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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-KSB/A
AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 1997
COMMISSION FILE NUMBER: 0-23138
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APPAREL TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 95-4374952
(State or other jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
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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
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Securities registered pursuant to Section 12(b) of the act:
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TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK AND REDEEMABLE WARRANTS
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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 ____
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. _X_
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the Registrant 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 September 22, 1997:
18,001,387
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
Apparel Technologies, Inc., which was formerly known as 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.
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
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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.
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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.
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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.
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.
EMPLOYEES
At July 31, 1997, the Company employed 48 full time employees.
ITEM 2. PROPERTIES
TRADEMARKS
JUST CLOTHES-Registered Trademark-, SUSAN BURROWES-Registered Trademark-,
LAURA KEIFFER-Registered Trademark-, and ABBREVIATE-Registered Trademark- 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,
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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
For information regarding the executive officers of the Company and its
subsidiaries, see Part III, Item 9.
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. Until September 15, 1997 the Common Stock
traded under the symbol "ACSI." Effective September 15, 1997, the Company
changed its trading symbol to "APTX," reflecting the Company's new strategic
direction into apparel and technology and the Company's proposed name change to
"Apparel Technologies, Inc."
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
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FISCAL YEAR ENDED MAY 31, 1996 HIGH LOW
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First Quarter................................................................... 5.50 3.38
Second Quarter.................................................................. 5.00 3.18
Third Quarter................................................................... 4.88 2.25
Fourth Quarter.................................................................. 2.88 0.88
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FISCAL YEAR ENDED MAY 31, 1997
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First Quarter................................................................... 3.00 1.16
Second Quarter.................................................................. 1.91 1.00
Third Quarter................................................................... 1.19 0.81
Fourth Quarter.................................................................. 0.84 0.06
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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.
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.
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
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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.
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
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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 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
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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.
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 an additional $880,000, net of
expenses, in a Regulation D private placement of a convertible note to a single
accredited investor in the original principal amount of $1.1 million. The note
bears interest at the rate of 6% per annum and is convertible into Common Stock
at 83% of the average price of the Common Stock for the five days immediately
preceding the date of conversion. The entire unpaid principal amount of the note
is due June 30, 1999.
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 automatically converted into a 4%
Cumulative Convertible Debenture ("Debenture") of the Company. The note was not
repaid on April 15, 1997 and the Debenture was issued by the Company. The
Debenture provided for a conversion price of the lesser of the bid price of the
Common Stock on the date of issuance of the Note or 60% of the bid price on the
date of conversion. The Debenture was fully converted under this agreement in
June 1997 at a conversion price of $.0375, which was 60% of the closing bid
price on the date of conversion.
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
11
<PAGE>
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, 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
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<PAGE>
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 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 22 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
13
<PAGE>
PART III
ITEM 9. DIRECTOR, EXECUTIVE OFFICER, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT.
DIRECTORS AND NOMINEES
The Company's nominees and directors are listed below, together with their
ages, offices with the Company and year in which each became a director of the
Company.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ------------------------------------------------ ----------- ------------------------------------------ -------------
<S> <C> <C> <C>
Kathryn Van Ness................................ 47 Chairman of the Board, Chief June 1997
Executive Officer and President
William P. Conlin............................... 64 Nominee
Samuel S. Guzik................................. 45 Nominee
C. Douglas Plank................................ 40 Nominee
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS AND NOMINEES DURING THE PAST FIVE YEARS
MS. KATHRYN VAN NESS was appointed as Chief Executive Officer and President
of the Company in June, 1997. Ms. Van Ness was previously with Authentic Fitness
Corporation (NYSE:ASM) where she served as President of the designer Speedo
swimwear and activewear wholesale apparel divisions whose major brands include:
Speedo, Anne Cole, Catalina, Cole of California, and Oscar de la Renta swimwear.
Ms. Van Ness has also held various other positions, including General
Manager/Vice President of Jantzen, Inc., a men's and women's swimwear/activewear
company which is part of V.F. Corporation (NYSE:VFC) and also President of White
Stag Sportswear, a Warnaco (NYSE:WAC) division. Ms. Van Ness also has an
extensive retail background, having spent over 15 years in various merchandising
and marketing positions for Federated Department Stores (NYSE:FED). Ms. Van Ness
served on the Board as President of the Princeton Ethics Committee Woodrow
Wilson School at Princeton University and is a member of the Young Presidents
Organization.
WILLIAM P. CONLIN is a retired president and chief executive officer of
CalComp Incorporated where he served in that position for 10 years until 1996.
CalComp is a premier computer graphic and computer distribution company. Prior
to joining CalComp, Mr. Conlin spent 23 years with Burroughs Corporation (now
UNISYS). While with Burroughs, he held a variety of marketing and general
management positions, including General Manager, National Accounts Region;
President, International Group; Senior Vice President, Corporate Product
Management; and President, Industry Systems Group. Mr. Conlin currently serves
on the Board of Directors as Lead Director of Structural Dynamics Research
Corporation, a mechanical design automation software and engineering services
company. Mr. Conlin also serves on the Board of Directors of Syntellect, Inc., a
publicly traded interactive communications company and has previously served on
other boards for companies including: Ampad Corporation, Archive Corporation,
Micom Corporation and MAJ Systems. Mr. Conlin has been listed in Who's Who in
America since 1990 and is highly active in various community and industry
volunteer positions such as University of California Irvine Foundation Board,
the UCI Chancellor's Committee and Trustee of the World Affairs Council of
Orange County. In addition, Mr. Conlin has held a variety of volunteer positions
on the Board of the Orange County Council, Boy Scouts of America, and Southern
California Technology Executives Network, among numerous other roles. Mr. Conlin
received his BBA from the University of Massachusetts and his MBA in Finance
from the University of California in Berkeley.
SAMUEL S. GUZIK is a corporate and securities attorney practicing for over
19 years. Mr. Guzik is the founder and principal of Guzik & Associates, a Los
Angeles, California law practice concentrating in
14
<PAGE>
general business, corporate finance, corporate securities transactions and
securities litigation. Organizations represented by Mr. Guzik range from
entrepreneurs and closely held companies to larger publicly traded companies. He
has represented clients in a variety of transactions, including private
placements, SEC registrations, initial and secondary public offerings, mergers
and acquisitions, and reorganizations. Mr. Guzik serves on the Board of
Directors for Lakeside Health Services and on the Boards of other private
companies. Prior to forming Guzik & Associates, he was a Partner with the law
firm of Ervin, Cohen and Jessup in Beverly Hills, California, where he had a
similar practice including mergers and acquisitions, venture capital and general
business transactions for more than ten years. Prior thereto, Mr. Guzik was an
Associate Attorney at Willkie Farr & Gallagher in New York City, New York. Mr.
Guzik received his B.S. in Industrial and Labor Relations at Cornell University
and his J.D. Law Degree at Stanford University. He is a member of the California
and New York Bar.
C. DOUGLAS PLANK is Assistant Vice Chancellor for Pepperdine University,
Malibu, California and has served in that capacity since 1993. He is the Senior
Development Officer for the University's $300 million "Challenged to Lead"
capital campaign. Mr. Plank also developed and coordinated the Seaver College
Board and served as the Director of Alumni Relations responsible for both the
Annual Giving and University Capital Campaigns. Prior to this role he served as
Associate Dean and Director of Admissions at Pepperdine. Mr. Plank was
co-founder and Director for two non-profit charitable corporations, Project Drug
Free, an educational awareness and community prevention and GI-Gift Pac, a
nationwide program providing care packages for Gulf War soldiers. Previous
experience includes co-founding Terracom, Inc., Torrance, California, a medical
management software solutions company serving physicians, medical groups,
clinics and hospitals. Mr. Plank is on the Executive Board, Western Los Angeles
Council, Boy Scouts of America and the Executive Committee, Seaver College Board
of Visitors. Mr. Plank received his BA Organizational Communications from
Pepperdine University.
MANAGEMENT
Listed below are key employees of the Company who are not directors or
nominees.
SUSAN WEINSTOCK, 35, was appointed as Vice President of Susan Burrowes, Ltd,
a subsidiary of the Company, in June, 1997, immediately following its
acquisition by the Company. Ms. Weinstock served in various executive positions
at Susan Burrowes, Ltd. prior to its acquisition by the Company. Ms. Weinstock
has extensive experience in all aspects of the apparel business including sales,
management, manufacturing and administration.
CHRISTOPHER D. KELLY, 50, has served as President of Sierra Fixture and
Design, Inc., a subsidiary of the Company, since its formation in 1995. From
1987 to February 1995, Mr. Kelly served as a Vice-President of Mesa Verde
Fixture and Design, Inc., a shopping mall fixture and design manufacturing
company, which he co-founded. From 1969 to 1986, Mr. Kelly owned and operated
Rax Unlimited, a manufacturer of mall and retail store fixtures. Mr. Kelly
received a bachelor's degree in advertising and an MBA degree from Woodbury
University.
WILLIAM GRIER, 50, has served as the President of The Digital Group, Inc.
("The Digital Group") since its acquisition by the Company in September 1997.
Mr. Grier has more than 25 years of experience in the digital printing industry,
including executive management, cross-functional product development, marketing
and research. From 1994 to 1997 he served as Chief Executive Officer of CACTUS,
which developed the first application laboratory for digital printing and
introduced the first commercial fabric digital printing system. From 1990 to
1994 he served as the Product Manager for CalComp, a division of Lockheed, where
he headed the team that developed wide format printing and film imaging
equipment and software. He also headed a multi-corporation development team to
manufacture the first chemical free image setter film and printing unit. From
1989 to 1990 he served as President of Retail Merchandising Group, where he
designed and managed a benchmark study by Procter & Gamble that proved the
retail value of account specific digital printing as a product mover.
15
<PAGE>
WALTER WILHELM, 58, has served as the Executive Vice President of The
Digital Group since its acquisition by the Company in September 1997. Mr.
Wilhelm is an experts in the application of Quick Response (QR) in the apparel
and footwear industries and has experience in startup operations and the
marketing of high tech digital apparel production equipment in both domestic and
international markets. From 1995 to 1997 he was a partner at Wilhelm and Leslie
Consulting, a systems and management consulting firm, primarily for sewn goods.
Products which were successfully introduced to the footwear, apparel and retail
industries included networked PC technology, numerically controlled (NC)
cutting, CAD and CAM products to streamline design and manufacturing at all
levels. Mr. Wilhelm also obtained broad technology experience at Microdynamics,
Inc., where he served as a Senior Vice President and Director from 1980 to 1995.
While at Microdynamics he developed and managed the marketing strategies making
Microdynamics the innovator and leader in CAD and CAM applications for the
textile and apparel industry. Prior to serving at Microdynamics, Mr. Wilhelm was
General Manager, Industrial Automation Systems, at Hughes Aircraft Company.
While at Hughes he adapted and sold the Hughes AM-1 CAD System and a range of
lasercutters to the apparel and footwear industries.
ROGER WILSON, 59, has served as the Executive Vice President of The Digital
Group since its acquisition by the Company in September 1997. Prior to joining
the Digital Group, he was the Chairman and CEO of Bula, Inc., from 1995 to 1997,
and was its Vice Chairman since 1993. Bula is best known for its global ski
accessories and ski headwear. Between 1992 and 1995 Mr. Wilson was General
Manager of AAAMP Systems Marketing, a consortium of technology companies
dedicated to developing vertical digital manufacturing and printing for the
apparel industry. Between 1980 and 1992 Mr. Wilson served as Vice President of
Corporate Affairs for H.H. Cutler Company, now a division of V.F. Corporation.
He has served as a member of the Board of Directors of the American Apparel
Manufacturers Association (AAMA) and as Chairman of the International Committee
as well as being a former Senior Consultant for Kurt Salmon Associates.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and beneficial
owners of more than ten percent of the Common Stock, to file with the Securities
and Exchange Commission and the National Association of Securities Dealers, Inc.
reports of ownership and changes in ownership of the Common Stock. Copies of
such reports are required to be furnished to the Company. Based solely on its
review of the copies of such reports furnished to the Company, or written
representations that no reports were required, the Company believes that during
its fiscal year ended May 31, 1997, all filing requirements applicable to its
officers, directors, and ten percent beneficial owners were satisfied.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table discloses for the fiscal years ended May 31, 1997, 1996
and 1995, compensation for Gill Champion, former Chairman of the Board and Chief
Executive Officer, and Steve Natale, former President and Chief Operating
Officer, the only other executive officer whose annual compensation exceeded
$100,000 during the fiscal year ended May 31, 1997. Messrs. Champion and Natale
(the "Named Executives") received no additional compensation for serving on the
Board of Directors.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- -------------------
OTHER ANNUAL SECURITIES
FISCAL COMPENSATION UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) (1)($) (#)
- ------------------------------------ ---- ---------- ------------ -------------------
<S> <C> <C> <C> <C>
Gill Champion,...................... 1997 126,875 7,657 --
Former Chief Executive Officer and 1996 126,875 7,657 --
Chairman of the Board(2) 1995 125,000 7,657 --
Steve Natale,....................... 1997 101,500 8,800 140,000
Former President, and 1996 100,000 5,796 --
Chief Operating Officer(3) 1995 100,000 5,796 --
</TABLE>
- ------------------------
(1) The amount reported in this column represents the annual amount paid as an
allowance for leasing and insuring an automobile for the Named Executives
and for reimbursement of automobile costs.
(2) Mr. Champion ceased to be an officer of the Company in June 1996.
(3) Mr. Natale ceased to be an officer of the Company in June 1997.
The following table sets forth information with respect to stock options
held by the Named Executives at May 31, 1997. No stock options were granted by
the Company to, or were exercised by, the Named Executives during such fiscal
year.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT MAY 31, 1997 AT MAY 31, 1997(1)
------------------------ ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Steve Natale............... 140,000(2) -0- -0- -0-
</TABLE>
- ------------------------
(1) Options are "in-the-money" if the fair market value of a share of Common
Stock exceeds the exercise prices of such options. No options were
"in-the-money" at May 31, 1997.
(2) Incentive stock options granted under the Company's 1993 Stock Option Plan,
as amended, which became exercisable after one year from the date of grant,
and expired on July 15, 1997, 30 days after the termination of Mr. Natale's
employment with the Company.
EMPLOYMENT AND TERMINATION AGREEMENTS
EMPLOYMENT AGREEMENT WITH KATHRYN VAN NESS
The Company entered into an employment agreement with Kathryn Van Ness,
effective June 1997, providing for her employment as President and Chief
Executive Officer of the Company for a term of not less than three years. Under
the terms of her Employment Agreement, Ms. Van Ness is entitled to a base
17
<PAGE>
salary of $200,000 per year for each year of the contract term and an additional
annual performance bonus if the Company meets or exceeds mutually agreed
performance criteria based upon the annual net income of the Company. If the
performance criteria is met in a fiscal year Ms. Van Ness will be paid a bonus
of $200,000; if the performance criteria is exceeded, then Ms. Van Ness is
entitled to additional bonus based upon the amount by which the performance is
exceeded.
The Employment Agreement provides for the grant of 1,500,000 shares of
Common Stock, of which 500,000 shares vest in June 1998, June 1999 and June
2000. The Employment Agreement also grants 750,000 stock options to Ms. Van Ness
at an exercise price of $.25 per share, which vests in three 250,000 share
installments in June 1998, June 1999 and June 2000.
The Company is entitled to terminate Ms. Van Ness' employment for "good
cause", and Ms. Van Ness is entitled to terminate her employment with the
Company for "good reason," in either case in accordance with the criteria set
forth in the Employment Agreement. If Ms. Van Ness' employment is terminated
other than for good cause, she is entitled to receive salary and bonus through
the end of the initial three year term and any unvested portion of her 750,000
share stock grant and 1,500,000 stock options. The Employment Agreement allows
Ms. Van Ness to terminate her employment for good cause if at any time a
majority of the Board of Directors has been appointed without her approval. Ms.
Van Ness has also entered into an agreement with First Fidelity Capital, Inc.
regarding election of directors of the Company. See "Change in Control" herein.
EMPLOYMENT TERMINATION AGREEMENTS
STEVE NATALE. The Company's former President, Steve Natale, was employed
under a two year employment agreement which expired in March 1999. Under such
agreement, Mr. Natale received base compensation at the annual rate of $125,000
as well as an automobile and life insurance. In June 1997, Mr. Natale resigned
as an officer and a director of the Company and entered into a severance
agreement with the Company whereby the Company agreed to pay 10.5 months of
severance consideration on his contract, totalling $110,000, in lieu of benefits
under the employment agreement.
CHRISTOPHER J. EBERT. The Company's former Chief Financial Officer,
Christopher Ebert, was employed under a two year employment agreement which
originally expired in March 1999. Under such agreement, Mr. Ebert received base
compensation at the annual rate of $110,000, as well as perquisites including
the use of an automobile and life insurance. In September 1997 the Company and
Mr. Ebert entered into a severance agreement providing for the termination of
his employment effective October 1997, and the payment to Mr. Ebert of $75,000,
payable in monthly installments between October 1997 and May 1998. The severance
agreement further provides that the installment payments cease if Mr. Ebert
obtains full time employment effective January 1998. In addition, under the
terms of the severance agreement Mr. Ebert will receive 100,000 shares of the
Company's stock for $.06 per share and is relinquishing his right under a June
1997 agreement to receive an additional 150,000 shares at $.06 per share. Under
the June 1997 agreement, Mr. Ebert was entitled to receive 250,000 shares of
Common Stock at $.06 per share in exchange for the surrender of 250,000
incentive stock options previously granted to Mr. Ebert.
GIL CHAMPION. In June 1996 Gill Champion agreed to resign as director,
Chairman of the Board and Chief Executive Officer of the Company. The Company
agreed to pay Mr. Champion his total unpaid salary and employment benefits under
his employment agreement through March 15, 1997, totalling approximately
$115,000, and the final payment was made in September 1997.
DIRECTOR COMPENSATION
Directors receive no cash compensation for serving on the Board. However,
non-employee directors are eligible to be granted non-statutory stock options
under the Company's 1993 Stock Option Plan, as amended. Nonstatutory stock
options may be granted for up to 10 years from the date of grant at such
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<PAGE>
exercise prices as the Board of Directors may determine. There are no
non-employee directors currently serving on the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 22, 1997,
with respect to beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) directors and nominees, (iii) the Named
Executives, and (iv) all directors and executive officers as a group. Except for
The Monument Trust Company, which disclaims beneficial ownership of the shares
held of record by it, the Company believes that all of the persons named in the
above table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF % OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OWNERSHIP
- ------------------------------------------------------- -------------------- -----------------
<S> <C> <C>
The Monument Trust Company(1).......................... 4,333,333 24.1
Steve Natale(2)........................................ 972,324 5.4
Kathryn Van Ness(3).................................... (4) --
William P. Conlin...................................... -- --
Samuel S. Guzik........................................ -- --
C. Douglas Plank....................................... -- --
All executive officers and directors as a group (two
persons)............................................. 100,000(4) (5)
</TABLE>
- ------------------------
(1) The address for The Monument Trust Company is c/o The Investors Union Trust,
14 New Street, St. Peter Port, Guernsey 641 4LE, Channel Islands. The
Monument Trust Company is the record owner, and disclaims beneficial
ownership of these shares. These shares were acquired by MTC in June 1997
upon the conversion of a $200,000 Convertible Note issued to MTC in a
Regulation S private placement in April 1997. The Note provided for a
conversion price of the lesser of the bid price of the Common Stock on the
date of issuance of the Note or 60% of the bid price on the date of
conversion. The Note was fully converted under this agreement at a
conversion price of $.0375, which was 60% of the closing bid price on the
date of conversion.
(2) The address for Mr. Natale is 115 Hurricane Street, Marina Del Rey,
California 90292.
(3) The address for Ms. Van Ness is 2300 South Eastern Avenue, Commerce,
California 90040.
(4) Does not include 1,500,000 shares of Common Stock and options to purchase
750,000 shares at $.25 per share, which shares and options vest in three
equal installments in June 1998, 1999 and 2000. See "Certain Relationships
and Related Transactions."
(5) Less than one percent.
AGREEMENTS REGARDING CHANGE IN CONTROL
AGREEMENT WITH FIRST FIDELITY CAPITAL, INC. AND STEVE NATALE In April 1997
the Company and Steve Natale entered into an agreement with First Fidelity
Capital, Inc. ("FFC") to represent the Company on an exclusive basis for five
years in connection with financing transactions and strategic acquisitions for
the Company. The agreement provides that FFC is entitled to nominate a majority
of the Company's Board of Directors, at FFC's option, during the term of the
agreement, so long as such nominees are reasonably satisfactory to the Company.
The agreement, as amended, further provides that so long as Mr. Natale owns
Common Stock, he will vote his shares in favor of FFC nominees until October
2002. FFC has not exercised its rights under this agreement to nominate any
directors, and none of the Company's nominees have been nominated pursuant to
this agreement. The agreement was amended in September 1997 to
19
<PAGE>
provide that effective November 1, 1997 until October 1999, Mr. Natale will not
sell more than 70,000 shares of Common Stock in any two month period.
AGREEMENT WITH FFC AND KATHRYN VAN NESS. FFC and Ms. Van Ness entered into
an agreement effective June 1997, in connection with Ms. Van Ness' employment by
the Company. In this agreement FFC agreed to use its best efforts to cause Ms.
Van Ness to be nominated to serve as a Director of the Company during the term
of her employment by the Company and to consult with Ms. Van Ness during the
term of her employment with a view toward reaching a mutual agreement on
nominees to the Board of Directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding certain agreements between the Company and its
directors, officers and certain shareholders, see Item 9, "Executive
Compensation," and Item 11, "Security Ownership of Certain Beneficial Owners and
Management."
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS AND SUPPLEMENTARY DATA INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation as amended(1).
3.2 By-Laws(1).
4.1 Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company, including
form of redeemable warrant(1).
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(1).
10.10 Employment Agreement dated March 15, 1997 between the Company and Christopher Ebert
10.17 Letter Agreement, dated June 25, 1996(2).
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
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed December 3, 1993 (Registration No. 33-72490 LA)
(2) Incorporated by reference from Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form SB-2 filed on July 23, 1996.
(b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K relating to the issuance of
$200,000 of convertible debentures via a Regulation S transaction on April 23,
1997 and May 6, 1997. The Company filed two reports on Form 8-K subsequent to
the fiscal year end relating to the acquisition of Susan Burrowes, Ltd. in June
1997.
20
<PAGE>
SIGNATURES
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.
APPAREL TECHNOLOGIES, INC.
<TABLE>
<C> <S> <C>
President and Director
(Principal Executive
/s/ KATHRYN VAN NESS Officer, Principal
- ------------------------------ Financial Officer and January 29, 1998
Kathryn Van Ness Principal Accounting
Officer)
Chief Financial Officer
/s/ BARRY HALL (Principal Financial
- ------------------------------ Officer and Principal January 29, 1998
Barry Hall Accounting Officer)
/s/ SAMUEL S. GUZIK
- ------------------------------ Director January 29, 1998
Samuel S. Guzik
/s/ C. DOUGLAS PLANK
- ------------------------------ Director January 29, 1998
C. Douglas Plank
/s/ WILLIAM P. CONLIN
- ------------------------------ Director January 29, 1998
William P. Conlin
</TABLE>
21
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
Report of Independent Certified Public Accountants......................................................... 23
Consolidated balance sheets as of May 31, 1997 and May 31, 1996............................................ 24
Consolidated Statements of Operations for the fiscal years ended May 31, 1997 and May 31, 1996............. 25
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended May 31, 1997 and May
31, 1996................................................................................................. 26
Consolidated Statements of Cash Flows for the fiscal years ended May 31, 1997 and May 31, 1996............. 27
Summary of Significant Accounting Policies................................................................. 29
Notes to Consolidated Financial Statements................................................................. 32
</TABLE>
22
<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
23
<PAGE>
AMERICAN CINEMASTORES, INC.
FORM 10-KSB
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
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
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of significant accounting policies
and notes to Consolidated Financial Statements.
24
<PAGE>
AMERICAN CINEMASTORES, INC.
FORM 10-KSB
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR
ENDED ENDED
MAY 31, 1997 MAY 31, 1996
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See accompanying summary of accounting policies and notes
to Consolidated Financial Statements.
25
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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 (Note 1)................. -- -- 500 5 499,995 -- 500,000
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.
26
<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.
27
<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.
28
<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.
REVENUE RECOGNITION POLICY
The Company recognizes revenue at the time products are delivered to the
customers.
29
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's note receivable and convertible debt, which
approximate the carrying value of each Security on the balance sheet, 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. 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 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
30
<PAGE>
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 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.
31
<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
32
<PAGE>
AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. STOCK OPTION PLAN (CONTINUED)
value (as defined in the Plan) of the Common Stock on the date of grant. The
aggregate fair market value (determined at the 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
33
<PAGE>
AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
In conjunction with private placements of Company securities, the Company
granted 420,000 warrants to the placement agent. These warrants are exercisable
at $2.00 per share and must be registered by the Company within 60 days of
demand by the placement agent. If the warrants are still unregistered after this
60 day registration period, the exercise price of the warrants will be reduced
by $0.05 per share for each 30 days beyond the aforementioned registration
period. The warrants have a term of five years. The fair value of the warrants
have been netted against the proceeds raised on the private placements of
securities.
NOTE 4. INCOME TAXES
The components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
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........................................................ $ -- $ --
------------ ------------
------------ ------------
</TABLE>
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
34
<PAGE>
AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. DISCONTINUED OPERATIONS (CONTINUED)
operations of $841,190 for the twelve months ended May 31, 1996. The Company
maintained physical ownership of these assets and was seeking to dispose of them
in a manner beneficial to the Company at May 31, 1996. The Company maintained
physical ownership of these assets at May 31, 1996, and disposed of them during
the current year resulting in immaterial net proceeds 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 an additional $880,000, net of expenses,
in a Regulation D private placement of a convertible note to a single
accredited investor in the original principal amount of $1.1 million. The
note bears interest at the rate of 6% per annum and is convertible into
Common Stock at 83% of the average price of the Common Stock for the five
days immediately preceding the date of conversion. The entire unpaid
principal amount of the note is due June 30, 1999.
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 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.
35
<PAGE>
AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
ASSETS
<TABLE>
<CAPTION>
SUSAN COMBINED PRO FORMA PRO FORMA
BURROWES ----------- ADJUSTMENTS COMBINED
AMERICAN ----------- (UNAUDITED) ----------- -----------
CINEMASTORES (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and equivalents.................. $ 155,319 $ 3,656 $ 158,975 $ 983,500(3) $ 1,142,475
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)....................... 28,180 295,392 323,572 323,572
Prepaid and other..................... -- 94,493 94,493 94,493
------------ ----------- ----------- ----------- -----------
Total current assets.................... 585,144 547,429 1,132,573 933,420 2,065,993
Property, plant and equipment (net)..... 84,359 289,599 373,958 373,958
Goodwill................................ 265,840 -- 265,840 1,718,797(5) 1,984,637
Other assets............................ 11,750 28,847 40,597 40,597
------------ ----------- ----------- ----------- -----------
Total assets............................ $ 947,093 $ 865,875 $ 1,812,968 $ 2,652,217 $ 4,465,185
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
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 (19,800)(6) 13,451
Additional paid in capital............ 8,593,211 -- 8,593,211 1,094,300(7) 9,687,511
Retained earnings (deficit)........... (8,358,212) (1,577,717) (9,935,929) 1,577,717(8) (8,358,212)
------------ ----------- ----------- ----------- -----------
Total stockholders' equity.............. 243,250 (1,552,717) (1,309,467) 2,652,217 1,342,750
------------ ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity................................ $ 947,093 $ 865,875 $ 1,812,968 $ 2,652,217 $ 4,465,185
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
36
<PAGE>
AMERICAN CINEMASTORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
SUSAN COMBINED PRO FORMA PRO FORMA
BURROWES ----------- ADJUSTMENTS COMBINED
AMERICAN ----------- (UNAUDITED) ----------- -----------
CINEMASTORES (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 9,573,509
------------ ----------- ----------- ----------- -----------
Gross Profit............................ 602,841 3,687,000 4,289,841 4,289,841
Selling, general and administrative
expenses.............................. 2,182,040 4,128,000 6,310,040 115,000(9) 6,425,040
------------ ----------- ----------- ----------- -----------
Income (loss) from operations........... (1,579,199) (441,000) (2,020,199) (115,000) (2,135,199)
Other expense (income).................. 112,381 380,000 492,381 492,381
------------ ----------- ----------- ----------- -----------
Net income (loss):
From operations....................... (1,691,580) (821,000) (2,512,580) (115,000) (2,627,580)
------------ ----------- ----------- ----------- -----------
Dividends to preferred shareholder...... 512,633 512,633 512,633
------------ ----------- ----------- ----------- -----------
Net loss allocable to common
shareholders.......................... $ 2,204,213 (821,000) $(3,025,213) $ (115,000) $(3,140,213)
------------ ----------- ----------- ----------- -----------
Net loss per share...................... $ (0.30) $ (0.27)
Weighted average common shares
outstanding........................... 7,314,943 11,514,943
</TABLE>
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial
Statements.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 SUBSEQUENT EVENTS (CONTINUED)
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 $983,500 from the Regulation D private
placement of 5 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 net proceeds of
983,500 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. 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 5 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
$0.58 per share, its fair value at the date of the closing of the acquisition.
In addition, the adjustment reflects the net proceeds associated with issuance
of 5 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. SG & A--PRO FORMA ADJUSTMENT. Adjustment to reflect the amortization of
goodwill over its 15 year life.
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
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LOAN PAYABLE (CONTINUED)
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. The loss of
any of these significant customers would have a material impact upon the
financial condition of the Company.
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.
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
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. ACQUISITIONS (CONTINUED)
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.
<TABLE>
<CAPTION>
UNAUDITED
--------------------------
FISCAL 1997 FISCAL 1996
------------ ------------
<S> <C> <C>
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)
</TABLE>
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.
NOTE 12. BUSINESS SEGMENTS
The Company operates in two business segments: Retail Design and Fixtures,
and Apparel Design and Manufacturing. Sales, operating income, capital
expenditures, and depreciation set forth in the following table exclude the
discontinued ACSI segment. Corporate assets included in corporate and
eliminations was $962,000 which principally consists of cash and cash
equivalents, note receivable, property, and goodwill. The remainder of corporate
and eliminations includes amounts to eliminate intercompany accounts receivable.
As the Company operated in only one business segment during fiscal 1996, no
segment information for that year has been reported below.
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
RETAIL DESIGN & APPAREL DESIGN &
FIXTURES MANUFACTURING CORPORATE &
1997 PRODUCTS PRODUCTS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------- --------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to Unaffiliated Customers................... 1,081,285 593,503 562 1,675,350
Operating Income.................................. (550,297) (248,577) (892,706) (1,691,580)
Identifiable Assets............................... 116,900 136,970 693,223 947,093
Capital Expenditures.............................. 30,000 -- (5,000) 25,000
Depreciation...................................... 10,475 3,675 45,685 59,835
</TABLE>
40
