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                       SECURITIES AND EXCHANGE COMMISSION
 
                                WASHINGTON, D.C.
 
                            ------------------------
 
                                 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
 
                            ------------------------
 
                           APPAREL TECHNOLOGIES, INC.
 
             (Exact name of Registrant as specified in its charter)
 
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<S>                             <C>
           DELAWARE                  95-4374952
 (State or other jurisdiction     (I.R.S. Employer
     of Incorporation or         Identification No.)
        Organization)
</TABLE>
 
                           2300 SOUTH EASTERN AVENUE
                       CITY OF COMMERCE, CALIFORNIA 90040
 
          (Address of principal executive offices including zip code)
 
        Registrant's telephone number, including area code: 213-725-4955
 
                            ------------------------
 
          Securities registered pursuant to Section 12(b) of the act:
 
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<CAPTION>
  TITLE OF EACH    NAME OF EACH EXCHANGE
      CLASS         ON WHICH REGISTERED
-----------------  ----------------------
<S>                <C>
      None                  None
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                      COMMON STOCK AND REDEEMABLE WARRANTS
 
                            ------------------------
 
    Indicate by check mark whether the registrant (1) has filed all reports 
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 
during the preceding 12 months (or for such shorter period that the 
Registrant was required to file such reports) and (2) has been subject to 
such filing requirements for the past 90 days. Yes _X_ No ____
 
    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.
 
                                       2
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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
 
                                       3
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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.
 
                                       4
<PAGE>
    MARKETING AND SALES
 
    Just Jackets maintains its sales office in the corporate offices in 
Commerce, California. Marketing and sales efforts for Just Jackets are led by 
management and primarily involve continuing telemarketing and mailings to the 
existing customer base.
 
    Products are sold regionally and nationally to more than 100 advertising 
specialty distributors. For the fiscal years ended 1995 and 1996, sales to 
the advertising specialty market accounted for approximately 75% of the net 
revenues of Just Jackets. The products are used for product promotions, 
employee incentive programs, customer gifts and advertising campaigns. 
Customers of Just Jackets sell to end users in the manufacturing, financial 
services, broadcasting, consumer products and communications industries.
 
    MANUFACTURING
 
    Just Jackets' products are manufactured at various contracting facilities 
in the greater Los Angeles area. While the Company believes that Just Jackets 
has good relationships with its manufacturers, Just Jackets is subject to the 
risk that a manufacturer may terminate its relationship with Just Jackets at 
any time or that an order may be received at a time when its manufacturer is 
working at full capacity. Historically, Just Jackets has not experienced 
material delays in obtaining needed merchandise and there are alternate 
sources of manufacturing available from whom they would be able to obtain 
timely deliveries of raw materials in sufficient quantities and at acceptable 
prices to arrange production of finished goods to satisfy customer 
requirements.
 
    BACKLOG
 
    At July 31, 1997, Just Jackets does not have a backlog of unfilled orders.
 
    SEASONALITY
 
    Just Jackets' business is seasonal. Sales are highest in the summer and 
fall months. Sales usually begin to decline in late winter by reason of the 
climate and reduction in tourism as well as fewer industry sponsored 
promotional events usually experienced during the fall and winter months.
 
    COMPETITION
 
    The advertising specialty industries in which Just Jackets is engaged is 
characterized by intense competition. The Company believes that the bases of 
competition in such industries are product offerings, prices, quality of 
products, design capabilities and customer service. Just Jackets believes 
that their principal competitors are Dunbrook and Hollaway.
 
SUSAN BURROWES LTD.
 
    OPERATIONS
 
    Susan Burrowes, Ltd., was acquired by the Company on June 12, 1997. Susan 
Burrowes commenced operations in 1978, and is a recognized brand name in the 
missy and women's apparel business under the labels Susan Burrowes and Laura 
Keiffer. The company provides custom missy and women's apparel and uses its 
expertise to build its private label business. The products designed use 
concepts developed by the brands with a focus on quality and construction to 
achieve retail pricing.
 
    THE MARKET
 
    The Company has leveraged its distribution network, fashion leadership 
and merchandising by focusing on the national chain department store and mass 
merchandisers. The Company participates in two marketing segments: branded 
missy/women's apparel and private label missy/women's apparel.
 
                                       5
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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,
 
                                       6
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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.
 
                                       7
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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
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1996                                                      HIGH        LOW
--------------------------------------------------------------------------------  ---------  ---------
<S>                                                                               <C>        <C>
First Quarter...................................................................       5.50       3.38
Second Quarter..................................................................       5.00       3.18
Third Quarter...................................................................       4.88       2.25
Fourth Quarter..................................................................       2.88       0.88
 
<CAPTION>
 
FISCAL YEAR ENDED MAY 31, 1997
--------------------------------------------------------------------------------
<S>                                                                               <C>        <C>
First Quarter...................................................................       3.00       1.16
Second Quarter..................................................................       1.91       1.00
Third Quarter...................................................................       1.19       0.81
Fourth Quarter..................................................................       0.84       0.06
</TABLE>
 
    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
 
                                       8
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    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 $2,132,792 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 $1,785,549. This improvement in general and administration
    
                                       9
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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 $1,712,721 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 $2,004,957, 
or ($0.29) per share, from continuing operations and a net loss of $505,190, 
or ($0.07) 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 
$2,004,957, or ($0.29) per share and the net loss from discontinued 
operations for fiscal 1996 was $505,190, or ($0.07) 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
    
                                       10
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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
 
                                       12
<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
 
                                       18
<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      March 2, 1998
       Kathryn Van Ness           Principal Accounting
                                  Officer)
 
                                Chief Financial Officer
        /s/ BARRY HALL            (Principal Financial
------------------------------    Officer and Principal      March 2, 1998
          Barry Hall              Accounting Officer)
 
     /s/ SAMUEL S. GUZIK
------------------------------  Director                     March 2, 1998
       Samuel S. Guzik
 
     /s/ C. DOUGLAS PLANK
------------------------------  Director                     March 2, 1998
       C. Douglas Plank
 
    /s/ WILLIAM P. CONLIN
------------------------------  Director                     March 2, 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.......................................................................        244,699       --
Deferred acquisition costs..........................................................         10,000        314,761
                                                                                      -------------  -------------
      Total assets..................................................................  $     925,092  $   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...............................................................     (8,379,353)    (6,153,948)
                                                                                      -------------  -------------
    Total stockholders' equity......................................................        222,109        956,496
                                                                                      -------------  -------------
Total liabilities and stockholders' equity..........................................  $     925,092  $   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........................................      2,203,181      2,029,385
                                                                                      -------------  -------------
Operating loss from continuing operations...........................................     (1,600,340)    (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 before income taxes...............................     (1,712,721)    (1,668,957)
  Provision for income taxes (Note 4)...............................................              0       (336,000)
                                                                                      -------------  -------------
  Loss from continuing operations...................................................     (1,712,721)    (2,004,957)
  Loss from discontinued operations (Note 5)
    Loss from operations net of an income tax benefit of $156,000...................       --             (235,051)
    Loss on disposal net of an income tax benefit of $180,000.......................       --             (270,139)
                                                                                      -------------  -------------
Loss from discontinued operations...................................................       --             (505,190)
                                                                                      -------------  -------------
Net loss............................................................................  $  (1,712,721) $  (2,510,147)
Dividends to preferred shareholder..................................................        512,684       --
                                                                                      -------------  -------------
Net loss allocable to common shareholders...........................................  $  (2,225,405) $  (2,510,147)
                                                                                      -------------  -------------
                                                                                      -------------  -------------
Net loss per common stock share
  From continuing operations........................................................  $       (0.30) $       (0.29)
  From discontinued operations......................................................       --                (0.07)
                                                                                      -------------  -------------
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...........................      --         --          --            --             --          (1,712,721)    (1,712,721)
                                                                                  --
                                     ----------  ---------         ---                  ------------  -------------  -------------
BALANCE MAY 31, 1997...............   8,251,054  $   8,251      --            --        $  8,593,211  $  (8,379,353) $     222,109
                                                                                  --
                                                                                  --
                                     ----------  ---------         ---                  ------------  -------------  -------------
                                     ----------  ---------         ---                  ------------  -------------  -------------
</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..........................................................................  $  (1,712,721) $  (2,004,957)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization...................................................         86,158         50,555
    Provision for income taxes......................................................       --              336,000
    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>
   
<TABLE>
<CAPTION>
                                                                                      FISCAL YEARS ENDED MAY 31, 
                                                                                          1997           1996
                                                                                         ------         ------
<S>                                                                                      <C>            <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES
  Cash paid for:
    Interest........................................................................      $   0          $   0
    Income Taxes....................................................................      $   0          $   0
</TABLE>
    
   
     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 five 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 provision for income taxes consists of the following:
    
   
<TABLE>
<CAPTION>
                                                                      Years Ended May 31, 
                                                                       1997          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
Current
  Federal........................................................  $    582,000  $    567,000
  State..........................................................       103,000       100,000
                                                                   ------------  ------------
                                                                        685,000       667,000
                                                                   ------------  ------------
                                                                   ------------  ------------

Deferred
  Federal........................................................      (582,000)     (567,000)
  State..........................................................      (103,000)     (100,000)
                                                                   ------------  ------------
                                                                       (685,000)     (667,000)
                                                                   ------------  ------------
                                                                   ------------  ------------

Allocation of tax benefit to discounted operations...............             0       336,000
                                                                   ------------  ------------
Income tax provision.............................................             0       336,000
                                                                   ------------  ------------
</TABLE>
    
    The differences between the U.S. federal statutory tax rate and the 
    Company's effective rate are as follows:
   
<TABLE>
<CAPTION>
                                                                      Years Ended May 31, 
                                                                       1997          1996
                                                                   ------------  ------------
<S>                                                                <C>           <C>
U.S. federal statutory tax benefit rate..........................         (34.0%)       (34.0%)
State income taxes (net of federal benefit)......................          (6.0%)        (6.0%)
Increase in valuation allowance..................................          40.0%         40.0%
Allocation of tax benefit to discontinued operations.............       --               20.0%
                                                                   ------------  ------------
Effective tax rate...............................................           0.0%         20.0%
                                                                   ------------  ------------
                                                                   ------------  ------------

</TABLE>
    
   
    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 
$270,139, net of $180,000 of income tax benefit, 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 $505,190, net of 
$336,000 of income tax benefit 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.
    
 
    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       275,597       303,777                        303,777
  Prepaid and other.....................       --             94,493        94,493       50,080(4)       144,573
                                          ------------   -----------   -----------  -----------       -----------
Total current assets....................       585,144       527,634     1,112,778      983,500         2,096,278
Property, plant and equipment (net).....        84,359       289,599       373,958                        373,958
Goodwill................................       244,699       --            244,699    1,507,326(5)      1,752,025
Other assets............................        11,750        28,847        40,597                         40,597
                                          ------------   -----------   -----------  -----------       -----------
Total assets............................  $    925,092   $   846,080   $ 1,771,172  $ 2,490,826       $ 4,262,858
                                          ------------   -----------   -----------  -----------       -----------
                                          ------------   -----------   -----------  -----------       -----------
 
                                      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.........................                     793,936       793,936                        793,936
                                          ------------   -----------   -----------  -----------       -----------
Total current liabilities...............       703,843     2,303,406     3,007,249                      3,007,249
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    1,028,300(7)      9,621,511
  Retained earnings (deficit)...........    (8,379,353)   (1,482,326)   (9,861,679)   1,482,326(8)     (8,379,353)
                                          ------------   -----------   -----------  -----------       -----------
Total stockholders' equity..............       222,109    (1,457,326)   (1,235,217)   2,490,826         1,225,609
                                          ------------   -----------   -----------  -----------       -----------
Total liabilities and stockholders'
  equity................................  $    925,092   $   846,080   $ 1,771,172  $ 2,490,826       $ 4,262,858
                                          ------------   -----------   -----------  -----------       -----------
                                          ------------   -----------   -----------  -----------       -----------
</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..............................     2,203,181     4,128,000    6,331,181      301,000(9)      6,632,181
                                          ------------   -----------  -----------  -----------       -----------
Income (loss) from operations...........    (1,600,340)     (441,000)  (2,041,340)    (301,000)       (2,342,340)
Other expense (income)..................       112,381       380,000      492,381                        492,381
                                          ------------   -----------  -----------  -----------       -----------
Net income (loss):
  From operations.......................    (1,712,721)     (821,000)  (2,533,721)    (301,000)       (2,834,721)
                                          ------------   -----------  -----------  -----------       -----------
Dividends to preferred shareholder......       512,684                    512,684                        512,684
                                          ------------   -----------  -----------  -----------       -----------
Net loss allocable to common
  shareholders..........................  $  2,225,405      (821,000) $(3,046,405) $  (301,000)      $(3,347,405)
                                          ------------   -----------  -----------  -----------       -----------
Net loss per share......................  $      (0.30)                                              $     (0.29)
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 (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. The Company has agreed to forgive 
this note over a six month basis, contingent upon the continued employment of 
this individual by the Company.
    
   
    5.  GOODWILL--PRO FORMA ADJUSTMENT.  Goodwill will be amortized over a
period of 5 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
$0.25 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 5 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>
 
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