburgh, Scotland.

JAY M. HAFT: Mr. Haft has been a Director of the Company since December
1997. Mr. Haft is a Managing General Partner of Venture Capital Associates, Ltd.
and of Gen Am "1" Venture Fund, a domestic and an international venture capital
fund, respectively. Mr. Haft is also a Director of numerous public and private
corporations, including Robotic Vision Systems, Inc., Noise Cancellation
Technologies, Inc., Extech, Inc., Encore Medical Corporation, Viragen, Inc.,
PC Service Source, Inc., DUSA Pharmaceuticals, Inc., Oryx Technology Corp. and
Conserver Corporation of America. He is a graduate of Yale College and Yale Law
School.

STEPHEN H. BITTEL: Mr. Bittel has been a Director of the Company since
December 1997. Mr. Bittel is the President and Chief Executive Officer of
Terranova Corporation, a full-service real estate organization based in Miami,
and founded in 1980. Mr. Bittel is also a director of Spec's Music, Inc., a
Florida specialty retail chain. He currently serves as a Trustee of the Greater
Miami Chamber of Commerce, a Director of the Community Partnership for the
Homeless, and served as a director of the Jackson Memorial Hospital Foundation.
Mr. Bittel received his B.A. from Bowdoin College and is a graduate of the
University of Miami School of Law and a member of the Florida Bar.

In addition to the foregoing, until December 1999, the underwriter of
the Company's IPO has the right to designate a representative as an advisor to,
or in lieu thereof, as a member of the Company's Board of Directors. The
underwriter has not identified its designee as of the date of this Report.

The non-employee directors of the Company will receive compensation in
the form of stock options to purchase common shares of the Company stock. The
two non-employee directors of the Company will be granted 20,000 stock options
each in 1998 at the fair market value of the common stock on the date of the
grant. As long as they continue to serve as a director they will receive
additional grants at the then fair market price of 5,000 stock options at the
end of each quarter and 2,000 stock options upon each anniversary of their
appointment to the Board of Directors.

Effective January 1, 1998, the Company entered into a consulting
agreement with Jay M. Haft, a director of the Company, pursuant to which Mr.
Haft will assist the Company in developing, studying and evaluating
capital-raising and proposals to expand the Company's business, including
through mergers and acquisitions. The agreement is for a six-month term that
automatically renews for additional six-month terms unless terminated by the
Company or Mr. Haft at least 15 days prior to the end of the then-current term.
As compensation for his services under the agreement, the Company granted to
Mr. Haft five-year options to purchase 66,000 shares of the Company's Common
Stock at a price of $2.00 per share. The options vest as follows: 5,000 upon
execution of the consulting agreement, 5,000 at the end of the initial
six-month term, and 14,000 at the end of every six-month period thereafter until
all of the options are vested and exercisable. Any unvested options will be
cancelled if the consulting agreement is terminated by either party.

During 1998, the Board established Audit and Executive Compensation
committees. Mr. Bittel chairs the Audit Committee and its other members are
Messrs. Haft and Wiley. Mr. Haft chairs the Executive Compensation Committee and
its other members are Messrs. Bittel and Douglas.

<PAGE> 41

Directors of the Company hold their offices until the next annual
meeting of the Company's shareholders and until their successors have been duly
elected and qualified or their earlier resignation, removal from office or
death.

Officers of the Company serve at the pleasure of the Board of Directors
and until the first meeting of the Board of Directors following the next annual
meeting of the Company's shareholders and until their successors have been
chosen and qualified.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table sets forth information
with respect to the total compensation earned by, or paid to, the Company's
Chief Executive Officer and Vice President (the "Named Executive Officers") for
services rendered to the Company during 1997 and 1996. The Company's other
executive officer, Chief Financial Officer, did not earn total salary and bonus
in excess of $100,000 during the fiscal year ended December 31, 1997.

<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards
---------------------------------------- -----------------
Other Annual Shares Underlying
Name And Principal Position Year Salary($) Bonus($) Compensation($) Options (#)
- --------------------------- ---- --------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Marc Douglas 1997 314,050 75,627 101,491(1)
Chief Executive Officer 1996 297,000 150,000 (2) 700,000 (3)
and President

Ileen Little 1997 129,000 (2) 150,000
Vice President and Secretary 1996 113,600 (2)
</TABLE>

- -------------------------

(1) Includes advances amortized into operations as compensation, car
allowance and life insurance payments.

(2) Perquisites and other personal benefits paid to the named executive
officers for 1997 and 1996 did not exceed 10% of the total of annual
salary and bonus reported.

(3) See "Executive Employment Agreement" below.

EXECUTIVE EMPLOYMENT AGREEMENT-MARC DOUGLAS. Effective as of June 1,
1996, the Company entered into an employment agreement with Marc Douglas, its
Chief Executive Officer and President for a term of 60 months. At the end of
each 12-month period of the term of the employment agreement, the term will
automatically be extended for one additional 12-month period unless the Company
or Mr. Douglas gives written notice of the intent not to renew to the other
party at least 90 days prior to the end of such period. The employment agreement
provides for a base salary of $286,000 (subject to 10% annual automatic
cost-of-living increases), an annual bonus in an amount equal to 1% of the
Company's annual gross revenues subsequent to the date of the agreement, and an
automobile allowance of $1,500 per month. The employment agreement generally
provides that Mr. Douglas will continue to receive his salary until the
expiration of the term of the employment agreement is terminated by the Company
for any reason other than death, disability or Cause (as defined in the
employment agreement), or for a period of 12 months after termination of the
employment agreement as a result of his disability, and that Mr. Douglas' estate
will receive a lump sum payment equal to one year's salary plus a pro rata
portion of any bonus to which he is entitled upon termination of the employment
agreement by reason of his death. The employment agreement also prohibits Mr.
Douglas from directly or indirectly competing with the Company for one year
after termination of his employment agreement for any reason other than the
Company's termination of his employment without Cause. If a Change of Control
(as defined in the employment agreement) occurs, the employment agreement
provides for the continued employment of Mr. Douglas until the later of three
years following the Change of Control or the then-scheduled expiration date of
the term of employment. The term "Change of Control," as defined in the
employment agreement, generally means (i) any person's or group's acquisition of
20% or more of the combined voting power of the Company's outstanding
securities, or (ii) in the event of any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, the persons
who were directors of the Company prior to such transaction cease to constitute
a majority of the Board of

<PAGE> 42

Directors following the transaction. In addition, following a Change of Control,
if Mr. Douglas' employment is terminated by the Company other than for Cause or
by reason of his death or disability, or for certain specified reasons (such as
a representation or diminution of duties), Mr. Douglas will receive a lump sum
cash payment equal to the greater of three times the aggregate compensation paid
to him during the preceding year or the remaining salary, plus any applicable
bonus, payable to him for the remaining term of the agreement.

EXECUTIVE EMPLOYMENT AGREEMENT - STEPHEN L. WILEY. Effective as of
June 19, 1997, the Company entered into an employment agreement with Stephen L.
Wiley, its Chief Financial Officer, for a term of 30 months. The employment
agreement provides for a base salary of $100,000 increasing to $137,500 on
January 1, 1998. The agreement also provides a leased automobile not to exceed
$669 per month plus reimbursement for insurance, gasoline and repairs plus $400
per month for the purpose of reimbursement of health insurance for his family.
The agreement provides for the grant of options to acquire an aggregate of
25,000 shares of the Company's Common Stock under the Company's 1996 Stock
Option Plan, as amended. The exercise price is $3.125 per share of Common Stock.
The Options vest in accordance with the following: Options to acquire 10,000
shares of Common Stock vest on January 1, 1998; Options to acquire 10,000 shares
of Common Stock shall vest on January 1, 1999; and options to acquire 5,000
shares of Common Stock shall vest on June 30, 1999, subject to meeting certain
performance requirements. Upon termination of the employment agreement by the
Company other than for cause (as defined in the agreement), Mr. Wiley will be
entitled to receive a severance payment equal to three month's salary at the
monthly rate then in effect.

OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information concerning individual grants of stock options made during the fiscal
year ended December 31, 1997.
<TABLE>
<CAPTION>

OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------
NUMBER OF
SHARES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Ileen Little 150,000 (1) 70% 1.625 05/18/07

- -------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Ileen Little gifted her options to the Ileen Little Irrevocable Family
Trust

STOCK OPTIONS HELD AT END OF 1997. The following table indicates the
total number and value of exercisable and unexercisable stock options held by
the Company's Named Executive Officers as of December 31, 1997. No options were
exercised by the Named Executive Officers during 1997.

<PAGE> 43

VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTION
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END(1)
---------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc Douglas 125,000(2) 575,000(2) -- --

Ileen Little 150,000 -- $ 112,500 --

</TABLE>

- --------------------
(1) Based on a closing price on December 31, 1997 of $2.375 per share.

(2) Represents the 700,000 options granted to Marc Douglas in 1996 under
the Company's 1996 Stock Option Plan. Of the total amount granted,
125,000 of such options vested upon the opening of the Company's
first thrift store following the IPO and 125,000 will vest when such
first new thrift store or related business operates profitably for
one year. Similarly, 125,000 and 100,000 of such options will vest
upon the opening of each of the next two thrift stores or other
businesses, respectively, and 125,000 and 100,000 will vest when
such two thrift stores or related businesses, respectively, operate
profitably for one year. Subject to such vesting, the options will
be exercisable commencing June 11, 1997.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to
1998, the full Board of Directors determined the compensation for the Company's
executive officers. In 1998, the Board established an Executive Compensation
Committee, which will set the compensation for the Company's executive officers.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables set forth certain information, as of March 19,
1998 regarding the Company's Common Stock owned of record or beneficially by (i)
each shareholder who is known by the Company to beneficially own in excess of 5%
of the outstanding shares of Common Stock, (ii) each director and executive
officer, and (iii) all directors and executive officers as a group. Except as
otherwise indicated, each shareholder listed below has sole voting and
investment power with respect to shares beneficially owned by such person.

<PAGE> 44

AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP PERCENT OF COMMON PERCENT OF TOTAL
NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY OWNED VOTING POWER(1)
- ---------------- ------------------ --------------------------- ------------------
<S> <C> <C> <C>
Marc Douglas 1,175,000(2)(3) 51.8% 77.0%
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009

Ileen Little -0- -0- -0-
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009

1997 Ileen Little 150,000 7.3% 3.3%
Irrevocable Family Trust
c/o Barry Nelson, Esq., Trustee
19495 Biscayne Boulevard
Aventura, Florida 33180

All directors and executive 1,175,000(2)(3) 51.8% 77.0%
officers as a group (five
persons)
</TABLE>
- --------------------
(1) The Common Stock votes together with the Series A Preferred Stock on
all matters, except as required by law. The Series A Preferred Stock
entitles the holder to 10 votes per share and the Common Stock entitles
the holder to one vote per share. Mr. Douglas holds 250,000 shares of
Series A Preferred Stock, which are reflected in Mr. Douglas'
percentage of total voting power.

(2) Includes 125,000 shares underlying options exercisable within 60 days.
See "Item 10. Executive Compensation -- Stock Options Held at End of
1997."

(3) Does not include 150,000 shares of Common Stock held by the 1997 Ileen
Little Irrevocable Family Trust (the "Trust") of which Mr. Douglas is
the beneficiary. Mr. Douglas does not exercise voting or dispositive
control of the shares held by the Trust.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

REORGANIZATION

In connection with the Reorganization, the Company acquired all of the
outstanding capital stock of the Subsidiaries from Marc Douglas, effective as of
May 31, 1996, in exchange for the issuance to Mr. Douglas of 1,050,000 shares of
Common Stock and 250,000 shares of Series A Preferred Stock of the Company. The
Reorganization was effected as a tax-free reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue code of 1986, as amended (the
"Code"). As a result of the Reorganization, each of the Subsidiaries became a
wholly owned subsidiary of the Company. The Company also effected, in connection
with the Reorganization, a 12,000-for-1 split of its outstanding shares of
Common Stock.

<PAGE> 45

Prior to the Reorganization, the Company and each of the Subsidiaries
were treated for federal and state income tax purposes as S corporations under
Subchapter S of the Code. As a result, earnings through the date of termination
of the Company's and the Subsidiaries' S corporation status (the "Termination
Date") have been and will be taxed for federal and state income tax purposes
directly to the respective shareholders of the corporations. The Termination
Date for the Company occurred on February 29, 1996, when the Company completed a
private offering of shares of Common Stock and Warrants; the Termination Date
for the Subsidiaries occurred upon completion of the Reorganization, May 31,
1996.

The Company and the Subsidiaries have previously paid cash dividends to
their respective shareholders, representing earnings distributions and funds
necessary to pay federal and state income tax obligations attributable to
earnings. For 1996, such dividends totaled $283,384. See "Management's
Discussion and Analysis or Plan of Operations" under Part II, Item 6 of this
Report.

DEFERRED COMPENSATION AGREEMENT

In 1995, Thrift Shops of West Dade, Inc., a Subsidiary of the Company,
entered into a deferred compensation agreement with Ileen Little, a director and
executive officer of the Company. Pursuant to such agreement, Ms. Little would
have been entitled to receive 5% of the gross proceeds from the liquidation of
the Company or any of the Subsidiaries, payable in two equal annual installments
following such liquidation. Effective March 31, 1998, Ms. Little agreed to the
termination of the deferred compensation agreement.

LOANS TO/FROM MARC DOUGLAS

The Company previously advanced Mr. Douglas monies on an interest-free
basis, the amount of which totaled $126,317 as of December 31, 1997. Mr. Douglas
and the Company have agreed that the remaining advances to Mr. Douglas will be
amortized into operations as compensation of $5,263 per month through December
of 1999. No further loans to or from Mr. Douglas are currently contemplated.

DISPUTE WITH MIAMI JEWISH HOME; AGREEMENT WITH FORMER SHAREHOLDER

In February 1994, the Miami Jewish Home filed a motion for contempt
against Mr. Douglas (as the sole shareholder of the Subsidiaries, prior to the
Reorganization) alleging violations of an injunction awarded to the Miami Jewish
Home in December 1993 against a former shareholder of one of the Subsidiaries
and two other companies controlled by that shareholder. The injunction had been
awarded, together with monetary damages, as a result of an action filed by the
Miami Jewish Home in 1987 alleging trade name infringement and unfair
competition by the former shareholder and his companies.

Although neither Mr. Douglas, Ms. Little, TMI nor any of the
Subsidiaries was a party to the 1987 action, in November 1994, the Miami Jewish
Home, Mr. Douglas and two of the Subsidiaries agreed to be bound by certain
provisions of the injunction. As part of the settlement, the former shareholder
relinquished his right to receive further payments under non-competition
agreements entered into in 1993 with two of the Subsidiaries in connection with
the termination of the former shareholder's and Mr. Douglas' business
relationship. Mr. Douglas and the two Subsidiaries also agreed to pay the Miami
Jewish Home the sum of $176,130, payable in installments through April 1997, and
the sum of $20,000 for the use of a trade name approved by the Miami Jewish
Home. Such payments were allocated to Mr. Douglas and each of the two
Subsidiaries in proportion to their respective original obligations to the
former shareholder. The payments were secured by a pledge of the capital stock
of all of the Subsidiaries. The balance remaining of the settlement was paid in
full in May 1996 and, accordingly, all of the shares of the Subsidiaries'
capital stock were released and the Miami Jewish Home agreed to withdraw its
motion with prejudice and waive any further claims thereunder.

The Company's previously entered into a consulting agreement with the
former shareholder which was modified in 1997 such that the former stockholder
is no longer entitled to receive 2% of the monthly gross sales of the Company's
Hialeah store if that store's monthly gross sales exceed $70,000. The agreement
does, however, continue to provide for a weekly consulting fee of $600 per week.
The agreement terminates in October 1999.

CONSULTING AGREEMENT

See "Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act -- Directors and
Executive Officers" for a description of the consulting agreement between the
Company and Jay M. Haft, a director of the Company.

<PAGE> 46

COMPANY POLICY REGARDING TRANSACTIONS WITH AFFILIATES

The Company believes that the transactions described above were on
terms no less favorable to the Company than those that would be available from
unaffiliated parties. The Company presents all proposed transactions with
affiliated parties to the Company's Board of Directors for its consideration and
approval. Any Board member who has an interest in such transaction abstains from
voting thereon.

<PAGE> 47

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------

3.1 Amended and Restated Articles of Incorporation of the
Company(1)
3.2 Amended and Restated Bylaws of the Company(1)
4.1 Statement of Designation of Series A Preferred
Stock(1)
4.3 Form of Common Stock Certificate(1)
4.6 Form of Warrant Agent Agreement with attached Form
of Warrant(1)
10.1 Employment Agreement with Marc Douglas*(1)
10.2 1996 Stock Option Plan*(1)
10.3 Purchase Commitment Agreement dated December 21, 1995
between the Company and All Around Recycling(1)
10.4 Agreement to Purchase Salvageable Property between
Hallandale Thrift, Inc., d/b/a The Jewish Bargain
Thrift Shop, and Temple in the Pines, d/b/a Beth Ahm
Israel, as amended(1)
10.5 Agreement to Solicit Salvageable Property between
Hallandale Thrift Management, Inc. and Temple in the
Pines, d/b/a Beth Ahm Israel, as amended(1)
10.6 Agreement to Purchase Salvageable Property between
Thrift Shops of South Broward, Inc. d/b/a the
Community Thrift Shop, Thrift Shops of West Dade,
Inc. and Missing Children Awareness Foundation, Inc.,
as amended(1)
10.7 Agreement to Solicit Salvageable Property between the
Company and Missing Children Awareness Foundation,
Inc., as amended(1)
10.8 Consulting agreement dated January 1, 1998 between
the Company and Jay M. Haft (2)
10.9 Employment agreement with Stephen L. Wiley (3)
18.1 Letter on change in Accounting Principle (2)
21.1 Subsidiaries of the Registrant(2)
27.1 Financial Data Schedule (SEC use only) (2)

- --------------------
*Management compensation plan or arrangement

(1) Incorporated by reference from the exhibit filed with the Company's
Registration Statement on Form SB-2 (File No. 333-5190-A).

(2) Filed herewith.

(3) Incorporated by reference from the exhibit filed with the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1997.

(b) The Company did not file any Reports on Form 8-K during the fourth
quarter of the year ended December 31, 1996.

<PAGE> 48

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused its Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.

THRIFT MANAGEMENT, INC.

DATE: April 9, 1998 By: /s/ Marc Douglas
---------------------------------
Marc Douglas, President and Chief
Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:

<S> <C>
DATE: April 9, 1998 /s/ Marc Douglas
----------------------------------------
Marc Douglas, President, Chief Executive
Officer and Chairman of the Board of Directors
(Principal executive officer)

DATE: April 9, 1998 /s/ Stephen L. Wiley
----------------------------------------
Stephen L. Wiley, Chief Financial Officer
And Director (Principal financial and accounting
officer)

DATE: April 9, 1998 /s/ Ileen Little
----------------------------------------
Ileen Little, Vice President, Secretary and
Director

DATE: April __, 1998 ----------------------------------------
Jay M. Haft, Director

DATE: April __, 1998 ----------------------------------------
Stephen H. Bittel, Director
</TABLE>

<PAGE> 1
EXHIBIT 10.8

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into
effective as of January 1, 1998 the "Effective Date") by and between JAY M.
HAFT, (the "Consultant"), and THRIFT MANAGEMENT, INC., a Florida corporation
(the "Company").

W I T N E S S E T H
-------------------

WHEREAS, the Company is in the business of owning and operating retail
thrift stores;

WHEREAS, the Consultant provides various business consulting services
to businesses such as the Company;

WHEREAS, the Company desires to retain the Consultant to consult with
the Company regarding strategies for development and expansion of the Company's
business, including advice with respect to mergers and acquisitions; and

WHEREAS, the Consultant and the Company desire to enter into this
Agreement under the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:

1. ENGAGEMENT. The Company hereby retains the Consultant, and the
Consultant hereby accepts such engagement, on the terms and conditions set forth
herein. During the term of this Agreement and any renewal(s) hereof (all
references herein to the term of this Agreement shall be deemed to include
references to all periods of renewal, if any), the Consultant shall devote such
time and perform diligently such services as provided in Section 3, but shall
not be required to devote any specific number of hours to such service.

2. TERM. The term of this Agreement shall be six months commencing on
the Effective Date (the "Contract Term") unless sooner terminated as provided in
Section 6. The Agreement will automatically renew for additional six-month
periods upon the expiration of the preceding Contract Term, unless notice of
termination of the Agreement is given prior to the expiration of a six-month
period pursuant to Section 6.

3. CONSULTANT'S SERVICES; EXPENSES.

a. During the term of this Agreement, the Consultant shall:

i. provide consultation services to the Company for
the purpose of assisting the Company in developing and expanding the business of
the Company;

ii. assist the Company in developing, studying and
evaluating capital-raising and merger and acquisition proposals; and

-1-

<PAGE> 2

iii. report to the Company and perform such services
as may be requested by the Company in accordance with this Agreement.

b. The Company agrees to reimburse the Consultant for any
pre-approved out-of-pocket expenses related to duties undertaken by the
Consultant pursuant to this Agreement.

4. COMPENSATION. (a) As compensation for the services rendered by the
Consultant under this Agreement, the Company grants to the Consultant
non-qualified stock options (the "Options") to purchase an aggregate of 66,000
shares of the $.01 par value per share common stock of the Company (the "Common
Stock"), exercisable at a price of $2.00 per share. The Options shall vest and
become exercisable by the Consultant as follows: (a) 5,000 of the Options shall
vest immediately upon execution of this Agreement, (b) an additional 5,000 shall
vest at the end of the next six-month period and (c) 14,000 shall vest at the
end of every six-month period thereafter until all of the 66,000 Options are
vested and become exercisable. Vested Options shall expire five years from the
date of this Agreement. If the Agreement is terminated with or without cause by
either the Company or the Consultant, any Options that have not vested as of the
date of such termination shall expire.

(b) The Company agrees to use its best efforts to register for
public resale the shares of Common Stock underlying the Options as soon as
reasonably practicable following the execution of this Agreement.

5. AGREEMENT NOT TO RESELL UNDERLYING SHARES. The Consultant hereby
agrees that he will not sell any shares of Common Stock obtained by exercise of
the Options for a period of one year from the date of each such exercise.

6. TERMINATION. This Agreement may be terminated by either party with
or without cause upon not less than 15 days' written notice given prior to the
expiration of the then-current Contract Term given to the non-terminating party
in accordance with Section 12.

7. CONFIDENTIAL INFORMATION. The Company and the Consultant understand
that prior to and during the term of this Agreement, the Company may, from time
to time, make available to the Consultant, certain financial, business and other
proprietary information concerning the Company's operations (collectively,
"Confidential Information") and that such Confidential Information may otherwise
come into the possession of the Consultant. Confidential Information includes,
without limitation, information relating to the strategies, plans, assets,
customers, suppliers, employees, and business activities of the Company. The
Consultant agrees that all such Confidential Information furnished or disclosed
to it or otherwise obtained by it will be treated as confidential and will not
be disclosed or divulged by the Consultant, directly or indirectly, to any other
person or entity. Confidential Information shall not include information which
becomes generally available to the public other than as a direct or indirect
result of a disclosure by the Consultant.

8. INDEPENDENT CONTRACTOR. Nothing in this Agreement is intended nor
shall be construed to create an employer/employee relationship, or a joint
venture relationship, or to

-2-

<PAGE> 3

allow the Company to exercise control or direction (except as specifically set
forth in the Agreement) in the matter or method by which the Consultant performs
the services required under this Agreement; provided that the Consultant
performs such services in a manner consistent with the standards governing such
services and the provisions of this Agreement. The Consultant understands and
agrees that: (a) it will not be treated as an employee of the Company for
federal tax purposes; (b) it shall not by virtue of this Agreement be entitled
to any of the benefits afforded to any employees of the Company, except as
specifically set forth in the Agreement; and (c) it shall indemnify and hold the
Company harmless from and against any and all loss or liability arising with
respect to such payments, withholdings and benefits.

9. ATTORNEYS' FEES. In the event any litigation or controversy arises
out of or in connection with this Agreement between the parties hereto, the
prevailing party in such litigation or controversy shall be entitled to recover
from the other party all reasonable attorneys' fees, expenses and suit costs,
including those associated with any appellate or post-judgment collection
proceedings.

10. SURVIVAL. Notwithstanding anything to the contrary herein, the
provisions of Sections 7, 8, and 9 shall survive any termination or expiration
of this Agreement.

11. NOTICES AND DEMANDS. Any notice, request, demand, offer, payment or
communication required or permitted to be given by any provision of this
Agreement shall be deemed to have been delivered and given for all purposes if
written and (a) if delivered personally or by courier or delivery service, at
the time of such delivery, or (b) if directed by registered or certified United
States mail, postage and charges prepaid, addressed to the intended recipient at
the address specified below, at such time that the intended recipient or his
agent signs or executes the receipt or (c) if by telefax (facsimile) at the time
received by the intended recipient as evidenced by the confirmation:

if to the Consultant: Jay M. Haft
Broad and Cassel
Miami Center, Suite 3000
201 South Biscayne Boulevard
Miami, Florida 33131
Telefax No.: (305) 373-9443

or at any other address designated by the Consultant to the Company in writing,
and

if to the Company: Thrift Management, Inc.
3141 W. Hallandale Beach Blvd.
Hallandale, Florida 33009
Attn: Marc Douglas, President and
Chief Executive Officer
Telefax No.: (954) 964-7920

or at any other address and/or telefax designated by the Company to the
Consultant in writing.

-3-

<PAGE> 4
12. SEVERABILITY. If any provision of this Agreement, the deletion of
which would not adversely affect the receipt of any material benefit by any
party hereunder or substantially increase the burden of any party hereto, shall
be held to be invalid or unenforceable to any extent, the same shall not affect
in any respect whatsoever the validity or enforceability of the remainder of
this Agreement.

13. WAIVER OR MODIFICATION. No waiver or modification of this Agreement
of any covenant, condition or limitation herein contained shall be valid unless
in writing and duly executed by the party to be charged therewith. Furthermore,
no evidence of any waiver or modification shall be offered or received in
evidence in any proceeding, arbitration or litigation between the parties
arising out of or affecting this Agreement, or the rights or obligations of any
party hereunder, unless such waiver or modification is in writing and duly
executed as aforesaid.

14. ENTIRE AGREEMENT AND ASSIGNMENT. This Agreement constitutes the
entire agreement of the parties hereto with respect to the subject matter of
this Agreement and supersedes any and all previous agreements between the
parties, whether written or oral, with respect to such matter. The parties agree
that this Agreement may not be assigned by either party without the prior
written consent from the other party.

15. APPLICABLE LAW, BINDING EFFECT AND VENUE. This Agreement shall be
construed and regulated under and by the laws of the State of Florida without
application of the principles of conflicts of laws. The Agreement shall inure to
the benefit of and be binding upon the parties hereto and their heirs, personal
representatives, successors and permitted assigns. Venue for any arbitration or
action related to or arising out of this Agreement shall lie in Broward County,
Florida.

16. MULTIPLE COPIES OR COUNTERPARTS OF THE AGREEMENT. The original and
one or more copies of this Agreement may be executed by one or more of the
parties hereto. In such event, all of such executed copies shall have the same
force and effect as the executed original and all of such counterparts taken
together shall have the effect of a fully executed original.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date indicated above.

CONSULTANT:

/s/ JAY M. HAFT
-----------------------------
JAY M. HAFT

COMPANY:

THRIFT MANAGEMENT, INC.

By: /s/ Marc Douglas
---------------------------
Marc Douglas, President and
Chief Executive Officer

-4-

<PAGE> 1
EXHIBIT 18.1

March 25, 1998

Thrift Management, Inc.
3141 West Hallandale Beach Boulevard
Hallandale, Florida 33009

Gentlemen:

Pursuant to your request we have read the statements contained in Note
3 to the consolidated financial statements included in the Form 10-KSB of Thrift
Management, Inc. for the year ended December 31, 1997. As stated in Note 3,
"Merchandise inventory has been valued using the retail method of accounting as
of December 31, 1997. This accounting principle was adopted by the Company on
October 1, 1997. Merchandise inventory in prior periods and years was valued
using the specific identification method" and "The newly adopted accounting
principle is preferable in the circumstances due to cost benefit considerations
of applying the specific identification method of accounting for inventories in
the Company's current operating environment."

You have requested a letter from us as your independent certified
public accountants that you can file with the Securities and Exchange Commission
indicating whether or not we believe the aforementioned change in method of
accounting is preferable under your particular circumstances. This letter is
submitted to you solely for that purpose.

Based on our reading of the information set forth in the Form 10-KSB of
Thrift Management, Inc. for the year ended December 31, 1997, we believe (a) the
newly adopted accounting principle is a generally accepted accounting principle,
(b) the method of accounting for the effect of the change is in conformity with
generally accepted accounting principles, (c) the Company has justified the use
of the newly adopted accounting principle on the basis that it is preferable as
required by Accounting Principles Board Opinion No. 20 and the Company's
justification for the change is reasonable, and (d) there are no unusual
circumstances such that the selection and application of the newly adopted
accounting principle would make the financial statements taken as a whole
misleading. We have not examined any financial statements of Thrift Management,
Inc. as of any date or for any period subsequent to December 31, 1997.

While there are a number of methods of pricing inventories that are
acceptable under generally accepted accounting principles, we believe that,
under your particular circumstances, the aforementioned change is to a
preferable alternative accounting principle.

Very truly yours,

BERKOWITZ DICK POLLACK & BRANT, LLP

<PAGE> 1
EXHIBIT 21.1

Subsidiaries of the Registrant

Name of Corporation State of Incorporation
- ------------------- ----------------------

North Broward Consignment, Inc. Florida

Thrift Shops of West Dade, Inc. Florida

Thrift Shops of South Broward, Inc. Florida

Hallandale Thrift Management, Inc. Florida

Hallandale Thrift, Inc. Florida

Thrift Shops of North Lauderdale, Inc. Florida

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THRIFT MANAGEMENT, INC. FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,202,540
<SECURITIES> 0
<RECEIVABLES> 189,688
<ALLOWANCES> 0
<INVENTORY> 328,433
<CURRENT-ASSETS> 2,720,661
<PP&E> 636,116
<DEPRECIATION> 169,882
<TOTAL-ASSETS> 3,411,487
<CURRENT-LIABILITIES> 382,162
<BONDS> 5,052
0
2,500
<COMMON> 21,450
<OTHER-SE> 3,000,323
<TOTAL-LIABILITY-AND-EQUITY> 3,411,487
<SALES> 7,728,241
<TOTAL-REVENUES> 7,728,241
<CGS> 3,951,016
<TOTAL-COSTS> 3,951,016
<OTHER-EXPENSES> 3,447,983
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,365
<INCOME-PRETAX> 425,942
<INCOME-TAX> 162,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263,942
<EPS-PRIMARY> .12
<EPS-DILUTED> .12

</TABLE>