AMERICAN CINEMASTORES INC, 10KSB, 1997-09-09

AMERICAN CINEMASTORES INC
10KSB, 1997-09-09
MISCELLANEOUS SHOPPING GOODS STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE U.S. SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31,1997

COMMISSION FILE NUMBER 0-23138

AMERICAN CINEMASTORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4374952
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2300 SOUTH EASTERN AVENUE
CITY OF COMMERCE, CALIFORNIA 90040

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 213-725-4955

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED

NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

COMMON STOCK AND REDEEMABLE WARRANTS

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE
FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.

YES X NO
----- -----

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK OF THE REGISTRANT HELD BY NON-
AFFILIATES OF THE REGISTRATION ON JULY 31, 1997 BASED ON THE AVERAGE ASKING BID
AND ASKED PRICE ON SUCH DATE WAS $19,929,102.

THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 31, 1997:
13,401,387.

THE ISSUER'S REVENUES FROM CONTINUING OPERATIONS FOR ITS FISCAL YEAR ENDED MAY
31, 1997 WERE $1,675,350.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

American CinemaStores, Inc. (the "Company") designs, manufactures, and
markets under two wholly owned subsidiaries Sierra Fixture & Design, Inc.,
("Sierra") and Just Jackets, Inc., ("Just Jackets"). The Company's business
under the Sierra brand includes products that target shopping centers, major
retailers, multi-site operations, smaller retailers, and commercial offices.
The Company believes Sierra is one of the few companies that designs and
develops a total interior functional product. Just Jackets designs and
manufactures jackets targeting specialty retailers and the advertising
industry. Just Jackets adds value to the jackets by adding logos of the
advertisers or other customers, creating a unique marketing tool.

HISTORY

The Company was incorporated as a Delaware corporation in February, 1992. From
May 1993, when American CinemaStores, Inc. commenced operations, to May 1996,
the Company was engaged in the operation of retail mini-stores offering movie
related merchandise, such as apparel, posters, toys, compact discs and cassette
tapes of movie sound tracks. The company's mini-stores were located in the
lobbies of movie theatres located in California, Florida, New Jersey, and New
York. In July 1994, the Company opened temporary mini-stores in regional
shopping malls offering merchandise similar to the merchandise sold in the
theatre lobby mini-stores. The mini-store operation did not generate the
revenues and profits to successfully operate the Company, and in the period of
May 1995 through May 1996, the Company discontinued all retail operations.

On March 21, 1994, the Company completed an initial public offering of 2,800,000
shares of its common stock at $2.50 per share and 2,000,000 redeemable warrants
to purchase its common stock at $1.25 per redeemable warrant for gross proceeds
of $7,250,000.

The Company restructured its business with the discontinuance of its retail
operations. This reduced the Company's revenues and reduced operating expenses.
With the discontinuance of retail operations the Company began to focus its
capital resources on the Sierra business. Steps in the restructuring process
include the identification of target companies by the Company for suitable
acquisition. The Company completed the acquisition of Just Jackets in October,
1996 and the acquisition of Susan Burrowes, Ltd. in June, 1997.

On June 19, 1996 the Company signed a definitive merger purchase agreement with
Superior Panoramic Hand Prints, Inc. and Just Jackets, Inc. of North Hollywood,
California. The Company was unable to raise sufficient capital within the
prescribed time frame to consummate the merger with Superior. Accordingly, the
merger prospect for Superior lapsed in April, 1997. The merger with Just Jackets
was completed on October 24, 1996. Just Jackets' 1996 revenues were estimated
at $1.2 million. Just Jackets was folded into a newly formed apparel subsidiary
of the Company and the shareholders of Just Jackets received an aggregate of
$80,000 in cash and 50,000 shares of common stock of the Company.

On June 12, 1997, the Company acquired 100% of the common stock of Susan
Burrowes, Ltd. Susan Burrowes is engaged in the design, manufacturing, and
distribution of missy and women's career apparel. Susan Burrowes was
incorporated in California in 1978. The Company has relocated its corporate
headquarters and all of its subsidiaries operations to the 62,000 square foot
facility in Commerce, California. Susan Burrowes has a showroom in New York City
in the apparel marketplace. Net revenues for Susan Burrowes during fiscal year
ended February 28,1997 were approximately $15.0 million. Their labels include
Susan Burrowes, Laura Keifer, Just Clothes , Independence, and Abbreviate.
Examples of key retail customers are Sears, JC Penney's, Macy's, and Casual
Corner Group.

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SIERRA FIXTURE AND DESIGN

OPERATIONS
Sierra commenced operations in March 1995, and is engaged in the design,
marketing and installation of fixtures used in malls and stores and mall
service operations. These fixtures consist of temporary retail units, kiosks,
carts and marketing directories, some of which incorporate state of the art
electronics, debit card systems, interactive computers and three-dimensional
technologies as touch video screens in mall directory units. Sierra does not
normally maintain an inventory of retail fixtures and units are produced for
customers solely on a custom basis, which means that units are produced only
against firm purchase orders received from customers.

THE MARKET
The shopping center industry is a highly diverse marketplace with different
purchasing points. The customers of Sierra are the developers of shopping
malls both on a regional and national basis, individual shopping malls, and
office complexes. The Company believes, based on its knowledge of the industry,
that the potential national market for its products is approximately $550
million. The purchasing decision is typically made by marketing directors,
retail licensing directors and operations personnel. The product needs of the
individual customers require custom design to meet their individuals needs.
These requirements can be as varied as providing information, customer profiles,
gathering marketing data, to displaying and selling a wide variety of retail
products.

MARKETING AND SALES
Sierra has relocated its offices and showroom to the corporate headquarters in
Commerce, California. Sierra's marketing and sales programs are implemented by
its president and various independent sales representatives. The sales
representatives receive commission income from Sierra based solely on orders
solicited by them and which have been accepted by Sierra. None of such sales
representatives are engaged by Sierra on an exclusive basis or devotes
substantially all of his or her time to selling Sierra's products.

Sierra's merchandising strategy is to focus on the development of the next
generation of technology based sales. The Company believes that Sierra produces
the finest quality product and is known for innovative leading edge design. When
a custom design is required, Sierra's accredited design staff will produce a
visual presentation of the model for customer approval. The Company believes
that Sierra has developed strong customer relationships with large mall
developers, such as Urban Retail Properties, General Growth Properties and The
Tirzac-Hahn company

During this fiscal year, Sierra sold units to customers including The Walt
Disney Company, Wolfchase Galleria Project, The California Mart, and CenterCourt
Concierge. Sierra had net revenues of $1,101,397 in the fiscal year 1997.

PRODUCT DEVELOPMENT
The Company believes that conventional forms of on-site retail merchandising and
advertising units are rapidly evolving into forms utilizing interactive video
and other state of the art technologies and that such products represent a low
cost alternative to traditional retailing concepts. These products can be used
by mall developers and retailers to deliver specific messages to targeted
customs. While the Company anticipates continued market acceptance of Sierra's
products, any delays of getting the product to the marketplace could adversely
effect the business.

<PAGE>

MANUFACTURING
Sierra develops and markets its products with contractors that supply the
finished products necessary to fulfill outstanding customer orders. The Company
believes that Sierra has good relationships with its manufacturers. Sierra is
subject to the risk that a manufacturer may cause delayed shipments or the
inability to produce a timely product due to the manufactures capacity. The
Company believes, based on its experience, that in the event a manufacturer
terminates its relationship with Sierra, or refuses to accept an order from
Sierra, it will be able to obtain alternative sources of supply that will
provide finished products in sufficient quantities, on a timely basis and at
acceptable prices to enable Sierra to satisfy customer requirements.

SEASONALITY
Sierra's business is cyclical. Sales are highest in the summer and fall months.
Mall and retail operators attempt to have all of their retail merchandising
units in place and tested prior to the onset of the Christmas holiday season.

BACKLOG
As of July 31, 1997, Sierra had a backlog of firm orders of approximately
$100,000. The backlog consists primarily of merchandising units being produced
for CenterCourt Concierge Company, Stonewood Shopping Center, and others. These
units are expected to be shipped during the first fiscal quarter. As of May 31,
1996, Sierra had a backlog of approximately $400,000, consisting of
merchandising units which were mostly shipped during the first quarter of the
fiscal year ended May 31, 1997.

COMPETITION
The Company believes that Sierra competes effectively on the basis of quality
products, customer service, pricing and timely delivery. Although pricing is
important, the Company believes that product quality and timely delivery are
almost of equal importance. Sierra's principal competitors are Mall Media, PNC
Bank Inc. and T. L. Horton. Each of these competitors has its own manufacturing
facility. The prices of products sold by competitors may be less than the prices
of similar merchandise sold by Sierra. The company believes it has the ability
to compete on innovative design and have a superior quality product.

The company does not hold any existing patents, but has developed a worldwide
strategic partnership with 3D projection system in August 1997 for
preferential marketing rights to the mall and retail businesses on a
worldwide basis. Sierra is in negotiation for a national contract to market
the mall dedicated debit card system. These relationships allow Sierra to
continue to build leading edge products.

JUST JACKETS

OPERATIONS
Just Jackets commenced operation in April, 1994, and was acquired by the Company
in October, 1996. Just Jackets designs and produces value-added decorated
jackets and denim shirts to distribute in the advertising specialty industry and
to retailers of souvenir and novelty products. Just Jackets adds value by
decorating the products with the exclusive logos of the advertisers or other
customers within the advertising specialty industry with whom they do business.

THE MARKET
According to the Advertising Specialty Institute, there are more than 13,000
distributors of advertising specialty products in the United States.
Distributors are entities with local or regional focus, ranging from one
person/one product entities to corporate customers. The Company believes that
advertising specialty products and programs generally can represent a lower cost
alternative to the traditional advertising media, and can be utilized by
marketers to deliver specific messages to targeted recipients.

<PAGE>

MARKETING AND SALES
Just Jackets maintains its sales office in the corporate offices in Commerce,
California. Marketing and sales efforts for Just Jackets are led by management
and primarily involve continuing telemarketing and mailings to the existing
customer base.

Products are sold regionally and nationally to more than 100 advertising
specialty distributors. For the fiscal years ended 1995 and 1996, sales to the
advertising specialty market accounted for approximately 75% of the net revenues
of Just Jackets. The products are used for product promotions, employee
incentive programs, customer gifts and advertising campaigns. Customers of Just
Jackets sell to end users in the manufacturing, financial services,
broadcasting, consumer products and communications industries.

MANUFACTURING
Just Jackets' products are manufactured at various contracting facilities in the
greater Los Angeles area. While the Company believes that Just Jackets has good
relationships with its manufacturers, Just Jackets is subject to the risk that a
manufacturer may terminate its relationship with Just Jackets at any time or
that an order may be received at a time when its manufacturer is working at full
capacity. Historically, Just Jackets has not experienced material delays in
obtaining needed merchandise and there are alternate sources of manufacturing
available from whom they would be able to obtain timely deliveries of raw
materials in sufficient quantities and at acceptable prices to arrange
production of finished goods to satisfy customer requirements.

BACKLOG
At July 31, 1997, Just Jackets does not have a backlog of unfilled orders.

SEASONALITY
Just Jackets' business is seasonal. Sales are highest in the summer and fall
months. Sales usually begin to decline in late winter by reason of the climate
and reduction in tourism as well as fewer industry sponsored promotional events
usually experienced during the fall and winter months.

COMPETITION
The advertising specialty industries in which Just Jackets is engaged is
characterized by intense competition. The Company believes that the bases of
competition in such industries are product offerings, prices, quality of
products, design capabilities and customer service. Just Jackets believes that
their principal competitors are Dunbrook and Hollaway.

SUSAN BURROWES LTD.

OPERATIONS
Susan Burrowes, Ltd., was acquired by the Company on June 12, 1997, Susan
Burrowes commenced operations in 1978, and is a recognized brand name in the
missy and women's apparel business under the labels Susan Burrowes and Laura
Keiffer. The company provides custom missy and women's apparel and uses its
expertise to build its private label business. The products designed use
concepts developed by the brands with a focus on quality and construction to
achieve retail pricing.

THE MARKET
The Company has leveraged its distribution network, fashion leadership and
merchandising by focusing on the national chain department store and mass
merchandisers. The Company participates in two marketing segments: branded
missy/women's apparel and private label missy/women's apparel.

<PAGE>

MARKETING AND SALES
The Company sells it products through commissioned account executives as well as
through the division's Vice President. The products are sold in department
stores (including Macy's, Lord and Taylor and Mercantile), apparel specialty
stores (including: Casual Corner, August Max, and Lane Bryant), national chain
stores (including: JC Penney's and Sears), and the mass merchandisers (Wal-
Mart).

PRODUCT DEVELOPMENT
The Company's merchandising staff determines market trends by visiting retail
stores and trade shows throughout the United States and Europe. The
merchandising staff selects the styles, colors, and fabrics for each new product
line. The design staff prepares the concept boards containing proposed designs
and fabric selections which are reviewed by the Company's management and major
customers.

MANUFACTURING
The Company manufactures with contractors in the Los Angeles area. Although the
Company does not have long term manufacturing agreements the Company believes
its relationships with its contractors is satisfactory and that alternative
sources of cutting and sewing are available. The Company also has an quality
control program and uses an outside service (CalCompliance) to insure proper
regulation and internal controls at the contractors site.

<PAGE>

SEASONALITY
Susan Burrowes business is not a seasonal business outside of the normal retail
receipts shifts.

BACKLOG
As of July 31. 1997, the backlog for Susan Burrowes was approximately $250,000.
Such merchandise is expected to be shipped within the first fiscal quarter.

COMPETITION
The apparel industry participates in a competitive marketplace that is driven by
the manufacturers ability to strategically align its product and price structure
with targeted retailers. Susan Burrowes Ltd. believes its key competitors are
Kellwood and Halston.

ITEM 2. PROPERTIES

TRADEMARKS

JUST CLOTHES (R), SUSAN BURROWES(R), LAURA KEIFFER(R), AND ABBREVIATE(R) are
federally registered trademarks in the United States. The Company is in the
process of registering trademarks for the names of Sierra Fixture & Design,
Just Jackets and Independence. The Company regards these trademarks as
valuable assets and believes they are an important factor in marketing its
products. It is the policy of the company to defend these trademarks against
infringement.

PHYSICAL PROPERTIES

As a result of the Susan Burrowes acquisition, the principal executive offices
of the Company are located at 2300 South Eastern Avenue, City of Commerce,
California, 90040 and are occupied pursuant to a lease which expires in 1999.
This location represents approximately 62,000 square feet of office,
manufacturing, and distribution space. The annual rent on such premises is
$296,000 for fiscal 1998. The building is appropriately designed and kept in
good repair. The facility is well maintained and has sufficient capacity to
accommodate present volumes. The Company has relocated Sierra from its Newport
Beach office into the executive offices in City of Commerce after negotiating an
early termination of its lease without penalty. As a result of the Susan
Burrowes Ltd. acquisition the Company leases an apparel showroom in New York
City for an annual rent of $90,000 per year with a lease continuing through
April 1998. The Company also leases an apartment in New York City for a rent of
$29,000 per year. The apartment is approximately 2200 square feet and is located
at 347 West 57th Street # 24C. The Company believes the rent will be offset with
expenses saved from sales personnel using the apartment throughout the year.

EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company and its operating subsidiaries, their
ages and their positions are set forth below.

<TABLE>
<S> <C> <C>
NAME AGE POSITION
Kathryn Van Ness 46 Chief Executive Officer and President of the Company
Christopher Ebert 46 Chief Financial Officer of the Company
Christopher Kelly 51 President, Sierra Fixture and Design
Susan Weinstock 35 Vice President, Susan Burrowes

</TABLE>
7

<PAGE>

Ms. Kathryn Van Ness was named Chief Executive Officer and President of the
Company on June 24, 1997. Ms Van Ness was previously with Authentic Fitness
Corporation (NYSE:ASM) where she served as President of the Speedo, Anne Cole,
Catalina, Cole of California, and Oscar de la Renta businesses. Ms. Van Ness
has also held various other positions, including General Manager/Vice President
of Jantzen Inc. V.F. Corporation (NYSE:VFC) and President of White Stag at
Warnaco (NYSE:WAC) where she instituted strategic and annual planning processes.
Ms. Van Ness also has an extensive retail background from Federated Department
Stores (NYSE:FED).

Mr. Christopher Ebert has served as the Chief Financial Officer of the Company
since September 1994. Mr. Ebert had previously served as the Director of
Finance and Accounting for the Alcoholic Beverage Control of Virginia. Prior
thereto he was the Chief Financial Officer and Treasurer and President of US
manufacturing divisions for Trio-Tech International, (NASDAQ:TRTC) a Los Angeles
based international manufacturer of semi-conductor test equipment. Mr. Ebert
has also served as Controller for Master Protection Corporation, and has held
various international finance and accounting positions with General Electric
Medical Systems.

Christopher D. Kelly, joined the Company in March 1995 as the President of the
Company's wholly owned subsidiary, Sierra Fixture and Design. From 1969 to 1986
Mr. Kelly owned and operated "Rax Unlimited", a mall and retail store fixture
manufacturer. From 1987 to February 1995 Mr. Kelly co-founded and developed
Mesa Verde Fixture and Design. Mesa Verde is a design and manufacturing firm
specifically tailored to work closely with mall developers. Upon occasion, Mr.
Kelly has taught at Woodbury University and the Fashion Institute of Design and
Manufacturing.

Ms. Susan Weinstock was named Vice President of the Apparel division June 12,
1997. Ms. Weinstock has extensive experience in all aspects of the apparel
business including sales management, manufacturing and administration. Her prior
experience is with Susan Burrowes Ltd. managing in various executive positions.

As of June 15, 1997, Mr. Steve Natale, the Company's President and Chief
Executive Officer resigned as an officer and director of the company. On June
24,1997, Ms. Kathryn Van Ness accepted the positions of President and Chief
Executive Officer.

ITEM 3. LEGAL PROCEEDINGS

On July 22, 1996, the Company and Sierra Fixture & Design were named by a former
vendor in a lawsuit alleging infringement on proprietary technology and trade
secrets. The Company and its attorneys, retained with respect to such
proceeding, believe the action to be frivolous and without merit and are
defending such proceeding. The suit was filed in the Superior Court of the
State of California and the plaintiff is seeking undisclosed compensatory and
punitive damages as well as attorney fees.

The Company is involved from time to time in litigation incidental to the
conduct of its business. The Company does not believe that any such litigation
currently pending will have a materially adverse effect on its financial
condition or results of its operations.

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

The Company did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year.

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PART II

ITEM 5. MARKET FOR COMPANY EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, par value $.001 per share ("Common Stock"), is
traded on the Nasdaq SmallCap Market under the symbol ACSI.

The following table sets forth quarterly inter-dealer bid prices of the Common
Stock as reported by Nasdaq for the Company's fiscal years ended May 31, 1996
and 1997, respectively. These quotations are inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.

BID PRICES OF COMMON STOCK

FISCAL YEAR ENDED MAY 31, 1996 HIGH LOW
FIRST QUARTER 5.50 3.38
SECOND QUARTER 5.00 3.18
THIRD QUARTER 4.88 2.25
FOURTH QUARTER 2.88 0.88

FISCAL YEAR ENDED MAY 31, 1997
FIRST QUARTER 3.00 1.16
SECOND QUARTER 1.91 1.00
THIRD QUARTER 1.19 0.81
FOURTH QUARTER 0.84 0.06

At July 31, 1997, the closing bid price of the Company's common stock was
$1.75.

On July 13, 1997, the outstanding shares of common Stock were held by
approximately 950 holders of record.

Considering the Company's new strategic direction into apparel and technology
the Company is currently in the approval process to change its name to Apparel
Technologies, Inc. and change its NASDAQ trading symbol to APTX.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This section contains forward-looking statements and includes assumptions
concerning the Company's operations, future results and prospects. These
forward-looking statements are based on current expectations and are subject
to a number of risks, uncertainties and other factors. In connection with
the Private Securities Litigation Reform Act of 1995, the Company provides
the following cautionary statements identifying important factors which,
among other things, could cause the actual results and events to differ
materially from those set forth or implied by the forward-looking statements
and related assumptions contained in this Section and in this entire report.
Such factors include, but are not limited to: product demand and market
acceptance risks; the effect of economic conditions; the impact of
competitive products and pricing; product development and commercialization
difficulties; capacity and supply constraints or difficulties; availability
of capital resources; general business and economic conditions; and changes
in government laws and regulations, including taxes.

<PAGE>

The following discussion provides an analysis of the company's results of
operations for fiscal 1997 compared to fiscal 1996 and a historical review of
events prior to 1996. This discussion is qualified in its entirety by, and
should be read in conjunction with, the other information and financial
statements.

The Company incurred significant losses in connection with implementation of its
plan to operate mini-retail stores in movie theater lobbies and shopping malls.
The Company determined that its retailing concepts were not viable and
discontinued all retail operations as of May 31, 1996. Since current revenue
levels were not sufficient to attain profitability, the Company attempted to
increase revenues and cash flow and attain profitability through implementation
of a restructuring plan involving the discontinuance of retail operations and
reduction of operating expenses, the consummation of mergers/acquisitions and
expansion of its shopping mall and retail fixtures business.

The Company's cash requirements continue to be significant. The Company had
been utilizing the proceeds of its 1994 public offering, together with its
limited operating revenues, to pay operating expenses of the mini-stores.
Since the discontinuance of retail operations, the Company's expenses include
expenditures necessary to support the operations of Sierra and Just Jackets,
salaries of, and employee benefits for, its executive, administrative and
marketing personnel, rent and utilities. In addition to the cash raised from
the 1994 public offering, the Company raised additional funding in October,
1996. The Company completed a Regulation S offering of convertible
preferred stock with an accredited off-shore investor totaling $500,000. Of
this $500,000, $80,000 was used to acquire Just Jackets and $420,000 was used
for working capital of Just Jackets. In March, 1997, the Company received
$200,000 from a separate accredited off shore investor from the issuance of
cumulative convertible debt.

The first step in the implementation of the Company's restructuring was the
discontinuance of its retail operations effective May 31, 1996. Although such
termination has reduced the Company's revenues, it has also significantly
reduced operating expenses. With the discontinuance of retail operations, the
Company is devoting its capital resources to the support of its Sierra
business. The final step in the implementation of the restructuring plan has
been the identification of target companies by the Company as suitable
acquisition candidates. The Company completed the acquisition of Just Jackets
in October, 1996 and the acquisition of Susan Burrowes, Ltd. in June, 1997.

COMPARISON OF FISCAL 1997 TO FISCAL 1996

Net revenues increased 145% in continuing operations for fiscal 1997 to
$1,675,350 from $683,888 in fiscal 1996. Net revenues from continuing
operations consisted of shipments generated by Sierra as well as the seven
months of shipments generated by Just Jackets. Sierra demonstrated a 60%
increase in net revenues in fiscal 1997 to $1081,285 from $673,834 in fiscal
1996. The increase in Sierra's net revenues is the result of an expanded
customer base. The remaining portion of the increase in net revenues is
attributable to Just Jackets.

Gross profit increased 120% in continuing operations to $602,841 in fiscal
1997, (or 36% of net revenues) from $273,799 in fiscal 1996 (40% of net
revenues). Gross profit from continuing operations is primarily attributable to
net revenues generated by Sierra. The decrease in gross profit percentage of
net revenues in fiscal 1997 as compared to fiscal 1996 reflects the change in
product mix within the Sierra division developing information centers for
CenterCourt Concierge. Additionally, Just Jackets has a lower gross margin as a
result of the competitive advertising specialty market which it services.

Selling expenses decreased for fiscal 1997 in continuing operations to $70,389
(4.2% of net revenues) as compared to selling expenses for fiscal 1996 of
$97,600 (14.4% of net revenues). Selling expenses from discontinued operations
for fiscal 1996 were $638,928. The reason for the decrease of selling expenses
from continuing operations is the result of a reduction in commissioned sales,
which are now being made by management.

<PAGE>

General and administrative expenses increased in continuing operations for
fiscal 1997 to $2,111,651 as compared to $1,931,785 in fiscal 1996. The
increase in general and administrative expenses as compared to fiscal 1996
reflects the write-off of the Company's accumulated acquisition costs of
$347,243 related to the non-effected acquisition of Superior Panoramic. During
the period of time during due diligence and fund raising the Company booked
these expenses as a non-current asset and classified as acquisition costs.
The net results without the write-off of the acquisition expenses demonstrate
decreased costs in general and administrative expenses in fiscal 1997 of
$1,764,408. This improvement in general and administration costs for fiscal
1997 was a result of lower office rent expense and labor expense as the Company
began to aggressively reduce cost.

Interest income received in fiscal 1997 from cash investments declined to
$20,952 as compared to fiscal 1996 of $80,065. The reason for this decrease in
interest income is the result of cash being used for working capital and
consequently having decreasing amounts of cash available for investment.
Interest expense of $133,333 is a non-cash item which records the expense
related to the 60% conversion rate for the $200,000 convertible debenture.
During the fiscal 1997, the Company recorded $133,333 in deferred interest on
the convertible debt and fully amortized that amount into interest expense. The
deferred interest is the result of the implied yield provided by the 60%
conversion feature. The amount was amortized over the period from the issuance
date through the date that the debt first became convertible into common stock.

The net loss of $1,691,580 for fiscal 1997, or ($0.23) per share compared to a
net loss from all operations for fiscal year 1996 of $2,510,147, or ($0.36) per
share. The net loss allocable to common Shareholders for fiscal 1997 is
$2,204,264 or ($0.30) per share. There was a net loss of $1,668,957, or
($0.24) per share, from continuing operations and a net loss of $841,190, or
($0.12) per share from discontinued operations in 1996. Loss from discontinued
operations includes a loss on disposal of fixed assets of $450,139.

COMPARISON OF FISCAL 1996 To FISCAL 1995

Net sales from continuing operations for the fiscal year ended May 31, 1996
were $683,888 as compared to fiscal year 1995 of $14,418. Net revenues from
continuing operations consisted of sales generated by Sierra. The net
revenues from the discontinued retail operations were $742,895 for fiscal
1996 resulting in a consolidated net revenue total of $1,416,728, as compared
to consolidated net revenues from all operations of $841,146 for fiscal 1995.

Gross profit for continuing operations for fiscal year 1996 was $273,799,
(40% of net revenues). Gross profit from continuing operations is
attributable to gross profit generated by Sierra. Gross profit from
discontinued retail operations was $83,811 for fiscal 1996. Consolidated
gross profit for fiscal 1996 was $347,555, (25% of net revenues), as compared
to consolidated operations gross profit for fiscal 1995 of $103,205,(12% of
net revenues).

Selling expenses relating to continuing operations for the year ended May 31,
1996 were $97,600, consisting of commissions paid to outside sales personnel for
Sierra. There were no selling expenses attributable to continuing operations
for the year ended May 31, 1995. Selling expenses from discontinued operations
for the year ended May 31, 1996 were $638,928, as compared to $969,305 for the
year ended May 31, 1995. The reason for the loss was a decrease in the retail
sales of the discontinued operations.

General and administrative expenses increased in continuing operations for
fiscal 1997 to $1,931,785, as compared to fiscal 1995 of $1,277,270. The reason
for the increase was higher office rent expense and rent for additional
warehouse space to store fixtures from closed retail stores and, as the Company
began to aggressively investigate possible merger candidates, legal, audit and
appraisal fees associated with pre-acquisition due diligence.

Interest received from cash investments decreased in fiscal 1996 to $80,065 as
compared to $160,765 in fiscal 1995. The reason for this decrease in interest
income is the result of cash being used for working

11
<PAGE>

capital and consequently having decreasing amounts of cash available for
investment.

The net loss from all operations for fiscal 1996 was $2,510,148, or( $0.36) per
share. The net loss from continuing operations for fiscal 1996 was $1668,957, or
($0.24) per share and the net loss from discontinued operations for fiscal 1996
was $841,190, or ($0.12) per share. The net loss from discontinued operations
includes a loss on disposal of fixed assets of $450,139. The Company incurred a
net loss of $2,255,847, or ($0.36) per share, for 1995. The loss from
continuing operations was $1,122,904, primarily attributed to start-up expenses
for Sierra and licensed product operations. Loss from discontinued operations
was $1,132,943, of which $136,813 related to a write-off of fixed assets.

12
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

The Company's primary cash requirements had been to support retail operations.
The Company relied on the proceeds of its 1994 public offering of Common Stock
and cash flow from retail operations to fund those working capital requirements.
As of May 31, 1996, the Company had discontinued all retail operations. The
Company has been devoting its resources to support the operations of Sierra and
Just Jackets and to complete due diligence investigations of target companies
and to raise funds for expansion and acquisitions. The Company intends to
utilize the money raised on June 12, 1997 and July 23, 1997 from Regulation D
private placements to accredited investors for its working capital requirements
for Sierra, Just Jackets and Susan Burrowes as well as to investigate other
appropriate acquisitions. Although subsequent to the fiscal year ended May 31,
1997, the amounts raised from both of these Regulation D offerings was
approximately $1.8 million.

On June 19, 1996 the Company signed a definitive merger purchase agreement with
Superior Panoramic Hand Prints, Inc. and Just Jackets, Inc. of North Hollywood,
California. The Company was unable to raise sufficient capital within the
prescribed time frame to consummate the merger with Superior. Accordingly, the
merger prospect for Superior lapsed in April, 1997. The merger with Just Jackets
was completed on October 24, 1996. Just Jackets' calendar year 1996 revenues
were estimated at $1.2 million. Just Jackets was folded into a newly formed
apparel subsidiary of the Company and the shareholders of Just Jackets received
an aggregate of $80,000 in cash and 50,000 shares of common stock of the
Company.

On June 12, 1997, the Company acquired 100% of the common stock of Susan
Burrowes, Ltd. The Company acquired all of the outstanding stock of Susan
Burrowes, Ltd. in exchange for 200,000 shares of the Company's common stock to
the shareholder of Susan Burrowes and forgiveness of a $50,080 note owed to
Susan Burrowes by the shareholder. Net revenues for Susan Burrowes during
fiscal year ended February 28, 1997 were approximately $15.0 million.

In conjunction with the acquisition of Susan Burrowes, a $1.2 million
Regulation D offering to accredited investors was accomplished whereby the
investors acquired shares of the Company's common stock at a price of $0.25
per share. On July 23, 1997, the Company raised another $880,000 via a
Regulation D private placement of 1,035,295 Shares of Common Stock to
accredited investors.

An accredited offshore investor paid $200,000 to the Company on March 28,
1997 in exchange for a promissory note. The terms of the promissory note
state that the note will bear interest at a rate of 12% per annum and is due
and payable on April 15, 1997. In the event that the note was not paid by
the due date, the principal and accrued interest shall automatically convert
into a 4% Cumulative Convertible Debenture of the Company and will be subject
to the terms and conditions contained in the terms sheet of the Offshore
Securities Subscription Agreement, Regulation S offering. The note was not
repaid on April 15,1997.

On May 31, 1997, the Company had negative working capital of ($118,700), as
compared to working capital of $525,612 at May 31, 1996. The decrease in
working capital was primarily attributable to inventory write-downs and loss
related to continuing operations. With the acquisition of Susan Burrowes
and the expansion of the Sierra business, the working capital ratio is
expected to improve during the current fiscal year.

Net cash used in operating activities was $867,623 for fiscal 1997, as
compared to net cash used in operating activities of $1,852,924 for the
fiscal 1996. The decrease in cash used in operating activities was primarily
attributable to the reduction of corporate overhead and expenses. Based upon
the Company's overhead reduction and expense control procedures, the Company
believes it will generate sufficient cash flows from operations in fiscal
1998 to meet cash requirements for existing subsidiary operations.

The Company provides for income taxes in accordance with STATEMENT OF FINANCIAL
STANDARDS NO. 109,

13
<PAGE>

ACCOUNTING FOR INCOME TAXES. Such net operating loss carry-forwards which
result in deferred tax assets of $3.0 million. The Company provides a valuation
allowance for deferred tax assets when it is more likely than not, based upon
available evidence, that some portion or all of the deferred tax asset will not
be realized. In management's opinion, it can not be determined if it is more
likely than not if the Company will generate sufficient taxable income before
the year 2012, two years after all net operating loss carry forwards expire, to
utilize all of the Company's deferred tax assets. As of May 31, 1997, a
valuation allowance has been recognized for the full amount of the deferred tax
asset of $3.0 million.

For federal income tax purposes, the Company has federal net operating loss
carry-forwards of $7,314,000 and California net operating loss carry-forwards of
$5,451,000 at May 31, 1997. These carry-forwards expire in the years 2008 to
2012. Federal tax rules impose limitations on the use of net operating losses
following certain changes in ownership. The Company experienced such a change
in March 1994, which will limit the use of the federal net operating loss
carryforward to $370,000 per year on a total of $985,000 incurred prior to the
change in ownership.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, EARNINGS PER SHARE. On
March 31, 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). This pronouncement requires a different
method of calculating earnings per share than is currently used in accordance
with APB 15, "Earnings per Share." SFAS 128 provides for the calculation of
Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. This pronouncement is effective for the fiscal years and interim periods
ending after December 15, 1997. Early adoption is not permitted. The Company
has not determined the effect, if any, of the adoption on its EPS computations.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING COMPREHENSIVE
INCOME. In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), which established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

SFAS 130 is effective for financial statements for periods beginning after
December 31, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION. In June, 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
Reporting Comprehensive Income (SFAS 131), which supercedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.

SFAS 131 is effective for financial statements for periods beginning after
December 31, 1997 and requires

14
<PAGE>

comparative information for earlier years to be restated. Because of the recent
issuance of this standard, management has been unable to fully evaluate the
impact, if any, the standard may have on future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of this standard.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this item is included in the Company's financial
statements beginning on page 20 of this report.

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

Not applicable.

PART III

The information required by Part III, Items 9 through 12, is hereby incorporated
by reference from the Company's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of fiscal 1997.

PART IV

15
<PAGE>

ITEM 13. EXHIBITS AND LISTS AND REPORTS ON FROM 8K

(a) INDEX TO EXHIBITS AND SUPPLEMENTARY DATA INCORPORATED BY REFERENCE

EXHIBIT DESCRIPTION

3.1 Articles of Incorporation as amended.
3.2 By-Laws.
4.2 Form of Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company, including form of redeemable warrant.
10.1 Employment Agreement dated March 15, 1997 between the Company and Steve
Natale.
10.2 Employment Agreement dated November 19, 1993, between the Company and
Gill Champion.
10.3 1993 Stock Option Plan.
10.10 Employment Agreement dated March 15, 1997 between the Company and
Christopher Ebert
10.17 Letter Agreement, dated June 25, 1996.
21.1 Subsidiaries of the Company
1. Sierra Fixture and Design, Inc.
2. Just Jackets, Inc.
3. SPI/ASCI Acquisition Corporation
27.1 Financial Data Schedule

(b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K relating to the issuance of
convertible debentures via a Regulation S transaction, April 1997. The Company
filed two reports on Form 8-K subsequent to the fiscal year end relating to the
acquisition of Susan Burrowes, Ltd. on June 1997.

16
<PAGE>

Pursuant to the requirements of Sections 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

AMERICAN CINEMASTORES, INC.

By:
----------------------------------
Christopher J. Ebert August 21, 1997
Chief Financial Officer
Secretary & Director

17
<PAGE>

AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS PAGE

Report of Independent Certified Public Accountants 19
Consolidated balance sheets as of May 31, 1997 and May 31, 1996 20
Consolidated Statements of Operations for the fiscal years ended
May 31, 1997 and May 31,1996 22
Consolidated Statements of Changes in
Stockholders' Equity for the fiscal years ended May 31, 1997
and May 31, 1996 23
Consolidated Statements of Cash Flows for the fiscal years ended
May 31, 1997 and May 31, 1996 24
Summary of Significant Accounting Policies 26
Notes to Consolidated Financial Statements 29

18
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
American CinemaStores, Inc.

We have audited the accompanying consolidated balance sheets of American
CinemaStores, Inc. and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American CinemaStores, Inc. and subsidiaries as of May 31, 1997
and 1996, and the results of their operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.

BDO SEIDMAN, LLP

Los Angeles California,
August 18, 1997

19
<PAGE>

AMERICAN CINEMASTORES, INC.

FORM 10-KSB
CONSOLIDATED BALANCE SHEETS

May 31,
------------------------
1997 1996
--------- ----------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $155,319 $113,997
Marketable securities - 359,934
Accounts receivable, net of allowance for
doubtful accounts of $8,000 and $60,662,
respectively (Note 9) 101,645 215,510
Note receivable (Note 10) 300,000 93,095
Prepaid and other - 21,750
Inventory 28,180 73,210
-------- ----------
Total current assets 585,144 877,496
-------- ----------

PROPERTY AND EQUIPMENT
Office furnishings and equipment 181,655 151,307
Automobiles 17,326 17,326
Leasehold improvements - 5,338
-------- ----------
198,981 173,971
Less accumulated depreciation
and amortization 114,622 71,221
-------- ----------
Property and equipment, net 84,359 102,750

Deposits 1,750 13,373
Goodwill - net 265,840 -
Deferred acquisition costs 10,000 314,761
-------- ----------
Total assets $947,093 $1,308,380
-------- ----------
-------- ----------

See accompanying summary of significant accounting policies
and notes to Consolidated Financial Statements.

20
<PAGE>

AMERICAN CINEMASTORES, INC.

FORM 10-KSB
CONSOLIDATED BALANCE SHEETS

May 31,
---------------------------
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY

CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 353,576 $ 229,284
Loan payable (Note 7) 150,267 -
Convertible debt (Note 8) 200,000 -
Deferred revenue - 122,600
------------ -----------
TOTAL CURRENT LIABILITIES 703,843 351,884
------------ -----------

COMMITMENTS AND CONTINGENCIES (Note 3)

STOCKHOLDERS' EQUITY (Note 1)
Preferred stock, $.01 par value
5,000,000 shares authorized,
500 shares issued and redeemed - -
Common stock: $.001 par value
30,000,000 shares authorized,
8,251,054 issued and outstanding
at May 31,1997 and 6,892,638 issued
and outstanding at May 31, 1996 8,251 6,892
Additional paid-in capital 8,593,211 7,103,552
Accumulated deficit (8,358,212) (6,153,948)
------------ -----------
Total stockholders' equity 243,250 956,496
------------ -----------

Total liabilities and
stockholders' equity $ 947,093 $ 1,308,380
------------ -----------
------------ -----------

See accompanying summary of significant accounting policies
and notes to Consolidated Financial Statements.

21
<PAGE>

AMERICAN CINEMASTORES, INC.

FORM 10-KSB
CONSOLIDATED STATEMENT OF OPERATIONS

Fiscal Year Fiscal Year
Ended Ended
May 31, 1997 May 31, 1996
------------ ------------
Sales (Note 9) $ 1,675,350 $ 683,888
Cost of sales 1,072,509 410,089
----------- -----------
Gross profit 602,841 273,799
----------- -----------

Selling, general and
Administrative expenses 2,182,040 2,029,385
----------- -----------
Operating loss from continuing operations (1,579,199) (1,755,586)
----------- -----------

Other income (expense)
Interest income 20,952 80,065
Interest expense (Note 8) (133,333) -
Other income - 6,564
----------- -----------
Total other income (expense) (112,381) 86,629
----------- -----------
Loss from continuing operations (1,691,580) (1,668,957)
Loss from discontinued operations (Note 5)
Loss from operations - (391,051)
Loss on disposal - (450,139)
----------- -----------
Loss from discontinued operations - (841,190)
----------- -----------
Net loss $(1,691,580) $(2,510,147)

Dividends to preferred shareholder 512,684 -
----------- -----------
Net loss allocable to common shareholders $(2,204,264) $(2,510,147)
----------- -----------
----------- -----------

Net loss per common stock share
From continuing operations $ (0.30) $ (0.24)
From discontinued operations - (0.12)
----------- -----------
Net loss per common share $ (0.30) $ (0.36)
----------- -----------
----------- -----------
Weighted average common stock shares 7,314,943 6,892,638
----------- -----------
----------- -----------

See accompanying summary of accounting policies and notes
to Consolidated Financial Statements.

22
<PAGE>

AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Common Stock Preferred Stock Total
-------------------------------------------- Paid in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1995 6,892,638 $6,893 $7,103,552 $(3,643,801) $3,466,644

Net Loss (2,510,147) (2,510,147)
-------------------------------------------------------------------------------------
BALANCE, MAY 31, 1996 6,892,638 6,893 - - 7,103,552 (6,153,948) 956,497

Issuance of Series A preferred stock - - 500 5 499,995 - 500,000
(Note 1)

Deferred accretion on Series A
Preferred stock (Note 1) - - - - 500,000 (500,000) -

Issuance of common stock upon
upon conversion of preferred stock
(Note 1) 1,000,000 1,000 (500) (5) (995) - -

Stated dividends paid in
Common stock 25,416 25 - - 12,659 (12,684) -

Issuance of common stock upon
acquisition of Just Jackets (Note 11) 50,000 50 - - 44,950 - 45,000

Deferred interest payable in common
stock on convertible debt (Note 8) - - - - 133,333 - 133,333

Stock subscription (Note 10) 283,000 283 - - 299,717 - 300,000

Net loss - - - - - (1,691,580) (1,691,580)
-------------------------------------------------------------------------------------
BALANCE MAY 31, 1997 8,251,054 $ 8,251 - - $8,593,211 $(8,358,212) $ 243,250
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>

See accompanying summary of significant accounting policies and notes
To Consolidated Financial Statements.

23
<PAGE>

AMERICAN CINEMASTORES, INC.
FORM 10-KSB
CONSOLIDATED STATEMENTS OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
Ended Ended
May 31, 1997 May 31, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,691,580) $(1,668,957)

Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 65,017 50,555
Provision for bad debt -- 20,000
Non-cash interest expense 133,333 --
Loss on transfer of certain net assets
net of effects from purchase of Just Jackets 119,564 --
Write-off of deferred acquisition costs 314,761 --
Increase (decrease) from changes in:
Accounts receivable 179,157 (234,815)
Inventory 45,030 (44,658)
Prepaids and other 34,173 12,658
Deferred revenue (122,600) 55,100
Accounts payable and accrued expenses 55,522 226,755
------------- -------------
Net cash used in continuing operating activities (867,623) (1,583,363)
Net cash used in discontinued operations -- (269,561)
------------- -------------
Net cash used in operating activities (867,623) (1,852,924)

CASH FLOW FROM INVESTING ACTIVITIES
Investment in marketable securities 359,934 1,774,259
Acquisition of property and equipment (25,000) (17,852)
Deferred acquisition costs (10,000) (314,761)
Note receivable -- (93,095)
Payment to Just Jackets principals (80,000) --
------------- -------------
Net cash from investing activities 244,924 1,348,551
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of :
Proceeds from bank loan payable 80,267 --
Loan from shareholder 70,000 --
Payment of Just Jackets bank notes (186,246) --
Convertible preferred stock 500,000 --
Convertible debt 200,000 --
------------- -------------
Net cash provided by financing activities 664,021 --

NET DECREASE IN CASH AND CASH EQUIVALENTS 41,322 (504,373)
Cash and cash equivalents at beginning
of period 113,997 618,369
------------- -------------
Cash and cash equivalents
at end of period $ 155,319 $ 113,997
------------- -------------
</TABLE>

See accompanying summary of accounting policies and notes to
financial statements.

<PAGE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In connection of the acquisition of Just Jackets, Inc. on October 24, 1996,
the Company received assets of $206,426 and assumed liabilities of $358,444
in exchange for $80,000 cash and 50,000 shares of the Company's common stock
valued at $0.90 per share, its fair value at the date of acquisition.

On February 4, 1997 the holder of the 250 shares of the Company's preferred
stock converted those shares into 512,083 shares of the Company's common
stock. On February 10, 1997 the holder of the 250 shares of the Company's
preferred stock converted those shares into 513,333 shares of the Company's
common stock.

In April, 1997, the Company issued 283 shares of the Company's stock in
consideration for a $300,000 note receivable to the Company.

In April 1997, the Company entered into an agreement with Superior Panoramic
in which it transferred certain inventory and fixed assets, and canceled a
$93,095 note receivable in exchange for Superior assuming certain payables.
The loss on this exchange totaled $119,564.

25
<PAGE>

AMERICAN CINEMASTORES INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF FINANCIAL STATEMENT AND PRESENTATION AND ORGANIZATION

American CinemaStores, Inc, (the Company), a Delaware corporation designs,
manufacturers, and markets under two wholly owned subsidiaries, Sierra Fixture
and Design, established in March, 1995, and Just Jackets. The company was
incorporated in February 1992 to engage in retail mini stores offering movie
related products. The Company completed an initial public offering in March
1994. In November 1995, the Company decided to discontinue all of its retail
operations (Note 5). The Company has now restructured and refocused on
acquisitions and mergers to build revenues.

In October 1996, the Company acquired Just, Jackets, Inc. to design, manufacture
and sell leather, leather and wool as well as other fabric jackets and denim
shirts to the advertising specialty industry.

The accompanying consolidated financial statements include the accounts of
American Cinema Stores, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

SUMMARY OF ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.

MARKETABLE SECURITIES
The Company's marketable securities consists of United States Government
Treasury Bills that matured in six months and are stated at cost which
approximates the market. The Company's policy is to hold such securities, unless
cash is needed for operations.

INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in first-out
basis, or market.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and properties are stated at cost. Depreciation of equipment is
provided using the straight line method over the estimated useful lives of the
related assets which range from three to ten years.

GOODWILL AND AMORTIZATION
Amortization of goodwill is being provided on the straight line basis over the
estimated lives of the related business which is fifteen years. Periodically,
using an undiscounted cash flow method, the Company evaluates the realization
and period amortization to determine whether events and circumstances warrant
revised estimates of amortization and whether goodwill has continuing value.

DEFERRED OFFERING AND ACQUISITION COSTS
Deferred offering and acquisition costs consist of legal, accounting, and other
professional costs incurred in connection with the pending merger of Superior
Panoramic as well as the anticipated offering of the Company's common stock to
finance the acquisition of Susan Burrowes, Ltd.

26
<PAGE>

REVENUE RECOGNITION POLICY
The Company recognizes revenue at the time products are delivered to the
customers.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's note receivable and convertible debt is
estimated based upon the quoted market price for the same or similar
financial instruments issued, or on the current rates offered to the Company
for financial instruments of the same remaining maturities.

INCOME TAXES
The Company provides for income taxes in accordance with STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 109 ("SFAS 109"), ACCOUNTING FOR INCOME TAXES. SFAS
109 employs an asset and liability approach in accounting for income taxes, the
objective of which is to recognize the amounts of current and deferred tax
payable at the date of the financial statements using the provisions of enacted
tax laws.

LOSS PER SHARE
Loss per share is based on the weighted average number of shares of common stock
outstanding during the period using a treasury stock method, after giving effect
to the stock dividend described in Note 1. Common Stock equivalents are anti-
dilutive and have not been considered in the calculations.

ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, REPORTING COMPREHENSIVE
INCOME. In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS 130), which established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

27
<PAGE>

SFAS 131 is effective for financial statements for periods beginning after
December 31, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.

RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to 1997 presentation.

28
<PAGE>

AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. CAPITAL TRANSACTIONS

On October 21, 1996 the Company issued 500 shares of Series A Cumulative
Convertible Preferred Stock, par value $0.01 per share, of the Company ( the
"Preferred Stock") in reliance upon the exemption from registration afforded by
Regulation S ("Reg S") as promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"). The preferred Stock
is convertible, whether all or in part, by the holder of the Preferred Stock
into shares of Common Stock, par value $0.001 per share of the Company ( the
"Common Stock") any time forty five (45) days after the date of the issuance of
the Preferred Stock at a conversion price equal to fifty per cent (50%) of the
average of the closing bid price of the Common Stock as quoted on NASDAQ for the
five (5) consecutive trading days preceding the notice to convert, as more
particularly set forth in the Certificate of Designation filed with the State of
Delaware October 21, 1996. The Preferred Stock also entitles the holder to
dividends at a rate of 10% per year, payable on a quarterly basis. On February
4, and February 10, 1997, the series A Preferred Stock was converted into
512,083 and 513,333 shares of the Company's common stock, respectively.

On October 25, 1996, the stockholders of the Company voted at the Company's
annual meeting to increase from 15,000,000 to 30,000,000 the number of
authorized shares of Common Stock, par value $0.001 per share, of the Company.

During the year ended May 31, 1997, the Company recorded $500,000 in deferred
accretion on the preferred stock and fully amortized that amount into dividends.
The deferred accretion related to the implied additional dividend rate of 100%
based on the fair market value of the 50% conversion feature. The amount was
amortized over the period from the issuance date that the preferred stock first
became convertible into common stock.

NOTE 2. STOCK OPTION PLAN

The Company adopted a 1993 Stock Option Plan (the "Plan"). The Plan, as
amended, provides that 800,000 shares of the Company's Common Stock are reserved
for issuance upon exercise of options to acquire Common Stock granted
thereunder, subject to adjustment for stock dividends and splits, reverse stock
splits and other like changes in the Company's capitalization. The purpose of
the Plan is to assist the Company in attracting and retaining qualified persons
to serve as employees, directors and consultants of the Company.

The Plan is administered by the Board of Directors, but the Board may appoint a
committee (the "Committee") consisting of two non-employee directors to
administer the Plan. In general, the Board of Directors or the Committee (the
"Administrator") will select the persons to whom options will be granted and
will determine, subject to the terms of the Plan, the number, exercise period
and other provisions of such options. Options granted under the Plan will
become exercisable at such times as may be determined by the Administrator.

Options granted under the Plan may be either incentive stock options ("ISOs")
(as defined in the Internal Revenue Code of 1986, as amended), or non-ISOs.
ISOs may only be granted to persons who are employees of the Company, including
employees who are directors of the Company. Non-ISOs may be granted to any
person, including, but not limited to, employees of the Company, independent
agents and consultants, whom the Administrator selects. The Administrator
determines the exercise price of options granted under the Plan, provided that,
in the case of ISOs, such price may not be less than 100% (110% in the case of
ISOs granted to holders of 10% of the voting power of the Company's stock) of
the fair market value (as defined in the Plan) of the Common Stock on the date
of grant. The aggregate fair market value (determined at the

29
<PAGE>

time of option grant) of shares with respect to which ISOs become exercisable
for the first time in any year cannot exceed $100,000.

Options generally vest over a four-year period at the discretion of the
Administrator. In addition, outstanding options vest upon the occurrence of
certain transactions, including certain mergers and other business combinations.
The term of each option may be not more than 10 years (five years in the case of
ISOs granted to holders of 10% of the voting power of the Company's stock) from
the date of grant. ISOs generally terminate upon an option's termination of
employment with the Company, for any reason other than death or disability.
Upon exercise of an option, the exercise price may be paid to the Company in
cash or in shares of Common Stock (based upon the market value of the shares so
surrendered).As of the date of this filing, there are no outstanding options
under the Plan. Options previously issued to Messrs. Champion and Natale (Note
3) have lapsed as a result of the options not being exercised within thirty days
of their respective resignations. The options issued to Mr. Ebert were
exchanged, per Board resolution, to 250,000 shares of the Company's common
stock on June 17,1997.

NOTE 3. COMMITMENTS AND CONTINGENCIES

As part of the acquisition of Susan Burrowes, Ltd. (See Note 6), the Company
relocated its corporate facilities to the Susan Burrowes location. At this
facility, the Company currently leases approximately 62,000 square feet of
office and manufacturing space in Commerce, California. As of July 31, 1997,
there are 19 months remaining on the lease; seven months of which will require a
monthly lease payment of $19,596 and twelve months of a monthly lease payment of
$20,208. The lease expires in February 8, 1999. Additionally, as a result of
the Susan Burrowes acquisition the Company now leases an apparel showroom
facility in New York City for $90,000 per year. That lease expires in April
1998. The Company has as a result of the Susan Burrowes acquisition has a
lease for a New York City apartment for an annual lease of $24,000. Sierra has
negotiated an early termination of that lease, without penalty, and has
relocated to the corporate offices. Minimum future payments for the corporate
office for the years ending May 31, 1998 and 1999, are $296,418 and $181,874
respectively. Rent expense for the years ended May 31, 1997 and 1996 amounted to
$86,440 and $145,644.

As a result of the Susan Burrowes Ltd. acquisition the Company leases an apparel
showroom in New York City for an annual rent of $90,000 per year with a
lease continuing through April 1998. The Company also leases an apartment in
New York City for a rent of $29,000 per year. The apartment is approximately
2200 square feet and is located at 347 West 57th Street # 24C. The Company
believes the rent will be offset with expenses saved from sales personnel
using the apartment throughout the year.

The Company entered into employment agreements with two of its officers which
were effective on March 21, 1994 and were for a term of three years. The
agreements provide for aggregate base salaries of $125,000 and $100,000 per
year to be paid to the officers, with increases in the second and third years
based on the increases, if any, in the consumer price index. The agreements
also provide for the officers to receive perquisites including the use of an
automobile and life insurance. During this reporting period, Mr. Champion
resigned pursuant to an agreement entered into whereby he is to be paid the
remainder of his contract, through March 14, 1997. On March 15, 1997, Mr.
Natale entered into a two year employment contract with the Company with an
aggregate annual salary of $125,000 as well as perquisites including the use
of an automobile and life insurance. On June 15, 1997, Mr. Natale resigned
as an officer and a director of the Company whereby the Company must pay 10.5
months of severance consideration on his contract equal to $110,000. The
amount has been recorded as an expense in fiscal 1997 and accrued for as of
May 31, 1997. The Company has entered into a one year employment contract
with Christopher Ebert, the Company's Chief Financial Officer, with an
aggregate annual salary of $110,000 as well as perquisites including the use
of an automobile and life insurance.

30
<PAGE>

NOTE 4. INCOME TAXES

The components of deferred tax assets are as follows:

1997 1996
-------------------------------
Deferred tax assets:
Accounts receivable $ 3,200 $ 24,447
Accrued vacation 9,992 13,325

Inventory reserve - 10,208
Depreciation 13,300 -

Net operating loss carry-forwards 2,995,942 2,085,937
-------------------------------
Net deferred tax assets 3,022,434 2,133,917

Valuation allowance (3,022,434) (2,133,917)
-------------------------------
Total $ -- $ --
-------------------------------
-------------------------------

Due to management not being able to conclude that it is more likely than not
that the deferred tax asset will be realized, a valuation allowance has been
recorded for the full amount.

For income tax purposes, the Company has federal net operating loss carry-
forwards of $7,314,000 and California net operating loss carry-forwards of
$5,451,000 at May 31, 1997. These carry-forwards expire in the years 2008 to
2012. Federal tax rules impose limitations on the use of net operating losses
following certain changes in ownership. The Company experienced such a change
in March 1994, which will limit the use of the federal net operating loss carry
forward to $370,000 per year on a total of $985,000 incurred prior to the change
in ownership.

NOTE 5. DISCONTINUED OPERATIONS

During November, 1995, the Company decided to terminate all of its retail
operations by the end of the fiscal year, May 31, 1996. This includes both
theatre lobby mini-stores as well as the mini-stores in regional malls. This
decision is the result of the retail operation's continued lack of
profitability. The regional mall stores remained open through the Christmas
season. The Company considers the fixed assets associated with the retail
operation impaired and therefore these fixed assets were written off during the
fiscal year ended 1996. The loss on disposal of the fixed assets written off in
connection with the discontinuation of retail operations amounts to $450,139,
and is included in the loss from discontinued operations of $841,190 for the
twelve months ended May 31, 1996. The Company maintains physical ownership of
these assets and is seeking to dispose of them in a manner beneficial to the
Company.

Discontinued operations resulted in revenues of $742,894 for the fiscal year
ended May 31, 1996.

NOTE 6. SUBSEQUENT EVENTS

a) On July 23, 1997, the Company raised $880,000 via a Regulation D
private placement of 1,035,295 shares of common stock to a single accredited
investor for use as working capital for the Company.

b) On June 12, 1997, the Company acquired 100% of the stock of Susan
Burrowes, Ltd. Susan Burrowes who is engaged in the design, manufacture, and
distribution of moderately priced missy and women's apparel items. Susan
Burrowes, Ltd. was incorporated in California in 1978. The Company has
relocated its corporate headquarters and is relocating all subsidiaries to
the 62,000 square foot. Susan Burrowes facility in

31
<PAGE>

Commerce, California. Susan Burrowes also has a showroom in New York City. For
their fiscal year ended February 29, 1997, Susan Burrowes reported net sales of
$15 million. Their labels include Susan Burrowes, Just Clothes and Laura
Keiffer with significant customers being J.C. Penney's, Sears and Macy's.

The Company acquired all of the outstanding stock of Susan Burrowes, Ltd. in
exchange for 200,000 shares of the Company's common stock to the shareholder of
Susan Burrowes and forgiveness of a $50,080 note owed to Susan Burrowes by the
shareholder.

In conjunction with the acquisition of Susan Burrowes, a Regulation D
offering to accredited investors was accomplished whereby the investors
acquired shares of the Company's common stock at a price of $0.25 per share.
Condensed unaudited pro forma results of operations of the Company and Susan
Burrowes as if the respective acquisition took place at the beginning of the
fiscal year, June 1, 1996, is presented below. The following unaudited
financials include $1,200,000 which was raised via a Regulation D private
placement of common stock to accredited investors as of June 12, 1997. This
$1,200,000 was used for working capital for Susan Burrowes.

<PAGE>

AMERICAN CINEMASTORES, INC. AND SUSAN BURROWES, LIMITED
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
FOR THE PERIOD ENDED MAY 31, 1997
AMERICAN CINEMASTORES ,INC. (AUDITED) AND
SUSAN BURROWES, LTD. (UNAUDITED)

<TABLE>
<CAPTION>
NOTE 6 Continued

American Susan Pro Forma Pro Forma
CinemaStores Burrowes Combined Adjustments Combined
------------ -------- -------- ----------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 155,319 $ 3,656 $ 158,975 $ 1,000,000 (3) $ 1,158,975
Accounts receivable (net) 101,645 103,808 205,453 205,453
Notes receivable 300,000 50,080 350,080 ( 50,080)(4) 300,000
Inventory (net) 28,180 1,979,000 2,007,180 2,007,180
Prepaid and other - 94,493 94,493 94,493
--------------------------------------------------------------------------------------------------
Total current assets 585,144 2,231,037 2,816,181 949,920 3,766,101
Property, plant and
equipment (net) 84,359 289,599 373,958 373,958
Goodwill 265,840 -- 265,840 41,376 (5) 307,216
Other assets 11,750 28,847 40,597 40,597
--------------------------------------------------------------------------------------------------
Total assets $947,093 $2,549,483 $ 3,496,576 $ 991,296 $4,487,872
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------

Liabilities and
Stockholders' Equity
Current liabilities
Accounts payable $ 147,782 $1,392,847 $1,540,629 $ 1,540,629
Accrued liabilities 205,794 104,903 310,697 310,697
Notes payable 150,267 11,720 161,987 161,987
Convertible debt 200,000 200,000 -- 200,000
Due to factor 909,122 909,122 909,122
--------------------------------------------------------------------------------------------------
Total current liabilities 703,843 2,418,592 3,122,435 3,122,435

Stockholders' equity
Preferred stock -- -- --
Common Stock 8,251 25,000 33,251 (20,800)(6) 12,451
Additional paid in capital 8,593,211 -- 8,593,211 1,117,987 (7) 9,711,198
Retained earnings (deficit) (8,358,212) 105,891 (8,252,321) (105,891)(8) (8,358,212)
----------- ---------- ------------- ---------- ----------
Total stockholders' equity 243,250 130,891 374,141 991,296 1, 365,437
----------- ---------- ------------- ---------- ----------
Total liabilities and
stockholders' equity $ 947,093 $2,549,483 $ 3,496,576 $ 991,296 $4,487,872
----------- ---------- ------------- ---------- ----------
----------- ---------- ------------- ---------- ----------

</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS.

33
<PAGE>

American CinemaStores, Inc., and Susan Burrowes, Limited
Pro Forma Condensed Combined Statement of Operations
For the Twelve Month Period Ended May 31, 1997 for
American CinemaStores, Inc. (Audited) and
Susan Burrowes, Ltd. (Unaudited)
<TABLE>
<CAPTION>
NOTE 6 Continued

American Susan Pro Forma Pro Forma
CinemaStores Burrowes Combined Adjustments Combined
------------ -------- -------- ----------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales $ 1,675,350 $ 12,188,000 $ 13,863,350 $ -- $13,863,350
Cost of Sales 1,072,509 8,501,000 9,573,509 (300,000)(9) 9,273,509
---------------------------------------------------------------------------------------
Gross Profit 602,841 3,687,000 4,289,841 300,000 4,589,841
Selling, general and
administrative expenses 2,182,040 4,128,000 6,310,040 (635,000)(9) 5,675,040
---------------------------------------------------------------------------------------
Income (loss) from
operations (1,579,199) (441,000) (2,020,199) 935,000 (1,085,199)
Other expense (income) 112,381 380,000 492,381 (350,000)(10) 142,381
---------------------------------------------------------------------------------------
Net income (loss):
From operations (1,691,580) (821,000) (2,512,580) 1,285,000 (1,227,580)
---------------------------------------------------------------------------------------
Dividends to preferred
shareholder 512,633 512,633 512,633
---------------------------------------------------------------------------------------
Net loss allocable
to common shareholders $2,204,213 (821,000) $(3,025,213) $1,285,000 $ (1,740,213)
---------------------------------------------------------------------------------------
Net loss per share $ (0.30) $ (0.15)
Weighted average common
shares outstanding 7,314,943 11,514,943

</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS.

<PAGE>
NOTE 6 Continued

NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION. The pro forma condensed combined historical financial
statements are based on the assumptions that (a) the acquisition of Susan
Burrowes, Ltd. ("SBL") was effected by American CinemaStores, Inc. ("Company")
in exchange for 200,000 shares of the Company's common stock to the shareholder
of SBL and forgiveness of a $50,080 note owed to SBL by the shareholder and (b)
the Company raised $1 million from the Regulation D private placement of 4
million shares of common stock to provide working capital to SBL.

2. FEDERAL INCOME TAX STATUS. The Stockholder of SBL had elected under
Subchapter S of the Internal Revenue Code of 1986, as amended, to include the
income of SBL as their own for income tax purposes. For pro forma purposes,
SBL has been treated as a C-corporation. Considering the consolidated tax
loss of the Company, no taxes have been provided for.

3. CASH AND CASH EQUIVALENTS - PRO FORMA ADJUSTMENT. The increase in cash for
the combined company is the result of the Company raising $1,000,000 for working
capital to SBL, as part of the acquisition agreement, via a Regulation D private
placement of common stock to accredited shareholders on June 12, 1997.

4. NOTES RECEIVABLE - PRO FORMA ADJUSTMENT. The note receivable is from the
principal shareholder of Susan Burrowes. As part of the consideration for the
acquisition, the Company has agreed to not collect on this note and forgive any
future payments,

5. GOODWILL - PRO FORMA ADJUSTMENT. An analysis of the components of goodwill
is being made to determine the appropriate asset accounts to which such
components should be allocated. The resulting amount of goodwill will be
amortized over a period of 15 years.

6. COMMON STOCK - PRO FORMA ADJUSTMENT. The amount consists of 200,000 shares
issued upon the acquisition, less the elimination of Susan Burrowes' common
stock upon consolidation. In addition, the adjustment reflects the issuance of 4
million shares of common stock, at $0.25 per share, as a result of the
Regulation D private placement used to raise working capital for Susan Burrowes.

7. ADDITIONAL PAID IN CAPITAL ADJUSTMENT. Accounts for value of the 200,000
shares of common stock issued to the principal of Susan Burrowes at $0.61 per
share, its fair value at the date of the closing of the acquisition. In
addition, the adjustment reflects the issuance of 4 million shares of common
stock, at $0.25 per share, as a result of the Regulation D private placement
used to raise working capital for Susan Burrowes.

8. RETAINED EARNINGS - PRO FORMA ADJUSTMENT. The amount consist of the
elimination of SBL's retained earnings upon consolidation.

9. COST OF SALES AND SG & A - PRO FORMA ADJUSTMENT. Adjustments to reflect
reduced payroll expenses as a result of layoffs and terminations of more than 40
people which have taken place with SBL and the Company as well as the Company's
corporate restructure which has resulted in reduced rent, utilities and other
overhead expenses.

10. INTEREST EXPENSE -PRO FORMA ADJUSTMENT. Adjustment reflecting the virtual
pay-off of factor bank debt upon the acquisition.

<PAGE>

NOTE 7. LOAN PAYABLE

On October 27, 1996, the Company's former president loaned the Company
$100,000 to be repaid to him within one year. The note bears interest at 10%
per annum and the interest is payable quarterly. As of May 31, 1997, there
is $70,000 remaining to be paid on the note. Subsequent to May 31, 1997, the
note has been completely repaid.

Additionally, the Just Jackets subsidiary maintains an overdraft line with the
bank with a $100,000 money market certificate of deposit in the name of the
Company held as collateral. As of May 31, 1997, the amount of the overdraft was
$80,267. Subsequent to May 31, 1997, the Company used the certificate of
deposit to repay the overdraft resulting in no money being owed.

NOTE 8. CONVERTIBLE DEBT

Monument Trust Company loaned $200,000 to the Company on March 28, 1997 in
exchange for a promissory note. The terms of the promissory note state that
the note will bear interest at a rate of 12% per annum and is due and payable on
April 15, 1997. In the event that the note was not paid by the due date, the
principal and accrued interest shall automatically convert into a 4% Cumulative
Convertible Debenture of the Company and will be subject to the terms and
conditions contained in the terms sheet of the Offshore Securities Subscription
Agreement, Regulation S offering. The note was not repaid on April 15,1997.

The Offshore Securities Subscription Agreement states that the debenture is
convertible into Common Stock of the Company, all or in part, of the closing bid
price at the date of the transaction, (April 15, 1997), or at 60% of the closing
bid price at the time of the conversion after the 41 day restriction period in
accordance with Regulation S.

During fiscal 1997, the Company recorded $133,333 in deferred interest on the
convertible debt and fully amortized that amount into interest expense. The
deferred interest is the result of the implied yield provided by the 60%
conversion feature. The amount was amortized over the period from the issuance
date through the date that the debt first became convertible into common stock

NOTE 9. SIGNIFICANT CUSTOMERS

Sierra had sales to two customers which represented approximately 36% and 27%
of the Company's net sales from continuing operations for the year fiscal
1997. The related accounts receivable from these customers represented 63%
and 74% of the accounts receivable at May 31, 1997. Sales to two other
customers in fiscal 1996 represented approximately 54% and 24% of the
Company's net sales from continuing operations. The related accounts
receivable from these customers represented 63% and 11% of the accounts
receivable at May 31, 1996.

NOTE 10. NOTES RECEIVABLE

At May 31, 1997, the Company has a note receivable of $300,000 from Wales
Securities, Ltd. related to a stock subscription. The note bears interest at
12% per annum and is payable on or before September 28, 1997. In June, 1997,
Wales Securities paid $225,000 of this promissory note to the Company and agreed
to pay the remaining balance by assuming consulting fees payable to a public
relations firm on behalf of the Company.

<PAGE>

NOTE 11. ACQUISITIONS

On June 19,1996 the Company signed a definitive merger purchase agreement
with Just Jackets, Inc. of North Hollywood, California. The merger of Just
Jackets was completed on October 24, 1996. Just Jackets revenues were
approximately $1.2 million. Just Jackets became a newly formed subsidiary of
the Company and the shareholders of Just Jackets received an aggregate of
$80,000 in cash and 50,000 of common stock of the Company valued at $0.90 per
share, its fair value at the date of the acquisition. The acquisition was
accounted for under the purchase method and the excess purchase price over
the fair value of the net assets acquired was recorded as goodwill.

Condensed unaudited pro forma results of the operations of the Company and Just
Jackets as if the respective purchases occurred at the beginning of the fiscal
years ended May 31, 1997 and 1996 are presented below. The unaudited pro forma
financial statements have been prepared for comparative purposes only and are
not necessarily indicative of what would have occurred had the acquisition been
completed as of those dates or any results that may occur in the future.

Unaudited
---------
Fiscal 1997 Fiscal 1996
----------- -----------
Revenues $ 2,030,342 $ 2,169,360
Net loss (1,770,211) (2,485,461)
Net loss allocable to
common shareholders (2,262,844) (2,485,461)
Net loss per share $ (0.31) $ (0.34)

Pro forma adjustments include adjustments to reflect amortization of goodwill
and to reflect payroll reductions of approximately $200,000 for principal
officers and certain other employees due to the redundancy of staff at Just
Jackets, as well as costs and per share data adjustments pursuant to the
issuance of convertible preferred stock.

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 155319
<SECURITIES> 0
<RECEIVABLES> 401645
<ALLOWANCES> 0
<INVENTORY> 28180
<CURRENT-ASSETS> 585144
<PP&E> 198981
<DEPRECIATION> 114622
<TOTAL-ASSETS> 947093
<CURRENT-LIABILITIES> 703843
<BONDS> 0
0
0
<COMMON> 8251
<OTHER-SE> 243999
<TOTAL-LIABILITY-AND-EQUITY> 947093
<SALES> 1675350
<TOTAL-REVENUES> 1675350
<CGS> 1072509
<TOTAL-COSTS> 2182040
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112381
<INCOME-PRETAX> (1691580)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1691580)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1691580)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> 0

</TABLE>